Development planning: the Indian experience [1 ed.] 0198285558

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THOMAS J. BATA LIBRARY TRENT UNIVERSITY

Development Planning

Development Planning The Indian Experience

SUKHAMOY CHAKRAVARTY

CLARENDON PRESS • OXFORD 1987

Oxford University Press, Walton Street, Oxford 0X2 6DP Oxford New York Toronto Delhi Bombay Calcutta Madras Karachi Petaling Jaya Singapore Hong Kong Tokyo Nairobi Dar es Salaam Cape Town Melbourne Auckland and associated companies in Beirut Berlin Ibadan Nicosia Oxford is a trade mark of Oxford University Press Published in the United States by Oxford University Press, New York ©

Sukhamoy Chakravarty 1987

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press British Library Cataloguing in Publication Data Chakravarty, Sukhamoy Development planning: the Indian experience. 1. India—Economic policy—1947— I. Title 338.954 HC435.2 ISBN 0-19-828555-8 Library of Congress Cataloging in Publication Data Chakravarty, Sukhamoy. Development planning. Bibliography: p. Includes index. I. India—Economic policy—19472. India—Social policy. I. Title. HC435.2.C467 1987 338.954 87-1554 ISBN 0-19-828555-8 Set by Colset Private Limited, Singapore Printed in Great Britain at the University Printing House, Oxford by David Stanford Printer to the University

For my daughter Mouri, who may learn what was attempted.

Digitized by the Internet Archive in 2019 with funding from Kahle/Austin Foundation

https://archive.org/details/developmentplannOOOOchak

Preface

India’s attempt at planned development over the greater part of her post-independence existence has been the subject of many studies, both at home and abroad. These studies have been written from a variety of view points, descriptive and analytical, critical and sym¬ pathetic. During the late fifties and early sixties, studies—even the critical ones—were appreciative up to a point, expressing some form of positive endorsement of what was being attempted by the planners. The tone changed towards the end of the sixties, and has stayed quite critical not only in the West but also within India itself. While the change in tone can be explained by a variety of factors, seldom has any attempt been made, especially of late, to put forward the Indian expe¬ rience as a form of societal response, legitimated by a democratic poli¬ tical process and underpinned by specific analysis. The norm by which Indian planning has been judged has generally been tempered not by an appreciation of what was possible, but by what has been done else¬ where, be it China or South Korea. In this book, which was originally delivered as three Radhakrishnan Memorial Lectures at All Souls College, Oxford, in the summer of 1985, I choose to present a synthetic overview of the Indian experience of development planning. As a student of development economics, and also as one who was a member of the Indian Planning Commission for nearly half a dozen years, I tried to present an analysis of what led India to opt for development planning in the first instance, of the difficulties encountered, and the problems that Indian planning is faced with today. It has been my view that India’s initial choice of a development strategy was not only justified but in some sense a ‘natural’ one; and although marred by inadequacies of design and implementation, it has constituted a major effort to reshape India’s economy and society. The way out of the present problems lies not in giving up planning but in giving it new content. In preparing these lectures in book form, I have expanded them con¬ siderably, especially by inserting specific chapters on plan imple¬ mentation and adding substantially to the discussion on current issues of policy. I have also added a statistical appendix setting out the

numerical data which forms the basis for the various qualitative and quantitative statements interspersed in the text. I have also made use of some ideas presented as part of my D. V. Glass Memorial Lecture at the London School of Economics in May 1985, as well as at two seminars given at Queens’ College, Cambridge. Dr Sudhir Anand, Dr Vijay Joshi, and Professor A. K. Sen strongly encouraged me to expand the original lectures. At Cambridge, dis¬ cussions with Dr Ruchira Chatterji, Dr Jayati Ghosh, Dr Michael Landesmann, and Dr Ajit Singh have proved useful. I must also record that the approach adopted here owes not a little to the discussions I have had with Lalita Chakravarty. I have two very specific acknowledgements to make. I owe a great deal to the devoted labour of Mr A. P. Pandey, who has successfully coped with the problem of typing the manuscript, and to Mr S. N. Raghavan for his considerable help in the preparation of the Statistical Appendix. Sukhamoy Chakravarty

Delhi, March 1986

Contents

1

Indian Planning: Basic Features and Analytics

1

/^Foundations of India’s Development Strategy: The Nehru-Mahalanobis Approach

7

3

Vicissitudes in the Career of a Strategy

19

4

Problems of Plan Implementation

39

Some Current Issues of Economic Policy

53

/ 5

6 Conclusion Notes

81 91

Statistical Appendix

103

Index of Names

129

Subject Index

131

1 Indian Planning: Basic Features and Analytics

The present book, which develops the themes I initially presented in my lectures delivered in memory of Sarvapalli Radhakrishnan—an eminent philosopher and a distinguished public man who was for several years president of the Indian Republic—deals with the expe¬ rience of development planning in India. My objective has been to ascertain and evaluate the type of reasoning that has gone into the formulation of Indian plans. A possible title for this book could have been Economic Theory and Indian Planning, but that would not have adequately conveyed my purpose. I do not propose to deal with the various plans as abstract exercises of a decision-theoretic kind. Any development plan, as an operating document which forms the basis for implementation, is rarely identical with a plan model. To judge a deve¬ lopment plan, one must therefore take into account the socio-economic landscape, as well as the informal constraints which the planners had to respect. It is, however, a fact that Indian plans have often been judged only by the adequacy, or otherwise, of the models which constituted their analytical underpinnings, although these by no means exhaust their full set of implications. The lectures I delivered constituted some¬ thing of a departure from this procedure. I wanted to describe and analyse the experience of development planning in its two-sidedness. Theoretical understanding at a given point in time, based on the per¬ ception of objectives and constraints, led to the formulation of concrete action schemes or plan directives. In turn, these action schemes, with some delay, led to the emergence of conjunctures not always anti¬ cipated, which in turn led planners and policy-makers to rethink their objectives and strategies. There have consequently been elements of change as well as of continuity from one plan to another. It would therefore be a mistake to regard the Indian planning experience as made of a whole cloth, although in comparison with most countries’ plans, Indian plans have displayed a much greater degree of stability in

2

Indian Planning: Basic Features and Analytics

conception. At the moment, there are indications that some major directional changes may indeed be taking place. They are being projected as ruptures with the past. Whether this is indeed the case is not yet clear. In one of the chapters dealing with current issues of policy, I try to assess how congruent these changes are with what has been described as the ‘Indian approach’ to development planning; and what is more important, whether these changes can cope with the major challenges before the Indian economy.today. In the very beginning, one may well ask why discuss Indian plans, or for that matter the economic theory underlying Indian plans, at all, especially today when there are signs of‘plan weariness’ in many parts of the world, not excluding India. Economists of different doctrinal persuasions have pointed out that planning has not proved a success. Planned economies, it is claimed, are incapable of bringing about the necessary structural changes at the right time and of the right magni¬ tude, although this is traditionally alleged as their rationale, and are inefficient in distributing current stocks of productive factors among competing uses. After all, is it not true that Deng Xiaoping, Rajiv Gandhi, and even Mikhail Gorbachov are all engaged in getting away from the strait-jacket of ‘planning’. ‘Economic reform’ is the key phrase, and why not concentrate on it? These questions are doubtless pertinent; they can no longer be dis¬ missed as unimportant, irrelevant, or merely ideologically motivated, and I shall have to return to them at a later stage in my presentation. But I believe that there are three majo'r reasons why Indian planning needs to be discussed seriously. I shall first state these reasons very briefly, and then proceed to elaborate them. The first reason has to do with the nature of the ‘structural break’ that planning represents in India’s development experience. The second reason has to deal with the ‘analytical’ ideas underlying Indian plans as contributory factors to the growth of‘development economics’ as a field of enquiry. The third reason is, of course, none other than the classic issue of ‘market vs. plan’, an issue of great contemporary interest on which Indian expe¬ rience throws some light. Taking the first reason first, it cannot be denied that Indian plan¬ ning has brought about major structural changes in the Indian economy, although not to the extent desired by the planners. To understand what has happened to India over the last thirty-five years, it is absolutely necessary to understand the objectives, targets, and implementation procedures of Indian planning. To describe the story

Indian Planning: Basic Features and Analytics

3

of India’s planned development in terms of the logic of pressure-group politics alone is, in my opinion, a very one-sided projection of a multi¬ dimensional reality, especially when the pressure groups have neither stayed the same nor retained their relative importance in the decision¬ making process. Similarly, it is quite inadequate to deal with the same story in terms of the logic of primary accumulation of capital. The reason why this particular formulation is inadequate lies in its implicit avoidance of the dialectic of ‘accumulation vs. legitimation’. While Marx may have been justified in writing the history of the development of productive forces in seventeenth- and eighteenth-century England as a story of Ursprung liche Akkumulation, misleadingly translated as ‘primitive accumulation’ (although some would question the alleged phenomenon both on analytical and empirical grounds), the post-inde¬ pendence experience of India has a basic structural difference. Adoption of a representative form of government based on universal adult suffrage did have an effect on the exercise of political power, and so did the whole legacy of the national movement with its explicitly arti¬ culated set of economic objectives. Jawaharlal Nehru, chief architect of Indian planning, was also the prime minister of India. He viewed plan¬ ning as a way of avoiding the unnecessary rigours of an industrial tran¬ sition in so far as it affected the masses resident in India’s villages. While it is possible that he may have shared something of Marx’s views on the ‘idiocy of rural life’, it should be remembered that he was also a pupil of Gandhi, from whom he had learnt his basic lessons in political mobilization which centred around the rural masses. Furthermore, he viewed planning as a positive instrument for resolving conflict in a large and heterogeneous subcontinent. Even staunch critics maintain that Indian planning was a lively exercise for the first fifteen years of India’s post-independence existence. While there may well have been a structural break in the mid-sixties, planning has been practised, in one form or another, right through to the present. Even to get away from planning, one has to know what it has achieved. It is well known that it was at Nehru’s initiative that P. C. Mahalanobis, an eminent statistician and a man with a wide range of intellectual interests, was persuaded to work out the blueprint for the Second Five-Year Plan. This is still probably the single most signi¬ ficant document on Indian planning. It is also useful to remember that Nehru himself helped to draft the introduction to the Third Five-Year Plan, although this fact is not as widely known as it should be. Moreover, Indian planning was, in the formulation of its theory, far

Indian Planning: Basic Features and Analytics

4 more

self-conscious

than

that

attempted

in

many

third

world

countries. The rise of development economics in the fifties as a serious subdiscipline of economics, whose alleged demise has recently been lamented by some and welcomed by others, coincided with the formu¬ lation of India’s first three plans.1 Almost all major contemporary economists who took an interest in problems of development had occasion to interact with India’s planners and policy-makers in the fifties and the early sixties. Several of today’s Nobel laureates in economics were among them, as well as many other distinguished theorists.2 The result was a process of two-way interaction. Dominant ideas of contemporary development economics influenced the logic of India’s plans, and correspondingly, development theory was for a while greatly influenced by the Indian case. H. Myint, an eminent development economist, drew attention to this on several occasions. While this relationship between development economics and Indian planning did not generally persist later (there being too many dis¬ cordant trends within development economics itself, and far too many vicissitudes within India and in the outside world), the Fifth Five-Year Plan, especially in its draft form with its focus on poverty eradication, reflected to a certain extent the same relationship. By looking at Indian plans from an analytical perspective, we are therefore in a better posi¬ tion to judge some of the central issues in development theory and planning. Finally, the ongoing debate on ‘market vs. plan’ is also an issue which can be somewhat better understood by a discussion of Indian planning. I believe that the term ‘plan’ should distinguish between planning as a form of ‘instrumental inference’

(to borrow an

expression from Adolph Lowe, the well-known German economist who taught for decades at the New School for Social Research at New York), and ‘planning’ as an alternative to a market system based on ‘command and fulfilment’.3 Similarly, the term ‘market’ also permits different interpretations. It may be first viewed as a co-ordinating system, or in the language of cybernetics as a ‘servomechanism’, and secondly as an expression of an industrial system based on ‘consumers’ sovereignty’ judged as an ultimate value in itself. The first inter¬ pretation of the market can with justification be understood as an implementational one, and not necessarily inconsistent with planning as a mode of ‘instrumental inference’. In other words, it is perfectly possible to allow the macro goals of a system and the principal action directives to derive from a properly formulated plan, while its micro

Indian Planning: Basic Features and Analytics

5

analogues are left to be implemented through the market. There are, of course, economists who will disagree with this proposition, but I believe that they will do so because they do not make a clear-cut distinc¬ tion between the market mechanism as an efficiency promoting device and ‘market’ as a process which has to be valued in itsef. While a large literature has grown over this topic, I find that much of the discussion is efficiency oriented. This includes Hayek’s contribution, even though he does raise epistemological issues as well.4 However, it is not clear to me that planning as a strategy can be easily dismissed on the grounds of efficiency (in contrast with any specific strategy of planning), where major structural changes are involved and where the ‘invisible hand’ can only be grasped through a very dark glass indeed.5 This is not the place to repeat the discussion of the relevant theore¬ tical issues, which I have presented elsewhere.6 However, a few points relating to the Indian situation should nevertheless be reiterated. India ^adopted a specific strategy of planning to overcome what was at that time widely believed to be the principal constraint on its growth process: the shortage of capital stock in relation to the availability of employable persons. This had both a structural dimension and a value dimension, generally lumped together under the ‘savings constraint’.7 Indian planning in its initial phases was especially concerned with the structural aspects of real capital formation.

Today,

the Indian

economy has overcome some of the structural deficiencies which worried the early planners, but those deficiencies have not dis¬ appeared. Furthermore, the very pattern and process of growth has introduced new problems. At the time the Fifth Five-Year Plan was formulated it was widely felt that Indian planning had not paid suffi¬ cient attention to problems of poverty, and a strategy was sought that would make a perceptible impact on poverty within a specified timeframe. That strategy was not implemented, for a variety of reasons; so the problem has remained, and requires serious attention. Given India’s land-man ratio, its high rate of population growth, and the deteriorating ecological situation, it is quite evident that tech¬ nological improvements which are land-saving have precedence over many others. I am using the expression ‘land’ here to mean what Ricardo meant when he talked about the ‘land constraint’. It is clear that ‘land-saving innovations’ would require considerable investment of other scarce resources, as well as an upgrading of labour skills. I believe that no sustainable improvement in the distribution of incomes is possible without reducing the ‘effective’ scarcity of land, which

6

Indian Planning: Basic Features and Analytics

involves the introduction of machinery of ‘land-esque’ type and/or allowing for the productive use of human labour. This goes way beyond installing the latest machines in a few selected sectors. A major growth impulse is needed, and that implies wider-ranging action on research and development in areas such as energy, crop husbandry, and materials management.8 While I believe that efficiency in the use of existing resources may be improved by greater autonomy of action through introducing a variety of signals, including greater use of price signals, there is a clear need for the ‘visible hand’ of planning, as many of these problems involving expansion and modification of the resource base itself require far-sighted action which is beyond the deci¬ sion horizon of private actors. What should constitute such a plan would need to be discussed in very concrete terms. This would imply an evaluation of alternative options, including an assessment of how much risk we can afford to take on a number of issues, such as the extent of transitional inequalities in the distribution of incomes, or serious balance of payments disequilibria. I shall have occasion to deal with some of these issues when we come to a critical analysis of the policy matrix which is currently being worked out. Meanwhile, in the next chapter, I propose to discuss the genesis and articulation of a specific strategy of planning which is best described as the Nehru-Mahalanobis strategy, and was most clearly reflected in India’s Second and Third Five-Year Plans.

2 Foundations of India’s Development Strategy: The Nehru-Mahalanobis Approach

Genesis of the Nehru-Mahalanobis Approach When the planning process was initiated in India, there was a legacy of pre-independence debate on India’s development problems. This debate centred around the Gandhian approach, at one pole, and the ‘modernizing’

approach of Nehru at the other.

The Gandhian

approach has never been seriously discussed by either mainstream economists or by its left-wing critics. There are good reasons for this neglect as both sides share fundamental propositions regarding the way one should view the central problematique of development. On this point, differences between the mainstream theorists and their critics have revolved around the role of the market system in bringing about the desired quantum leap in the volume of accumulation and its distri¬ bution between sectors. However, both have largely accepted a ‘commodity-centred’ approach and the extremizing action directives that govern the behaviour of economic agents. Thus, in either system, more goods are preferred to less; and a higher level of capital stock per worker has been considered unambiguously helpful in improving the standard of living. While substantial differences have remained as to who will bear the costs of accumulation, and also regarding the character of the social support structure that the adoption of a techno¬ logical change may entail, the common ground between the two can no longer be ignored, especially since the socialist planners of the 1980s in China, Hungary, and even the USSR have been calling for marketoriented reforms. China under Deng is a particularly interesting example, where goals of modernization have been closely tied up with the introduction of market-oriented

reforms

through

the

introduction

of ‘contract

systems’ in several major spheres of economic activity, notably agri¬ culture. In contrast with the basic tenet of Maoist economic policy

8

Foundations of India’s Development Strategy

which was presented as the development of a ‘socialist man’ based on co-operative value orientations, emphasis in recent policy announce¬ ments has been placed on the development of a competitive spirit, and particularly on greater availability of private goods, especially con¬ sumer goods. In Marxist terms, the sociological impulse behind the changes can with some justification be described as the introduction of a form of ‘ commodity fetishism ’. While it is possible to offer dissenting opinions as to the compatibility of the present change in China with the ideals of socialist construction (some would treat the whole thing as an aberration), in my opinion, it seems to suggest that a more basic issue is at stake here. In the present climate of opinion, in contrast with what Marx himself may have thought about the objectives of socialism, the idea of what constitutes a ‘ good life’ seems to be not significantly differ¬ ent between socialist and capitalist modernizers. Consequently, the entire debate, at least in China, has for the time being been reduced to one of how best to promote ‘productivity growth’—a concept which gets increasingly complex as one moves from a subsistence economy to a modern economy with an increasingly diverse assortment of goods available for consumption.1 This is equally true of the ‘market socialism’ which has been practised by Hungarian planners since the late sixties with a certain measure of success. In contrast, the Gandhian approach has always talked about the voluntary limitation of wants, the need for having self-reproducing village communities, and about issues bearing on a better balance between man and nature. While the Gandhian approach has received a certain measure of support in recent writings of ecologists and ecolo¬ gically minded economists, in the early fifties such positions appeared to lack any substantive theoretical foundation.

Gandhi and his

disciples looked more like moralizing old men than like people who could be expected to change the direction of society. Thus the modernizing school under Nehru won the day as their ‘scientism’ seemed more compatible with the ideological priorities involved in building up a post-colonial nation-state, although some vestigial traces of the alternative approach remain in the attitude to certain very smallscale industries such as hand spinning, generally known in India as the ‘tiny sector’. The first three five-year plans, which bore the personal imprint of Nehru—and especially the Second Plan, which reflected a major watershed in India’s economic thinking—are especially important as attempts at giving concrete shape to the vision of transformation, social

Foundations of India’s Development Strategy

9

and economic, to which the modernizing elite subscribed. I have presented Nehru as a modernizer par excellence. But some may like to differentiate sharply between Nehru as a modernizer and, say, J. R. D. Tata, one of the authors of the famous‘Bombay Plan’, which projected a vision of industrial India even before the country became independent. There is little doubt that as a modernizer, Nehru was rather heavily influenced by the ideals of Fabian socialism. In fact, in his famous pamphlet ‘Whither India’ written in the thirties, Nehru talked in favourable terms about Soviet socialism much as the Webbs did. The National Planning Committee set up by the Congress Party of India, with which not only Nehru but also eminent scientists such as M. N. Saha were associated, reflected a profoundly interventionist economic philosophy. The deliberations of this committee undoubt¬ edly had an impact on the type of economic regime that India adopted on gaining independence, which involved a variety of institutional motive forces. That India under Nehru adopted a socialist framework of economic policy in the mid-fifties doubtless owes something to the ideological predilections of Nehru and some of his close associates, and cannot be denied by any student of recent Indian history. But it may be maintained that even a more pragmatically inclined politician than Nehru could well have opted for the same set of arrangements for pro¬ moting economic development if his perception of the factors perpe¬ tuating structural backwardness conformed to what is described below.

Structural Constraints and the Development Strategy The underlying causes of structural backwardness were perceived as follows. First, the basic constraint on development was seen as being an acute deficiency of material capital, which prevented the introduction of more productive technologies. Secondly, the limitation on the speed of capital accumulation was seen to lie in the low capacity to save. Thirdly, it was assumed that even if the domestic capacity to save could be raised by means of suitable fiscal and monetary policies, there were structural limitations preventing conversion of savings into productive investment. Fourthly, it was assumed that whereas agriculture was subject to secular diminishing returns, industrialization would allow surplus labour currently underemployed in agriculture to be more productively employed in industries which operated according to increasing returns to scale. A fifth assumption was that if the market mechanism were accorded primacy, this would result in excessive

Foundations of India’s Development Strategy

10

consumption by the upper-income groups, along with relative under¬ investment

in

sectors

essential

to

the

accelerated

development

of the economy. Sixthly, while unequal distribution of income was considered to be a ‘bad thing’, a precipitate transformation of the ownership of productive assets was held to be detrimental to the maximization of production and savings. In other words, there was a tolerance towards income inequality, provided it was not excessive and could be seen to result in a higher rate of growth than would be possible otherwise. As this last point was to figure quite prominently in the debate of the late sixties and early seventies, it may be worthwhile to stress here that while Nehru and others did talk about letting the national cake grow larger before an adequate standard of living could be provided for all, they were not growth-maximizers in any sense of the term. A satis¬ factory rather than a maximum rate of growth would correspond more closely to what they had in mind. Given all these perceptions, it was felt that economic theory indi¬ cated that the basic questions relating to how much to save, where to invest, and in what forms to invest could be best handled with the help of a plan. It will be noted that the economics profession in the fifties, especially during the early and middle part of the decade, subscribed to most of the perceptions presented above. It is enough to recall Arthur Lewis’s famous dictum that the central issue for development economics was to understand how a country which saves 5% of its income is transformed into one which saves 20% of its income. The same view was expressed by A. K. Das Gupta, a prominent Indian economist with a classical bent^f mind, who defined India’s problem as one of ‘ primary accumulation of capital’. Apropos the distinction in the growth problem between developed and developing economies, he wrote that in the former ‘it is a follow-up of the Keynesian theory of under-employment equilibrium and leads up to models of steady growth. The latter is a problem of “primary accumulation” and leads to models of accelerated growth.’2 On the third proposition, agree¬ ment was not so universal. While structuralists like Prebisch would have endorsed it, for most economists it was an empirical question. However, quite a few would have subscribed to Nurkse’s ‘export lag’ thesis, especially because of the heavy weight of primary products in India’s export basket.3 Furthermore, the sharp fall in commodity prices after the Korean War also added to the plausibility of that pro¬ position. But the export lag thesis leads to a proposition for balanced growth, while Indian planners were talking about the primacy of

Foundations of India’s Development Strategy

11

industry and particularly of heavy industry. The reason is that in con¬ trast with Nurkse, who worried about horizontal inter-relationships, Indian planners were much more concerned about vertical inter¬ relationships. The fourth argument was initially set forth by Allyn Young in his justly famous article on increasing returns and economic growth. In the post-war period, continuing the original empirical work of P. J. Verdoorn, N. Kaldor has done much to emphasize the need for fast rates of growth in manufacturing production for promoting a ‘virtuous circle’ of growth.4 The fifth argument is the ‘market failure’ argument, which has been so extensively treated in the literature that we need not deal with it here. Finally, in regard to the tolerance of inequality, not only did it reflect a convenient value bias of the elite, but it formed the staple of much of the classical theorizing on growth adopted by the economics profession with the exception of Paul Baran, who came to the conclusion that 15% of India’s national income could be invested without any reduction of mass consumption.5 It will be observed from the above that the Indian planners sub¬ scribed to a basically supply-side view of the planning problem. The argument that domestic demand can possibly be a constraint on the growth process was not even mentioned as a hypothesis that needed to be rejected. The reason, presumably, was the belief that with an active state policy on investment, all possible slack in the economic system would be utilized. Statically considered, the argument was right. There was little Keynesian-type unemployment in India in the early fifties. There was consequently justification for concentrating on factors

promoting

savings

or

productive

accumulation.

Indian

planners could at that stage maintain that what mattered most was growth in the aggregate level of investment and that, disproportionalities apart, the growth process was unlikely to lose steam so long as public investment was growing at a fast pace.6 That led them to look into areas where public investment could be more fruitfully deployed, in the long term. There were three major possibilities which could be expected to balance supply with demand along a growing trend line. First, public investment would be concentrated in the area of infra-V structure. Secondly, public investment could be directed primarily towards agriculture. Thirdly, public investment could be directed towards

industrial development.

Indian

planners obviously did

attempt all three, as any reasonable planner can be expected to do in such situations. The First Five-Year Plan (1950-5) focused on the first two types of investment. At the time of the Second Five-Year Plan 1

Foundations of India’s Development Strategy

12

(1955-60), however, a major change was brought about. As already pointed out, Indian planners operated on the assumption of a low elasticity of export demand accompanied by a system of strict import allocation. Thus they were in reality operating on the assumption of a nearly closed economy.7 In such an economy, if savings were to be substantially raised from a low initial level of around 5% in 1950 to 20% in 1975, inter-sectoral consistency over time would demand that the productive capacity of the capital goods sector would have to rise at an accelerated rate to convert growing savings into additional real investment. It was therefore the need to raise the real savings rate that led Indian planners to accord primacy to a faster rate of growth in the capital goods sector, although doubtless there could have been other considerations such as building up defence capability. The Second Five-Year Plan, which was heavily influenced by the work of Mahalanobis, reflected to a much larger extent the necessity to build ahead of demand in the area of capital goods production. The Mahalanobis strategy, which deviated from the ‘textiles first’ strategy of industrial development followed by a successful late-comer in industrialization like Japan, was the object of a great deal of critical comment. Mainstream economists found it an unjustified departure from the principle of ‘comparative advantage’, while those who were impressed by the Soviet model of industrial development thought that the avowed priority for the capital goods sector corresponded to the logic of accumulation enunciated by Marx in his models of expanded reproduction. Looking at the debate from the vantage point of the eighties, it can be seriously maintained that both sides overstated their respective cases. The proponents of ‘comparative advantage’ took a much too myopic view of the growth process, especially taking into consideration India’s size, resource endowments, and the existing trade oppor¬ tunities. On the other hand, while the Mahalanobis model contained an important insight into the dynamics of a disaggregated growth process (a point to which I shall return), that insight by itself did not permit far-ranging conclusions to be drawn about the primacy of the capital goods sector irrespective of initial conditions and social valua¬ tion of consumption at different points in time. Most importantly, if the inability to employ more people productively depended as much on the absence of suitable ‘machines’ as on the shortage of ‘food’, the workability of the model, as distinguished from its analytical contri¬ bution, depended on an adequate and effective policy frame for agri-

Foundations of India’s Development Strategy

13

culture, which was absent from the Second Five-Year Plan. This is a point to which I shall return in Chapter 3.8 From the angle of political economy, the Indian planning exercise is often viewed as a variant of the Soviet planning model. I am of course referring here to the decade of the fifties, especially the late fifties. That Mahalanobis himself saw the matter in this way is borne out by the following statement, which he made in a paper hardly commented on in the western literature. This, incidentally, is also the only place where he compares his own work with that of Feldman, a Russian economist of the twenties whose work was popularized in the mid-fifties by E. D. Domar. Mahalanobis wrote while referring to his own model of growth, A model of exactly this type was developed by Feldman in 1928 in the U.S.S.R. A summary of the paper in English is available in Domar’s essay in the Theory of Economic Growth. The Indian work, however, was done completely independently of Feldman’s findings. It is interesting to note that the impetus of planning initiated almost identical lines of thinking in the two countries, the U.S.S.R. and India.9

Let us note that Mahalanobis does not talk about the political economy of backwardness as responsible for the convergence of the Russian and Indian lines of thinking, but the ‘impetus of planning’. Obviously, he had in mind the so-called primacy thesis of the capital goods sector, which he thought to be logically deducible from the two-sector model of growth that he had formulated in his paper in 1953; a policy which was also advocated by Feldman, and adopted by the Soviet Union during the Stalinist period. Was Mahalanobis right? Were the two lines of thinking ‘almost identical’? We have already said that the priority argument for the capital goods sector does not necessarily follow in all situations. As there is a very considerable technical literature on this question, which I have discussed elsewhere, it is not necessary to enter into these issues here.10 What is of importance here is that there was a certain homology between the Soviet ec'onomic situation in the twenties and the Indian situation in the mid-fifties. That homology pertained to the situational logic inherent in the problems faced by late-coming nations seeking to industrialize quickly. The argument gains greatly in plausibility when one talks about countries of the size and resource diversity of the USSR and India. Alexander Gerschenkron had talked about such a logic in the context of enunciating his principle of ‘recursive backwardness’. In conceptualizing Soviet growth models of the twenties, the

14

Foundations of India’s Development Strategy

expression ‘socialist model’

is frequently employed.

For certain

purposes this may not be inappropriate. For our present purposes, if we replace ‘socialist’ by ‘modern’, and recall that before collectivi¬ zation was carried through, petty production was nearly universal in agriculture in Russia, the similarity between the two situations becomes quite evident. Add to this that the assumptions regarding foreign trade were roughly the same in both cases, and we are then led to the convergence in lines of thinking that Mahalanobis talked about. Up to a point,

it is therefore quite possible to uphold the

Mahalanobis line of reasoning even without talking about the more doubtful thesis on which much ink has been spilt, namely, ‘the priority for the rate of growth of Department of 1’. I would, however, like to maintain that this comparison cannot be stretched too far. This becomes quite apparent when account is taken of the multiplicity of pressure groups which existed in Indian society: in particular, the existence of rather large capitalist combines, rich landowners, and a very powerful middle class. Unlike the Russian revolution, the Indian independence movement and the subsequent transfer of power did nothing significant to curb the pre-existing power of these groups. What they did do, and this is not unimportant, was to curb their poten¬ tial rate of expansion in a newly independent country. As I have pointed out already, Nehru sought to forge a more complex relation¬ ship with these groups, involving elements of strategic support as well as restraint. The possibilities and limitations of this approach were not clearly perceived at the time.11 From the vantage point of today, the Indian development model of the mid-fifties is probably better viewed as a variant of the Lewis model.12 The variation relates to the two-sector disaggregation intro¬ duced by Mahalanobis, as well as to the active role allotted to the state. In the original Lewis model, the principal actors were the capitalists in the ‘modern’ sector, but in the Indian case a development bureaucracy was also assigned a major role. Whether this latter substitution affected the growth process in an essential way is an issue that will be discussed in the chapter on plan implementation. The adoption of a mixed economy framework with the private sector and the state competing for scarce resources made finance a major problem in its own right: a quasi-bottleneck, to use Kalecki’s expres¬ sion.13 Lewis had found the solution to the financing problem in the accumulation of profits which were to be reinvested to generate growth. Profits arose in the sphere of production. In the Russian model

Foundations of India’s Development Strategy

15

as practised during the twenties, the situation was more complex because industry and agriculture operated according to different ground rules. There was indeed a genuine financing problem after the introduction of the New Economic Policy. Both Bukharin and Preobrazhensky, principal contestants in the debate that raged at that time in the Soviet Union, recognized this problem. Preobrazhensky’s formulation of the principle of ‘socialist primitive accumulation’ during the 1920s was only an expression of the idea that the socialist state, like the Indian state, had to find sub¬ stantial real resources for accumulation. It differed from Bukharin’s primarily in the pace at which the accumulation process could be carried out. While Preobrazhensky may be said to have thought more along ‘maximalist’ lines, Bukharin was more inclined to think along a more proportional growth path (a possibility not unlike what India could have hoped to attain if the state were more powerful as well as more deft). In the Indian case, having ruled out the juridical change in the status of productive assets, the state was thinking in incremental terms. A modern, capital-intensive industrial sector was to be created side by side with private agriculture, with the continued functioning of a private industrial sector confined to relatively labour-intensive, light consumer goods. There was, therefore, an assumption of a mixture of industrial motive forces which were supposed to act in a synergistic manner. The financing pattern adopted in the fifties was not an act of over¬ sight but a deliberate choice, rooted in what Indian planners believed to be an egalitarian policy mix. The idea was that accelerated invest¬ ment was likely to create large profits which should be re-invested. It was alright to encourage the private sector to display its incentive to maximize production so long as it was possible to tax it sufficiently; or even to raise low interest loans as long as it was understood that in the course of time, the state or public sector was going to be largely self¬ financing. In my discussion so far, I have barely touched on the theme of‘trade’ as an engine of growth. Why did Indian planners ignore the trade option as a major source of growth? The issue was posed at the time the Second Five-Year Plan was formulated. A projection of the balance of trade was attempted in the plan document, and the planners con¬ cluded that no significant increase in export earnings in the short run could be expected. However, they recognized that ‘it is only after

16

Foundations of India’s Development Strategy

industrialization has proceeded some way that increased production will be reflected in larger export earnings’.14 That this argument was considered reasonably sound is indicated by the conclusions Sir Donald McDougall reached when he was asked to advise the Planning Commission in the early sixties on the balance of payments problem. Sir Donald was of the opinion that ‘India with potentially cheap steel and low wages should in time be able to compete abroad over a wide range of manufactured goods’ (my italics).15 What could have been the basis for short-run export pessimism? Even if demand for primary products were assumed to be strongly inelastic, there was obviously a major manufacturing sector which India could have developed for export purposes—cotton textiles. Planners expected the export of cotton piece goods to increase from 747 million yards in 1955 to 1,000 million yards in 1960, not a spectacular increase considering that the country had exported 867 million yards in 1954. Looking back, it would appear that India could certainly have placed greater emphasis on the cotton textile sector. There may be different explanations for this neglect. But the usual explanations, given in terms of the absence of a natural resource base (because of the poor quality of cotton grown in India) or an emphasis on maximizing home consumption rather than on earning foreign exchange are inadequate, even though there is some basis for these judgements. I believe that the reason was basically political. Emphasis on textile exports would have required supporting a particular regional group of industrialists at the expense of others. Furthermore, there was the Gandhian legacy which viewed the textile sector as pre-eminently suited to small-scale initiative. This became an issue in the debate on the choice of techniques to which many notable contributions were made.16 In his famous four-sector model, Mahalanobis wanted to define a ‘dual development thesis’ (which Mao Ze-dong called ‘walking on two legs’), whose purpose was to combine high employ¬ ment growth with building up a capital goods base. In the context of employment generation, he too assigned an important role to the highly labour-intensive part of the textile sector. This precluded a fast rate of growth in a modern textile industry.17 The argument, briefly, was as follows. The development of a heavy capital goods base over a period of time would lead to the diversifi¬ cation of the export basket in the direction of manufactured goods, including machinery and equipment; while the increase in employ¬ ment, leading to an expanded demand for consumer goods, would be

Foundations of India’s Development Strategy

17

met by pursuing ‘capital-light’ methods of production. That this would not enable India to be competitive in the world market for textiles was considered to be a short-term adjustment problem.18 As it happened, the needed increase in the production of consumer goods did not materialize. This posed a serious problem, especially in regard to food grains and cotton. Furthermore, while Mahalanobis had expected the learning effect to gradually diminish the cost of production of capital goods, this did not happen either. In addition, the economy received several severe jolts, some of which were exogenous and unrelated to the development strategy, the most notable one being the outbreak of border troubles with China in 1962. Can we conclude from these facts that the strategy was devoid of analytical and policy significance? I think that such a conclusion is not warranted. The analytical significance of what was attempted by the Indian planners during the Second and Third Five-Year Plans could be best brought out by linking the core theoretical argument with the theory of traverse recently brought into the foreground of discussion by Sir John Hicks in his perceptive reinterpretation of the ‘machinery question’ which Ricardo had added in the third edition of his Principles. Professor Hicks has not merely shed analytical light on this old and vexed question, he has also provided lucid historical insight. But his mode of analysis was what he calls ‘neo-Austrian’.19 What Indian planners, notably Professor Mahalanobis, had in mind could be put more easily in the language of traverse analysis developed by Adolph Lowe. His formulation, like that implicitly formulated by Professor Mahalanobis, is strategically centred on the relationship between three major groups of industries: consumer goods, capital goods for producing consumer goods, and capital goods for producing capital goods.20 How the relationship between these sectors changes over time, even with unchanged technology and less than abundant natural resources, is at the heart of the problem of economic growth for a developing economy. For a small open economy enjoying very favourable demand conditions, this problem of transition can be significantly eased by utilizing trade possibilities, but I doubt whether India can be fitted into such a framework. Criticisms which have been made on this score appear to me greatly overstated. I do however believe that there were two major limitations to the Indian plan exercise. First, the treatment of prime consumer goods, such as food, was highly optimistic. This and the distortions created thereby will be treated in Chapter 3.

18

Foundations of India’s Development Strategy

Secondly, discussion of what Lowe would call ‘force analysis’ was not sufficiently realistic. This means that the role of the planning process was viewed much too simplistically. The most frequently heard criti¬ cism—that the fault with Indian planning lay in a high degree of centralization of investment—seems to miss the mark. Subsequent developments showed that a more important reason was that insuffi¬ cient attention had been paid to the problem of how to obtain resources for public investment purposes while encouraging the growth of incomes in private hands. So long as the growth of the agricultural sector could be viewed as a low-cost option and a reasonable volume of net aid was available, these problems did not surface much. But from the mid-sixties onwards these conditions were to change significantly. Discussions on the ‘crisis of Indian planning’ in the late sixties put a lot of emphasis on ‘urban bias’ and ‘neglect of foreign trade’. These discussions, as I look back, were often overstated, but they had a point: the failure to consider the full set of logical implications of what accelerated growth implies in the context of a mixed economy. The achievements of the first three plans were not insignificant, although they fell short of expectations. Among the achievements, one can mention a great deal of diversification within the industrial structure, a significant upgrading of the skill base of India’s popu¬ lation, and a turnaround in the long-standing stagnation of Indian agriculture because of a large step-up in irrigation investment. Amongst the failures, one has to admit the underestimation of the import-intensity of the import substitution process. This showed that the process of industrialization had ignored certain important issues relating to the phasing of investment outlay. But probably more importantly, the inability to carry out effective land reform in the early fifties when conditions had been reasonably opportune, along with the maintenance of the largely unchanged input base of traditional agri¬ culture, meant that the agrarian transition was left largely incomplete. Methods adopted to tackle this problem from the mid-sixties onwards when the vulnerability of Indian agriculture was exposed will be taken up in the next chapter.

3 Vicissitudes in the Career of a Strategy

The Development Strategy in Operation: 1950-65 The first three five-year plans of India are generally treated separately from all the others. There are two good reasons for this: first, they were successive in time, together spanning a period of fifteen years; and secondly, and more importantly, they were all formulated under the active chairmanship of Jawaharlal Nehru. This last fact is doubtless important from the point of view of explaining the seriousness with which the planning effort was treated at home and abroad. From a purely analytical point of view, however, the First Plan was not a plan in the sense of constituting an internally co-ordinated set of investment decisions. This point has been noted often enough, although on occa¬ sions the First Plan has been praised as the most successful because its very modest (12%) targeted increase in national income over the plan period was surpassed in execution, largely because the production of food grains (cereals and pulses) increased from around 52 million tonnes to 66 million tonnes.1 The plan had emphasized public irri¬ gation as a leading input into agriculture, but otherwise its diagnosis and solution for the development problem ran along very conventional lines. The real break with the past came with the Second Five-Year Plan. This saw the articulation of what may be called the NehruMahalanobis strategy of development. This strategy, as we have seen, lacked neither a theoretical rationale nor a measure of empirical plausi¬ bility. It was primarily a strategy of industrialization which hoped to succeed by forging strong industrial linkages, both ‘backward’ and ‘forward’. In this respect the strategy seems to have worked, at least for a time. The rate of growth of industrial production was impressive. The Third Five-Year Plan noted that the general index of industrial production rose from 139 in 1955/6 (1950/1 as base) to 194 in 1960/1.

Vicissitudes in the Career of a Strategy

20

It also noted that the machinery index, which was 192 in 1955/6, increased to 503 in the corresponding period. Considerable though less spectacular growth was observed in iron and steel and chemicals. How¬ ever, a very discordant note was struck by cotton textiles, which rose from 128 to only 133 in 1960/1. Even after allowing for differences in the base lines of different industries as well as differences in coverage, these figures seem to indicate disproportionate growth of the heavy industries sector, which was more striking than the planners may have initially bargained for. However, of more immediate concern for the planners was their underestimation of the imports needed to achieve the process of transition to self-reliant growth. They concluded on the basis of their analysis that this reflected merely a ‘hump’ which could be surmounted if suitable foreign assistance was available for a period of ten to fifteen years. The planners admitted that ‘the general pattern of development followed in the Third Five-Year Plan necessarily flows, in large part, from the basic approach and experience of the Second Five-Year Plan’. They then went on to add that ‘in some important respects it represents a wide view of the problems of development and calls for both more intensive effort and a greater sense of urgency’. Among the priorities listed in the Third Five-Year Plan, it was recognized quite explicitly that agriculture had the first place. Thus, in its initial formulation at least, the Third Plan seems to differ from the Second. It was obviously thought both logical and necessary to modify the original Mahalanobis formulation to accord priority to a sector which could not be classified under his Department 1, namely, the ‘heavy capital goods’ sector. It is not, however, clear from the plan document and discussions which took place around that time whether the planners had fully comprehended the nature of the changed priorities and their lack of congruence with the Second Five-Year Plan strategy. Facts suggest that compared with the First Five-Year Plan, there was a relative de-emphasis on agriculture in the Second Five-Year Plan. There is no doubt that this was so in terms of investment allocation ratios, both planned and realized. Economists, both within India and abroad, often claim that this implies an urban bias at the root of India’s development planning which was especially pronounced in the Second Five-Year Plan and not significantly different in the Third. Reference was made earlier to the Soviet debate of the twenties between Preo¬ brazhensky and Bukharin. We saw that while the comparison should not be stretched too far, there was some similarity in perception

Vicissitudes in the Career of a Strategy

21

between the principal Soviet theorists and the major architects of Indian planning, especially Mahalanobis. I even quoted from a paper of Mahalanobis which shows that he himself was not unaware of this similarity. But I believe that Indian planners were not principally thinking in terms of extracting ‘surplus’ from agriculture for financing investment in industry. What they effectively did was to treat agri¬ culture as a ‘bargain sector’ ,2 They were aware that major institutional changes were required in order to realize the production potential of agriculture, but they did not realize the nature and dimension of poli¬ tical mobilization that would be necessary to bring about the necessary institutional changes. The Second Five-Year Plan document included a very well written chapter on ‘Land Reform and Agrarian Reorgani¬ zation’, which went beyond the mere enunciation of a redistributive strategy for land to the articulation of what could form the basis for a progressive agrarian structure. It is on this latter dimension that hopes were placed for bringing about the envisaged increase in agricultural output, particularly by those who, like Nehru, saw co-operative far¬ ming as the ultimate solution. Such people believed that the proposed programme of community development and national extension would constitute an essential catalyst in this process, along with irrigation financed from public budgets. Thus, while it would be inaccurate as well as unfair to say that the Second and Third Five-Year Plans were lacking in an agricultural strategy,3 it would not be unwarranted to maintain that planners were grossly over-optimistic as to what traditional Indian agriculture, with its conventional input-output basis and deep-seated social strati¬ fication, could do within the constraints set by the political changes which the Congress Party was able to engineer. In actual fact, the planners’ strategy boiled down to- the traditional thesis, upheld by several contemporary scholars of economic development, that during the early stages of industrialization it was necessary for agriculture to contribute to the building up of a modern industrial sector by pro¬ viding cheap labour and also cheap food. Along with increasing pro¬ ductivity, this in turn would help in maintaining a low ‘product wage’ in the industrial sector.4 The relationship between maintaining a low product wage and a high level of accumulation was assumed to be strictly positive. While this whole sequence of reasoning was not explicitly stated in any plan document, it can be deduced as a corollary from many contemporary discussions.5 In an attempt to explain why it was wise on India’s part to go into an agreement with the United States

Vicissitudes in the Career of a Strategy

22

on the large-scale import of food grains under PL480 (which enabled food grains to be imported, largely against payment in rupees and partly as a gift), Dr S. R. Sen, to whom reference has already been made, stressed the great importance of maintaining a ‘cheap food regime’ for promoting growth in India. Properly elaborated, Sen’s thesis would not be different from the logic given here.6 In fact, the disincentive effects of specific commodity imports on such a large scale were raised at that time, only to be dismissed by the official response that with sufficient increases in the level and the rate of public investment, there was an assured prospect of rapidly expanding home markets for principal commodities such as wheat, cotton, and edible oils. Things did not work out quite the same way. Indian planners had underestimated the time lags involved on the production side in industry, as well as the need to bring about a large-scale shift in the input-output ratios in traditional agriculture. However, through PL 480 imports as well as through irrigation-induced increase in food production, they succeeded in maintaining a low rate of price increase (around 2.5% per annum), which helped to maintain a sort of social equilibrium in the urban areas. Social peace was further promoted by rapid increase in urban employment. Meanwhile, there was not much evident sign of unrest among the peasant classes as the expansion of the area cultivated even under traditional technology had led to a nonnegligible increase in rural incomes, at least in major agricultural states such as the Punjab, Andhra Pradesh, and Tamil Nadu. Uttar Pradesh,

the largest state, which did not show any significant

increase in agricultural production, nevertheless benefited from cer¬ tain land-reform measures, such as the abolition of intermediary tenures. There were two major exogenous shocks which did a great deal to upset the general optimism about Indian growth, which in turn led to substantial changes in agricultural strategy both in fact as well as in formulation. These were the sharp increases in defence spending after 1962, and the two successive monsoon failures in 1965 and 1967 which led to catastrophic declines in food production.7 The first shock led to severe cut-backs in public investment, putting the ‘acceleration prin¬ ciple’ into reverse,8 and leading to the emergence of significant excess capacity in the heavy and capital goods sectors. While the immediate impact of the disaster on the food front was mitigated by additional large-scale imports of US wheat, it was quite clear that a basic

Vicissitudes in the Career of a Strategy

23

imbalance had arisen between the demand for food and the supply of food, which was the combined result of acceleration in the rate of popu¬ lation growth, exhaustion of the possibilities for increasing the culti¬ vated

area,

and

the

diminished

effectiveness

of regional

crop

specialization.9 The government’s first response was to abandon the method of fiveyear planning in favour of annual plans, which were relatively modest budgetary exercises. A second response—sharp cut-backs in public investment—inevitably dampened the economy in that it led to reduced demand for a whole range of products produced by the private sector. A draft Fourth Five-Year Plan had been abandoned in 1965/6 along with an ambitious perspective plan drawn up under the influence of Pitambar Pant, an intellectual disciple of Professor Mahalanobis and a close supporter of his strategy within the Planning Commission. In its place, as already mentioned, annual plans were introduced to retain a very limited amount of development orientation in the annual budgets. There was no attempt at any methodological innovation in these plans, but the ‘annual plan’ period was significant for two reasons. First of all, annual plans brought out into the open one of the major weaknesses underlying Mahalanobis’s strategy, namely, the idea that what was physically possible and desirable could also be rendered financially feasible. Mahalanobis and his colleagues, notably Pant, had maintained that material balances for all the key commo¬ dities constituted the chief operating document in any plan. While there was always a powerful group within the government which did not agree with this view, especially within the Finance Ministry and to a much smaller extent within the Planning Commission, they had a rather simple quantity-theoretic view of price level dynamics. But the experience of inflation in the mid-sixties, coupled with the govern¬ ment’s reluctance to step up investment lest it trigger off inflationary price expectations (in spite of the existence of significant excess capa¬ city in the equipment goods sector), brought home the lesson that the problem of how best to finance a plan required very careful attention. It had been pointed out by Kalecki in a paper that he wrote when he visited India in 1960 that for any rate of growth of national income there must be a corresponding rate of growth in the supply of neces¬ sities. He further stated in this paper, which was first published in the Economic Weekly in J uly 1960, that

Vicissitudes in the Career of a Strategy

24

a sound financial policy must be based on two very different elements: (a) A correct proportion between the rate of growth of the national income and that of the supply of necessities, (b) A policy of taxation which would restrain the consumption of nonessentials to the extent that would provide sufficient resources for the financing of investment.10

While Kalecki’s recommendations did not make much impact at the time they were written, his proposition (a) acquired an overwhelming plausibility after the evident slowing down of the rate of growth of food production. I have to add here that his proposition (b) is yet to be fully grasped, and this is a point to which I shall return in Chapter 4, which deals with the present framework of policy-making.

New Agricultural Policy: Characteristics and Consequences To overcome the ‘agricultural stagnation’, a new strategy of agri¬ cultural development was formulated during the

‘annual plan’

period. This strategy carried over into the Fourth Five-Year Plan, which was finally adopted in 1969 under the intellectual leadership of D. R. Gadgil, an eminent economist with a deep interest in the problems of Indian agriculture.11 The new policy marked a notable shift in the perception of what constituted the crucial constraint in the agrarian sector. Earlier theorizing had maintained, as we have noted, that it was basically the absence of knowledge of appropriate agricultural practice, along with the maintenance of an obsolete social structure, which prevented increases in agricultural production. Land reform was considered very important, at least in principle; in practice the issue was largely evaded. The new strategy seemed to deny the critical importance of land reform even on the level of principle. Instead, emphasis was shifted towards technological modernization.

It was also openly

admitted that it was essential to ‘bet on the strong’, to recall Stolypin’s famous expression in a somewhat different context, if the rate of growth of agricultural production was to be revived. Based on recently released papers of Lyndon Johnson, some commentators maintain r that President Johnson lent a helping hand to the new strategy by with¬ holding orders for the shipment of grains to India pending India’s adopting a new package of policies comprising the following set of measures:

Vicissitudes in the Career of a Strategy

1.

25

a shift in emphasis from ‘major’ to ‘minor’ irrigation works, which implied largely a shift from publicly financed large irrigation projects to small tube wells and energized pump sets;

2.

adequate provision of ‘credit’ to those who were considered to be credit-worthy, which in effect meant the large farmers;

3.

an alteration in the input base of agriculture, which meant an increase in the rate of fertilizer consumption along with commer¬ cial sources of energy, such as electricity and diesel oil; and

4.

the development of fertilizer-sensitive varieties of grains.

The new strategy seems to have had a very impressive effect in the case of wheat, but it is not possible to discern a similar effect on other crops, at least in the earlier years—and even with wheat, the impact was most pronounced in states already well endowed with such infrastructure as adequate roads, market towns, co-operative credit societies, and above all, good irrigation coverage. Much has been written on the social effect of the Green Revolution and its effect on rural inequality. This is not the occasion to go into an evaluation of a whole mass of polemical and contradictory literature. But several points need to be made here concerning certain irreversible changes produced within the Indian economy which pose problems for the future of Indian planning. First of all, there was an increase in the use of purchased inputs in the agricultural sector, which meant that agriculture-industry linkages were now two-way to a much greater extent than ever before. This meant that the block-angular character of the input-output matrix, which had formed the basis of some influential theorizing within India, was going to be less relevant in future. In concrete terms, this meant that while the input flow from agriculture to industry could be expected to continue, the need to ensure flows from industry to agriculture could no longer be ignored,12 even though in the earlier stage the input base of agriculture was largely provided by the agriculture sector itself. This will be evident from Tables 23 and 24, which describe the input-output structure of the Indian economy for the years 1968/9 as well as 1973/4. Further, Tables 25 and 26 reflect the changes in direct and indirect input requirements per unit of output in various sectors for those two years. These tables, therefore, are of considerable importance to an understanding of the structural changes going on in the economy. Secondly, the monetization of Indian agriculture increased drastically as a far greater proportion of output began to be exchanged against money. Thirdly, introduction of a price-support policy on a fairly

26

Vicissitudes in the Career of a Strategy

remunerative basis, initially for wheat and later for other crops, intro¬ duced a downward rigidity in agricultural prices: it was no longer possible to assert that agricultural prices were merely a matter of supply and demand as they became part of the wider political process.. Finally, significantly greater use of energy and of oil-based fertilizers not only changed the cumulative capital-output ratio of agricultural production in India, but also made it far more sensitive to fluctuations in the world market—and particularly in oil prices. It is sometimes added that the Green Revolution led to undue mechanization of agri¬ culture, especially in the northwest. There is little doubt that certain types of capital goods, such as diesel and electric pump sets, increased very substantially, and so to a lesser extent did the use of tractors. But to use A. K. Sen’s felicitous expression, much of the capital was ‘landesque’ rather than ‘labour-esque’.13 As a result, the Green Revolution did not lead to the type of labour displacement from agriculture which was predicted by some, mostly radical, economists. In fact, the increase in capital intensity in Indian agriculture, especially during the 1970s, has helped to achieve an increase in output per unit of land as well as per agricultural worker, in the face of a severe land constraint and rising agricultural population (see Table 15). However, consequent upon the Green Revolution, the change in the character of the exchange relationship between industry and agri¬ culture, as well as the change in methods of production in areas where crops such as wheat and rice (wheat more particularly) were rapidly expanding, led to the emergence of a changed distribution pattern in incomes, savings, and consumption. This is reflected in the statistics relating to the rates of growth of certain types of durable consumer goods, the growth of rural investment in financial assets, and an increase in the share of subsidies in the government budget. Agronomists who took part in the development of hybrid varieties of seeds initially obtained from Mexico and the Philippines were of the opinion that the ‘seed-fertilizer’-based technology was basically sizeneutral. It was claimed that unlike the traditional forms of mechani¬ zation, which were spearheaded more by engineers than by geneticists, the new technology could be profitably used by both small and large farmers. This was because items such as seed, fertilizers, pesticides, and electricity consumption were all in principle divisible. The scaleneutrality assumption therefore appealed to many economists as well. However, this line of argument forgot to take into account two crucial features of the new technology. One was that the necessary capital had

Vicissitudes in the Career of a Strategy

27

to be obtained on the basis of market transactions. Apart from seed, the working capital requirement in traditional agriculture took the form of ‘wage advances’ along with organic manure obtained from the farm itself. These assumptions were no longer valid; even leaving out irri¬ gation pump sets and so forth, the working capital requirement per unit of output was higher for the new technology. Secondly, given the gross inequalities in the credit delivery system, this meant that only the well-to-do farmers could make the most profitable use of the new pack¬ age of measures. The machinery of government was not structured to overcome the basic deficiencies from which the small farmers suffered. Thus, while the Green Revolution increased output, it conferred more than proportionate benefits to the better-off farmers in the infrastructurally better endowed regions. It certainly broke the stagnation, which had assumed worrying dimensions, but it did so at the price of increased polarization within the countryside. Furthermore, there was the fear that ‘mechanization’ in the ‘labour-esque’ sense was bound to develop over time, leading to labour expulsion from agriculture and greater rural-urban migration. Unless industrial demand for labour was going to increase substantially, there was apprehension of greater urban unemployment. These fears have not proved altogether base¬ less. They were to form the basis for a reformulation of development strategy in the early seventies.14

Distributional Aspects in the First Three Plans It may be useful at this stage to clarify the distributional premisses underlying the Indian plans, especially the Second and Third FiveYear Plans which rested on the Nehru-Mahalanobis strategy of development. It is sometimes maintained, and with some reason, that Indian plans have ignored issues relating to the distribution of incomes. I say ‘with some reason’, because the central analytical models, as we have seen, pertained largely to issues relating to capital accumulation under conditions of structural backwardness. But to say this is not the same thing as saying that distributional issues were not articulated at all in the planning documents. In fact, neither Nehru nor Mahalanobis had forgotten to address themselves to issues of a distributional nature. In his famous ‘Approach’ paper, Mahalanobis mentioned three major issues of policy as deserving of serious attention, even if short-run pro¬ ductivity gains were not particularly great: education, health, and land

28

Vicissitudes in the Career of a Strategy

redistribution. On the issue of land redistribution he had written, ‘Such redistribution would not necessarily lead to an increase in pro¬ ductivity but it may still be worthwhile because of the social and political benefits which would accrue from it. ’ Further, he was worried about the premature mechanization of agriculture as well as of light consumer goods industries, at least in part from distributional con¬ siderations. In the Third Five-Year Plan, whose first chapter, ‘Objec¬ tives of Planned Development’, was at least partly written by Nehru himself,

distributional

considerations

were

even

more

strongly

emphasized. Thus there were sections in it dealing with disparities of income, concentration of incomes, and so on. A key to the distri¬ butional thinking which underlay the Nehru-Mahalanobis strategy is to be found on page sixteen of the document: ‘The essential problem here is to reduce the spread between the higher and the lower incomes and to raise the level of the minimum (italics mine). However, on going through the text it becomes apparent that there was no clearly laid out strategy which could be expected to raise the ‘minimum level’—at least, not one that could match the industrialization targets articulated with great eloquence in the first two plans. How can this be explained? If we recall the state of development theory which prevailed around the mid-fifties, it will become quite apparent why distributional statements tended to be qualitative and vaguely centred on issues of institutional change. This is because all the models used operated under the postulate that ‘accumulation + con¬ sumption = production’—ignoring the fact that there are certain types of consumption which are quite close in character to accumulation. Mahalanobis, as we have noted, had of course explicitly drawn atten¬ tion to the role of education as an equalizing force, and had strongly stressed that educational planning was an essential part of the planning process. But he too had operated under the same type of assumption relating to additivity. In fact, it may be maintained that he went one step further by linking consumption with the stock of capital goods which is tied to producing consumer goods. In other words, by ruling out shiftability, he had imposed two constraints instead of one. Strictly speaking, in his model, consumption could grow over a period of time only if there were a prior increase in the capacity of capital goods sector. This gave rise to the formulation of gradualist growth paths of consumption, subsequently developed by a number of economists.15 These assumptions were obviously too rigid. They ignored the possibility that with substantial labour surplus, the redistribution of

Vicissitudes in the Career of a Strategy

29

consumption with an unchanged total could lead to an increase of capital stock (the Nurkse-Kahn point),16 and also to the labourproductivity-wage nexus, which was later emphasized by Myrdal.17 Thus, the distribution of consumption among contemporaries was seen as a subsidiary issue. Pride of place in plan formulation was given to the question of present-future choice—the classic issue of ‘jam today versus jam tomorrow’. The crucial variable in the whole exer¬ cise was the time needed to equip the economy with a large enough capital stock, higher than would be possible by direct attempts at redistribution. The above formulation has been put in a somewhat schematic way, but I believe that central issues are seen in a clearer light if the bare bone of economic logic is first exposed. Can this be described as what later came to be called a ‘trickle-down’ strategy? I think that the answer is ‘yes and no’. ‘Yes’ because it promised an improvement in the consumption level only as the end product of a process of accumulation. ‘No’ because it did not require that any particular income group had to be specially treated. There was no necessary presumption that a high income stratum was necessary because it served an important role in the accumulation process. The ‘bearers’ of the accumulation process did not have to belong to a speci¬ fic, well-defined socio-economic class or stratum. Political expediency was by no means absent from planners’ considerations. But it would be somewhat gratuitous to add that the expedient was necessarily identified with the optimal. It was believed that a sharp increase in the size of the public sector financed by initial savings out of taxation would tend over a period of time to socialize a greater proportion of the flow of current incomes through increased production and productivity of the public sector. Along with a steady growth in the productivity of agriculture and in small and village industries, fuller employment at an adequate wage level could be reached, sooner or later. Even Mahalanobis’s foursector model, with emphasis at one extreme on heavy industry, whose ownership was to be very largely vested in state hands according to the Industrial Policy Resolution of 1956, and priority at the other extreme on cottage and decentralized sectors with a presumed potential for large-scale labour absorption, was, after all, based on a variant of the same logic. Difficulties with the implementation of such a strategy were quite considerable in the context of India’s mixed economy, a point per¬ ceived neither early enough nor adequately enough in the planning

30

Vicissitudes in the Career of a Strategy

process. The model failed as a redistributive device because the initial distribution of income-yielding assets such as land was very unequal, and the state had very few instruments of control to siphon off rising private incomes into additional public savings. It is true that marginal tax rates on non-agricultural incomes were very high, but they did not produce the desired result. Suggested reforms, such as the ‘expen¬ diture tax’ as modified by N. Kaldor to suit the Indian condition, were never given a serious chance. The situation became worse because the main action correlate, that a rapid build-up of publicly owned capital stock was going to help channel an increasing proportion of surplus flow into public coffers, turned out to be quite an unreliable instrument for this purpose. This was partly because of the inefficiency in setting up and running these enterprises, and partly because the government did not possess enough clarity of objectives for the public sector. In fact, much of the early dis¬ cussion on public sector pricing policy was based on the idea that the public sector ought not to make profits. It was evident by the early sixties that something was seriously wrong on this question.18 A committee was again set up under the chairmanship of Mahalanobis to look into the question of whether the ‘level of living’ had improved or deteriorated as a result of plan¬ ning. The report came out with the Scottish verdict of ‘not proven’, and Pitambar Pant was instrumental in setting up a working group which was supposed to look into the question of raising the minimum level of living. Helped by Pant, this working group, which com¬ prised such eminent personalities as the economists D. R. Gadgil, B. N. Ganguli, P. S. Lokanathan, and V. K. R. V. Rao, the poli¬ ticians M. R. Masani and Ashoka Meta, and others, came out with a set of recommendations on the ‘minimum level of living’. The committee made a recommendation to distinguish between public con¬ sumption such as housing and education which was to be financed by the state directly, and private consumption which was to be met by an individual’s income. Calculated at 1960/1 prices, the basic minimum was to be no less than Rs.20/- per month on a per capita basis for rural areas and Rs.25/- per month for urban areas. Pitambar Pant went ahead with working out the possibilities of achieving this target in quantitative terms in an internal document which was prepared by the Perspective Planning Division of the Plan¬ ning Commission. This document was doubtless a remarkable one for its time. As early as 1962, it worked out, in a rough and ready way, the

Vicissitudes in the Career of a Strategy

31

options available. Pant, whose enthusiasm was the chief motive force behind this piece of work and who declared himself to be in favour of poverty alleviation as the central concern of planning, came to the conclusion that ‘some degree of inequality in incomes is thus an essen¬ tial part of the structure of incentives in any growing economy’. He then enquired as to whether the needed degree of inequality could be quantified or not. After giving a broad analysis of various factors likely to shape income distribution in India during the next fifteen years, he came to the conclusion that the distribution of income amongst the upper 80% of the population in 1975 ‘may not be very different from the present pattern’. He excluded the lowest 20% from his calculation because they were not likely to be affected by the growth process, and had to be taken care of by means of‘transfer payments, etc.’. He then looked at the question of the minimum required rate of growth and came to the conclusion that an average annual rate of growth of 7 % per annum sustained over the decade 1965-75 was needed in order to give the poorest three deciles a nutritionally adequate diet. In arriving at this number, Pant allowed for a base year national income figure for 1965/6 of some Rs.90,000 millions (at 1960/1 prices), as well as for a slight increase in inequality. I have given an indication of the contents of Pant’s remarkable docu¬ ment as it is not sufficiently well known. Moreover, it is probably one of the first attempts in a non-socialist developing country to work out a perspective for poverty eradication. However, because of the disas¬ trous harvest failures in 1965 and 1966, Pant’s base level assumption turned out to be way off mark, and details of this particular exercise were almost completely forgotten even within the Planning Com¬ mission itself. The document was never officially published, but an edited version was printed in the mid-seventies in a non-official publi¬ cation after an Approach document prepared for the Fifth Five-Year Plan had for the first time put the problem of poverty eradication in the foreground of political discussion.19 The cut-back in public investment and increase in the rupee cost of investment consequent on the devaluation of 1966 led to a depression in the aggregate rate of investment. But investment in agriculture was kept up because of the incentives given to the relatively better off farmers who initially spearheaded the Green Revolution. The grain output recovered, and by 1970/1 production of cereals increased to 96.6 million tonnes, in comparison with 62.4 millions in 1965/6. There was a particular increase in wheat; the high-yielding varieties made a

Vicissitudes in the Career of a Strategy

32

spectacular breakthrough in the north-west, especially the Punjab, and production went up from 10.4 million tonnes to 23.8 million tonnes, a very remarkable rate of growth indeed. This increase gave rise to fear in certain quarters that India could soon be faced with a demand bottle-neck for food, which would either require large-scale exports or an expanded home market. Since Indian grains were faced with stiff competition in the international market, even the more conservative policy-makers came to feel that the time had come to attempt a strategy for growth with an accent on redistri¬ bution. This was supposed to ensure the removal of a ‘demand bottle¬ neck’ and to generate employment opportunities. A new definition of ‘relevant radicalism’ was mooted by those who did not favour a state build up of production assets in the industrial sector, but were realistic enough to understand that industrial development by the private sector, even at its maximum, could not absorb the additional labour force generated by natural population growth and the displacement created by agricultural transformation. They emphasized the special role that an expanded public works programme could play in this context. More radical opinion was not opposed to a public works pro¬ gramme, but felt that it was not enough by itself to alleviate the problem of‘mass poverty’ which now moved into the centre of political attention. This led to the formulation of an Approach to the Fifth Five-Year Plan which was based on a strategy of ‘redistribution with growth’. The Approach to the Fifth Five-Year Plan followed the recom¬ mendation of the working group in its definition of poverty in terms of nutritional inadequacy, and further encouraged by the political mood, ventured to put explicit redistribution in the lowest three deciles as an objective in its own right. It will be apparent from the bare outlines of Pant’s document that he did not, in the final analysis, envisage any¬ thing significant by way of direct redistribution. He was extremely cautious in this regard, and possibly with very good reason. But he was much bolder in assuming a sustained rate of growth of 7 % per annum over a ten-year period. While he did not work out the full range of balance of payments implications, it was quite clear that his approach could succeed only with a large net inflow of concessional external capital. This was possibly his own deduction from the generally pre¬ vailing climate of international opinion which talked in terms of ‘twogap models’, which even without any reference to poverty eradication

Vicissitudes in the Career of a Strategy

33

found a very special role for foreign aid. At the time the Fifth Five-Year Plan Approach Document was being formulated, planners postulated a much more modest growth rate, but they wanted to be self-reliant. The idea of self-reliance was not new. The Third and Fourth FiveYear Plans had discussed the ultimate objective of elimination of con¬ cessional external assistance. The Third Five-Year Plan had talked about the ‘economy being independent’ of external assistance outside of the normal inflow of foreign capital by 1975/6. The Fourth FiveYear Plan postulated in the same vein the need to minimize depen¬ dence on aid from outside sources. Thus, two sources of ideas found their joint expression in the formu¬ lation of the Approach to the Fifth Five-Year Plan, which postulated a specific objective of poverty eradication along with the elimination of net aid. The task was no doubt an ambitious one, but the political mood was encouraging—at least initially, as the ruling party had been returned to power in 1971 with a popular mandate to remove poverty. The work of the planners was initially a technical one of demonstrating whether the objetives were at all achievable, and if so by what time. We need to understand the nature of the exercise more carefully before we can place it in the context of India’s planning.

Growth with Redistribution To determine the rate and pattern of growth for the Fifth Five-Year Plan, it was no longer considered sufficient to postulate a desired rate of growth of consumption per capita, and it was found useful to pose the central decision problem for planning purposes somewhat differently. The statement of the problem in the Approach to the Fifth Five-Year Plan can be summarized briefly as follows: Given the length of the planning horizon and the objective of eliminating net aid by the end of the planning period, find the inter-sectorally consistent growth rates of output that would be necessary to raise the average per capita con¬ sumption level of the lowest three deciles to a stipulated figure. In order that the average of this group can be raised progressively over time, especially after taking into account a population growth rate of 2 % per annum, it was obviously essential to allow for positive investment levels in the terminal year. Furthermore, since net aid had to be reduced to zero by the terminal year, domestic savings had to equal domestic investment in the terminal year. There was however a cushion provided by the assumption that net inflow of external capital

34

Vicissitudes in the Career of a Strategy

for the plan as a whole would be a non-zero sum worked out from inde¬ pendent estimates. To work out the size and composition of a plan budget which would achieve the reduction in the inequality coefficient implicit in the stated objective while also reducing net aid to zero in the terminal year, the exercise proceeded in two steps. As a first approximation, a macro model was constructed to determine the magnitude of total investment that would be required to achieve a prespecified rate of growth. After deducting the net inflow of external capital, total savings for the plan period were computed. From this, a yearly savings profile was com¬ puted on the assumption of a linear increase in the investment level. Inter-industry analysis was used to compute gross production levels for the terminal year using the following steps: 1.

A breakdown of total investment by delivering sectors was drawn up on the basis of observed trend adjusted in the light of overall data on major investment projects.

2.

The domestic input coefficient matrix was separated out from the total coefficient matrix inclusive of imported raw materials. A similar netting out was made for the domestic and imported parts of different components of final demand.

3.

A detailed consumption submodel was developed which enabled the commodity composition of total consumption to be calculated on the basis of a detailed expenditure breakdown by twenty-seven size classes, on the assumption that the average consumption level of the three lowest deciles would rise by the stipulated amount. Several alternative scenarios were worked out to test the sensitivity

of the results to changes in the length of the planning horizon and to variations in the annual average rate of growth of gross domestic product over the planning period. The results were not altogether unexpected in a broad qualitative sense, but the magnitudes involved were quite revealing.20 It was found that if a higher growth rate could be achieved, the extent of the reduction required in the average consumption level of the three top deciles would be smaller. In other words, a higher rate of growth would help in achieving the minimum level of living for the poor without creating large social pressures. In fact, it was found that a rate of growth of 6.5% in gross domestic product (GDP) eliminated the decline in the average level of consumption of the first three deciles altogether, whereas with a growth rate of 5.5% as adopted in

Vicissitudes in the Career of a Strategy

35

the ‘preferred variant’ of the model, the three top deciles could not maintain their consumption levels. But a higher growth rate could be achieved only if the implied capital-output ratio could be lowered, or if there were a greater inflow of external capital, assuming that the marginal propensity to save out of domestic income was more or less given. Lengthening the time horizon had the predictable effect of reducing the rigours of the redistribution process. Interesting results were obtained on the production side. It was seen that provided agriculture could grow at around 4% per annum in terms of value added, it was possible to meet the consumption target for the poorest deciles. While this was substantially higher than the average growth rate that had so far been attained in the agricultural sector over the planning period as a whole, it was not an altogether impossible target. There were clear indications that the ‘luxury goods’ sector, defined as items which figured more or less exclusively in the consumption baskets of the first two deciles, must grow at a slower rate. But it was noticed that the rate of growth in the so-called heavy and intermediate sectors was fairly high, and practically invariant to changes in the redistribution coefficient. There were two main reasons for this result. First, the model had a considerable amount of import substitution built into it, because of the assumption relating to net aid; and second, new agricultural inputs were purchased from industrial sectors, which in turn required increases in the production levels of such sectors as energy, oil, and fertilizers. Given that imports were limited by the exogenously stipu¬ lated growth rate of exports and a diminishing inflow of net aid, these intermediate and capital goods sectors showed a rate of increase of around 7-8% per annum. It was clear from these exercises that in so far as there were major supply constraints on meeting minimum needs, India’s economic strategy needed to pay greater attention to agriculture and energy. ‘Food’ and ‘fuel’ emerged as the leading sectors, as there was at that time significant excess capacity in sectors such as steel. The Mahalanobis strategy was seen to be not so much basically flawed on the pro¬ duction side as inadequate because of the relatively simple treatment of the agriculture sector and inability to take account of the different end uses of intermediate products. This last deficiency no doubt arose from its highly aggregated character. The weak point of the model adopted in the Approach was its formal neglect of the relationship between production and income

36

Vicissitudes in the Career of a Strategy

distribution. The model did not solve for incremental income flow by size classes. While the link between demand and production was allowed for in terms of varying propensities to consume different com¬ modities, the reverse link from production to demand was not included in the formal description of the model.21 Inability to include a formal description of the income-generation process did not preclude the planners from making suggestions on policy changes as to how to increase the capacity of the poor to buy. Data difficulties were formidable enough to prevent any quantitative treatment of income distribution by sectors. Indian national accounts even today include a large self-employed sector which is extremely heterogeneous in terms of social and occupational characteristics. The main message of the model was quite clear, however, despite all its limitations. It showed that if the growth rate of around 5-6% per annum was about the maximum one could have, it was impossible to bring about a significant reduction in poverty, howsoever defined, without attacking the problem directly. A higher growth rate was likely to be self-defeating unless it was rendered possible by large-scale transfer of external resources. Further, the market-determined com¬ modity vector was far from what was necessary if basic needs were to be met. Despite aggregation biases and rigidities inherent in the assump¬ tions relating to foreign trade, the pattern of growth of different commodity-producing sectors was shown to be a function of two sets of choices: (a) the present-future choice much discussed earlier, and (ib) the tolerance for inequality in consumption. Contemporaries counted as much as unborn generations. While the ‘oil crisis’ and the inflationary pressures generated as a result of serious harvest failures in 1972/3, mitigated only partially by a recovery in 1973/4, made it imperative to redraft the Approach to the Fifth Five-Year Plan and to considerably dilute its ambitious redistribution objectives, the idea that planning of appropriate

investment levels by commodity-

producing sectors was necessary but by no means sufficient persisted in the context of public discussions relating to poverty eradication programmes. These additional conditions implied the use of additional instruments of policy, which in a fully planned economy could be reduced to achieving appropriate relationships between prices and wages (in the vectorial sense) but in a mixed economy with extensive underemployment required more direct intervention in the economic growth process. As a result, when the Sixth Five-Year Plan was formulated in 1980, a

Vicissitudes in the Career of a Strategy

37

number of poverty eradication measures were introduced. The impact of these measures, which basically consisted of rural employment pro¬ grammes of different types along with programmes for self-employ¬ ment aimed at improving the productivity of small and marginal farmers and rural artisans, has been much discussed in India, and there has been considerable criticism from different parts of the poli¬ tical spectrum. Even leaving out considerations of ideology, there is considerable difference of opinion on what these programmes have achieved. The discussion is complicated by the fact that experiences in different parts of the country differ a great deal. Such eminent eco¬ nomists as M. L. Dantwala and Nilakantha Rath have widely diver¬ gent views on the usefulness of these integrated programmes for rural development. While the empirical evidence is somewhat mixed, we need to discuss what kind of redistributive policy frame can be devised within the para¬ meters of the mixed economy which prevails in India. In this respect, one’s perception of the possibilities of the system, in terms of the ability to take redistribution decisions in the face of deeply entrenched interest groups, is as important as the understanding of structural constraints. Further, a distinction must also be drawn between impact effects and long-term responses. Briefly, I believe that within the kind of political system that India runs, from the point of sustainability the most significant redistributive measures will centre around improving the productivity of small and medium farmers, especially those engaged in the production of food grains, along with an employment guarantee scheme in the rural areas. A one-sided emphasis on one item or the other may not prove suffi¬ cient, either because of inadequacy of food production or because of inadequacy of purchasing power. This can be significantly supple¬ mented by a programme of education, health, and nutrition, each of which has a major effect on improving productivity besides conferring substantial consumption benefits. In the Indian case a programme of population limitation can also serve as a redistributive measure, but it is unlikely to get off the ground in a decisive way, especially in the rural areas, unless the above programmes are implemented with a vigour they have lacked so far. It will be obvious that I have not yet talked about asset redistri¬ bution, especially the redistribution of land which traditional radical thinking would hold to be the key element in a redistributive pro¬ gramme. While I do not believe that any large-scale redistribution is on

38

Vicissitudes in the Career of a Strategy

the cards, it is certainly possible to do a great deal more in relation to security of tenancy, conditions relating to crop-sharing contracts (especially on how inputs costs are to be shared, etc.), and improving the working conditions of agricultural labour. This discussion of the approaches adopted by the Fifth and Sixth Five-Year Plans show that there was a shift in emphasis away from the earlier concept of a ‘traverse’, with its so-called heavy-industry bias, to a strategy centring around ‘food’ and ‘fuels’. Or to put it differently, there was a much better appreciation of the fact that the problem of ‘traverse’ could not be studied exclusively in terms of the ability to sustain domestically a machinery sector of sufficient scale. It became quite clear that with a growing population and limited natural resources, emphasis had to be placed on improving the productivity of land through the greater diffusion of technological improvements which would not add to the existing pressures of unemployment and inadequate employment. Meanwhile, the balance sheet of the Indian economy towards the end of the seventies presented a mixed picture.

4 Problems of Plan Implementation

Weak Links in the Indian Planning Process It has been widely held among observers of the Indian planning expe¬ rience that Indian plans may be good on paper but are rarely good in implementation. This is a point of view which deserves serious consi¬ deration. What can this proposition mean? A simplistic interpretation is that while Indian plans project a desired state of affairs with some precision, and may also succeed in indicating directional changes that may be required in consonance with the objectives, they do not pay enough attention to issues of feasibility. If this is indeed the case, Indian plans cannot be good even on paper. Without question, a good plan must minimally attempt a proper appraisal of the feasibility of what it normatively postulates. A second interpretation is that plans may be both feasible and consistent on a very high level of aggregation but are unlikely to work in practice—not merely because feasibility and consistency tests are carried out at a high level of aggregation, which can prove very misleading, but because there is a very large number of actors involved whose decisions cannot be influenced in the desired directions by what the planners propose. A simple illustration may be useful. In the past, plans have often projected that if certain inter¬ sectoral balances are maintained, the plan should be able to generate a certain rate of growth of employment, or a certain envisaged reduction in the current account deficit on the balance of payments, which did not in fact materialize. One possible explanation for this failure is that plan models have been improperly specified, in the sense that they have failed to capture the true state of underlying structural relationships. Thus, it is possible that employment elasticity of output was put at a very high level, or that projections on the side of exports were too opti¬ mistic. But there can be other explanations as well. It is possible that plans did not work because the desired co-ordination of activities

Problems in Plan Implementation

40

among the different actors was faulty, either because ‘messages’ were faulty, or because they were transmitted with delay, or went contrary to the specific interests of the actors involved and were therefore evaded. The above reasoning can be explained with the help of a concrete example. We take the case of the power sector. It is often held that the state of infrastructure is a major reason for the slow-down of growth in industrial production. Professor Isher Ahluwalia attaches a lot of importance to infrastructural bottle-necks as a cause of industrial slow¬ down in the period stretching from the middle of the sixties onwards.1 That there is an element of truth in this argument is evident from the available data. It can be seen from Table 12 that the capacity for power generation grew more slowly in the 1970s than in the 1960s, while from Table 13 we see that the power-intensive manufacturing sectors, such as basic metals and alloys, electrical and non-electrical machinery, as well as the transport sector, also recorded smaller growth in the 1970s than the 1960s. Now, the question arises as to why the planning of the power sector in Indian plans turned out to be faulty, as is widely alleged. One reason can be that the total investment allocated to power was deficient. In that case, obviously, the plan was ‘bad’ even on paper. However, it may also be that demand was wrongly estimated because planning was based on incorrect information. For example, planners may have taken into account only the demand originating in the organized sector of Indian industry, and left out the ‘unorganized sector’, which inci¬ dentally is growing very fast.2 This implies an ‘information’ failure with raw data. This has undoubtedly been part of the explanation of the chronic ‘power crisis’. But this need not be the only form of information failure. There have also been several occasions when the reason for the power shortage has lain completely outside the power sector. Typical examples would be delay in the movement of coal, or in the unsuitability of coal supplied to a specific power station. Failures to co-ordinate the coal, power, and transport sectors can undoubtedly explain part of the power shortages. Finally, it is also quite possible that price signals have not only been weak but have acted ‘perversely’, namely by introducing destabilizing expectations regarding avail¬ ability, or through insufficient flexibility in the prices charged. In India all the above three reasons have applied, although they operated during different periods with varying degrees of intensity. Moreover, in the case of power, another major contributory factor has been the

Problems in Plan Implementation

41

inter-regional diversity in the rate and pattern of growth of demand, and

the uneven rate of growth of productive capacity. The inter-regional dimension of plan implementation is a separate question altogether, and is treated separately. Meanwhile, we should consider whether there may not be other factors at work which affect plan implementa¬ tion as well. While the analysis of the power sector can be further extended to include the choice of project site, or the size and type of generating sets, and so on, enough has been said to suggest a possible classificatory scheme into which implementational failures can be fitted, at least as a first approximation. An implementational failure may be said to arise if one or more of the following conditions hold: 1.

Planning authorities are plainly inefficient in gathering the rele¬ vant information within the needed range of precision.

2.

Planning authorities respond with considerable time lags when the underlying situation changes.

3.

Agencies through which the planning authorities are supposed to implement plans have little or no capacity (or in some cases, moti¬ vation) to carry them out. There are two important sub-cases (a) publicly owned agencies, which operate largely according to ‘non¬ price’ signals (such as government ‘orders’); and (b) private agencies, whose behaviour can be approximated with the help of profit-maximization models; in the latter case, the plan may have projected a product mix on ground of social desirability which may not be optimal for the agency concerned, and there is then a tendency to ‘avoidance’ which can lead to distortions. A useful elaboration of condition 3 is to distinguish between the

‘strategic’ and the ‘parametric’ behaviour of the agencies concerned. When agencies can be expected to behave in a strategic fashion, it is necessary to be much more cautious in indicating a plan target, espe¬ cially in sectors involving significant inter-industrial linkages. As I see it, the main change in regard to plan implementation that has come about in the Indian economy over the years is that the scope for strategic action by private actors has widened, partly because the size of relevant industrial or production units has increased, and partly because the distinction between political behaviour and administrative direction has been considerably eroded.3 On top of this, changes taking place in the world economy have also helped to make the problem of production planning a more difficult task, especially because the

42

Problems in Plan Implementation

degree of ‘openness’ of the economy has increased in recent years. Does this mean that the proper role of ‘planning’ relative to that of the market has significantly altered, an issue of current debate in India? This takes me back to a point I raised in the first chapter, where I expressed the view that ‘planning’ should be viewed more as a form of instrumental inference, as Adolph Lowe has emphasized in his wri¬ tings. Instrumental inference, according to Lowe,4 consists, first, of derivation of one or more paths which can transform the initial states into desired terminal states. While the derivation of the transition path is a necessary first step, based in large part on structural requirements, it has to be supplemented by establishing behavioural patterns which will set the system on goal-adequate trajectories. It can be maintained that Indian planning has largely confined its attention to the first task, and has not paid very serious attention to the second. In my opinion, when one talks about ‘greater reliance on the market mechanism’ it would be more appropriate to talk about goal-adequate behaviour sustaining what can be called transitional paths, consistent with terminal goals reflected in the plan documents. This does not imply by any means the abandonment of planning, but redirection of its scope. Like Lowe, I also believe that a return to laissez-faire will be self-destructive, especially in a country like India where one of the major pressures on the continued viability of the system is emerging from the rapid growth of population, a process which is only remotely related to market processes. What are the components of goal-adequate behaviour? One impor¬ tant idea, going back to Adam Smith, is a relative emphasis on directly productive activities as against rent-maximizing activities. Krueger and Bhagwati have written extensively on this class of issues. Their argu¬ ment has rested basically on demonstrating that non-functional restric¬ tions imposed by a regulatory state may end up systematically distorting incentive patterns, to the detriment of the accumulation process. Pranab Bardhan has used a basically similar approach in explaining the relatively slow growth performance of the Indian eco¬ nomy as contrasted with that of South Korea.5 Bardhan’s emphasis is on the role played by ‘subsidies’ which will be discussed later in the context of plan financing. But basically the point remains the same: in either case, the distribution of income is altered in a manner that is considered to be prejudicial to the growth of socially desired baskets of goods and services. While not denying that some forms of government intervention tend to produce the effects noticed by these authors, the

Problems in Plan Implementation

43

basic question remains: can a market system, especially an open trading system, provide the needed set of signals? It will be recalled that Frederick List’s main criticism of the free market system advo¬ cated by the classical economists was that it attached too much importance to ‘production’ and too little to ‘productive power’.6 List accordingly recommended protection to insulate the domestic manu¬ facturing sector and provide time for learning. Government inter¬ vention to promote ‘learning by doing’ was judged to be a good thing, even by John Stuart Mill, otherwise a very good classical economist. It is of course true that in the case of several developing countries, not excluding India, the desired amount of learning may not have materialized. But in the case of India, at least, it remains a very moot question as to whether the learning effect has been negligible or not. In my opinion, learning effects have been an important feature of Indian industrial and agricultural development, although not without a cost. We have also seen that the ratio of savings to gross domestic product has increased, but the productivity of investment may have fallen. We shall discuss in the next chapter whether any clear inference can be drawn from an increasing capital-output ratio—especially since the pattern of investment has shifted from traditional uses, partly due to changing technology and partly to offset diminishing returns to land. The government policies have helped to promote technological change in agriculture even though this has meant paying subsidies to certain classes of farmers in rapidly growing states like the Punjab. While this has doubtless several income distributional consequences which cannot be left unquestioned, it is very much an open question whether the observed growth rate would have materialized in the absence of this support. In short, the point is that when major structural adjustments are called for, goal-adequate behaviour may very well include scope for price as well as non-price adjustments. Whether the latter would include typical ‘quantity’ restrictions or direct public ownership is an issue which can be decided only in the light of the specific charac¬ teristics of a given situation. A crucial component of any decision¬ making process would appear to lie in the ability to obtain or generate the necessary information. Inability to carry out the technological transfer so widely regarded as necessary for initiating growthpromoting changes would appear to lie also at least partly in the sphere of information failure—that is, the inability to assess the social value of a particular piece of information. It is extremely doubtful whether the problem can be resolved only in price-theoretic terms. Considerable

Problems in Plan Implementation

44

direct investment in appropriate forms of human capital appear to be necessary too, as the Japanese and Korean experiences would suggest. Indian planning may be rightly criticized for not making sufficient use of the price-theoretic dimensions in the implementation process. But it is not permissible to draw from this observation any far-reaching conclusion regarding the replacement of ‘planning’ by ‘the market’. There is insufficient appreciation of the developmental dimension of the administrative process, some of which has been indicated already. It is not possible to maintain that administrative processes are per se inadequate to deal with issues relating to innovativeness, and so on, because the exercise of control in large-scale corporations has not necessarily inhibited their creativity. A somewhat different discussion of the implementation process relates to the issue of what can be appro¬ priately done at the different levels of government. This issue is important enough to be dealt with separately, as in the case of India the large size of the country would appear to suggest the need for a flexible organization framework for planning. To return to the question with which I began this analysis, the statement that Indian plans are good on paper but bad in implemen¬ tation can only mean that planners have used as a conceptual frame a set of devices which are informationally inadequate for arriving at appropriate targets, along with a set of operating rules which are rela¬ tively insensitive to conjunctural variations and also insufficiently permissive of autonomous decision-making by agents even in areas where they can be expected to be knowledgeable. The Krueger argument on rent-seeking is quantitatively difficult to estimate. Even otherwise, its validity is difficult to assess as it is not clear to me that ‘without restriction, entrepreneurs would seek to achieve windfall gains by adapting new technology, anticipating mar¬ ket shifts correctly, and so on’.7 In fact, I believe that Krueger’s argument seems to imply that all distortions are exogenous or policyinduced, and are not themselves functions of structural properties of the economy being studied. Furthermore, it would seem to suggest that resources can be shifted around costlessly, or that the government can resort to any amount of non-distortionary taxation. In the Indian case, these are patently extravagant assumptions. This implies that while no good plan can afford to ignore major issues of implementation through incentive-adequate devices, it cannot in a structurally back¬ ward economy rely solely on the market as the instrument of plan implementation.8

Problems in Plan Implementation

45

Spatial Implications of the Development Strategy In my discussion on problems of plan implementation, I have thus far omitted any reference to a whole complex of issues which emerge from the fact that India is a large country with considerable agroclimatic variations. These spatial dimensions of the development problem have so far been referred to only implicitly, in discussing the implications of regionally uneven rates of growth of agricultural productivity. It is now necessary to take explicit account of several major con¬ ceptual problems that the space dimension introduces into any plan¬ ning discussion. First, the question of transportation costs and the issue of restructuring production plans so as to minimize the resources involved in transportation cannot be disregarded. Secondly, the pre¬ sence of strong external effects in space implies, as has often been noted in the growth literature, the emergence of polarizing influences.9 Thirdly, the fact that capital in the sense of money capital is more mobile than labour, especially unskilled labour, can lead to significant differences in the levels of living in different parts of the country.10 Fourthly, the standard assumption that production functions invol¬ ving commodities and services are uniform can no longer be assumed to be valid within large countries. This is noticed within India when it comes to the production of even major staples such as rice, sugar cane, and the like. Finally, social and cultural practices tend to vary so con¬ siderably in the different parts of the country that it is not possible to assume that the same economic stimulus will produce a largely similar response throughout. Thus, the large size of a country like India tends to increase both the possibilities and the problems of planning. On the one hand, it presents the possibility of deriving the advantages of scale that a large market entails; but on the other hand the very fact that regions are unevenly endowed with relevant economic resources at the beginning of the planning process tends to bias the formulation and implementation of plans in directions which are more conducive to differential growth than to regional equity. That this has happened to a certain extent cannot be denied either by causal empiricism or by careful analysis of the data. Is it not possible to maintain that the problem is better taken care of by leaving decision-making to the market? Once a political structure is assumed as given, it may be argued that the market can be expected to cope more successfully with the problem of size as it will be less

Problems in Plan Implementation

46

expensive in terms of incentives, a more rewarding game than any that a central planning authority can play vis-a-vis the subordinate planning authorities. This is a complex question and can only be answered with reference to the type of planning that is being practised. The presence of external effects and problems of scale would seem to suggest that decentralized planning through the market cannot be expected to yield optimal results. A market system will spatially give rise to growth poles whose ability to transmit impulses evenly can be seriously questioned. Fur¬ thermore, the benefits of scale will give rise to the emergence of productive units with the power to manipulate prices of inputs and outputs to their advantage. Very likely, these powerful market units will gravitate towards growth poles, tending to reinforce the agglomerative forces with further adverse effects on equity. The Brazilian experience during the sixties and seventies possibly corresponds to some features of the model sketched here. In the case of India, it is certainly true that deficiencies of the market mechanism in promoting what plan documents called ‘balanced regional growth’ were implicitly or explicitly recognized from the mid¬ fifties onwards. Perhaps the pattern of economic development expe¬ rienced during the colonial period, with infrastructure concentrated in certain developed coastal towns while backward hinterlands supplied raw material and labour and the gains of international exchange were unevenly distributed, had left an adverse impression on the percep¬ tions of the Indian political elite. However, it is not clear whether the type of planning that India adopted has in fact succeeded in avoiding the dangers of polarized growth. Quite a few would maintain that it has not. I have already had occasion to refer to the nature and varied impact of the Green Revolution in India. Similarly, the industrial develop¬ ment of the country has also been highly uneven in space. From the statistics on the distribution of value added by states (Table 33) it would appear that the average per capita domestic product in the richest state is nearly three times as high as in the poorest one. While these statistics can be questioned on the ground of coverage as well as for their interpretative significance, it would be difficult to deny that the problem of poverty is beginning to emerge as more of an inter¬ regional problem tha * before. In other words, while India still remains a poor country on the average, certain parts of the country are much poorer than others. It is no longer homogeneous, regionally undiffer-

Problems in Plan Implementation

47

entiated poverty that we are dealing with, but areas of rising economic well-being accompanied by stagnating economic zones. It may be maintained by historians that this has always been so, but some would say that this has become apparent even as a result of regionally skewed growth impulses. How have plans and planners actually viewed the process? Can things be done better in the future than in the past? First of all, we should recognize that this is not an issue of plan implementation in the narrow sense of the term. We are also dealing in part with the broader political processes which are reflected in the functioning of the federal polity that is India. I shall have occasion to comment on this aspect of the matter as well, although my comments in this case will be neces¬ sarily brief, given the general scope of this volume. The planning process in India has generally recognized several levels of decision-making. First, we have plans formulated at the central level—that is, plans and programmes executed by different ministries, departments attached to ministries, and statutory corporations over which ministries serve as presiding authorities. Secondly, we have the plans of the state governments and union territories, like Delhi, Pondi¬ cherry, and so on. Thirdly it is the job of the Planning Commission in Delhi to produce a plan on a yearly and Five-yearly basis for the country as a whole, which has to be sanctioned by an august body known as the National Development Council, which consists of the prime minister in his capacity as chairman of the Planning Commission, along with chief ministers of the states and union territories. The relationship between the centre and the states is a critical dimension in the planning process. While many of the states have by now got state planning boards as well as the Zilla Parishads and Panchayati Raj institutions which reach further down into development blocks and districts,11 the nature of the intra-state planning exercises is seldom made public or presented as an articulated network of decision¬ making. In contrast, the nature of the centre-state planning exercise is often made public, especially in matters relating to the size of the plan for each state and/or the location of major centrally funded projects. The basic idea behind the vertical division of responsibilities is that states are likely to do best in activities whose ‘spread effects’ are gene¬ rally felt most conspicuously within the state itself (or even within a part of the state), and where information availability is likely to pose less of a problem. Thus, areas such as agriculture, small industries, health, and education tend to figure very prominently in state plans.

Problems in Plan Implementation

48

On the other hand, large industrial projects, long-distance transporta¬ tion, communications, major investments in mineral development (as in the case of coal, oil, etc.) generally come under the central plan. Power is a sector where large outlays are incurred by both states and the central government. On the part of the state governments, there have been two major criticisms of the functioning of the planning system. First, the states generally complain that they are badly underfunded in relation to their ‘felt needs’, an expression which is often used in this connection. Secondly, central government has over the years developed a whole array of centrally sponsored schemes which are provided for within the central budget and carried out by central ministries. State ministries may sometimes be brought in to help in execution, but it is often alleged that the latter’s role is entirely subordinate to the authority of the central government, and that this leads to distortions as well as inefficiencies in plan execution. Criticism made by the states that the centre has arrogated to itself more money and responsibility than it can legitimately claim has some validity, especially given that the overwhelming part of the Indian population live in villages. But observers who have worked at the ‘grass-roots’ level have also often noted that the state governments, in their turn, have a lot to explain when it comes to the distribution of their spending across different regions within the states: they tend to favour areas around the capital city and areas which have emerged as growth poles, and in some cases the reason an area is favoured is purely electoral. Some economists have argued in favour of inserting a new tier between the states and the basic administration units, namely, dis¬ tricts; whereas others favour more adequate planning on the state level accompanied by a strengthened form of district planning. The chronic fiscal problem that some states experience has its origin in a combination of factors, not all of which were anticipated at the time the planning effort was initiated. First, some of the industrially deve¬ loped areas such as West Bengal have lagged behind states such as Maharashtra, Tamil Nadu, and Karnataka because of an inability to transform their capital stock into modern fields of industry such as chemicals, petrochemicals, and so on. In the particular case of West Bengal, the slowing of demand for railway transport equipment has hurt its traditional engineering industries. This has led to a steady erosion of financial resources which has compounded the forces

Problems in Plan Implementation

49

leading to its industrial decline. Thus, a state like West Bengal displays several of the features which old industrial districts show in the UK and has financial problems of a special character. The situation prevailing in the North-Eastern States is different but equally anticipated: the taxable capacity of the population is very narrow but the development requirements, especially in the area of infrastructure, are particularly large. However, leaving out accidents of history and geography, the chronic resource difficulty of the states has a major source in their unwillingness to tap the agricultural sector to raise resources. I am using the expression ‘tap’ rather than ‘tax’, because states have been unwilling even to charge irrigation rates to cover maintenance costs, or to impose appropriate electricity tariffs when the consumption of energy is growing at a fast rate. State electricity boards, far from earning the recommended rate of return on investment, often have large deficits on revenue accounts. This cannot be ascribed entirely to the inability to raise resources from the agricultural sector, to be sure. Nonetheless, the fact remains that agriculture today is a sector enjoying large subsidies that can only up to a point be justified by the overall need for attaining a reasonable rate of growth of agricultural production. Distributionally, benefits tend to accrue largely to the richer farmers. Those who argue for a restricted role for the central government in matters of investment allocation are rarely willing to accept the need to tax the agricultural sector. There is little reason to question the necessity for states to spend more on matters relating to health, education, and many other public goods. But it is not possible to maintain that this problem will auto¬ matically solve itself if the power to levy taxes, especially excise duties on commodities, were left in the hands of state governments. It may indeed help the prosperous states, especially those where industrial development has progressed far and Green Revolution-style agri¬ culture prevails, but it is likely, if anything, to worsen the situation of industrially backward states, other things remaining the same. Some have come to the view that financial institutions, including commercial banks, have a major role to play in facilitating an equitable transfer of resources. The argument is valid only up to a point. There is little doubt that the portfolios of these institutions are biased in favour of the better-off states, but this merely reflects the logic of the growth process in an uneven spatial environment, and in part the nature of the business of these institutions. Goals such as equity are possibly better

50

Problems in Plan Implementation

met through the open budgetary exercises than hidden in subsidized banking and other facilities. Obvious bias in favour of the well-placed regions ought to be highlighted, but a very rigid application of any mechanical rule in respect of loanable funds may in the medium-run raise more problems than it will solve. In sum, one cannot maintain the proposition that a larger devolu¬ tion of funds from the centre to the states will in itself provide the neces¬ sary stimulus for speedier development of the lagging regions, even though more adequate funding may very well be needed. What is, however, perfectly maintainable (and in fact essential) is to augment the planning and execution capability of decision-makers at lower levels of the hierarchy in the light of appropriate perspective plans for the development of different agroclimatic regions. Location of indus¬ trial projects has very often been guided by considerations of short¬ term political expediency, whereas the development of agriculture has often been neglected by inadequate investment in research and exten¬ sion activities, to mention one major item where direction has come principally from central institutions. Conspicuous examples of such neglect have become evident in regard to the lagging productivity levels of crops grown in rain-fed regions, or in the lack of conjunctive use of surface water and groundwater in the eastern region.

Resource Constraints on Regional Development In discussing the problems of plan implementation, I have tried to indicate that quite a few of these are not problems of implementation in the narrow sense of the term. They have their origin in the basic design of a mixed economy that India adopted within a constitutional frame¬ work that was federal in conception. With the passage of years, the political system gravitated towards a more unitary form of federalism, partly as a result of the process of planning itself, but also as a direct consequence of the changing percep¬ tion of the external environment on the part of the political elite. As in nature, every plan-induced action tends to produce a reaction, but unlike in nature, the reaction is not equal in magnitude. We are now witnessing pressure for greater regional autonomy even when from the strictly market point of view India is far more integrated than before. Obviously, this paradox has its origin in the feeling that economic forces are helping the regional ‘haves’ as against the ‘have nots’. Is it likely that this process has been going on because the political elite in

Problems in Plan Implementation

51

India has been colluding with the economic elite, such that the forces of state intervention are strengthening the polarizing influence of market forces? Or is it that the design and implementation of Indian planning has been much too weak to neutralize the forces promoting uneven development amongst the regions? To my mind, it would appear that the latter explanation is much more credible, taking the planning process as a whole. This is not to deny that regionally powerful lobbies tend to bias investment decisions from time to time in a manner that would seem to support the collusion argument. If my perception is correct, it would follow that we need to streng¬ then the planning process in a strategic sense, because as I have already argued there is nothing in economic theory that would suggest leaving things to market forces alone. A spatial ‘trickle down’ strategy is unlikely to work fast enough in a large and heterogeneous country like India. It has been suggested that we need to view the planning problem as a multi-level exercise. While there is no doubt that the broad change in the point of view entailed in a ‘multi-level approach’ is a helpful one, to date we have very few analytical results to go by when it comes to multi-level planning. Its one-time advocate, the Hungarian economist Janos Kornai, seems to have abandoned multi-level planning in favour of what can be best described as a variant of‘market socialism’. In the Indian case, the problem can be best taken care of in practice by strengthening the synergy of the institutional motive forces repre¬ sented by the ‘state’ and the ‘market’; and by devising practical instru¬ ments and policies which can maintain a proper balance between ‘advancing’ and ‘lagging’ regions. The first set of issues were dealt with in the first section of this chapter, but it may be useful to indicate a few concluding remarks on the second set of issues. We need to begin with the basic perception that there is a basic ‘fiscal crisis’ in Indian public economy. It is deep and pervasive but it is not ineradicable, even within the framework of India’s mixed economy. To comprehend it one needs to enter the terrain of fiscal sociology, a point to which we shall revert later. What is important to emphasize in the present context is that without a major attempt at resource mobili¬ zation on the national scale, an adequate solution to the centre-state resource problem will evade planners and policy-makers. A certain rationalization of the pattern of expenditure and sources of revenue can obviously be carried out, but no fundamental alteration is possible without further raising public savings as a proportion of gross domestic product.

Problems in Plan Implementation

52

Strengthening the productive base of backward states requires a major attempt at raising their agricultural productivity per hectare. It also requires generation of adequate off-farm employment in smallscale enterprises in rural areas and smaller district towns. In addition, there is the obvious need to develop a whole range of activities which will create human capital as well as have a significant effect on res¬ training population growth. All this requires that the states have to be not merely properly admi¬ nistered but also adequately funded. For quite some time to come, resources will have to be transferred from prosperous states to back¬ ward states, and leakages in the transfer process will have to be plugged. The major contributions that central government can make in this regard are to-raise the efficiency of large public corporations, reduce the rate of expansion of its own bureaucracy, and reduce delays in the completion of large centre-initiated projects. It can also contribute by maintaining a non-inflationary macro-economic environment. Regionally equitable development strategies are not necessarily more expensive in terms of capital requirements, as sometimes held, if they make better use of locally available resources, and also pay greater attention to the prevention of premature urbanization or exces¬ sive growth of ‘primate cities’. In fact, it can be maintained with adequate justification that India has a great deal to gain from following an appropriate pattern of regional specialization coupled with more adequate provision of public goods on a regional basis. These gains will be reflected directly in the form of higher productivity of relatively immobile resources, as well as through long-term effects on the quality of human life. A more systematic integration of regional planning and sectoral planning will strengthen the process of attainment of long-held goals of ‘growth with equity’.

5 Some Current Issues of Economic Policy

The Capital-Output Ratio in the Indian Economy There has been a great deal of discussion in India in recent years about the efficiency of resource use in the Indian economy. Thus, many policy-makers as well as planners are of the opinion that the incre¬ mental capital-output ratio (ICOR) in the Indian economy rose sharply from the mid-fifties to the early eighties. Dr V. K. R. V. Rao, in his recent book on India’s national income, deduced from this alleged fact a very major conclusion which is best stated in his own words: ‘It is clear from our analysis that the policy we have followed for capital formation during this period, from the point of view of maxi¬ mizing productivity and the impact on growth, has been erroneous.’1 Dr Rao’s conclusions may indeed be right, but it is not possible to deduce any such conclusion without a more careful examination of both the aggregate data and its internal composition. First, is it true that the incremental capital-output ratio has risen very substantially? Secondly, if the answer is yes, does the cause lie in factors specific to India, or are they general concomitants of the growth process in a lowincome economy? Dr Rao proceeds from the time series of gross domestic savings as a percentage of gross domestic product at market prices as given by the Central Statistical Organization. As may be seen from Table 2, the rate of gross saving increased substantially, from 9.5 % in 1951/2 to 22.3 in 1983/4, after reaching a peak of 23.4% in 1979/80. It may also be observed (from Table 1) that the marginal rate of saving reached a high of 26.3% during the 1970s. This is indeed a steep increase, and has often been quoted as an indication of the growing maturity of the economy. On the other hand, the rate of growth of GDP has not displayed a corresponding acceleration, as can be seen from Table 5. An inference has therefore been drawn which runs in terms of declining investment productivity. However, several

54

Current Issues of Economic Policy

questions arise. First of all, the high rate of saving in the period 1977_80 seems to have been in part due to exceptional factors as it has since declined, reaching 22.1% in 1984/5. Thus, if the incremental capital-output ratio rose during the late sixties and early seventies, it appears to have come down somewhat in the course of the last two fiveyear plans (as can be seen from Table 3), since the annual average rate of growth of GDP has been around 5 % over the period 1975-85. The transient factors on the savings side have not been fully analysed but would include, among other things, sharply increased remittances of Indian nationals employed in the Gulf countries. Secondly, even the higher figure of 23 % may involve a measure of overstatement in terms of capacity to add to the stock of domestic capital. Thus, the Report of the Working Group on Savings appointed by the Department of Statistics of the Ministry of Planning under the chairmanship of Dr K. N. Raj came to the following important conclusion: It will have been obvious from our analysis in Chapter 5 that, even though the rate of gross capital formation in the economy would at first appear to have risen by about two and a half times over the last quarter of a century (from about 10 per cent of the GDP in the middle 1950s to nearly 24 per cent by the end of the 1970s), the order of increase has been much lower. When year-toyear fluctuations are smoothened out, and both the capital formation and domestic product series are estimated at 1970-71 prices, the rate of gross fixed capital formation in the closing years of the 1970s (about 18 per cent of G.D.P.) turns out to be no higher than in the middle of the 1960s and only about two thirds higher than in the middle of the 1950s (when it was about 11 per cent of G.D.P.).2

The working group took into account the fact that inventories may have averaged around 2.5% of GDP during the 1970s, which was one percentage point higher than earlier. The main explanation offered by the committee was that the price index of capital goods had risen faster than the GDP deflator since 1974/5. This is evident from the data given in Table 10. A note of dissent appended by Dr S. P. Gupta and Dr Mahfooz Ahmad did not question the above explanation, but raised the issue that the price deflator for capital goods may not have reflected qualitative changes in the composition of the capital stock.3 However, even allowing for the point made by the dissenting note, it would appear from the above analysis that the rise in incremental capital-output ratio may not have gone up as high as Dr Rao and some other critics would appear to think. The interesting question that then arises is, What can we infer

Current Issues of Economic Policy

55

from this increase regarding the efficiency of resource use? To deduce any operational conclusion, one would need to provide at least a decomposition of the increase in the ICOR according to sectors contributing to GDP, on the one hand, and changes in capital pro¬ ductivity at the sectoral level (after making suitable adjustment for variations in the lag structure of investments) on the other. Tables 4,6, and 7 throw some light on these issues, even though no comprehensive decomposition exercise has been carried out here. If it turns out, for example, that in order to overcome the ‘land constraint’, the country has to make additional investment in, say, irrigation or power to feed the growing population, then it may be the right thing to have done unless it can be demonstrated that the capital requirement to generate the extra export earnings to import food for the growing population would have been smaller in magnitude. Obviously, the arguments for increasing the density of the transport networks consequent on the increase in the marketed surplus of agri¬ culture would lead to a similar conclusion. Thus, it is quite clear that without additional supporting evidence, we cannot deduce anything more about whether the policy decisions taken were in fact erroneous. Dr K. N. Raj has in a very recent paper raised some additional ques¬ tions in this regard, especially on a cross-country basis.4 He argues that the increase in the incremental capital-output ratio has not been signi¬ ficantly different in India from what has been observed in many other developing countries. It is worth quoting the following paragraph: It will be seen that rise in incremental capital-output ratio has been an almost universal phenomenon; that the only exceptions are the ‘least developed’ among the developing countries (presumably because current replacement investment is relatively low in such countries); and that it has been sharpest among the capital-surplus energy exporting countries (presumably for the reason that massive investments in ‘modernization’ have been taking place in these countries on an unparalleled scale).

Raj finds a possible clue to the increase in the capital-output ratio in India, which on his own reckoning went up from 3.50 for the period 1951/2-1959/60 (excluding gross inventories) to 5.55 for the period 1970/1-1979/80, in Arthur Lewis’s observation that ‘infrastructural capital costs tend to be very high in periods of urbanization’. Raj does not discuss in this paper the inter-sectoral shift in the invest¬ ment pattern in the sixties and seventies, although he points out the increasing amount of resources devoted to the energy sector in recent plans. This is no doubt a very important point as the capital-output

56

Current Issues of Economic Policy

ratio in energy production has been quite high in India, partly because of the quality of resources (such as high-ash coal), or because easily exploitable reserves may be getting somewhat exhausted. But behind the rising energy demand, there are major structural changes going on. It is an important fact that Indian agriculture has become far more energy-intensive during the seventies as compared with the two previous decades of Indian planning. When we refer to the increasing energy intensity of agriculture, we mean not only the amount of electri¬ city consumed directly by agriculture, we also include diesel oil for running pump sets and tractors, as well as the growing practice of applying oil-derived chemical fertilizers. Thus it can also be seen from Table 18, which is based on national accounts data, that there has been a general increase in the amount of current inputs going into agri¬ culture. As a proportion of total value of output, the total value of current input has gone up from about 0.197 to 0.275 over the period 1970/1 to 1981/2, whereas as a proportion of total inputs, energyrelated inputs purchased from commercial sources have gone up from 0.164 to 0.403.5 This steep increase has been made possible by greater imports of fertilizers, crude oil, and oil-based products, on the one hand, and greater domestic output in these sectors on the other. This can be seen from Table 19, which demonstrates the rise in fertilizer consumption. The point simply is that there has been both an increase in capital (fixed and working) directly needed by agriculture, as well as a change in the elements constituting the inter-industry matrix. The combined impact of both types of change has implied that the economy now has to devote a larger percentage of total investment to maintain the same rate of growth in the final consumption of agricultural produce than in the fifties and the early sixties, when agricultural expansion largely took the form of an increase in the area cultivated. Thus, the very nature of the change in agricultural technology, espe¬ cially in the areas affected by the Green Revolution, has disproved one of the early assumptions of Indian planning: that with an abundant labour reserve, agriculture constitutes a ‘bargain sector’, a point that we touched upon earlier. While agricultural and infrastructural requirements taken together explain a considerable part of the rise in the incremental capital-output ratio.6 I believe it is necessary to point out that Indian industry has not shown any tendency for unit costs to come down with an increase in the volume of output. To put it differently, while the agricultural sector shows sign of diminishing returns, which has been in part mitigated by

Current Issues of Economic Policy

57

the diffusion of yield-increasing innovations (even though as yet con¬ fined to a limited part of the country), industry has not displayed any conspicuous signs of increasing returns to scale.7 What are the reasons for the phenomenon? Partly, I believe, that public investment has shown an erratic pattern of growth during this period—that is, the period from the mid-sixties onwards. This has led to the emergence of excess capacity in some sectors and supply bottle¬ necks in others. Secondly, the rate of growth of real public investment, excluding inventory investment, has slackened off from the mid-sixties onwards. Thus, as Table 8 bears out, the rate of growth of public investment fell from around 14% in the 1950s to around 3.4% in the 1960s. This is a phenomenon that we will need to discuss at some length in a subsequent section, as the causes and implications are both far-ranging in character. Thirdly, one has to take into account the fact that the market for final industrial products in India, other than for agro-based goods such as textiles, is still relatively small and not growing fast enough, except for a few items such as transistors, syn¬ thetic fabrics, television sets, and the like. There is as yet a relatively small domestic market for many of these consumer durables, which is highly protected. While international competition has been precluded at least thus far by government policy, and this has led to the fact that benefits of cost reduction abroad have not reached the Indian consumer, benefits of domestic competition have not so far been notable because of the slow growth of domestic absorptive capacity. Barriers to entry have been reinforced by the government’s licensing policy, which has come under heavy fire, leading to recent shifts in government policy. Finally, it is worth mentioning that delays in the completion of projects have also contributed considerably to the increase in the capital-output ratio.8 It has often been observed by economists with an Austrian persuasion of mind (and in this respect, Marx appears to have been an Austrian too), that all economy finally boils down to the economy of time. This is- a point that the late Andropov in Russia seemed to have recognized in his speeches as well, while trying to explain the recent slow-down in economic growth in the USSR. In this respect, the experience of India has been highly unsatis¬ factory. Budgetary procedures are grossly inadequate from the point of view of quick completion of projects. Gestation periods tend to be lengthened because initial allocations of funds are insufficient. (This reflects an attempt to spread scarce resources rather thinly over time

Current Issues of Economic Policy

58

and space.) Then there is the additional problem of unsatisfactory monitoring of the progress of major construction projects in sectors such as irrigation, power, open-cast mining, and so on. Furthermore, there is the protracted bargaining that goes on with the aid donors, bilateral or multilateral sources from which technology or equipment may be purchased. The multiplicity of sources from which technology and equipment are obtained from abroad have also led to problems like lack of standardization, the absence of spare parts, and similar pro¬ blems that add to investment inefficiency. On top of all this, there is an element of politicization of public investment decisions on matters relating to location which can also raise investment costs. While it is difficult to quantify the relative impact of different factors outlined here on an economy-wide basis, one can study a sample of cases and come up with a diagnosis which will help identify remedial courses of action. While the Indian Planning Commission has con¬ siderable information on public sector projects, I do not know of any completed study of a significant part of investment which will help quantify the impact of these factors. My hunch on the basis of experience is that procedural matters, including lack of adequate monitoring, have possibly contributed to the greatest extent in causing avoidable delays and hence overcapitali¬ zation of projects in sectors such as power and steel. Secondly, the increase in prices of imported equipment has been a significant factor from the mid-seventies onwards. Thirdly, lack of suitable upgrading of technology has made the Indian capital goods sector a less attractive source of equipment purchase, while imports have only recently been liberalized. Action correlates of these propositions are not difficult to discern. It is difficult to maintain that the capital needed, directly or indirectly, to increase the output of agricultural sector can come down in the medium run—agricultural production based on new technologies will need to be spread to areas where the level of infrastructural facilities is still low, and increasing urbanization will mean that the productive capacity of each remaining farming household will have to be inten¬ sified in order to feed the growing non-agricultural population. In consequence, short-term relief will need to be found in the area of management of major public enterprise units. I use the expression ‘short term’ because I believe that once infrastructural facilities have been created in the eastern and central parts of India, agricultural

Current Issues of Economic Policy

59

production is likely to show significant increase.9 There is no doubt that relative to certain areas in the north-west and the south, these areas suffer from what some have described as ‘semi-feudal’ relations of production. It is not clear to me, however, that these relations will not evolve once the opportunity of entering into profitable market transactions is available.10 The crux of the problem would appear to be one of suitable water management, along with provision of credit. The former remains to be tackled primarily on a technical basis, although it is not independent of social factors such as fragmentation of holdings, the lack of consolidation of holdings, and so on. The volume of credit disbursed in the eastern region through co-operative credit organi¬ zations is an exceedingly small fraction of what goes into financing working capital for agricultural purposes in the west and the north¬ west, as can be seen from Table 28. This is primarily a matter of poli¬ tical mobilization of the small farmers, on the one hand, and provision of adequate administrative support for infrastructure development, on the other. G. Myrdal came to the conclusion, at the end of his three-volume Asian Drama, that completion of agricultural transition was a matter of the highest priority for India. While Myrdal’s specific recommenda¬ tion on the precise way this transition has to be brought about (i.e. his emphasis on capitalist farming) has been criticized,11 and with good reason in my opinion, the basic conclusion cannot be denied. From the statistics spanning the period from 1951 to 1981, it would appear that the income per agricultural worker has continuously deteriorated rela¬ tive to income in the non-agricultural sectors,12 as implicit in Table 29. This is true even after allowing for the change in occupational distri¬ bution shown by the 1981 census, which would suggest that the percentage of the labour force engaged in agriculture has somewhat declined. If this trend remains unchecked, one can expect neither vigorous industrial growth in the years to come nor any drastic decline in the level of mass poverty which planners generally give as a major policy objective. The analytical basis of these propositions will be discussed in the next section.

Interdependence between Agriculture and Industry The argument that a higher rate of growth of agriculture, other things remaining the same, will exert a favourable influence on the rate of

Current Issues of Economic Policy

60

growth of industrial production is, of course, a long-standing one. It goes back to Sir James Steuart and, of course, to Adam Smith. In modern days, many have argued along similar lines. A prominent exponent—Nicholas Kaldor, who has dealt with the issue in numerous places—attaches importance not so much to agricultural production but to agricultural surplus. He wrote, ‘Indeed, the ratio of agricultural production to the self-consumption in the agricultural sector, which is invariably low in countries where agriculture is backward, is perhaps the best available indicator of the “development potential” of an economy.’13 For a closed economy, the argument put forward by Kaldor would appear to be very plausible, for no better reason than the fact that food constitutes the principal wage good. Income elasticity of demand for food is known to be relatively high in poor countries. In India, it has been often put at somewhere between 0.6% and 0.7%, which is markedly higher than in developed countries. If the argument put forward by Mahalanobis rested upon viewing capital as ‘machines’, Kaldor’s argument here views ‘capital’ in the early stages as primarily food advanced to workers, a very classical concept indeed. How do the two arguments link up? One would appear to suggest additional generation of agricultural surplus as the first prerequisite for accelerated growth and industrialization, whereas the other places emphasis on the building up of machine-making capacity. In England, the industrial revolution, as is well known, followed the so-called ‘agricultural revolution’, which was spread out over a fairly long period of time. Indian planners were not unaware of this sequence even when the Mahalanobis model was adopted as the theoretical basis for the Second Five-Year Plan. In fact, Vakil and Brahmananda went to the extent of denying the validity of the entire logic put forward by Mahalanobis, on the grounds that what mattered most in the early stages of growth was to increase the elasticity of supply of wage goods, which meant food and textiles. As usual, the argument can be better understood by distinguishing carefully between the implicit premisses. One of them is that agricul¬ tural production is more or less autonomously determined. As Kaldor put it, ‘Agricultural production has an autonomous momentum which is mainly dependent on the progress of landsaving, as distinct from labour saving innovations.’14 This is obviously relevant for India, as we have also argued earlier. But how does one bring it about? Here

Current Issues of Economic Policy

61

Kaldor seems to understate the importance of ‘purchased inputs’ in agriculture. As Table 17 clearly shows, in the post-Green Revolution period, this ratio has gone up by a high growth factor. Mahalanobis would have placed emphasis on this point, and looked upon the increase of machine-building capacity as facilitating this process. The argument was most explicitly stated in his reply to Myrdal, when he reviewed the latter’s book.15 The other important point relates to the item ‘self-consumption’, which can be regarded as a fairly elastic category or something very rigid, depending upon circumstances. If the assumption is that there is a fair degree of elasticity in both production and self-consumption, then obviously industrialization can proceed a fair way from a low initial base without getting aborted through price increase. The two arguments can then be satisfactorily reconciled as a practical proposi¬ tion. In fact, they can even mutually reinforce each other. A judicious mix of capital as ‘machines’ and capital as ‘wage good’ (e.g. food) can lead to a faster rate of growth than an unbalanced mix. As a matter of fact, during the decade of the fifties both industry and agriculture increased substantially, especially the former, and the net barter terms of trade were kept steady. Marginal propensity to save was also signi¬ ficantly positive, and the savings ratio went up substantially.16 While it would be unwarranted to deduce from these facts that India had followed any kind of optimizing trajectory, the reason for the above experience was probably that agricultural production did not compete in any significant way for scarce investible funds. The rate of growth of agricultural production was to a significant extent brought about by area expansion and better regional specialization, both largely onceand-for-all increases. However, in the mid-sixties, industrial invest¬ ment stagnated and agricultural investment had to be stepped up to compensate for the exhaustion of these two major sources of growth. The question of striking a better balance between the two somewhat different concepts of ‘capital formation’ arose in a rather painful way during the seventies, and there had to be a change in both the nature and pace of industrialization consequent on the changing input requirements of agriculture. We have so far assumed the case of a closed economy. But most economies are ‘open’ to varying degrees, and the Indian economy is also an open economy, although the ratio of both imports and exports to GDP is rather low. In an open economy, industrialization can receive a further push from import substitution, at least up to a point.

Current Issues of Economic Policy

62

It has been argued by some that Indian industrialization in the first part of its planning experience was based largely on easy import substitution. It is now held that during the mid-eighties, when India has reached a high level of agricultural production—food grain production has climbed from around 50 million tonnes in 1950/1 to 150 million tonnes in 1983/4, and the government has accumulated a very comfortable food stock of nearly 30 million tonnes—the emphasis should now shift towards industrializtion, with an export market in view. In other words, since India has achieved a fair measure of food self-sufficiency and is in fact likely to meet a demand constraint for agricultural products, the Kaldor argument, it is now held, justifies our shifting attention to international trade in a much greater measure if we are looking for acceleration of growth in industrial production. The argument is not without some basis, for the strength of the industry-agriculture linkage seems to have weakened somewhat over three decades of planning. There are several ways of substantiating this proposition. One way is to estimate the elasticity of GDP in manu¬ facturing with respect to GDP in agriculture. It may be seen from Table 21 that during the 1950s this magnitude was of the order of 2.19, but declined to 1.77 in the 1960s and rose slightly to 1.88 in the 1970s. The coefficient for the entire period from 1970/1 to 1983/4 was 1.76. The magnitudes are not significantly affected if lagged ratios are computed. Thus a qualitative change is clearly there, even though not as sub¬ stantial as some would argue. This change is explained possibly by four major forces which have pulled down the growth-stimulating effect of agriculture. First, the increase in agricultural production has been very substantially confined to food grains, as can be seen from Table 14. Commercial crops which enter into industrial processing have shown much lower rates of increase, posing constraints for industrial expansion. This is corroborated by the decline in the elasticity coeffi¬ cient of GDP in manufacturing with respect to non-food grains pro¬ duction in the 1970s as compared with the 1950s, as shown in Table 22. Secondly, the effect of a rise in the amount of purchased inputs used by the agricultural sector has spilled over into the balance of payments, creating a proportionately larger increase in the import demand for petroleum and petroleum-based products. Thirdly, industrial pro¬ duction has been propelled to a greater extent than before by a fast rate of increase in the demand for consumer durables, which are often

Current Issues of Economic Policy

63

highly capital- and import-intensive. Fourthly, the Indian capital goods sector has increasingly faced competition from imports, as a direct function of the changed policies adopted. Thus, a substantial increase in demand for oil exploration and drilling equipment has stimulated demand outside the Indian economy, as these could be better met from foreign sources. All these would imply that the nature of the stimulus presented by agricultural growth may have weakened in intensity during recent years. However, as we have noted, despite a downward drift in the elasticity coefficient, the influence is still sub¬ stantial, as the coefficient is still about 1.8. If certain policy changes which are desirable in themselves (or for balance of payments reasons) are introduced, the picture can alter substantially. First of all, the unbalanced nature of the product mix originating in agriculture still plays a very major role in limiting the impact on industrial expansion. The production of edible oils, other fats, and medium-staple cotton is expanding at slower rates than grain production, as noted already—an imbalance which needs to be corrected. This will require an appro¬ priate policy frame for agriculture which will allow productivity to rise in ‘commercial crops’ within a very tight land budget. Thus, ‘land¬ saving innovation’, through increases in yield and multiple cropping intensity, appears to remain very important. Along with these, improvements in dry-land farming methods are very important as parts of the country, such as the Deccan Plateau, are subject to very precarious rainfall. Secondly, the importance of eradicating mass poverty would suggest that a sustained increase in the availability of food grains along with greater generation of employment oppor¬ tunities may remain the key factors for preventing social unrest for the foreseeable future. Thirdly, since the growth rates of productivity of different food crops have been far from uniform, wheat leading the list by a large margin, we have a regional dimension to the problem which is likely to pose an important constraint to the eradication of poverty in the next decade. Experience on the whole seems to suggest that possibly more is needed today for rapid industrialization than maintaining a satis¬ factory performance in agriculture, particularly because agriculture itself has become more import-dependent than before. If imports are to be secured through greater exports, we have to secure greater levels of competitiveness in manufactured exports. Or if we would rather produce them at home, as in the case of items such as fertilizers and chemicals, our productivity levels must rise significantly. Either way,

64

Current Issues of Economic Policy

the efficiency of the industrial sector has to improve. In other words, with an increase in the marketed surplus of food grains and an overall increase in industrial diversification, priority may have to be given to improving efficiency in the industrial sector. The question is how best this increased efficiency can be achieved. An influential body of opinion would suggest that the key lies in technological improvement, and that this can be brought about most easily by increasing the ‘open¬ ness’ of the Indian economy. These are all issues which are currently being debated within India, and we need to turn to them.

Technology, Capital Goods, and Growth Technology is currently very much on the agenda of the government. One widely diagnosed cause of India’s growing lack of competitiveness in the international markets is the so-called ‘technological lag’. The Indian economy is often described as a ‘high-cost economy’, and among the factors responsible for the high level of costs, a prominent role is given to the ‘obsolete’ nature of much technology utilized in Indian industry. Within this diagnostic framework, it is no surprise, then, that an attempt at quick elimination of this lag takes the form of liberal imports of know-how and capital goods. Statistics on growing foreign collaboration agreements and on the import of capital goods would also suggest that the current government policy is indeed very much influenced by the above diagnosis.17 It is, of course, too early to assess the impact of these policy changes. But it may be useful to consider a number of analytical issues which have a bearing on the problem of technological backwardness. First of all, it is necessary to recall that the strategy of industrial development adopted at the time of the Second Five-Year Plan did recognize the need to overcome technological backwardness as a major objective of economic policy. The importance that was attached at that time to the development of a ‘machine tools sector’ within India was based on the understanding that an efficient and diversified sector producing machine tools was likely to help substantially the production of capital goods over a wide spectrum of uses. Thus the development of a dynamic capital goods sector in the broad sense was given high priority. This analysis lacked neither a basic rationale nor historical support. In an important paper which was first published during the early sixties, N. Rosenberg, a prominent economic historian, pro¬ vided a useful analysis of the ways in which the growth of a capital

Current Issues of Economic Policy

65

goods sector could help to raise both the rate of capital formation and the efficiency of capital stock engaged in producing consumable goods. Rosenberg’s analysis was backed by historical reasoning, which he has since developed in numerous writings. It was Rosenberg’s contention that underdeveloped countries are doubly handicapped: low rates of capital forma¬ tion perpetuate low capital/labour ratios and therefore low levels of labour pro¬ ductivity; and the failure to achieve a well developed capital goods sector means a failure to provide the basis of technical skills and knowledge necessary to the development of capital-saving techniques and therefore a reinforcement of the state of technical backwardness.18 It may be noted that Rosenberg traced the theoretical basis of his argu¬ ment to Marx’s analysis of ‘machinofacture’, and to the critical role that Marx placed within machinofacture on the development of ‘vast Cyclopean machines’. Rosenberg’s analysis and Indian strategy during the fifties and early sixties were logically congruent. The interesting question, then, is why India today finds its capital goods sector relatively backward and capital costs relatively high, so that rates of return on prospective capital investment are low. This is a very major question. Fortunately, on this question, we have a very useful contribution by Dr M. R.

(

Bhagvan, which gives a detailed analysis of the capital goods sector in India.19 Dr Bhagvan finds that the average annual rate of growth in value added (at 1960 prices) of the capital goods sector was 7.2% over the years 1960-80. However, he notices that while during the Third FiveYear Plan (1961-5) the rate was as high as 19.4% , it then went down to - 17.6% during the era of annual plans (1966-8). The situation did not significantly improve during the Fourh Five-Year Plan (1969-73), when the rate was - 10.4%. It was only during the Fifth Five-Year Plan that a positive growth rate was again achieved (9.6%). Dr Bhagvan did not work out the growth rate for the Sixth Plan, but my estimate, derived from the official data, is only 6.23% per annum — distinctly lower than for the Fifth Plan. The declining share of capital goods production in total industrial production is significant for explaining India’s current ‘technological lag’. One of Dr Bhagvan’s major findings deserves to be quoted here: By the early 1970s, India had achieved near total self-sufficiency in its capacity to produce most of the standard modern capital goods required by Indian

Current Issues of Economic Policy

66

industry. However, this remarkable manufacturing capacity has not been accompanied by any significant acquisition of design-capacity. Thus, the manufacture of technology continues along ‘outdated’ lines, based on the knowhow imported in the 1960s and early 1970s from Europe and North America . . . With the exception of machine tools, R&D developments in public sector capital goods firms are stagnating with no significant techno¬ logical innovations to their credit. Equally, there is very little R&D work of significance going on in the private sector. Incentives towards domestic R&D activities and technological innovations are being severely undercut by the continuing policy of liberalization of technology imports and of promotion of technology agreements with foreign firms (agreements already add up to a huge number).

I have quoted extensively from Dr Bhagvan to stress the following points: (a) one cannot deny that Indian capital goods sector is today outdated, the lag being of the order of around ten to fifteen years; (b) this lag is partly explained by the switch towards imports; and (c) little effort is being made either to improve design capability or to engage in^ R&D. If these points are true, the present shift in the policy mix may be creating more problems for the future than is generally recognized. The fundamental idea on which the Rosenberg thesis rested was that a ‘capital-saving’ bias in innovation in developing countries was pre¬ dicated on the improvements in the efficiency of capital goods production. The important analytical point was that any cost reduction in the capital goods sector—whether it is labour saving or capital saving—is ‘a capital saving innovation to the economy as a whole’. The present policy of liberal imports of know-how and capital goods together may in fact be based on mutually offsetting forces. While access to new knowledge is a positive factor for future growth, it should be clearly recognized that accompanied by liberalization of imports of capital goods on a significant scale, domestic costs of production are unlikely to come down if the imports act largely as substitutes for domesti£^£roduction. Inducement to invest may suffer correspondingly unless the prospective demand for final products is large and growing. This brings me to the desired nature of the final product mix as a determinant of technological choice. It should be quite clear that the social value of technological improvement cannot be dissociated from issues relating to the desired product mix. In a country where a large proportion of the population do not receive adequate nourishment in terms of calories needed, two issues would appear to be of paramount

Current Issues of Economic Policy

67

importance: (a) more adequate production of goods directly and indirectly geared towards ‘basic needs’, howsoever defined; and (b) more productive use of labour without incurring excessive investment cost on the worksite. By the criteria of meeting ‘basic needs’ of the population, perhaps the most important breakthroughs called for are in areas such as utili¬ zation of solar energy for pumping purposes, biotechnological changes involving direct fixation of nitrogen in the soil, and other such advances which make the large-scale import and investment of oil or oil-based products less necessary. It may be said that these are highly futuristic technologies, but there is little doubt that these technologies are going to come, sooner or later. This means that adequate prepara¬ tion, including building up human skills and institutional infra¬ structure for these purposes, must proceed without delay. Similarly, there is the need to extend crop genetic research to new areas. If one considers that the so-called ‘non-commercial energy’ still accounts for nearly 40 % of our total consumption of energy, the entire perspective alters. To a certain extent, India has so far been able to meet its energy requirements for a fast-growing population on an extremely modest basis precisely because far-reaching ecological degradation has provided the short-term cushion. However, this is not the way to go about meeting the energy requirement for years to come. The currently prevailing elasticity of energy consumption with respect to gross domestic product is estimated to be around 1.3. One can easily see that this is a figure which has serious implications for India’s tech¬ nology policy. In so far as commercial energy consumption is still dependent significantly on coal—directly as coal, and indirectly on coal through electricity generation based on thermal plants—tech¬ nological changes having significant implications for coal handling and beneficiation, long-distance transmission of power, and so on would appear to have priority over many others. The difficulty is that there are short-term options that the market, left to itself, would much prefer, especially if the pricing policy favours a ‘convenience’ fuel such as diesel oil or kerosene. The rate at which India’s hydrocarbon consumption has been allowed to increase since 1980 seems to indicate that pending further discoveries of large oil¬ bearing basins, India is likely to face a major energy crunch in the early nineties or maybe even considerably earlier. I have so far emphasized the role of energy-related options, which are obviously very important from every point of view. From the point

68

Current Issues of Economic Policy

of view of meeting the basic needs of the population, any advance in techniques of ‘dry farming’ can go a long way to meeting the con¬ sumption needs of the poor. However, to date no very significant advance has been recorded, although an international institute located at Hyderabad has been carrying out work for some years now. If the induction of new technology is largely influenced by consi¬ derations of short-term profitability, and if short-term demand is significantly determined by India’s prevailing pattern of income distribution, it is very likely that the impact of today’s liberalized import policy regarding capital goods will be largely confined to the sec!or^nung consumenSuraBEes^Whether this will serve as ‘incentive goods’ for the Indian middle and upper classes and make them more productive (an Indian version of supply-side economics), or whether it will prevent large-scale smuggling of attractive luxury goods from abroad, and thus help in saving foreign exchange, I cannot say with any assurance. My personal guess will be that smuggling will take new forms, as such activity depends on a variety of considerations not all of which are strictly economic. Likewise, the restoration of a ‘work ethic’ depends on a variety of factors, in which social pressures must rank high. The upshot of this discussion is to suggest the need for a technology policy which is more closely rooted in the socio-economic priorities which are still widely acknowledged as valid. Furthermore, they have to be judged against a long-term perspective. We have already noted that the continued development of a capital goods sector is necessary to change the bias of technological change in a capital-saving direction. We have also noted the great importance of land-saving innovations for India, given its agroclimatic conditions and deteriorating ecological conditions. These considerations do not preclude the introduction of high technology into Indian industry if this improves the functioning of key infrastructural items such as power, transport, and communica¬ tions, as any significant reduction in capital-output ratios in these sectors can lead to substantial saving of capital for the economy as a whole. But even in these areas the need for building up indigenous capabilities is considerable. India’s technology policy for the fore¬ seeable future must emphasize the development of design capabilities for sectors such as chemicals and fertilizers where a substantial growth of demand can be expected and where existing capabilities are quite inadequate. The present policy talks about avoiding repetitive import of technology, but the practice does not confirm it. This is again an

Current Issues of Economic Policy

69

area where effective action is called for, which will prevent monopoly gains from accruing to certain privileged parties on the one hand and avoid undue bureaucratization on the other.

Foreign Trade: Performance and Prospects In our discussions thus far, we have had occasion to point out that the inward-looking character of the industrialization process has been one of the more persistent traits of the strategy of planning that India originally adopted during the mid-fifties. We have also noted that this decision derived from a specific understanding of the structural constraints limiting Indian growth. There was more than ‘elasticity ‘ability to transform’, although ‘elasticity pessimism’ doubtless helped to buttress the argument. While the Second and Third Five-Year Plans registered high rates of industrial growth even when the export perfor¬ mance of the economy was pretty unsatisfactory, thereby demon¬ strating the scope for growth based on domestic demand accompanied by import substitution, from the mid-sixties onwards it was beginning to be evident that the process of industrialization could not continue on the same basis as in the past. We have already reviewed the perform¬ ance of agriculture and the problem that it posed for maintaining a rising level of real public investment. When the agricultural policy was being reviewed and reshaped (partly under duress), a group of scholars and administrators boldly argued for a ‘devaluation’ of the Indian rupee to make Indian exports more competitive, along with a policy for the liberalization of imports.20. In the event, liberalization of imports could not go very far because of the foreign exchange constraint—there was no significant increase in the flow of aid consequent on the devaluation of the rupee by a substantial margin, even though there had been a general expectation in certain policy-making circles that such transitional assistance would accompany any bold attempt at opening up the economy. Exports also did not increase as anticipated, and reasons for this have been much debated. Some have blamed the timing of the devaluation, while others have argued that the effective quantum of devaluation was much lower than the nominal one. Yet others have argued that the supply elasticities of exportables were, in general, rather low. Sectors such as engineering did show some increase, but mostly because significant excess capacity had emerged in the capital goods sector as a result of slackening in the tempo of

SUt’SHht-hOr*

pessimism’ that was at issue as the basic argument ran in terms of

70

Current Issues of Economic Policy

public investment. It may be seen from Table 27 that during the seventies. Indian exports put up a much better performance. Between 1970/1 and 1981/2, exports increased nearly fivefold at current prices, implying an annual average rate of growth of 15.9%. The quantum index rose at a lower rate (around 7%), and the net terms of trade moved against India from 1973/4 onwards, although the initial sharp deterioration in the wake of the first oil-price rise was partly restored by 1977/8 until the second round of oil-price increase in 1979 pushed it down again. During the years 1982/3 and 1983/4, exports at current prices grew at less than 15.9%, the average rate of growth over the period 1970/1 to 1981/2. The quantum index for these years is unoffi¬ cially estimated to have increased only by around 3% per annum. The remarkable performance of exports from 1972/3 to 1976/7 was due to the conjunction of several favourable factors, such as the commodity boom of the early seventies which continued till 1974, the opening up of a large market for Indian exports in the oil-rich Gulf countries consequent on the first oil price hike, the increase in project and turnkey exports, and finally to an effective devaluation of the not performed as well since then? While detailed analysis cannot be attempted here, the following major factors can be mentioned: (a) the decline in import demand arising from developed countries as they slipped into the Great Recession, since 1980; (b) the protectionist measures adopted in developed countries, which negatively influenced Indian exports in the areas of textiles, garments, shoes, iron and steel, iron ore, and leather; (c) the fall in the unit values of some key Indian exports; and (d.) infrastructural constraints within India in areas such as power and transport. Right now, export prospects look rather bleak, even though the Seventh Plan, currently adopted, has projected a real export growth of 7%. The present fiscal year, 1985/6, is unlikely to show any export growth even at current prices over the previous year. Why is India’s performance on the export front so unsatisfactory even when the export basket has been considerably diversified in the course of the seventies, with non-traditional manufacturing exports growing at a faster rate than total exports? It may be argued that the Indian export environment was kept very unfavourable domestically through the adoption of an inappropriate package of policy measures. A contrast is drawn here with the case of South Korea, which has shown spectacular export growth since it

Current Issues of Economic Policy

71

switched from import substituting industrialization to export-led growth in the mid-sixties. Why cannot India repeat the export performance of South Korea? Before we attempt a few tentative obser¬ vations on this score, we should remove some obvious misconceptions regarding Korea’s development experience. First of all, Korea did not practise a ‘free market’ regime. It was a system greatly based on what is called

‘administrative

guidance’.

Secondly,

Korea’s educational

system was reshaped considerably to allow for the transfer of know¬ ledge. Thirdly, the government bureaucracy acted in very close concentration with the business community. As a recent article puts it, Here we should mention that the power of bureaucracy vis-a-vis business was greater in Korea, since the power base of the government was in the army, while in Japan political parties were dependent on business firms for contri¬ butions and government officials found employment in private companies after retirement.21

Finally, it may be maintained that the political regime in Korea was not particularly conspicuous for its encouragement of trade union activities. Given these general features, it would, of course, still not follow that Korea should have done as well as it did on the export front. This can in part be explained by its ability to raise the savings rate from 15% in 1965 to 31% as early as 1974, a very sharp increase indeed. Growth in the domestic savings rate implied that Korean productive capacity could be significantly modernized as well as augmented to bring about a greater degree of competitiveness in industrial products, besides providing adequate infrastructural support. High marginal propensity to save implied that potential output was realized in a greater volume of export sales. And in switching over from a regime based on import substitution, transitional difficulties were additionally’ smoothed by the significant inflow of foreign funds. As Blumenthal and Lee point out, In Korea, the import surplus was an important source of finance: the balance of goods and services was negative for every year of the decade and the average rates of external financing amounted to 36 per cent. Although the share of domestic saving showed a remarkable increase, Korea still relied heavily on foreign savings to carry the burden of domestic capital formation.

It would appear, therefore, ‘that while Korea switched its attention to promoting exports, it also succeeded in attracting a large volume of foreign capital, and simultaneously managed to find outlets for its products—especially in Japan, where Korean goods displaced the

Current Issues of Economic Policy

72

high-wage Japanese items. The phase difference in the real-wage growth paths between the two countries was a useful factor, in as much as Korea could move into producing and exporting commodities which had been abandoned by Japan consequent on the improvement in its real wage rates. Koreans seem to have also relied to a greater extent on vertical integration to reap the benefits of scale economies, while the Japanese had relied more on subcontracting as a source of procuring intermediate inputs. Thus, when Korea opted to move from light con¬ sumer goods to heavy capital goods, it was able to secure the latest tech¬ nological know-how, a factor which was helped once again by its Japanese connection and high investment rates. In contrast with Korea, the case of India shows the role of‘tied aid’ in preventing the purchase of the most efficient capital equipment in a number of different areas. There is little doubt that the consequent lack of standardization and the initial import of relatively old technologies have played an adverse role in key sectors, while the inadequate maintenance and replacement have contributed towards making the economy a ‘high cost’ one. Things were rendered worse in some cases because of the Indian industrial policy, which did not show due regard for the ‘scale factor’ in the design of projects. I have described the Korean case in some detail as it is held up by certain circles, both inside and outside the government,

as an

exemplary one for India to follow during the coming decade. How¬ ever, even if India were to follow a policy leaning heavily on export promotion, its export performance in the medium run will be have to reckon with certain important constraints. The reasons, briefly are as follows: 1. On present indication it appears unlikely that the world will expe¬ rience in the near future a rate and pattern of recovery which will exert a significantly favourable effect on exports from lessdeveloped countries (LDCs), both in volume terms as well as on their terms of trade. 2. As some of the major semi-industrialized countries also happen to be heavily indebted, they will need to run export surpluses to pay back their debts. This may imply severe competition in sectors where India may wish to step up its exports. 3. Sectors where India can step up exports with little additional effort but with a change of policy, such as textiles, will continue to receive heavy protection in the rich country markets. 4. India is unlikely to be able to overcome the foreign exchange

Current Issues of Economic Policy

73

constraint during the process of transition which any significant shift from a relatively closed economy to an open one will entail. These assumptions relate to the international environment, but certain domestic factors must be mentioned as well. India’s infra¬ structural support base is not adequate enough for a major export thrust, as everybody admits. However, improving it is not easy. India does not run a very centralized system of management so far as infra¬ structure is concerned. Power supply, a major input into export production, is mostly in the hands of state governments. The railway management system leaves a lot to be desired, and the state highways are not of the best quality, to put it mildly. Improvements in these areas are in principle possible, but they cannot be taken for granted. The size and heterogeneity of the country pose major problems. Secondly, there is the problem of inflation. Unless suitable domestic policies are followed, an issue I come to later, the rate of inflation in India, in comparison with the rate currently prevailing in the industrialized countries, will erode India’s competi¬ tiveness. Thirdly, there is the intriguing fact that countries which have done particularly well on the export front also happen to be countries with strong authoritarian political regimes. Some economists have maintained that labour market conditions have played a major role in the export success of the newly industrializing countries (NICs). The evidence on this point is sufficiently important to make it pertinent to raise doubts whether the open democracy that India maintains can be equally efficient on the export front.22 The upshot of these observations is not to suggest that exports are not important for India, or that exports cannot be stepped up in the years to come. What I would like to stress is that Indian economic realities cannot be wished away while making projections for export growth. India should probably rely more on specific sectors with some demonstrable export potential; devise a mix of policies that aim at penetrating specific markets which are geographically or otherwise well situated from its point of view; maintain an exchange rate regime along with other competing countries; and minimize budgetary bur¬ dens while ensuring that exporting remains a profitable activity. While domestic demand, in my opinion, will provide the major source of growth, exports can play an important supporting role.23 However, before we conclude this part of our discussion, it is neces¬ sary to take into account some recent ‘liberalization measures’ adopted in the context of import policy—the so-called ‘open door’ policy.

74

Current Issues of Economic Policy

There is an expectation, strongly held in some circles, that with the adoption of a more liberal policy of imports of capital goods and tech¬ nology, the Indian economy will be able to reap the benefits of a rational international division of labour, something which its so-called inward-looking policy has prevented so far. There is little doubt that there have been periods when in the name of import substitution, rela¬ tively low-cost options involving imports were not taken up. Whether the learning effects did not take place because the domestic demand was wrongly estimated, or because the technology in question was inappropriately chosen in the first instance, or whether it was the general slowing down of the rate of increase of real public and private investment which prevented the scale economies being reaped, can only be very approximately established. My personal guess is that none of these explanations are mutually exclusive. It is possible that they operated with varying degrees of intensity in different sectors. As a very rough guess, I believe that in sectors such as steel, the need today is for energy-saving modifications in technology along with flexi¬ bility in product mix, rather than large-scale changes; whereas in sectors such as fertilizers, the need is for well-supported design and organization divisions to be set up so as to provide for the assimilation and upgrading of technology on a continuing basis. In electronics, it has been said, the lag is especially great. The present government seems to be of the opinion that a very significant alteration of the policy framework is necessary, and accordingly steps have been undertaken to encourage a large number of foreign collaboration agreements as well as to allow the import of components for assembly purposes. From an overall social point of view, it is not very important whether one particular segment of a particular industry is rendered obsolete or not. After all, ‘creative destruction’ is a necessary part of a growth process, if one takes a Schumpeterian view. Flowever, it is important that imports do not merely substitute for domestic production; on balance, they must lead to a substantial increase in production or productive capacity if a potential balance of payments crunch is to be avoided.24 The idea that liberalized imports are likely to stimulate export growth is not altogether without foundation in a few sectors such as engineering, but it is possibly too facile to extend it to the whole indus¬ trial spectrum. In this respect we need to learn a great deal from the experience of a country like Japan, especially from what Japan did in the mid- and late-fifties. Possibly it may be useful to draw a few lessons

Current Issues of Economic Policy

75

from the way the Ministry of International Trade and Industry (‘MITI’) operates.25 In my judgement, India’s balance of payments is likely to come under pressure unless we carry out a policy of import substitution in certain crucial sectors. These sectors include energy (especially the replacement of imported hydrocarbons by greater domestic pro¬ duction of oil, gas, and coal), edible oils (which rank today next to mineral oil in our list of imports), and nitrogenous fertilizers. These are sectors where demand is large and fast growing. There is little doubt that India has been able to manage a rate of growth of GDP of around 4.5 % with a very low debt profile for the last ten years because it did not have to import food in large quantities, and succeeded in raising domestic oil production substantially from a fairly low base in 1974. In the years to come, one can expect the tempo of increase in oil production to slacken and the gap on the edible oils front to widen unless major steps are executed with suitable expedition. While the former is partly a matter of luck, the latter would relate to more effective planning within the agricultural sector itself, where signi¬ ficant inter-crop imbalances have emerged.26

Resource Mobilization and Public Sector Investment If exports cannot play the role of prime stimulus to industrial growth, at least in the second half of the eighties, what can? Here, I revert to a theme which I have touched upon at different places. It may be recalled that in my analysis of the Indian experience, I attach a lot of impor¬ tance to the task of completing India’s agrarian transition. To complete this transition, I think that public investment will have a leading role to play, in the form of providing infrastructure as well as in providing necessary research and development support. The results of the econometric analysis given in Table 16 show that there is a signi¬ ficant relationship between public investment in agriculture and private investment undertaken by the farmers. In addition, there is the need to upgrade the quality of human agents, through appropriate investment in health, education, and nutrition. I believe that an increase in the agricultural surplus can in part play the same role as the effect induced by the foreign trade multiplier in a small open economy.27 This is because of the size of the country, the very different resource bases of different regions of the country, and the limited mobility of unskilled labour between different regions. Statistical

76

Current Issues of Economic Policy

evidence for this proposition is also available from those parts of the country where the growth of marketed surpluses has been accom¬ panied by the local growth of processing industries and of tertiary sectors catering to agricultural requirements.28 Recent census data show that in these areas, the change in the occupational pattern away from agriculture has been particularly pronounced, suggesting a dimi¬ nishing pressure of population on land. The same conclusion is supported by the National Sample Survey data. A sustained increase in agricultural productivity can significantly help to widen the market for industrial products on the all-India level as well, enabling econo¬ mies of scale to be reaped for most industrial products, especially industrial consumer goods. It would appear, therefore, that sustained growth of agricultural productivity can help usher in a system of self-reinforcing feedbacks which can lead to a more pronounced rupture in what has effectively been an ‘occupational stasis’, even though the 1981 census has for the first time shown a limited break with the occupational pattern which has persisted for more than half a century. The key question, then, is: Can India secure resources for stepping up the rate of public investment? If mere stimulation of monetary demand could do the job, there is obviously an easy way out. However, I do not believe this is a wise course to follow. There are obviously many slacks in the system, but they are not in the areas which can be significantly activized by mere stimulation of monetary demand through what is called deficit financing, which amounts to little more than printing money.29 Can one think of doing it through taxation? I have had occasion to refer to Kalecki’s views on the Third Five-Year Plan. Among his observations, he made the point that prices of neces¬ sities should not be raised through taxation. He was of the opinion that taxation should be used primarily to restrain the rate of growth of luxury consumption, and not as an instrument for reducing the level of mass consumption as it is low enough already. However, this is an issue which can only be discussed with adequate reference to fiscal sociology, an issue to which Schumpeter drew atten¬ tion in one of his brilliant but less well known essays, ‘The Crisis of the Tax State’ ,30 If one looks at India’s tax policy as it has evolved over the last thirty years of planning, one notices a significant increase in the tax-to-GDP ratio over the period as a whole, as may be seen from Table 30. This increase is largely due to an increase in indirect taxation. Even more

Current Issues of Economic Policy

77

important, a very large part of the revenue through indirect taxation is raised from a handful of commodities (which include several major industrial intermediates), which leads to significant cascading effects.31 In addition, heavy import duties, including high duties on capital goods, were levied primarily to raise revenue, but were also justified on the ground of ‘self-reliance’. Direct taxes on incomes in organized sectors were kept nominally very high for a long period, but their collection seems to have left much to be desired. Evasion was always widely spread, and increased over the years. A programme of tax reduction started in 1976, but was most notably accelerated in the fiscal budget for 1985/6. There seems to be a kind of consensus amongst fiscal experts that a nominally higher marginal tax rate does not corres¬ pondingly imply a higher level of tax revenue. In fact, it may lead to the enlargement of the so-called ‘black economy’, whose size it is difficult to estimate but impossible to ignore. The present policy changes have been hailed as bold measures by some people, mostly businessmen and upper-income professionals, but in my opinion do not touch the heart of the matter. This relates to the fact that India has seen a proliferation of the unorganized industrial sector which is an almost complete tax haven. Furthermore, while agriculture has prospered in many states and has created a large class of prosperous farmers, there is hardly any attempt at raising resources through direct taxation. What is more, both the unorganized industrial sector and prosperous agriculture receive signi¬ ficant subsidies, such as fertilizer, power, and irrigation, as can be seen from Tables 31 and 32. We are therefore faced with a situation where, for the first time in India’s planned development, the balance from current revenues at 1984/5 rates of taxes for the Seventh Plan period (1985/90) is placed at -Rs.52,490 million.32 So far as India’s budget is concerned, the balance from current revenues works out at - Rs. 120,110 million for the same period. This is explained by large increases under three headings: subsidies, interest payments, and defence. While expen¬ diture on defence is explained by factors largely exogenous to the plan¬ ning process, the other two items do directly reflect the method of plan financing adopted, as well as the changing balance of class forces, as in particular they reflect the transformation of rich peasantry from being a ‘class in itself to a ‘class for itself. We should note that the govern¬ ment budget has come under pressure even when the government is faced with a favourable succession of good monsoons—again a matter

Current Issues of Economic Policy

78

of some contrast with the pre-Green Revolution years, when govern¬ ment resources dipped only when harvests failed on a large enough scale. Can we reasonably hope for a large step-up in the rate of real public investment, given the present constellation of social and economic forces? In fact, there is a growing body of public opinion that would appear to favour a policy of encouraging upper-class consumption on the ground that this would stimulate private investment through the usual acceleration-type mechanism as well as through incentive effects. Their logic would appear to be the following. Indian consumer goods are currently overpriced because of scale diseconomies as well as tech¬ nological obsolescence. On top of these two structural factors, they bear heavy indirect taxes. The argument runs that if indirect taxes were to be very significantly reduced, these reductions would be passed on to the consumer and demand would widen substantially. Combined with liberal imports of latest-vintage technology and the choice of optimum scale, India will progressively be able to move towards a ‘low-cost economy’, which will also make it internationally more competitive. In this strategy, domestic demand is given some importance, but only in

60

far as it affects the top 10% of the

population. There are, however, two major snags in this argument, apart from issues of equity. First, infrastructural constraints, especially in the form of power, are highly capital intensive in character. Even if the share of public investment in total investment is reduced, this will only mean ‘financial savings’, as a lot of potential output may be lost because of non-availability of power, transport, and so forth. Some substitute for public investment must be found in these areas. Secondly, there is going to be an adverse impact on the balance of pay¬ ments situation resulting from liberal imports of capital goods which will act at least initially as a substitute for domestic production. Furthermore, this direct effect will be strengthened by the import of oil, which always goes up whenever there is power shortage arising from fluctuating generation accompanied by generally insufficient investment in transmission and distribution. The policy, therefore, is likely to generate in the first instance short-term rents to certain sectors, inflationary problems in the economy as a whole, and addi¬ tional problems for the balance of payments. Only through the sus¬ tained inflow of external capital, along with the social and economic costs of increased dualism, can this policy be made to work. Under the present constellation of forces, the ability to maintain a

Current Issues of Economic Policy

79

satisfactory rate of growth of real public investment seems to me essen¬ tial as a growth-promoting force. However, this does require major decisions aimed at mobilizing resources from sectors which have significantly benefited from the development process. The Seventh Five-Year Plan proposes to raise the tax-to-GDP ratio by two percent¬ age points, and also projects large-scale stepping up of surpluses from public enterprises. Both these propositions face severe difficulties. The first proposition is opposed usually on grounds of difficulties of imple¬ mentation, especially because they tend to be costly in terms of admini¬ strative inputs. However, it is not clear that administrative difficulties are necessarily as great as they are made out to be. More importantly, the major areas for resource mobilization today are all directed by pressure groups, which in the atmosphere of competitive politics tend to be opposed to any form of taxation, or for that matter even to concede the need for payment for services provided by the govern¬ ment.33 The second proposition is a function of the level of efficiency in the operation and maintenance of the public sector. While the scope here is considerable from the point of view of sectors such as coal, trans¬ port, steel, and fertilizers, the type of managerial culture that is needed to realize a higher level of productivity of capital and labour cannot be reached with the present style of running public enterprises. Meanwhile, the fact that the present financing system continues to operate without generating large-scale inflationary pressures is due to a combination of two factors. First of all, public investment has been heavily biased in favour of infrastructure, and very legitimate demands from sectors such as health, education, and housing have been treated sparingly. Secondly, with the system of nationalized banking that India has adopted, the government has been able to secure com¬ mand over financial savings of the community at largely negative real rates of interest. This has been aided to a certain extent by the financial deepening that India has experienced, a matter of some positive significance.34 It is not difficult to see that both these devices have serious limita¬ tions. The first has hurt India more than official thinking admits, as large human resources remain untapped. The second has technical limitations which render the monetary authorities incompetent to regulate the money demand for goods and services, should the need arise following harvest failures and/or a ‘foreign exchange crunch’. Without going into the details, I may hazard the following proposi¬ tion. If India is to achieve a rate of growth of around 5% per annum,

80

Current Issues of Economic Policy

along with single-digit inflation and some alleviation of poverty, methods must be found to broaden the tax base, to use existing capital and labour resources more efficiently, and to provide adequate outlays on certain forms of public consumption such as health, education, and nutrition, while also ensuring more equal access on the part of deprived sections of the community. The policy mix that India is going to evolve during the eighties must pay due attention to each of the points mentioned above.

6 Conclusion

An Overall Assessment What are the major conclusions that one can draw from India’s expe¬ rience with development planning? First of all, I should like to sound a note of caution. History shows that perceptions of India’s development prospects have not stayed the same over the last three and a half decades. During the fifties, India’s development prospects were rated rather high, inside the country as well as outside. It had a very stable government, an educated elite of sizeable dimensions, a commitment to planned development, and very low defence spending. The logic of Indian development plans, although not universally appreciated, did on the whole fit in with what contemporary development economics had held up as a viable model to follow, especially for a large country. Those who believed in the welfare state as an answer to the pro¬ blems that faced developed capitalism saw in the Indian plan model a genuine possibility that escapes from low-level equilibrium could be found through the mixture of institutional motive forces that the plan projected. Indeed, Nehru’s vision of a mixed economy moving towards a socialist pattern of society appeared to theorists of reformed capitalism as an answer to the challenge posed by the model of growth presented by Mao’s China. During the sixties, the atmosphere changed drastically. Two successive droughts, the declaration of‘plan holidays’ for three years, and large-scale imports of food grains under US Public Law 480 brought about a great change in the inter¬ national perception. For a while India appeared to be a ‘basket case’, and not a model for others to emulate. Internally also there was ini¬ tially great uncertainty. The savings rate dropped, excess capacity emerged in ‘basic sectors’ such as steel and capital goods, and there was fear that maintaining food availability per capita was going to be a very great problem in years ahead. However, from the experience

Conclusion

82

of the initial feeling of helplessness a new strategy for agricultural development was

forged,

based

on

a pronounced technocratic

approach as described in Chapter 3. Unlike what radicals had forecast, the system did not break down. At some cost in economic and social terms, production revived in agriculture, especially in food grains (particularly, wheat), and India avoided the calamity which many had predicted. Ten years after the drought, when there was much criticism of the domestic ‘emergency’ then prevailing, economic indicators were all'pointing upwards. A comfortable balance of payments, bumper food crops, and high growth rates of industrial production made it look as if India were doing very well on the economic front. The late seventies saw renewed political uncertainty, but in the first half of the eighties India turned out to be one of the few countries which main¬ tained a growth rate in gross national product exceeding 4% per annum on a trend basis, along with single-digit inflation in most years. In fact, the Sixth Five-Year Plan (1980-5) achieved an annual average rate of growth exceeding 5 %. This happened when the world was passing through the Great Recession, when the high performers in the growth league of the sixties and seventies, such as Brazil and Mexico, were mostly recording negative or only mildly positive growth in GDP, and with per capita output levels showing large dips all through. Orie has a better appreciation of these facts when one takes into account that Indian plans have been largely internally financed. India’s debt service ratio as a proportion of export earnings during 1983-4 was 11.6%, while in 1984-5 it would have gone up to around 12%. These numbers indicate that thus far, India has managed its external payments posi¬ tion with prudence. One key to this macro-economic performance has been the substantial increase in food grain production, which went up on a peak-to-peak basis by 20 million tonnes in the course of five years (from 131 million tonnes in 1978/9 to 151 million tonnes in 1983/4). That this increase was not fortuitous is underlined by the fact that production in 1985/6 may slightly exceed this figure, despite relatively poor weather conditions in the Kharif season of 1985, which depends heavily on the monsoon. What can one infer about the success of Indian development plans as one surveys the scene spanning the last thirty-five years (1950-85), a period long enough to warrant some statements of a relatively robust character? First of all, India’s macro-economic performance has been only moderately_gQ.o_d.in terms of GDP growth rates. Allowing for the fact that for the better part of the entire plan period, population has

Conclusion

83

increased by more than 2% per annum, the growth in per capita income on an annual average basis has been somewhat less than 2 % per annum.1 While it does not compare favourably with the experience of the so-called NICs, compared with India’s own past (1900-50) the growth acceleration has been impressive indeed. While it will remain an undecidable issue as to how much of this acceleration has been due to the change in the world economic conjuncture since World War II, and how much due to India’s own efforts at planning, the rise in the domestic savings rate from around 10% of GDP in the early fifties to around 23% currently is generally judged as impressive. Secondly, while India has had to reckon with a fair measure of inflation from time to time (1965-7, 1972-4, and 1979-80), the awerage rate of inflation has been a very modest one by international standards. Most often, these inflationary episodes have been triggered offTDy’massive harvest failures or a sharp rise in international prices of essential inter¬ mediates, and most often they were brought under control without resort to large-scale foreign borrowing. There have been two major reasons for this success. One is the ability to maintain a rate of growth of food production of around 3 % per annum over the period as a whole. The other is the financial deepening that was experienced by the country, which allowed domestic savings to go up in a monetized form. As Nicholas Kaldor and others have often emphasized in the analysis of Latin American inflation, the inflation proneness of Latin American countries has been in large part due to their neglect of food grain agri¬ culture.

The deepening of the financial structure has succeeded

because the government has attached a lot of importance to both supply and demand management whenever inflation has exceeded a single-digit figure. While this has to a large extent been prompted by consideration of political legitimacy (an open democratic system in a poor country being generally less tolerant of inflation than authori¬ tarian regimes), it has, in the long run, helped to increase the savings rate by helping to maintain confidence in the ‘standard of value’. How¬ ever, much of the increase in savings has taken place in the household sector. This has involved an inter-sectoral mismatch between the increase in savings and the increase in demand for investment. The public sector, whose savings have not increased proportionately, has been obliged to rely, in growing measure, on borrowing from house¬ holds. This is the crux of the problem of plan financing in the context of the currently formulated Seventh Five-Year Plan. This problem not¬ withstanding, the increase in the aggregate savings rate has on the

Conclusion

84

whole been a stabilizing influence on the macro-economics of India. However, some economists may question whether stability has not been purchased at the cost of some growth. On the side of industrial planning, Indian plans have operated on the basis of an inwm^d-lookmgdevHo^mentstrategy, the outlines of which were sketched in the Second Five-Year Plan. While we have analysed this strategy for its logical underpinnings as a theory of the ‘traverse’, new light has been thrown on this strategy by the resilience that India’s balance of payments displayed during the period 1975-84. While a broad-based industrial structure with an orienta^gntothe homemarketma^wr^well have deprived India of some of the gains from trade in an expanding world economic environment, in a global downswing it has so far stood the economy in good stead. Clearly, whether a country should pursue an outward-looking or an inward¬ looking policy is not an issue that can be decided on the basis of first principles only. One has to reckon not only with the size and composi¬ tion of a country’s resources, but also with the nature of the world economic ‘conjuncture’. This last issue was much discussed during the inter-war period, a point that was missed by policy-makers in many developing countries in the sixties and seventies. Thirdly, there has been considerable capital formation in human terms.

While the

country’s export of skilled manpower cannot be regarded as an unmixed blessing and does reflect an imbalance in manpower plan¬ ning,

workers to draw upon,

even if the level of efficiency varies a great Heal across sectors. —i—nrmni’rT’P'MaBagi^aifctl^1*

ini

—wit""

Can we draw from these facts that India’s development planning has been on the whole a great success? I believe that it would be just as rash to draw such a conclusion as to dismiss Indian planning as an essay in failure. Neo-classical economists are horrified by the inefficiency of resource allocation in India, which implies a considerable loss in poten¬ tial welfare as they understand it. On the other hand, radical econo¬ mists of varying persuasion see in Indian planning an attempt by the ruling elite to deprive the masses of the surplus product they have themselves generated. For the first group, India has erred heavily by following a regime based on quantitative controls, apart from fol¬ lowing mistaken choices regarding sectoral development strategies. Many of them would have preferred India to follow a ‘textiles-first’ strategy, supplemented by large-scale import of capital goods from abroad. For the second group, Indian planning has been an exercise in primitive accumulation, and hence no different in character from

Conclusion

85

capitalist-oriented strategies followed elsewhere. I believe that there is some truth in both contentions. There are many areas of production where inefficiency is fairly widespread, as in the generation of power, transport, steel, and fertilizers, let alone high-cost consumer durables. However, I do not believe that these are strategic mistakes, but rather reflections of faulty design and implementation. There is no inherent reason why plant load factors in thermal power stations have to be around 50%. They can be raised, and raised substantially, by better maintenance, prompt delivery and quality control of coal, redesign of boilers, and so on. Similarly, production from integrated steel plants can be significantly increased through modernization and a greater realization that steel is not a homogeneous product but an ‘engineered’ one. So far as the radical critique is concerned, the fact is that serious problems have been caused not so much by a significant part of net out¬ put being appropriated by property-owning classes, especially in tradi¬ tional agriculture and large business, for no better reason than that they own the means of production (which are in short supply) and have access to decision-making centres, but by the inability to generate suffi¬ cient employment opportunities and ensure adequate production of the basic necessities of life. The result is that while India has doubtless scored some success with the type of planning that it has practised, it has left a large number of people below the poverty line. The 32nd National Sample Survey showed that in 1977/8, the proportion of the population in rural areas living below die poverty line was 5T2%. whereas the corresponding figure for urban areas was 38.2%. According to the 38th Survey (1983/4), the figures have recently undergone a sharp downward revision, to 40.4% for rural areas and 28.1% in urban areas. Even if these figures were accurate and comparable, they would still indicate the gross poverty that exists in the country, as the norm used for these purposes is based principally on caloric intake. What are the causes of India’s persistent poverty? What does one do about it? Does it imply a basic deficiency in the design of development plans? These are some of the questions which are likely to occur to anyone interested in Indian problems. It should be evident from our discussions that it was not because Indian planners had decided that poverty would, willy-nilly, grow in the earlier years of planning and come down later, following a Kuznets-type pattern. They started worrying about distributional issues from the early sixties onwards, in

Conclusion

86

-very explicit terms. If the problem still persists in a serious form, as it doubtless does, one would need to ponder all the more on the issues and remedial courses of action.

Poverty Alleviation: Problems and Prospects An easy answer to the problem of poverty is that India must reduce her population growth to get over the so-called ‘poverty barrier’. I believe that there is a considerable amount of truth in this perception, espe¬ cially if one were to go by the long-term requirement of having an appropriate balance between population and resources, renewable and non-renewable. But I think that the problem of population reduction cannot be seen in abstraction from socio-economic considerations. It is intimately connected with the production and distribution processes which operate in India’s traditional rural economy. More investment in family planning, while welcome per se, cannot by itself bring about the needed reduction in the population growth rate. What is needed, above all, is to change the nature of demand for labour from one of quantitative expansion to one of qualitative upgrading. This is a point which is not always perceived by family planning enthusiasts as it relates to the whole pattern of work organization in agriculture and other rural activities. With the type of production processes which prevail in large segments of agriculture and mediate the redistribution processes, a large family size is often prized by peasant families and agricultural labourers as a way of increasing their incomes, a fact from which purely biomedical devices cannot offer an escape route. India’s social structure is rigid and hierachical, and on top of it, commercialization has deprived it of such ‘communitarian’ elements as it may have had fifty years ago. From the economic point of view, the Green Revolution, as we have pointed out, has so far been largely confined to wheat, cotton, and to much lesser extent rice, while the situation in regard to edible oils, pulses, and coarse grains has, by and large, deteriorated. The result has been the emergence of an unbalanced cropping pattern. Infrastructure conditions helped in bringing about the ‘wheat revolution’, along with human efforts, public and private. No such concentrated effort has so far been devoted to the crops which cater to a more nutritious diet. Even rice yields have risen very slowly in comparison with wheat, especially in the Gangetic plains. Water management is the key problem here, but it is not merely an engineering problem. It is also pre-eminently a social problem as it

Conclusion

87

has to do with problems of land consolidation, access to irrigation water, credit for buying pump sets, and so on. If land-saving and labour-saving innovations could be brought about through providing a better balanced package of the above inputs, especially in eastern and central India, then there are reasons to expect an accelerated decline in population growth in the medium run which can break the low-level equilibrium in which these parts of India are largely trapped today. In the absence of sizeable and well-conceived plans of development for these areas, it is only to be expected that inter-regional inequality will grow, resulting in increasing social tension as well as loss of potential output. There was a time when it was assumed by many economists that India will need to change its occupational structure quickly to get over the problem of poverty. In simpler terms, proportionately more people will need to be employed in industry, which will reduce the relative overpopulation in agriculture. Largely as a result of population growth but also in part because of the strategy of industrialization adopted, this has not happened to any significant extent. While the 1981 census shows some change in the desired direction on an all-India level, a care¬ ful look at the data would show that outside the Green Revolution areas and Maharashtra these changes are not beyond the error margins.2 A point sometimes has been made that with an increased orientation towards export of labour-intensive manufactured goods, and liberal imports of high-technology products, India could have generated more industrial employment than through pursuing its inward-looking approach. Even if this were true for the sixties, which is not obvious, the present world economic situation hardly supports such a con¬ jecture. Secondly, in the long run, where does and how does India find reasonably cost-effective substitutes for non-commercial sources of energy, as its ecological environment continues to deteriorate? I think that the basic strategic questions for India in the coming years are the following. First, can India make small farms viable farms? Can India carry out large-scale public works involving large labour inputs which are not ‘make-work’ programmes but result in the large-scale creation of productive assets?3 This is, of course, not to deny that India has engaged in some inefficient import substitution, which needs to be phased out. It was the increased hiatus between the evolving income distribution and the desired pattern reflected in the plans which was primarily responsible for these inefficiencies, even though there is no denying they have been aggravated by government policies. This

Conclusion

88

points to a major deficiency of the method of development planning that India has followed, a deficiency that we have discussed in con¬ nection with resource mobilization as well as in regard to methods of plan implementation.

Moreover, this deficiency is unlikely to be

removed merely by ‘opening up the economy’, an idea which has gained popularity in very recent years.4 While India’s price-cost relationships for the tradeable sectors ought to be brought into closer alignment with relationships which prevail internationally, given the size of the country, its diversity, and the large-scale underemploy¬ ment, it is only over a period of time that divergences can be signi¬ ficantly reduced. Meanwhile, the Indian economy will have to look for solutions which are inherently ‘second best’ or ‘third best’ in terms of the precepts of neo-classical welfare theory. But there are serious reasons to doubt whether these precepts have much applicability so long as India harbours multiple economies.

The solution to the

problem of rural poverty will require that small farmers must also be given access to land-augmenting innovation along with a programme of well-conceived public works. Both these make considerable demand on available services and organizational capabilities as they cannot be merely directed from above—many of the specific tasks will need to be done on a decentralized basis, a point I have emphasized in connection with problems of plan implementation. One cannot help concluding that India’s development pattern has exacerbated the ‘dualism’ that was there at the start of the development process itself. This can prove fairly corrosive if it is left unchecked. However, it is not planning as such that has done it; rather, it is the product of lack of appropriate planning. Some Indian economists are today looking much more eagerly towards the free market, in keeping with a widely discernible trend all over the world. But while market-led growth patterns have proved themselves efficient in some cases, this has generally been at the cost of equity. India may well need to get rid of some features of its complex regulatory framework and give greater scope to market signals, but it will need to take countervailing measures on redistributive policies.5 A redistributive programme is unlikely to work in isolation from the pattern of growth that India is able to generate. Regularities that characterize the circular flow of income would suggest that ineffi¬ ciencies may be implied by anti-poverty programmes which do not improve the operating efficiency of production processes. While the first round of putting money into the hands of the needy may relieve dire necessities for a while, the effects tend to be highly transitory in

Conclusion

89

character as such programmes do not improve the capability to earn more on a steady basis. While some supplementary consumption in relation to selected target groups has a proper place in the design of redistribution in a country like India, the more pressing necessity is still for investment for both material and human capital formation. It may be argued that India has a high enough savings rate already and does not need any more. Comparisons involving savings rates and the rate of growth of GDP do not contradict the conventional wisdom that higher savings play a major role in sustaining higher rates of growth. This is not to deny that greater efficiency in resource use is also urgently called for. Such exercises as have been carried out on total factor productivity growth, despite methodological deficiencies, sug¬ gest that greater attention need be paid to this class of issues. But we have already seen that the data are not unambiguous as to the extent of the increase in domestic capital formation that increased savings has rendered possible. If one were to accept fully the conclu¬ sions of the Working Group on Savings, it would be difficult to deny that India has to increase its current rate of savings substantially.6 Issues that bear upon India’s development prospects are inevitably very complex. Moreover, they cannot be devised merely by techno¬ cratically inclined civil servants. While technocrats can obviously suggest more efficient means for pre-assigned goals, the problem of goal-setting is inherently a socio-historical process. Societies which have grown fast during the recent period have done so not because the sum total of problem-solving effort has been vastly greater in any measurable sense, but because they could succeed in evolving a broad consensus on priorities. If Indian society values growth with equity, as plan documents repeatedly emphasize, India has still a long way to go in adapting insti¬ tutions and aspirations in that direction. Neither the recently discussed virtues of the free market mechanism nor the earlier panacea of central planning would appear to carry much conviction today. Societies grow in historical time characterized by irreversibilities, and history does not perform controlled experiments for our benefit. Hence the task for perspective planning remains to minimize avoidable social costs. How¬ ever, the need for flexible adaptable operating mechanisms is very much there. Above all, there has to be a much greater degree of poli¬ tical consensus on what is attempted. India benefited from this in the first decade of planning. It is still greatly needed in the remaining years of this century. No facile conclusion is warranted.

Notes

Notes to Chapter 1 1. See A. O. Hirschman, ‘The Rise and Decline of Development Economics’, in Essays in Trespassing (Cambridge, 1980). 2. While it is invidious to mention names, it is nevertheless useful to point out that among those who visited India for extended periods of time during the fifties were economists with divergent doctrinal positions. However, it is possibly true to maintain that they were mostly ‘reformists’ of one shade of another. But liberation economists were not altogether absent, Milton Friedman and P. T. Bauer being two prominent examples. 3. See A. Lowe, On Economic Knowledge, 2nd revised edn. (New York, 1977). Lowe’s methodological ideas are not as well known as they deserve to be. To my mind, both his critique of traditional economics as well as the advocacy of ‘political economics’ are highly pertinent to recent discussion on eco¬ nomic reform. While much of the substance of current discussion centres around restoring primacy to the price mechanism, Lowe has critically examined the postulational basis of ‘supply-demand analysis’ from a perspective which is generally hidden in the axiomatics of general equili¬ brium analysis. His principal thesis has been that the replacement of the ‘supply-demand’ model is long overdue in an environment where atomistic postulates, along with extremum principles hold with severe qualifications. His proposal to replace this traditional approach by ‘political economics’ raises many issues which I cannot even note here. Suffice it to remark that ‘political economics’ forms a useful vantage point from which one can look at planning as a form of inference. 4. For a recent and relatively succinct presentation, see the Nobel Memorial Lecture by F. A. Von Hayek, ‘The Pretence of Knowledge’, Scandinavian Journal of Economics (1975). 5. See P. Masse, ‘The French Planning and Economic Theory’, Econometrica 33 (1965), 265-76, for a defence of planning as a strategy on a decisiontheoretic basis. Masse was associated with the French planning apparatus for years besides contributing substantially to the literature on investment planning. 6. See S. Chakravarty, ‘Theory of Development Planning: An Appraisal’, in Economic Structure and Development: Essays in Honour of Jan Tinbergen, ed. H. C. Bos, H. 'Linnemann, and P. de Wolff (Amsterdam, 1973). 7. The expression ‘savings constraint’ is interpreted by neo-classical writers as a limitation on capital formation arising from an unwillingness to defer current consumption. Emphasis here is put on the deficiency of adequate

Notes

92

foresight. Sometimes it is interpreted as an expression of irrationality on the part of the consumer, as by Pigou and Ramsey. From a classical point of view, savings emerge as a constraint because the distribution of incomes is weighted in favour of classes with low propensities to save. Profits are gene¬ rally assumed to be mostly saved, hence the emphasis on policies in favour of profit-receivers. This corresponds to the point of view which Arthur Lewis has taken in the recent literature. In addition, we also have the positions taken by Keynesians and structuralists. For Keynesians, savings cannot directly affect the growth process. Their role is an adaptive one—a high pro¬ pensity to save being consistent (in a non-inflationary context) with a high rate of investment, which is the active variable provided investment is well directed. For a structuralist, the ‘savings constraint’ implies a disaggregated view: a reflection of the lopsided nature of the inter-industry matrix. We shall see in the course of our discussions how that inability to keep these meanings separate has been responsible for considerable confusion in framing appropriate action-directives. 8.J. R. Hicks has very rightly emphasized the concept of ‘impulse’ in his recent writings on the mainsprings of growth. See his essay ‘Industrialism’ in Economic Perspectives. Hick’s idea is basically akin to the Schumpeterian notion of ‘innovation’ which has been gaining in importance in the context of the explanation of the ‘Great Recession’ of the 1980s.

Notes to Chapter 2 1. It is interesting to note that R. H. Tawney, a man with strong egalitarian sympathies, found preoccupation with ‘productivity growth’ the hallmark of an acquisitive culture. Tawney was of course a non-Marxian socialist. For a Marxist, ‘productivity growth’ has a justified role in the context of transition—provided, of course, it does not obliterate the perspective of transition itself. 2. See A. K. Das Gupta, ‘Recent Tendencies in Economic Theory’, The Indian Economic Journal 3 (1961), reprinted in Planning and Economic Growth (London, 1965). 3. See in particular the formulation presented by Nurkse in his famous Wicksell Lectures ‘Patterns of Trade and Development’, reprinted in a collection of his papers edited by G. Haberler and R. M. Stern, Equili¬ brium and Growth in the World Economy (Cambridge, Mass., 1961). 4. See A. Young, ‘Increasing Returns and Economic Progress’, Economic Journal 38 (1928), 527-42. See also N. Kaldor, Further Essays in Economic Theory (London, 1978). Reference to Verdoorn is included in Kaldor’s papers. 5. See P. A. Baran, The Political Economy of Growth, ed. R. B. Sutcliffe (London, 1973), p. 374. Baran was one of several prominent left-wing economists who visited India at the invitation of P. C. Mahalanobis, as did others, such as Oskar Lange and Charles Bettleheim. While Baran’s

Notes

93

influence was confined largely to the radical intelligentsia, the more tech¬ nical contributions made by Lange and Bettleheim left a permanent mark on the Indian economists who worked on the theory of economic planning. Bettleheim’s work was thematically related to the work done by A. K. Sen and others on the choice of techniques, while Lange’s impressive lectures on input-output analysis, preceded by the earlier work of Richard Good¬ win on the empirical side, helped the younger generation of Indian econo¬ mists to orient themselves to the development of economy-wide planning models. 6. That a growth in demand could elicit extra supplies with the same resource base in conditions of primitive stagnation was discussed by A. Smith in connection with his famous discussion of ‘vent for surplus’. H. Myint has made much of this in his work on the effect of trade on growth. However, it is doubtful whether this factor constituted a major growth potential for the Indian economy in the mid-fifties. 7. This was not quite true for a couple of years during the mid-fifties, which led to an exchange crisis followed by a rephasing of the Second Five-Year Plan.

See D. R. Gadgil on this point in Planning and Economic Policy

(Poona, 1971). 8. ‘Food bottle-neck’ as the main operative constraint on India’s growth was much emphasized by C. N. Vakil and P. R. Brahmananda in their book Planning for an Expanding Economy (Bombay, 1956), which was heavily influenced by the work of R. Nurkse. Nurkse later wrote a review of this book which is included in his posthumous volume of essays edited by G. Haberler and R. M. Stern. This essay is worth reading even after the lapse of nearly thirty years. See R.

Nurkse,

‘Reflections on India’s

Development Plan’, in Haberler and Stern (eds.), Equilibrium and Growth in the World Economy. 9. SeeP. C. Mahalanobis, ‘Operational Research Models used for Planning in India’, in Papers on Planning, ed.

P. K.

Bose and M.

Mukherjee

(Calcutta,. 1985), p. 257. This paper was first published in 1960. 10. See J. Bhagwati and S. Chakravarty, ‘Contribution to Indian Economic Analysis’, American Economic Review, Supplement, 5 (1969), 1-73. See also S. Chakravarty,

Capital and Development Planning (Cambridge,

Mass.,

1969). 11. It is a reasonable conjecture that the compulsions of building up a post¬ colonial state based on consensus led Nehru to compromise to a much greater extent with rural vested interest than was necessary. This is, how¬ ever, an issue which only historians will be able to judge with authority. 12. See W. A. Lewis, ‘Economic Development with Unlimited Supplies of Labour’, Manchester School 22 (1954), 131-91. 13. See M. Kalecki, Essays on Developing Economies (London, 1976). 14. See Second Five-Year Plan, 1956, p. 99. 15. See G. D. A. McDougall, ‘India’s Balance of Payments’, in Pricing and Fiscal Policies, ed. P. N. Rossenstein-Rodan (London, 1964). 16. See A. K. Sen, Choice of Techniques (Oxford, 1960), app. B.

94

Notes

17. R.

Komiya,

who

developed

a

simple

maximizing version

of the

Mahalanobis model in its four-sector variant, found the optimal solution to be quite different from what Mahalanobis had deduced on the basis of his ‘fixed targets’ model. Obviously, the Mahalanobis solution was an inefficient one in terms of the assumed set of parameter values. But it would be simplistic to dismiss the Mahalanobis solution on this account, as Komiya’s solution would have implied zero investment in one of the sectors, which was politically unacceptable. See R. Komiya, ‘A Note on Professor Mahalanobis’ Model of Indian Economic Planning’, Review of Economics and Statistics 41 (1959), 29-35.

18. I believe that it is possible to maintain that the full implications of the ‘dual development thesis’ were not fully grasped by Mahalanobis himself. His own numerical analysis was extremely weak. G. Mathur in his book, Planning for a Steady Growth (Oxford, 1965), did develop the thesis at greater

length and brought out its rationale. His analysis was, however, abstract and did not take into account the class distinction of incomes and assets. 19. SeeJ. R. Hicks, Capital and Time (Oxford, 1973). See also J. R. Hicks, Economic Perspectives (Oxford, 1977).

20. See A. Lowe, ‘Structural Analysis of Real Capital Formation’, in Capital Formation and Economic Growth (Princeton, 1955), 581-634. See also his

more extensive treatment in The Path of Economic Growth (Cambridge, 1976).

Notes to Chapter 3 1. Third Five- Year Plan (1961), 39. 2. The expression ‘bargain sector’ was explicitly used by Dr S. R. Sen in his presidential address before the All-India Agricultural Economics Confer¬ ence in Baroda in December 1959. Sen, who was at that time working in the Planning Commission as adviser on agricultural problems, explained further: Until the entire field of agriculture in such a society [he was referring to the Indian case] is saturated with the application of such known techniques, the development of agriculture can provide as it were a bargain sector [italics in the original], a sector with large unexploited

potential which can provide the requisite surplus with relatively low investment and in a comparatively short time after, of course, a certain minimum infrastructure has been developed. The address was reprinted in S. R. Sen, The Strategy for Agricultural Develop¬ ment, 2nd edn. (London,

1966), 3-4. Sen’s perception was evidently

shared by Mahalanobis, whose four-sector model used a very low capitaloutput ratio for agriculture, the justification for which was not so explicitly stated by Mahalanobis himself. 3. We have seen that the Third Five-Year Plan document was eloquent in its advocacy for agriculture. This is not, however, equally evident from the

95

Notes

investment-allocation ratios worked out by the planners. Thus, whereas in the Second Plan the outlay on agriculture was originally envisaged as 11.3% of the total, in the Third Plan the proportion was increased to 14%. 4. The ‘product wage’ is the more relevant variable here as it involves deflation of money wages by the price index of industrial products and is thus more clearly linked with profitability. 5. Historical support for the above thesis was ardently sought. It was almost elevated to a ‘natural law’ of growth. Some found support for it in the Russian experience, as we have noted, but there were others who found Japanese development more relevant to the Indian experience. What was not adequately appreciated at this time was that India had recorded an annual average population growth rate of 2.4 % over the decade 1951-61, which exceeded the Japanese pre-take-off growth rate by more than a factor of two. This, along with the pre-existing density of population, was enough to create a historically unique configuration which made the wholesale application of a ‘classical strategy’ inapplicable. Subsequent historical research has further questioned the factual basis of some of the more facile formulations. 6. See S. R. Sen, ‘Impact and Implications of Foreign Surplus Disposal on Underdeveloped Economies’, address delivered at the Fiftieth Anniver¬ sary Session of the American Farm Economics Conference, Ames, USA, published in S. R. Sen, The Strategy for Agricultural Development (Bombay 1962). 7. Food grains production fell from an all-time peak of 89 million tonnes in 1964/5 to 65 million tonnes in 1965/6, and did not significantly increase above this level even in 1966/7. 8. Acceleration principle operating in the reverse direction is a typical feature of a cyclical downswing. In the Indian case, the downswing was triggered off by adverse weather. For an explanation of the process, seej. R. Hicks, A Contribution to the Theory of the Trade Cycle (Oxford, 1950). 9. See D. Narain, ‘Growth of Productivity in Indian Agriculture’, Indian Journal of Agricultural Economics (1977), 1-44. Narain’s study was a very carefully conducted decomposition exercise. It covered the period from 1952/3 to 1972/3. His aim was to breakdown sources of productivity growth into three factors: a pure yield effect, a locational effect, and an effect based on changes in the cropping pattern. His Table II shows that the productivity growth in the period 1952/3 to 1962/3 was of a relatively low-cost variety, being the product of changes in cropping pattern induced by public irrigation and better inter-regional specialization, whereas in the period 1962/3 to 1972/3 it reflected much more the effect of intensified use of modern inputs,

reflecting in turn

substantial capital investment,

directly and indirectly. 10. Kalecki’s paper is now widely available in his posthumous collection of papers edited by Joan Robinson, Essays on Development Economics (London, 1976). 11. D R. Gadgil was one of the foremost critics of the Indian planning process

Notes

96

in the 1950s. Gadgil was not opposed to the need for industrialization as such, but he strongly criticized what he considered to be the undue centra¬ lizing tendencies of Indian planning. By training an economic historian and by practice also an activist in the co-operative movement in Maha¬ rashtra, Gadgil strongly emphasized institutional dimensions which were not adequately stressed by Mahalanobis and his colleagues. Incidently, Gadgil was one of the experts who served on the first UN committee which recommended a package of measures for the economic development of underdeveloped countries. 12. A. S. Manne and A. Rudra argued in their widely acknowledged paper, ‘A Consistency Model for Indian Planning’, Sankhya, series B, 27 (1965), 57-144, that in India, industrial growth had a largely autonomous charac¬ ter as flows between industry and agriculture were not sufficiently strong. 13. See A. K. Sen, Choice of Techniques (Oxford, 1960), app. A; also Joan Robinson’s valuable discussion of‘Land and Accumulation’, in her book

The Accumulation of Capital (London, 1956), 321-4. 14. In a recent ILO study, Poverty in Rural Asia, we read that while the Green Revolution may have affected production levels favourably in several cases, only in the Punjab and Thailand is there evidence of a reduction in poverty in the 1970s, and even there, the reduction was not particularly notable. See A. R. Kahn and E. Lee (eds.), Poverty in Rural Asia (Bangkok, 1984). 15. See S. Chakravarty and A. S.

Manne,

‘Optimal Growth When the

Instantaneous Utility Function Depends on the Rate of Change in Con¬ sumption’, American Economic Review 58 (1968), 1951-4. 16. Nurkse had talked about the savings potential contained in ‘disguised unemployment’, an adaptation of J. Robinson’s earlier work which was initially proposed to explain a partial shift of the labour force from regular work to casual employment in the context of the downswing of an econo¬ mic cycle. While Nurkse used the same term (i.e. disguised unemploy¬ ment) in his theoretical analysis, he used it in discussing the possibility that the ‘structural labour reserve’ in overpopulated agriculture could be redeployed without significant additional investment.

Richard Kahn

developed the idea at greater length in his important but somewhat neglected paper ‘The Pace of Development’. SeeJ. Robinson, ‘Disguised Unemployment’, Economic Journal (1936), reprinted in Collected Papers, vol. iv (Oxford, 1973); R. Nurkse, Problems of Capital Formation in Under¬

developed Countries (London, 1953); R. F. Kahn, Essays in the Theory of Growth (Cambridge, 1972). 17. See G. Myrdal, Asian Drama (London, 1968). 18. In fact, the Third Five-Year Plan itself suggests uneasiness on this score (p. 18) and talks about setting up a committee to look into this issue. 19. Report of the Committee on the Minimum Level of Living (1962), reprinted in abridged form in P. K. Bardhan and T. N. Srinivasan (eds.)

Poverty and Income Distribution (Calcutta, 1974). 20. For a detailed discussion of the mathematical structure of the model as well

97

Notes

as for the type of data used, see the ‘Technical Note’ to the Fifth Five-Year Plan Approach Paper which was released by the Planning Commission in 1973. See ‘Technical Note on the Approach to the Fifth Five-Year Plan of India’,

Perspective

Planning Division,

Planning Commission

(New

Delhi, 1973). This note is the first of its kind issued by the Indian Planning Commission, where an explicit inter-industry model was integrated with a macro-economic model to deduce a profile of internally consistent sectoral growth rates for the terminal year of the plan. 21. The ‘open loop’ character of the model was the subject of an extensive critique by S. D. Tendulkar. See his contribution in Bardhan and Srinivasan (eds)., Poverty and Income Distribution.

Notes to Chapter 4 1. See Isher Judge Ahluwalia, Industrial Growth in India Since the Mid-sixties (Oxford and Delhi, 1985). This is one of the more comprehensive studies on India’s industrial performance, although doubts can be raised on several matters of interpretation. 2. The organized manufacturing sector covers all manufacturing and pro¬ cessing establishments classified as factories and registered under the Indian Factories Act, 1948. The ‘unorganized sector’ covers all other establishments. Statistics are much more reliable for the organized sector. 3. This point is connected with the general issue highlighted by M. Olson in his valuable work, The Logic of Collective Action (Cambridge, Mass., 1975). It is possible to use some of his insights to throw light on how the objectives of the plan have been frustrated in practice by a coalition of different interest groups who have in recent years become much better organized to protect their ‘sectoral interests’, be it in agriculture or industry. 4. See Lowe, ‘Postscript’, in On Economic Knowledge. 5. See P. K. Bardhan, The Political Economy of Development in India (Oxford, 1984). See also my review of his book in Journal of Peasant Studies 13 (1985), 134-6. 6. See F. List,

The National System of Political Economy, first published in

German in 1841; English version published in London, 1928. 7. See A. O. Krueger, ‘The Political Economy of Rent Seeking Activities’, American Economic Review 64 (1974), 291-303. 8. S. Ishikawa in his recent analysis of Chinese economic reform has come to a similar conclusion. His criticism of the ‘market adjustment process’ as a substitute for what he calls the ‘State economy’ are not that much apart from the reasons I have indicated, although his analysis runs in lines of Hicks’s distinction between a ‘customary economy’, ‘state economy’, and ‘market economy’. See S. Ishikawa, ‘Socialist Economy and the Expe¬ rience of China—A Perspective on Economic Reform’, A.

Eckstein

Memorial Lecture, 18 Mar. 1985, University of Michigan, Ann Arbor, (mimeo).

98

Notes

9. See especially A. O. Hirschman, The Strategy of Economic Development, (New Haven, Conn., 1959). The same set of issues has been very prominently stressed by G. Myrdal and F. Perroux in numerous writings. 10. This can give rise to a form of‘unequal exchange’ and a resulting transfer of resources from ‘poorer’ to richer parts of the country. 11. The Panchayati Raj is a system of local self-government at the village, block (group of villages), and district levels. The Panchayati Raj institutions exhibit considerable variation across the country but have a three-tier structure: Zilla Paishads at the district level, Panchayat Samitis at the block level, and Village Panchayats at the village level.

Notes to Chapter

5

1. Se V. K. R. V. Rao, India’s National Income,

1950-80: An Analysis of

Economic Growth and Change (Delhi, 1983), 161. 2. See Report of the Working Group on Savings (Reserve Bank of India Feb. 1982), 44. 3. Ibid., p. 133. 4. See K. N. Raj, ‘Some Observations on Economic Growth in India Over the Period 1952/53 to 1982/83’, Economic and Political Weekly 19 (13 Oct 1984), 1801-4. 5. In the context of formulating an appropriate energy policy for India, the distinction between ‘commercial’ and ‘non-commercial’ sources of energy is a very important one. ‘Commercial energy’ refers to all forms of energy for which there is a well-organized market.

‘Non-commercial

energy’ refers to energy derived from vegetable wastes, forest resources, and domestic sources. As a percentage of total energy consumed, non¬ commercial energy is declining but still very important, as will be clear from Table 18. 6. Faulty design as well as tardy implementation can also explain why capital-output ratios in sectors such as irrigation and power have exceeded the planned figures. See Table 11. 7. B. Goldar, in a recent study dealing with productivity trends in Indian manufacturing industry over the period 1951-78, finds that total factor productivity growth has been sluggish (somewhat less than 2 % per annum on a trend basis). However, he finds no evidence of a structural change in this regard between the period 1951-64, on the one hand, and 1965-78, on the other, even though the rate of growth of industrial production was higher during the earlier period. Goldar also finds no evidence of increasing returns to scale in the manufacturing sector. See B. Goldar, ‘Productivity Trends in Indian Manufacturing Industry, 1951-78’ Indian

Economic Review 18 (1983), 73-85. 8. As an example, we can take the case of the irrigation sector. In 1980, 172 major and 452 medium irrigation projects were under execution. Out of 172 major on-going projects, 82 had been started before 1976, of which it

Notes

99

was expected that 65 would be completed by the end of the Sixth Plan. This shows clearly that the taking up of a large number of projects to satisfy the demands of different states resulted in the spreading of available resources somewhat thinly. As a consequence, delay in the completion of on-going projects had an adverse impact on the growth rate. For more details see

Organizational Set-up, Functions, Achievements, and Future Programmes (Minis¬ try of Irrigation, New Delhi, 1981). 9. Certain recent studies carried out by the Planning Commission and other agencies, including research institutions, suggest that agricultural tran¬ sition is currently going on in the Eastern Region of the country especially Eastern Uttar Pradesh. Thus, Professor Kusum Chopra in her recent study has found that during the period 1970-80, the agricultural output in Eastern U. P. increased at a rate greater than 3% per annum. Eastern U

P. has traditionally been a backward area, even though well endowed

with water. However, much of this increase is due to an increase in wheat production, for which appropriate water management is easier to achieve. While a combined package of irrigation, fertilizer, and credit can help sub¬ stantially in raising yield levels for the region as a whole, as may have happened in Eastern U. P. varietal improvements allowing the crop to mature before floods occur or to survive the average span of floods will prove useful, as will consolidation of holdings, security of tenancy, and better organization of small farmers. See K. Chopra, ‘An Analysis of Agricultural Transition in Eastern Region of India, 1970/71 to 1980/81’, paper presented at the Conference on Planning at Jawaharlal Nehru University, December 6-8, 1985. Her conclusions in this respect are fully compatible with the findings in the Report of the Study Group on Agricultural

Strategies for the Eastern Region of India (Planning Commission, New Delhi, 1985). 10. The model presented by A. Bhaduri of incompatibility between semi¬ feudalism based on usurious exploitation and introduction of techno¬ logical change has attracted considerable attention in the literature. While the role of usury cannot be denied as a part of the way of life of land-owning gentry in these areas, it is doubtful that the latter are likely to shy away from profit-making investment opportunities once the infrastructural support base is created. I am at this stage not interested in entering into a discussion of the highly stylized character of the Bhaduri model. See A. Bhaduri, ‘A Study in Agricultural Backwardness under Semi-Feudalism’

Economic Journal (1973) 83. See also S. Chakravarty, ‘Power Structure and Agricultural Productivity’, in M. Desai, S. H. Rudolph, and A. Rudra (eds.), Agrarian Power and Agricultural Productivity in South Asia (New Delhi, 1984), 345-73. 11. For reviews, see M. Dobb in Co-existence 7:1 (1969), 63-6; P. Mattick, ‘Gunnar Myrdal’s Dilemma’, Science and Society 32:4(1968), 421-40; and P. C. Mahalanobis, ‘The Asian Drama: An Indian View’, Sankhya, series B(1969), 435-58. 12. See Rao, India’s National Income, 1950-80, 37. Rao’s analysis uses the

Notes

100

three-fold classification of primary, secondary, and tertiary sectors, but his findings are consistent with the statement in the text. 13. See N. Kaldor, Strategic Factors in Economic Development (New York, 1967), 55-6. 14. Ibid., p. 56. 15. See Mahalanobis, ‘The Asian Drama: An Indian View’, 435-58. 16. See S. Chakravarty, ‘Reflections on the Growth Process in the Indian Economy’, Administrative Staff College, Hyderabad, 1974, reprinted in C. D. Wadhawa (ed.) Some Problems of India’s Economic Policy (Bombay, 1977). 17. The number of foreign collaboration agreements in force was only 262 in 1978, a figure which increased to 384 in 1981, 590 in 1982, 673 in 1983, and more than 700 in 1984. 18. See N. Rosenberg, ‘Capital Goods, Technology and Economic Growth’,

Oxford Economic Papers 15 (1963). Reprinted in his Perspectives on Technology (Cambridge, 1976) 148. 19. See M. R. Bhagvan ‘Capital Goods Sector in India’, Economic and Political

Weekly 20 (9 Mar. 1985). 20. The logic of this position has been carefully stated by J. Bhagwati and P. Desai in their well-known OECD volume India: Planning]or Industrialization (Oxford, 1970). 21. See T. Blumenthal and Chung H. Lee, ‘Development Strategies of Japan and the Republic of Korea: A Comparative Study’, The Developing Econo¬

mies 23 (1985), 221-35. 22. See Gary Fields,

‘Employment,

Income Distribution and Economic

Growth in Seven Small Open Economies’, Economic Journal 94 (1984), 74-83. Professor Bhagwati has questioned the analysis by Fields in his recent essay, ‘Export Promotion as a Development Strategy’, in Economic

Policy and Development, ed. T. Shishido and R. Sato (London, 1985), 59-68. I believe, however, that this is not merely a question of relative wage differ¬ entials in exportables as against other sectors, but a much broader issue of political economy where the nature of bargaining process between capital and labour is at issue. 23. See also I. Adelman, ‘Beyond Export-led Growth: A Symposium on Reassessing Development

Experience’,

World Development 12 (1984),

937-49, and comments by Hans W. Singer and T. Scitovsky (pp. 950-4). 24. As an illustration of this point, it is instructive to take the case of‘machine tool’ industry, a key sector in the Indian context. In this sector, while domestic production met 86% of total requirements in 1978, the corres¬ ponding figure came down to 62% in 1984 as a result of import liberali¬ zation. What is more interesting, the fiscal policy seems to be also biased against greater domestic production of more recent types of machine tools, particularly the more modern computer numerically controlled machine tools, CNC in brief. Thus, if a CNC machine tool is imported, the duty levied is only 45% whereas ‘if components of similar or even the same machines are imported, one has to pay a duty at 85 per cent in

101

Notes

addition to the excise duty and sales tax. All this actually adds up to over 100 per cent of the value of the indigenously assembled machine as compared to only 45 to 50 per cent on a completely imported machine tool of equivalent type.’ See S. M. Patil, ‘Machine Tool Industry’, Economic

Times (9 Jan. 1986), p. 5. No wonder the author of the article, who was for many years chairman and managing director of Hindustan Machine Tool, the premier organization in the country, felt baffled by the policy as he could discern no rationale behind it. 25. There is insufficient evidence as to the direction of causation between exports and economic growth. It has been the common practice to inter¬ pret high correlation between exports and economic growth as evidence of causation running from exports to growth. A recent study using Granger tests casts considerable doubt on the direction of causality. See W. S. Jung and P. J.

Marshall,

‘Exports, Growth and Causality in Developing

Countries’, Journal of Development Economics

18:1

(1985),

1-12.

The

relationship is obviously much more complex than what export promotion enthusiasts believe to be the case. 26. Recent indications on the balance of payments front would appear to support the cautious view adopted here. Exports are unlikely to show any increase even in value terms over the fiscal year 1985/6, whereas imports have shown a steep increase. While the so-called ‘bulk imports’ have shown a very sharp rise, imports such as capital goods have also shown a considerable rise. The effect of the set of policies generally labelled as ‘out¬ ward looking’ has thus far shown little to add to industrial dynamism. The present trend may reverse itself, but it is rather unlikely on the present reckoning unless the reduction in bulk imports can be carried out along the lines indicated in the text. 27. This point has also been stressed by Kaldor in his more recent contri¬ butions. See N. Kaldor, Further Essays in Economic Theory (London, 1978). 28. SeeJ. Krishnamurty, ‘Changes in the Indian Work Force’, Economic and

Political Weekly 19 (1984), 2121-8. 29. A recent report on the functioning of the monetary system in India released by the Reserve Bank of India shows quite conclusively that Indian public debt is highly monetized. The entire management of the public debt in India needs a through review from the point of view of minimizing its impact on the growth of money supply, an issue which, is covered in some detail in the above report. See RBI, Report of the Committee to Review the Working of the Monetary System (Bombay, April 1985). 30. See J. A. Schumpeter,

‘The Crisis of the Tax State’, in International

Economic Papers, no. 4 (London, 1954). 31. Recent policy changes introduced in the Finance Bill, 1986, envisage a modified value added tax to get over some of the cascading problems. 32. The corresponding figure for the Sixth Five-Year Plan even on a realized basis was Rs. 18,930 million. 33. See Bardhan, The Political Economy of Development in India. 34. Statistics show the large growth of net financial savings on the part of

Notes

102

the household sector which are held in the form of currency, time deposits, and certain forms of contractual savings. This has reflected not merely the growing monetization of the Indian economy, but also a greater degree of overall financial deepening. The point is discussed at length in the Report of the Committee to Review the Working of the Monetary System (Reserve Bank of India, Bombay, 1985).

Notes to Chapter 6 1. However, indicators such as life expectancy and literacy show more signi¬ ficant growth rates, although not satisfactory enough in terms of what I would consider desirable as well as feasible. 2. For a comparative analysis of the data captured by the census of 1981 and recent National Sample Surveys, seej. Krishnamurty, ‘Changes in the Indian Work Force’ Economic and Political Weekly 19 (15 Dec. 1984), 2121-8. 3. These questions raise a whole complex of issues connected with the question of ‘property rights’ in land. Do we view ‘property rights’ as an indivisible variable which is restricted to assuming only two values, zero and unity; or do we treat it as a ‘bundle of rights’ implying some divisibility? Implications of this question in connection with fashioning ‘rural public works’ have been discussed in my paper, ‘Mahalanobis and Contemporary Issues in Develop¬ ment Planning’, Sankhya, series C, 37 (1975) pt. 2, 1-11. 4. On the question of technological modernization which ‘opening up the economy’ is supposed to facilitate, a well-known Japanese scholar has emphasized

very

strongly

the

role

of ‘social

absorption

capacity’

in

explaining Japan’s technological progress. This is a Veblenian perspective, much neglected in contemporary literature on models of development. See R. Minami, ‘Industrialisation and Technological Progress in Japan’, Asian

Development Review 2:2 (1984) 69-79. 5. In a recent paper, C. H. Hanumantha Rao, until recently a member of the Planning Commission in charge of perspective planning, has forcefully highlighted the role of direct programmes aimed at alleviating poverty. See C. H. Hanumantha Rao, S. P. Gupta, and K. L. Dutta, ‘Poverty Eradi¬ cation in India by the Year 2000: Some Macroeconomic Implications’, Man

and Development 7 (1985), 29-37. 6. In fact, the postulated value for the marginal propensity to save for the Seventh Five-Year Plan is 28.4% which, in effect, will require a reversal of the trend noticed during the recent past. For further details, see Table 1.

Statistical Appendix

Table 1

Estimates of the Marginal Rate of Saving in the Indian Economy, 1950-85

Period

Marginal rate of gross saving (%)

1950/51-1960/61

20.0

1961/62-1969/70

18.2

1970/71-1979/80

26.3

1980/81-1984/85

21.4

Source: Estimates are based on data available in the various issues of National Accounts Statistics, Central Statistical Organization, Department of Statistics, Ministry of Plan¬ ning, New Delhi.

104 Table 2 Year

Statistical Appendix Rate of Gross Saving in the Indian Economy, 1951-84 Rate of gross domestic saving

1951/52

9.5

1952/53

9.0

1953/54

9.3

1954/55

11.2

1955/56

12.8

1956/57

12.9

1957/58

11.8

1958/59

11.5

1959/60

12.3

1960/61

13.1

1961/62

13.8

1962/63

14.0

1963/64

14.2

1964/65

14.6

1965/66

15.2

1966/67

15.3

1967/68

14.8

1968/69

14.8

1969/70

15.8

1970/71

16.8

1971/72

16.8

1972/73

17.7

1973/74

18.0

1974/75

19.3

1975/76

20.3

1976/77

21.6

1977/78

23.1

1978/79

23.2

1979/80

23.4

1980/81

22.6

1981/82

22.5

1982/83

22.3

1983/84

22.3

Source: Estimates are based on the data available in National Accounts Statistics, (Jan. 1985), CSO, New Delhi; and ‘Quick Estimates of National Income, Consumption Expenditure, Saving and Capital Formation, 1984/85 (Jan. 1986), CSO, New Delhi. Note: The rate of saving is calculated as a percentage of gross domestic product at market prices and has been calculated on a three-year moving-average basis.

105

Statistical Appendix Table 3

Estimates of Incremental Capital-Output Ratios in the Indian Economy, 1951-84

Period

Gross ratio

Net ratio

1951/52-1955/56

2.87

1.97

1956/57-1960/61

4.05

3.16

1961/62-1965/66

4.58

3.61

1966/67-1968/69

5.05

3.96

1969/70-1973/74

5.86

4.30

1974/75-1978/79

4.28

3.24

1980/81-1983/84

4.45

3.38

1951/52-1959/60

3.49

2.59

1960/61-1969/70

4.40

3.39

1970/71-1979/80

5.40

4.11

1980/81-1983/84

4.45

3.38

Source: Estimates are based on the data available in the various issues-of National Accounts Statistics, CSO, New Delhi. Note: Estimates are at 1970/71 prices and were made using three-year moving-average estimates of GDP and NDP at market prices for the gross and net ratios respectively, except for the years 1950/51 and 1983/84 for which point estimates have been used. A one-year time lag has been assumed between investment and output.

Table 4

Estimates of Sectoral Incremental Capital-Output Ratios in the Indian Economy, 1951-84

Sector

1951/52

1960/61

1970/71

1980/81

to

to

to

to

1959/60

1969/70

1979/80

1983/84

Agriculture (crops and livestock)

.2.18

3.23

4.22

3.17 9.98

Mining

2.59

5.62

14.56

Manufacturing

4.47

6.49

8.20

14.36

Other sectors

5.85

5.31

5.79

4.43

All sectors

3,93

5.93

5.97

.5.16

Source: Estimates are based on the data available in the various issues of National Accounts Statistics, CSO, New Delhi. Note: Estimates are at 1970/71 prices and were made using three-year moving-average estimates of sectoral GDP at factor cost. A one-year time lag has been assumed between investment and output for all sectors. The sectoral and aggregate GDP estimates for 1983/84 are point estimates.

106 Table 5

Statistical Appendix Sectoral Rates of Growth of Gross Domestic Product in the Indian Economy, 1950/51 to 1983/84 {per cent per annum)

Sector

1950/51

1960/61

1970/71

1980/81

1970/71

to

to

to

to

to

1959/60

1969/70

1979/80

1983/84

1983/84

Agriculture (crops and livestock)

2.61

1.37

2.31

3.96

2.27

Mining

4.81

5.24

4.33

10.53

5.14

Manufacturing

6.11

4.77

4.75

3.25

4.21

All sectors

3.63

3.24

3.76

4.98

3.81

Source: Estimates are based on the data available in the various issues of National Accounts Statistics, CSO, New Delhi. Note: Estimates are trend growth rates based on semi-log functions; three-year movingaverage estimates of GDP have been used for estimating the growth rates. The data for 1983/84 are point estimates, taken from ‘Quick Estimates of National Income’ (Jan. 1986), CSO, New Delhi.

Table 6

Sectoral Contribution to Aggregate Growth in the Indian Economy, 1950/51 to 1983/84 {per cent)

Sector

1950/51

1960/61

1970/71

1980/81

1970/71

to

to

to

to

to

1959/60

1969/70

1979/80

1983/84

1983/84

Agriculture (crops and livestock)

54.5

48.1

41.0

0.8

1.0

1.1

1.3

1.2

Manufacturing

11.4

13.8

15.4

15.0

14.8

Other sectors

33.3

37.1

42.5

44.5

44.4

100.0

100.0

100.0

100.0

100.0

Mining

All sectors

39.2

39.6

Note: Sectoral contribution to aggregate growth for each period has been computed by using the average share of sectoral GDP to total between the base year and terminal year as weights and applying trend growth rates of sectoral GDP at each period.

107

Statistical Appendix Table 7

Sectoral Shares in Total Investment in the Indian Economy, 1951-84 (per cent)

Sector

1950/51

1960/61

1970/71

1980/81

to

to

to

to

1959/60

1969/70

1979/80

1983/84

Agriculture (crops and livestock)

22.1

16.4

17.9

0.8

1.8

3.0

5.2

Manufacturing

20.4

26.2

26.7

26.0

Other sectors

56.7

55.6

52.4

52.2

100.0

100.0

100.0

100.0

Mining

Total

16.6

Source: Estimates are based on the data available in the various issues of National Accounts Statistics, CSO, New Delhi. Note: Estimates represent the average share of sectoral investment to total investment for each period, measured at 1970/71 prices.

Table 8

Trend Growth Rates of Investment in the Indian Economy, 1950/51 to 1983/84 (per cent per annum)

Sector

1950/51

1960/61

1970/71

to

to

to

1959/60

1969/70

1982/83

7.42

4.94

4.94°

14.20

3.42

6.87“

5.99

3.39“

5.81

4.68

Total investment Public sector investment Private sector investment

—

SECTORAL INVESTMENT

Agriculture 2.89

Total Public sector

—

4.44

6.48

Private sector

—

6.38

3.95

- 1.09

4.56

17.20

11.41

Mining Manufacturing

5.14

4.83

Public sector

—

5.33

9.22

Private sector

—

4.93

2.70

Electricity

16.96

7.71

8.65

Railways

15.93

-5.06

3.88

3.18

9.57

8.55

10.10

3.76

3.01

Total

Communications Other transport Total Public sector

—

8.64

1.24

Private sector

—

1.31

4.12

Note: Computations are based on the data on gross domestic capital formation at 1970/71 prices available in National Accounts Statistics CSO, New Delhi. al 970/71 to 1983/84.

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