1st Five Year Plan
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Introduction || APPENDIX (CH-4) || APPENDIX (CH-9) || ANNEXURE (CH-12) || APPENDIX (CH-14) || APPENDIX (CH-24) || APPENDIX (CH-29) || Conclusion
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Chapter -1:
Planning: Economic And Social Aspects

The central objective of planning in India at the present stage is to initiate a process of development which will raise living standards and open out to the people new opportunities for a richer and more varied life. The problem of development of an under developed economy is one of utilising more effectively the potential resources available to the community, and it is this which involves economic planning. But the economic condition of a country at any given time is a product of the broader social environment, and economic planning has to be viewed as an integral part of a wider process aiming not merely at the development of resources in a narrow technical sense, but at the development of human faculties and the building up of an institutional framework adequate to the needs and aspirations of the people.

2. An underdeveloped economy is characterised by the co-existence, in greater or less degree, of unutilised or underutilised manpower on the one hand and of unexploited natural resources on the other. This state of affairs may be due to stagnancy of techniques or to certain inhibiting socio-economic factors which prevent the more dynamic forces in the economy from asserting themselves. Corresponding to each stage of development, there tends to grow a certain economic and social stratification which is conducive to the conservation of the gains from the use of known techniques. Such stratification has a part to play in social progress. But, beyond a point, it hampers innovation and change, and its very strength becomes a source of weakness. For development to proceed further, a re-adaptation of social institutions and social relationships thus becomes necessary. In planning for a better economic order, the close interrelation between the technical and social aspects of the process of development has to be continually kept in view. While there is need for concentrating effort on the more immediate problems, planning implies the readiness on the part of the community to view the social process as one whole and to take action designed to shape this process along desired lines over a defined period.

3. In spite of considerable advance in public thinking on the subject, the acceptance of such an approach to the problems of economic development and social change represents a relatively new phase in policy-making and in administration. Planning involves the acceptance of a clearly defined system of objectives in terms of which to frame over-all policies. It also involves the formulation of a strategy for promoting the realisation of the ends defined. Planning is essentially an attempt at working out a rational solution of problems, im attempt to co-ordinate means and ends ; it is thus different from the traditional hit-and-miss methods by which 'reforms' and 'reconstruction' are often undertaken. A planned economy has inevitably in view a somewhat wider time-horizon, to which the day-to-day decisions have to be related. And yet, practical policy cannot operate in terms of mere set doctrines ; it must satisfy certain pragmatic tests. In spite of the considerable developments in economic and social sciences in the last few decades, our knowledge of human motivation and of social processes is but limited. We cannot always say for certain that a given set of causes will produce a particular, clearly definable, set of results and none other ; we do not always know at what rate the effects of a particular change in a part of the system will be transmitted to the other parts of the system. Responses of individuals or of groups of individuals and of classes cannot always be predicted in advance. Even if the conceptual relationships between different aspects of the phenomena under study are clearly understood, there is often the lack of precise statistical data on which to base an assessment of the requirements of a given situation. It follows that a considerable part of the planning authority's task is to assess the significance of some of these indeterminate or partially known factors at work in the life of the community and to recommend policies on the best judgment available. This is particularly so in India today.

4. The urge to economic and social change under present conditions comes from the fact of poverty and of inequalities in income, wealth and opportunity. The elimination of poverty cannot, obviously, be achieved merely by redistributing existing wealth. Nor can a programme aiming only at raising production remove existing inequalities. The two have to be considered together ; only a simultaneous advance along both these lines can create the conditions in which the community can put forth its best efforts for promoting development. The problem, therefore, is not one of merely re-channelling economic activity within the existing socio-economic framework ; that framework has itself to be remoulded so as to enable it to accommodate progressively those fundamental urges which express themselves in the demands for the right to work, the right to adequate income, the right to education and to a measure of insurance against old age, sickness and other disabilities. The Directive Principles of State Policy enunciated in Articles 36 to 51 of the Constitution make it clear that for the attainment of these ends, ownership and control of the material resources of the country should be so distributed as best to subserve the common good, and that the operation of the economic system should not result in the concentration of wealth and economic power in the hands of a few. It is in this larger perspective that the task of planning has to be envisaged.

5. A process of all-round and orderly development, such as is indicated above, must inevitably take time to come into full fruition. Large scale changes in modes of production, in commercial and industrial organisation and in the institutional framework of corporate life cannot be seen through within a brief period of four or five years. In the initial stages of development, divergence in the economic and social interests of different sections of the community may create special problems. While this fact has to be recognised, persistent effort must be made to give a new sense of direction and purpose to the community It is important also to ensure that in the process of development, the forces of growth from within are not stifled by attempts abruptly to superimpose preconceived patterns of life and activity. The strengthening of these inner forces and the creation of new institutions must proceed side by side so as to facilitate rapid advance through a process of interaction. The modern world is changing so rapidly that it is not enough to think in terms of slow changes and marginal adjustments, a minor shake-up here and a little cementing elsewhere. An underdeveloped country which has suffered long from the effects of cramped development desires inevitably to progress rapidly and in many directions ; the aim of planning must be to make this possible. Political independence provides the needed opportunity. It is therefore namral that improvement in economic and social conditions through the acceptance of more progressive ideas and through suitable institutional changes is regarded as the practical test for judging the adequacy of the new political system.

6. The rapid advances in science and technology over the last few decades have opened out new possibilities in the direction of abolition of want and the restoration of man to a new sense of dignity, but they also carry potentialities of harm and danger. Our knowledge of the socio-economic changes which utilisation of these techniques calls for is neither complete nor certain. In the nature of the case, the problem does not admit of a generalised solution. Conditions vary as between countries, and each country has to evolve a solution in the light not only of contemporary conditions but also of its traditions and culture. In planning for a transformation along the right lines, there are many pitfalls to be avoided, and it is of the utmost importance to strike the appropriate balance between various considerations so as to secure the optimum pattern and rate of progress. Parallels from past history or from contemporary conditions in other countries are useful upto a point, but they cannot provide a complete answer. A nation, like an individual, has to work out its inner potentialities oy a process of experimentation. All that can be said is that there is need, on the one hand, for clarity in regard to basic values and, on the other, for readiness to adapt practical solutions to the concrete problems arising in the process of transition to a different economic and social order.

7. We should like in this context to stress the essential political and administrative conditions essential to successful planning. Briefly these are :

(a) a large measure of agreement in the community as to the ends of policy ;
(b) effective power, based on the active co-operation of citizens, in the hands of the State ; and, earnest and determined exercise of that power in furtherance of these ends ; and
(c) an efficient administrative set-up, with personnel of requisite capacity and quality.

A national plan has to be an expression of a basic unity of purpose in the community. It is this unity which would constitute the ultimate sanction behind the plan, give it driving force and evoke the necessary sacrifice and effort on the part of members. Joined to this unity of purpose must be effective power in the hands of the State to be exercised with the necessary persistence and determination in order to ensure the furtherance of accepted ends. Constructive use of this power calls for integrity, efficiency and responsiveness in administration. The creation and maintenance of these basic pre-requisites of economic and social growth have to be considered as matters deserving continuous and careful attention, and if we revert to this theme several times in this report, it is because we feel that the need for creating in the country an environment favourable to progress can hardly be overemphasised. The changes in administration appropriate in the context of the new role of the State are dealt with in detail in subsequent chapters,

8. The task of organising a democracy for rapid and coordinated advance along several lines is one of special difficulty. The party in power has not only to carry public opinion with it; it has to get the active co-operation of all sections. In a democratic country, every citizen is free to think and vote as he likes, and political parties have the right freely to canvass public support for their programmes and in the event of securing a majority in the legislature to form the government. Under these conditions, the greater the responsiveness of the party in power to trends of opinion outside, the greater will be its effectiveness for action. The smooth functioning of the party system rests on an underlying agreement as to objectives, though there may be differences as to approach or to the pace of change with reference to certain problems. These differences are a necessary concomitant of democracy ; they ensure a continuous re-examination and re-adaptation of governmental policies. The rights of free expression of opinion and of reedom of organisation inhere in the very concept of government by consent. Through these alone is a vigorous, creative political life possible. At the same time, it is evident that the problems of the modern world are too complex to be dealt with in terms of rival or opposing programmes of action. On various matters, different parties tend inevitably to come together and co-operate. For planning to proceed with the necessary momentum and continuity, it is essential that the country adopts a programme of action which reflects the unity of outlook and approach among the members of the party in power and draws forth at the s-ime time the support and co-operation from shades of opinion outside the party. It is through enlargement of the area of agreement that conditions can be created for the most effective mobilisation of the community's resources towards the common objective of all-round economic development.

9. Democratic processes are complex, and they mate large demands on the government as well as the governed. It cannot be assumed that the apparatus of democratic forms or procedures necessarily ensures the preservation of the basic values which a democratic way of life connotes. Real democracy means much more than adult suffrage and parliamentary government ; it means a reordering of social relationships in terms of new values. It is not without significance that in several parts of the world the emergence of a new leadership determined to cany through far-reaching economic and social changes in keeping with the needs and urges of the people has been accompanied by a great upsurge of public enthusiasm and a release of the pent-up energies of the community. The relationship between political forms and the spirit underlying them is a vast and ntricate subject in which no easy judgments are possible. But, it must be emphasized that for democratic planning to succeed, it will have to energise the entire community and to place before it a goal of endeavour which will call forth all its latent creative urges. Under pressure of crisis such as war, democracies have proved capable of effective action on a mass scale, and there is no doubt that once the community has corn-: to appreciate the vital significance of the tasks in hand, it will rise to similar heights for constructive purposes also. The crucial factor in organising the community for action is leadership, and, in a democracy, not merely leadership at the top but at all levels.

10. Under the Constitution, India is organised as a federation, in which the Central Government and the Governments of States have their assigned spheres of action. There are certain concurrent subjects in which the Centre as well as the States can undertake legislation. Economic and social planning is in the concurrent list, as this is a subject in which the Centre as well as the States are interested and have to work in unison. The Centre has certain emergency powers, but normally coordination of policies has to be effected through mutual consultation. This system of consultation and of formulation of policies on the basis of over-all national requirements will have to be strengthened in the interests of planning. Care will have to be taken to see that the plan is implemented throughout the country as a single coordinated whole. The National Development Council which has been set up recently and which comprises the Cabinet, Ministers of States and the members of the Planning Commission, with the Prime Minister as Chairman, is intended to secure this result. It is obvious that without complete coordination of policies and timely, concerted aciion, there is danger of waste and misdirection of effort, which may have consequences extending far beyond the area of responsibility of any single authority, and this, it must be iccognised, places special responsibilities on the Centre.

11. A planned economy aiming at the realisation of larger social objectives entails a vast increase in governmental functions For these to be discharged efficiently, appropriate local, regional and functional organisations have to be built up and strengthened. Each of these must have a defined sphere of action and responsibility, and must be able to function with a measure of autonomy Arrangements for the necessary coordination between them must be made at various levels from the village upwards. The activities of all developmental institutions in the country, official and non-official will have to be reorientated in terms of the requirements of the Plan, and in this process, due stress must be laid on the appropriate role of various local and functional organisations. The function of the Central Government is to evolve a national plan, to work out a coordinated policy for implementation of the same, to watch and assess the progress of major development schemes in the different parts of the country, and constantly to initiate and promote action in furtherance of the objectives and targets defined.

II. The Determinants Of Economic Development

12. While developmental planning, as stated above, is an all embracing process, which cannot be compartmentalised, the accent of endeavour under present conditions in India has to be on economic development. The latter may in a sense be regarded as a consequence of intellectual, social and cultural advance. It is true, nevertheless, that economic development of an underdeveloped country cannot proceed far unless the community learns how to get from its resources of men and materials a larger output of commodities and services.

13. In the last four or five decades, there has been considerable industrial development in India, accompanied by urbanisation and expansion of commerce. Large towns and cities have grown and transport and communications have developed extensively. The isolation of the village has been broken and the average citizen lives in an environment significantly different from the one in which he lived and worked fifty or sixty years ago. Indi ;n enterprise has made considerable headway, and the country has now considerable experience in the fileds of modern business, industry and finance. New economic and social relations have emerged, giving rise in turn to a general desire for more rapid change. But the development that has taken place is partial and limited when judged in terms of the country's needs and potentialities. Industrialism and the use of modern techniques have affected only limited segments of the economy. Agriculture is still the mainstay of life for about 70 per cent of the population, and productivity in this sector is exceedingly low. The size of agricultural holdings has progressively diminished ; the old cottage and small-scale industries have been decaying, and the rural population which constitutes about 83 per cent of the total suffers from chronic underemployment and low incomes. Population has increased by more than fifty per cent in the last fifty years, but the growth of alternative occupations either in the rural areas or in the towns has not been on a scale which could absorb this growing population. In the limited spheres which have registered expansion, the level of productivity and the level of incomes have naturally been higher. But, for the community as a whole, the economic development of the last few decades has brought no significant improvement in standards of living and opportunities for employment, and has perhaps accentuated to some extent inequalities of income and wealth.

14. The pace of economic development depends on a variety of factors which constitute the psychological and sociological setting within which the economy operates. A major element in this setting is the community's will to progress and its readiness to develop and adopt new and more efficient methods and processes of production. Basically, development involves securing higher productivity all round and this is a function of the degree of technological advance the community is able to make. The problem is not one merely of adopting and applying the processes and techniques developed elsewhere, but of developing new techniques specially suited to local conditions. Modern technology is changing rapidly and no country can hope to maintain a steady pace of advance unless it keeps abreast of current developments. Techniques in turn affect and are affected by economic and social organisation. Certain forms of economic and social organisation are unsuited to or incapable of absorbing new techniques and utilising them to the best advantage. To some extent techniques must of course be adapted to economic and social organisation, but the latter has also to change in order to accommodate new techniques which need to be applied not merely in one or two isolated lines but in several lines of economic activity so that advance in one line could react on and stimulate advance in others.

15. These are aspects of the problem of economic development which have to be constantly kept in view. Given these basic conditions of rapid and sustained progress, institutional as well as others, the key to higher productivity and expanding levels of income and employment lies really in stepping up the rate of capital formation. The level of production and the material well-being a community can attain depends, in the main, on the stock of capital at its disposal, i.e., on the amount of land per capita and of productive equipment in the shape of machinery, buildings, tools and implements, factories, locomotives, engines, irrigation facilities, power installations and communic lions. The larger the stock of capital, the greater tends to be the productivity of labour and therefore the volume of commodities and services that can be turned out with the same effort. The productivity of the economy depends on other things also, as for instance the technical efficiency and attitude to work of the labour that handles the available capital equipment. But the stock of capital reflects in a concrete form the technological knowledge that underlies the organised processes of production, and while other factors are important and essential a rapid increase in productivity is conditional upon additions to and improvements in the technological framework implicit in a high rate of capital formation.

16. The conditions in which economic development was achieved in the course of the last century have naturally differed from country to country, but a common feature of almost all of them is the high rate of capital formation which characterised periods of expansion. In times when the whole capital structure of a country is being transformed, the normal replacement of existing equipment becomes itself to some extent a means for introducing improvements in the technological framework of production, so that, in assessing rates of capital formation achieved, the resources set apart for this purpose must be also regarded as a material factor in determining the tempo of development. For Britain statistics on national income and investment are not available for the first half of the nineteenth century, which was perhaps the most significant period in its economic development, but the available data for 1870-1913 show that net investment in this period was on an average more than 10 per cent of the national income and in prosperous years as much as 15 per cent. In the United States, the rate of capital formation was higher over the years 1869-1913; net investment represented 13 to 16 per cent of the national product while gross investment ranged between 21 and 24 per cent. In Japan, new capital formation in the decade 1900-1909 is estimated to have averaged about 12 per cent of the national income ; this rate appears to have risen to 17 per cent in the following decade, though it declined again to 12 per cent. in the period 1920-1929. More recently, the U.S.S.R. furnishes an instance of a high rate of investment being achieved as a matter of deliberate State policy and action. The First Five Year Plan of the Soviet Union had a target of net investment amounting to "between a quarter and a third of the national income" ; the actual achievement was perhaps slightly lower. At any rate, though the Second Five Year Plan envisaged a somewhat lower ratio of capital formation to national income, it would appear on a fairly conservative estimate that the rate of net investment in the U.S.S.R. in the decade 1928-1938 was of the order of 20 per cent of the national income, if not more.

17. The data given above are not of a nature which would warrant any firm relationships being deduced between rates of investment and rates of develpment, nor can they be used for making comparisons as between countries or as between widely separated periods within the same country. Even conceptually, these, relationships are very complex. It is virtually impossible to evaluate in quantitative terms the psychological and social forces which have played a part in shaping the pace and pattern of development under different circumstances. Nevertheless, the available evidence, however scanty, may be used for judging broadly the scale of effort involved in relation to the results obtained. In the United Kingdom, a rate of net investment which fluctuated between 10 and 15 per cent of the national income went hand 'in hand with an increase of over 150 per cent in the national income between 1870 and 1913. In the United States, with a somewhat higher rate of investment, which was accompanied also by large scale immigration and settlement in virgin territory, national income increased nearly five-fold between 1869 and 1913 , the increase in per capita income in this period is estimated at over 130 per cent. In Japan, with the population growing at an average annual rate of about i f per cent, per capita income is estimated to have been doubled between 1878 and 1912;it was doubled again between 1913 and 1938. Varying estimates have been made of the achievements of the Soviet Union in terms of national income, but, taking again a conservative estimate, it would appear that with a rate of net investment of about one-fifth (or probably a little more) of the national income the increase in the national product in the period from 1928 to about 1940 was around 130 per cent.

18. These relationships are more suggestive than conclusive, but it is fairly obvious that a doubling of per capita incomes within a generation or so (that is in 25 to 30 years) required, in most of these countries, a rate of net investment of the order of 12-15 per cent of the national income. More rapid rates of development have required, apart from other things, still higher rates of investment as in the U.S.S.R. It would appear on the whole that, in under developed countries with low standards of living and rapidly increasing population, a rate of growth commensurate with needs cannot be achieved until the rate of capital formation comes up to around 20 per cent of the national income.

19. Very little information is available on the rate of investment and on the trends in national income in India in the last few decades. Rough estimates based on scattered data suggest that, as in other underdeveloped countries, the resources devoted to net capital formation today probably amount to about 5 per cent of the national income. It is true that, where manpower is plentiful relatively to the land and other capital equipment available, development has to be based to a great extent, at least in the initial stages, on labour-intensive processes. Even so, without a big increase in the rate of investment and through it in productive capital, substantial and progressive improvement in the level of incomes and of living standards cannot be secured. India has considerable resources of water, minerals and power still to be harnessed or exploited. Large areas of the country remain undeveloped for lack of basic services like transport, communications, irrigation and power. The use of machinery is limited to narrow spheres of industry, and the bulk of the country's labour force works with tools and implements which add little to the productivity of labour and thus keep real incomes low. There is also shortage of buildings for residential purposes as well as for schools, hospitals, welfare centres, factories and the like. All these have therefore to be built up, side by side of course with the knowledge of how to use the capital equipment thus built up to the best advantage. It has been estimated that for a population growing at the rate of i^ per cent per annum, tlie rate of investment needed for maintaining per capita incomes constant is generally between 4 and 5 per cent of the national income. Such a generalisation cannot obviously be interpreted literally, but the nature of the relationship suggested may explain broadly the failure of the Indian economy in the last few decades to respond adequately to the needs of a growing population and of higher standards of living and employment.

20. A somewhat low rate of capital formation might have been adequate for countries like the U.K. and the U.S.A., in which modern industrialism took root early. The under developed countries which make a late start have to aim at comparable development within a briefer period. Japan and the U.S.S.R. are instances in point. Some of the countries in South Eastern Europe which are now planning for rapid development have also envisaged high rates of investment. In Hungary, 10 per cent of the national income was devoted to net investment in 1947, the first year of her planning, but this appears to have been stepped up to 18 per cent in 1949. In Poland, gross investment in the post-war period has ranged between 20 and 25 per cent. Outside this region and under more normal conditions, Norway is known to have attained a rate of net investment of 15 per cent and Finland a rate of 18 per cent even before the Second World War. The question therefore is not whether a high rate of investment could be aimed at or achieved by relatively under developed countries, but rather under what conditions and in what stages it could be attained.

21. Investment implies applying productive resources to the building up of capital equipment. These resources could come eihter from utilisation of resources hitherto unutilised or by way of diversion from the_production of consumer goods. An underdeveloped country has a certain advantage in that it has large resources of unutilised or underutilised manpower. By utilising these, capital formation can be stepped up without drawing away to any larger extent resources employed in the production of consumer goods. Idle manpower thus constitutes a large investment potential. But it must be recognised that, in the initial stages of development, the scope for directly utilising such manpower tends to be somewhat limited. For one thing, the unutilised labour available for productive work is often also unskilled labour, which would have to be trained before it could be recruited for the new works to be undertaken. Some of the problems involved in direct investment of under employed manpower could be overcome by efficient organisation. Still, in practice, mobilisation of idle manpower on a large scale cannot but result in the generation of considerable money incomes in advance of a corresponding increase in output. This is likely to create inflationary pressures which might be felt strongly at particular points in the system, impinging more heavily on the real income of some sections of the population than on others. A measure of privation to start with and austerity for a fairly long period are thus ^unavoidable under conditions of rapid development even in countries with vast unutilised resources. The strain of development on the economy might be felt in a variety of ways : scarcities, high prices, disparate movements of incomes of different classes, bottlenecks in production, strain on transport, etc. To some extent, this strain can be moderated through appropriate measures of policy, but the fact of strain on the economy will remain. In determining the tempo of development, which, as has been indicated above, would mean raising the rate of investment from about 5 per cent of the national income to a level of something like 20 per cent, a view has therefore to be taken as to the pace at which the required organisational and institutional changes can be made without engendering too much economic and social instability.

22. The level of saving is to a great extent dependent on the level of national income ;the higher the national income the higher normally should be the proportion saved. However, this is not always true. In the United States, considering the rate of increase in income per capita and the high level of this income even to begin with, the rate of net saving achieved in the period 187010 1913, viz., 121015 percent, was relatively low. On the other hand, Japan with a lower level of incomes was able to attain a remarkably high rate of investment out of its own savings. The proportion of national income that is saved and made available for investment depends upon psychological and institutional factors. Social customs and habits, the distribution of incomes, the rates at which incomes of different classes go up and the efficacy of banking and other institutions for mobilising savings—all these—play a part in determining the rates of saving attained. The high rate reached in Japan has been explained by the fact that "the Japanese capitalists spend very little on personal consumption, that the rural population and urban working proprietors are exceptionally thrifty and, indeed, the wage earners themselves save a substantial proportion of their incomes". There is also a further factor which may be noticed here. Between 1878 and 1940 the price level in Japan rose by about 400 per cent while, in the United States in the corresponding period, the increase was less than loo per cent. Rising prices tend to enforce rates of savings which would not otherwise be possible. This factor has probably played a not insignificant part in the U.S.S.R. also where it is clear that prices of consumer goods went up sharply in the decade 1928-1938.

23. The programme of investment that can be undertaken at any particular time depends primarily on two factors : the rate of saving in the community, and the volume of unutilised human and material resources which can be used for direct investment. In the earlier stages of development, as already mentioned, though the unutilised resources would be considerable the cope for using them for stepping up the rate of capital formation might be restricted by either lack of technical skill or shortages of specific commodities and services. In this period, therefore, the reliance on savings has to be correspondingly greater. As capital formation gets under way and the basic framework of services like transport, communications, irrigation and power is built up, the scope for utilising underemployed resources will expand rapidly. The problem is to get the right start. Once this is secured and fresh capital formation started on a significant scale, it increases the ability to undertake further complementary investments, thus creating also new opportunities for employment. Further investments then get the benefit of 'external economies' which lower costs and increase the profitability of still further expansion. It is thus that the vicious circle of low output, low savings and low investment is broken and the economy started on an upward course.

24. In the initial stage—which is the critical period in development—there are clearly two alternatives open. One is to impose on the community a high rate of saving through taxation, lo-ms, price inflation, or by any other means and to utilise the resources thus made available for a sharp Increase in the rate of capital formation. This has certainly its merits, as, in this way, not only would development be rapid but there would be immediately a large increase in employment. But, this increase in employment will not lead to a corresponding increase in spendable incomes ; the community as a whole will have every little more to consume than before and there would be set up severe inflationary pressures. This is the price for more rapid development later. The other alternative is to step up the rate of capital formation more gradually, but this would mean that progress would be correspondingly less rapid. Since the objective of planning is, in fact, to promote rapid development, the problem is one of stepping up the rate of investment by denned stages, so as to minimise the hardships in the initial period, but taking care at the same time that the community does put forth within a relatively brief period the big effort needed.

25. On this analysis, the question is in what manner and how quickly the rate of capital formation in India can be stepped up, consistently with other objectives, from about 5 per cent of the national income to, say, about 20 per cent. The answer depends upon the rate at which the national income increases as development proceeds and the proportions of this increase which can, so to say, be ploughed back into investment. The larger the proportion of the increments to national income that can thus be ploughed back into investment, the greater is the pace at which development can be accelerated. The principle is, in essence, simple. If, for instance, a community starting with a 5 per cent rate of saving increases its total output by, say 10 per cent, and if in the following period capital formation is stepped up by an amount equal to half the additional output, the rate of saving would almost get doubled in the process. If it is not desired to secure a high rate of capital formation right at the start at a cost of excessive privation which a reduction in the initial levels of consumption would entail, the goal of policy must be to ensure that a high proportion of the additional incomes that accrue as a result of development is saved and invested. This will, no doubt, mean that the rate at which the initial levels of consumption can be allowed to go up will rise only slowly, but the pressure on consumption standards will at least be no worse than before and it might well become possible to permit moderate improvements. In other words, such a programme for stepping up capital formation calls for sustained austerity rather than any excessive degree of privation and suffering.

26. It is necessary to visualise the problem of development over a period of twenty-five or thirty years and to view the immediate five year period in this broader context. In formulating a plan of development for a particular period, an estimate of what is feasible must, no doubt, carry more weight than abstract reasoning as to a desirable rate of growth. But, there is clearly need for looking beyond immediate possibilities and for taking a view of the problem even from the beginning in terms of continuing and over-all requirements, and for preparing the ground in advance. Precisely for the reason that the development of a country is a somewhat long-term process, the institutional and other factors which affect it can be changed to the desired extent and in the desired direction through conscious effort. Moreover, a programme of development even for the short period would fail to have direction and perspective unless it is in some way linked to certain long-term targets and objectives relating to the kind of economy and social framework which it is proposed to evolve. In other words, while it is important to preserve throughout a pragmatic and non-doctrinaire approach, and also to bear in mind the limitations involved in any calculation of long-term development possibilities, it is of the essence of planning that it must have a wider time-horizon than immediate requirements and circumstances might seem to indicate.

27. In estimating possible rates of development in India, what they would involve in terms of effort required and what they would achieve, there are two or three major factors to be taken into account. We have already referred to the central role of capital accumulation in economic development, and how it can be stepped up by, so to say, ploughing back additions to national income. The proportion of the addition to the national income in each period which it is decided to plough back is thus one of the major determinants of the rate of development. But this proportion cannot itself be fixed in a given situation without reference to two other factors. These are (a) the rate of growth of population, and (6) the increase in national output and income likely to follow a given increase in the capital stock.

28. If population is growing at a certain rate, the total national output has to be raised at the same rate merely to maintain existing standards of income and consumption ; this means that not only will so much less of further additions to national income be available for ploughing back into investment but a part of what is ploughed back will be taken up by capital equipment required for maintaining per capita incomes constant in the following period. It is true that a growing population increases the manpower potential of the country and also has the effect, in some ways, of stimulating investment. It is also true that the effect of an .increase in population cannot be judged solely in terms of the effect on per capita incomes ; it affects the whole pattern of production and consumption. It is not possible to judge whether, on net, an increasing population is favourable or unfavourable to development. In the past, periods of rapid economic development have also been periods of rapidly increasing population, but whether there is any causal relationship between the two or how it works one cannot say with any certainty. In Britain, between the commencement of industrialisation and now—a period of about 180 years—population has increased roughly five-fold. Japan had by 1939 a population about twice as high as when it embarked on industrialisation. In periods of rapid development and changing techniques it is questionable whether the concept of an 'optimum' population can have any precise meaning. But in the short run—and we are concerned here primarily with the earlier critical stages of development—there is no doubt that, given a situation in which shortage of capital equipment rather than of labour is the main limiting factor in development, a rapidly growing population is apt to become more a source of embarrassment than of help to a programme for raising standards of living. In other words, the higher the rate of increase of population, the larger is likely to be the effort needed to raise per capita living standards.

29. The relationship between additions to capital stock and increases in national income is also one which by its nature, would vary with circumstances. There is no unique capital-output ratio applicable to all countries at all times. Much depends not only on the stage of economic development reached but also on the precise forms of further expansion. Japan provides the instance of a country where, in about a generation (i. e., roughly between 1885 and 1915), labour productivity in agriculture was doubled with very little additions to capital equipment and mainly through the use of fertilisers, better seeds, improvements in water supply and pest control, etc. Though climatic and other differences might require larger investments to produce the same result under other conditions, the capital-output ratio is likely to prove favourable in most countries where agricultural yields are low and where they can be stepped up by relatively small improvements in technique and organization. Industrial development naturally requires more capital, but here too there are differences from country to country depending on the capital intensity of the industries concerned. Before the War, for instance, capital per occupied person in manufacturing industry was about three times as high in Canada as in Australia, while in the realtively more undeveloped countries of South Eastern Europe it was a quarter to a third less than even in Australia. As a rule, basic industries like iron and steel, heavy chemicals and power, and services like railways are more capital-intensive than others, and therefore, in the stages of industrial development where these are being built up, the capital-output ratio is likely to be less favourable than when more attention is being given to light consumer-goods industries. As development proceeds, external economies also become more evident, and this has the effect of reducing the amount of capital required per unit of output. The capital-output ratio also depends in a given period on the extent to which installed equipment in industry and transport is utilized ; if it is used more intensively, say by multiple shift working, the output as a proportion of the capital invested would naturally tend to be greater than otherwise. An outstanding case of a given capital stock yielding larger output was furnished by the United States when the exigencies of war required fuller employment and longer hours of work. Then, again, the likely increase in national income consequent on capital accumulation depends to a great extent on the share of residential buildings in the additions made to the capital stock. In the pre-war Five Year Plans of the Soviet Union, it would appear that the share of the new residential constructions in capital formation was relatively small ;this entailed austere standards in regard to housing, particularly in the urban areas, but it made possible a greater concentration of resources on industrial and agricultural development and, therefore, a more favourable capital-output ratio for the country as a whole. It must also be noted that the efficiency of investment depends upon a great many other factors besides the size of the investment.

30. It will be seen from the above that one can assume a capital-output ratio only in relation to the pattern of development visualized for a particular country, the capital stock already at its command, and the extent to which the available capital resources are being utilised. In some of the relatively more developed countries of the world, a unit increase in national income has apparently required, in the last few decades, something between 3 and 3^ times as much in terms of additions to capital stock ; in limited periods and in particular instances the ratio has of course varied. These relationships are subject to the various qualifications mentioned, but they indicate the range within which the capital-output ratio may fluctuate. In making any assumption about India for the future, we have to take into account several diverse factors, e.g. the possibility of raising yields in agriculture with relatively small additions to capital equipment, the need for expanding basic industries and services like irrigation and power which are highly capital-intensive, the lack of technical skill which is likely to be reflected in lower productivity of labour in the initial stages, the scope for intensive use of equipment in at least some industries through full utilisation of capacity, shortage of housing in urban areas needing early attention, the 'external' economies likely to follow development of transport, power, marketing and credit, etc.

III. Investment, Income And Economic Development In India : A Broad Outline

31. For the purposes of our calculations regarding possible rates of developemnt in India in the next few decades, we have made by way of first approximation the following assumptions in regard to the three realtionships mentioned :

(i) population will continue to grow at the rate of about 11/4 per cent per annum (which is the rate recorded in the last decennial period) ;

(11) a unit increase in national output and income will require about three times as much by way of additions to capital stock, and the increased output will materialize in the third year from the date of investment ; and

(m) in regard to additional income in each period ploughed back into investment, there is scope for choosing the proportions according to the rate of development desired, the measure of austerity involved, and the organsational and institutional changes necessary.

On these assumptions, the alternatives in regard to investment targets can be set out in terms of the increases in. national income that can be achieved and the repercussions that particular investment targets would have on consumption standards at each stage in the process of development.

32. The national income of India might be estimated as approximately Rs. 9,000 crores in 1950-51. Starting from this level, the calculations we have made indicate that national income can be raised by over 160 per cent in about twenty-two years, and per capita incomes doubled,if capital formation is stepped up from the beginning by as much as two-thirds of the additional income each year. Apart however from the organisational difficulties in stepping up investment at such a rapid rate, this rate of development would involve—particularly in the initial stages—considerable pressure on the resoures available to the community for consumption and in fact necessitate a reduction in per capita consumption standards for a period of 10 to 15 years. If, on the other hand, capital formation is raised more gradually, say, by 25 per cent of the additional income in each period, no significant fall in present consumption standards would be necessary, but the rate of growth of national output will be very much slower—in twenty-two years it will have gone up by hardly 80 per cent and per capita incomes even less;the rate of improvement in consumption standards will also be correspondingly low. We have therefore to think in terms of stepping up capital formation by somewhat less than two-thirds but by more than a quarter of the additions to national output in each successive period.


  1. NATIONAL INCOME IN 1950-51: RS.9,000 CRORES.



33. In the present Five Year Plan, capital formation is estimated to rise by about 20 per cent of the additional income each year. The internal resources thus generated by the process of development would be supplemented to some extent by external resources. By 1955-56, national income, it is estimated, will have gone up to about Rs. 10,000 crores, that is, by about n to 12 per cent above the estimated level for 1950-51. Proceeding from the level of Rs. 10,000 crores reached at the end of this five-year period, the graph attached shows the rate of progress in regard to national income and consumption standards that could be attained if, from 1956-57 onwards, investment is stepped up each year by an amount equal to 50 per cent of the additional output. This means that the rate of saving as a proportion of total national income will have to go up from 5 per cent in the base year 1950-51 and 6 3/4 per cent in 1955-56 to about 11 per cent by 1960-61, and 20 per cent by 1967-68. After 1968-69, though the resources devoted to investment will continue to go up in absolute terms, capital formation as a proportion of national income, it is assumed, will not be raised beyond 20 per cent of the national income. On these assumptions, it will be seen, per capita incomes can be doubled by about I977? i-e; in about twenty-seven years, and consumption standards raised by a little over 70 per cent over the 1950-51 level.

34. These calculations, it must be emphasised, are illustrative and are intended to indicate only broadly the implications, in terms of effort and return, of alternative courses'of action. The projections of national income, investment and consumption are to be interpreted with due caution. For instance, a fair proportion of the investment required could be drawn from the beginning from unutilised manpower and other resources, and to this extent the attainment of the investment targets would not require a corresponding decrease in the resources available to the community for current consumption. There arc a variety of ways in which idle manpower and the spare hours of those partially employed can be canalised into a nationwide programm; of developmental activity. In the digging of canals, repair and renovation of tanks, construction of roads, bridges, and bunds, in rural housing, in improvement of sanitation, in the imparting of elementary education and technical training, and in several other activities, there is scope for participation by all sections of the population. The problem is essentially one of organisation. We have stressed throughout this Report the need to mobilise resources for local works and have also made provision in the present Five Year Plan for assisting and initiating the process. As organisational deficiencies are made good, and supply of construction materials like cement, bricks and timber improve, the scope for direct utilisation of idle manpower for building up capital will undoubtedly widen. Thus, the targets of investment suggested might, in fact, prove less difficult to attain than would appear when stated in financial terms. Correspondingly, the pressure on consumption standards of a development effort of the order indicated might also turn out to be less than the estimates given above suggest.

35. Development effort, it must be emphasised here, is something more than investment defined in the technical sense of additions to capital equipment. When the levels of education and health are as low as they are in India today, measures designed to raise them—which might require only moderate amounts of capital equipment—would yield larger returns than many forms of investment in the narrower sense of the term. The potentialities in this direction are immense. The scope for raising agricultural productivity in the country by relatively small outlays of money on agricultural extension services is an instance in point. Technical education and training, together with slight improvements in methods of production may have similarly the effect of increasing productivity substantially in small-scale industries. The doubling of national income in Japan between 1878 and 1912, referred to earlier, is perhaps explained more by factors of this nature than by high rates of investment as such. In other words, while it is important not to base our assessment of future possibilities on unduly optimistic assumptions, we should not ignore the scope for increasing productivity substantially in lines where they are now exceptionally low and thus achieve a more favourable capital output relation than 3 : I assumed in the calculations above.

36. It will be seen from the graph that the rate of increase of national income will tend to gather speed after the first 10 years or so by when capital formation per annum will have reached a level three to four times as high as in the base year 1950-51. If this order of increase in capital formation could be brought about earlier, either through direct utilisation, of idle manpower or by larger savings, the target of doubling per capita national income can be achieved earlier. In judging the feasibility of attaining high rates of investment and saving in India, it is also essential to bear in mind that only a little over 2 per cent of the national income is absorbed by defence expenditure. Considering the resources that some of the other countries had to divert to defence in periods of development—perhaps 10 per cent of the national income and often more—this must be regarded as a factor conducive to rapid development, provided conditions are favourable in the future for maintaining this relatively low proportion.

37. What has been said in qualification of investment estimates is also true by implication of the estimates regarding resources becoming available for consumption. As incomes increase, the whole pattern of consumption would change and so would individual and social valuations. In periods when the constituents of the national output are changing rapidly, the notion of a doubling of standards of living does not by itself convey any precise picture. Doubling per capita consumption does not, for instance, mean doubling of cereal consumption. A rising standard of life is likely, in fact, to result in reduced per capita consumption of cereals, and a substitution of other foods, such as fruits and vegetables, eggs, etc. Raising of nutritional standards has to be an important aspect of development in India, but improvement in these standards cannot be gauged solely with reference to any particular item or items within the food group. With extension of irrigation over large parts of the country, increasing use of fertilisers and better seeds, and the use of power for certain agricultural operations, a new pattern of intensive agriculture which provides a more complete and balanced diet may be expected to evolve. Rising standards of living will also be characterised by greater demand for the secondary essentials of life like education and health facilities, travel, entertainment, etc. A doubling of consumption standards is, therefore, more a question of planning for and meeting changes in the pattern of consumption and in social valuations than of doubling the production of its existing components.

38. In the calculations of investment and income given in the earlier paragraphs, it has been assumed, as a first approximation, that population will continue to grow over the next generation at the rate of i^ per cent per annum. This would mean that the population of the Indian Union at the end of 25 years from now would be of the order of 500 million. This assumption might or might not be legitimate. Trends in population growth cannot be altered quickly, and any reduction in birth rates may well be neutralised by a corresponding reduction in death rates. On the other hand, with family planning on a nation-wide scale, there is no reason why the rate of growth cannot be brought down to, say, about i per cent per annum or even lower. The pressure of population in India is already so high that a reduction in the rate of growth must be regarded as a major desideratum. To some extent, improvement in living standards and more wide-spread education, especially among women, will themselves tend to lower the rate. But positive measures are also necessary for inculcation of the need and techniques of family planning. Elsewhere in this Report we make recommendations in this regard.

39. In view of all these considerations, we regard the rate of development indicated in the graph as not only the minimum that the community will have to aim at over the next few quinquenniums but as something which must be exceeded. With planned conservation and utilisation of resources, it should be possible to double per capita incomes in 20 years or so. Doubling national income per capita in this period is by no means an overambitious target. Yet the scale of effort that it calls for will be obvious from. the broad calculations set forth above. This scale of effort can be secured only through organisational and institutional changes affecting several aspects of economic and social life, and beginnings in this direction have to be made even during the period of the First Five Year Plan.

IV. Employment In Relation To Development

40. There are one or two problems of particular importance and interest in the earlier stages of development to which we would like to refer briefly at this stage. The first is the problem of employment. In a country with vast reserves of unutilised manpower, the problem of employment has two aspects in relation to development. There is, in the first place, the need to make the maximum use of idle labour for the purpose of development. Here it is not so much a question of providing employment at existing or higher real wages but rather one of effectively mobilising all the available resources at minimum social cost. The second aspect of the problem is that of increasing the productivity of labour so that larger employment can be provided at rising levels of real income. This is obviously linked to the whole question of capital accumulation and technical efficiency to which we have already referred. There may be, in the initial stages, an apparent conflict between the need for making the maximum use of idle manpower and the need for raising productivity, but it is essential to recognise that, over a period, progress in one is apt to be checked by insufficient progress in regard to the other. In the initial stages of development, newly mobilised labour will not be able to contribute significantly to total output and, therefore, larger money incomes will tend to exert pressure on available supplies and cause sectional rises in prices. This process is apt to cause a redistribution of available supplies leading probably to a rise in the real incomes of those newly employed and a fall in the real incomes of those who were already employed. To some extent such redistribution may be necessary and desirable, but there are obviously limits to this, particularly as the pressure is likely to be felt on commodities like foodgrains. In promoting higher levels of employment, it is necessary, therefore, to see that the newly mobilised labour is able to raise total output. If productivity of labour cannot be increased in the short run, and particularly if the availability of basic essentials like foodgrains cannot be increased, a programme of full employment, designed primarily to put to work all idle labour, runs the risk of breaking down on account of excessive pressure of money incomes on available supplies. It is for this reason that we emphasise throughout this report the need for relying as far as possible on voluntary labour, and using money mainly as a means of attracting and organising such labour. In other words, the accent in these first few years of development has to be on mobilisation of idle manpower, with as little increase in money incomes as possible, rather than on full employment as such which, to have any meaning, should be able to provide higher money as well as real incomes all round.

41. A programme of full employment, with assurance of at least the current level of real wages to the newly employed and with no reduction in the real wages of those already employed, can get into swing only as capital formation in the community goes up. During the period of the present Five Year Plan, considerable progress will have been made in expanding irrigation, power, basic industries, transport and other services and these will provide, directly as well as indirectly, new avenues of employment. After the five year period, the pattern of priorities may to some extent change, but since aggregate investment will be continually stepped up, employment opportunities will expand rapidly. Through progressive increase in irrigation facilities, the scope for double-cropping will be enlarged and seasonal unemployment will diminish. Rural electrification will open up prospects for the establishment not only of large scale but also of cottage and small scale industries. As commodity production goes up, the scope for employment in services will also grow. There is at present a large measure of disguised unemployment in the spheres of services ; the tendency at first will be to eliminate this element of unemployment, but gradually the proportion of the total working force engaged in services will also begin to rise. The elimination of unemployment in an under developed economy is by its nature a somewhat long-term problem which calls for steady and persistent effort. In fact, development is, in a sense, but another name for employment opportunities. The larger the increase in national output aimed at, the greater must be the demand for labour, especially if care is taken to adopt labour-intensive processes to the maximum extent possible. This means that expansion of employment opportunities at rising levels of real income will proceed side by side with the development of the economy and, like the process of development itself, will become cumulative as soon as there is a marked improvement in the technical equipment of the community.

42. In the interim period there are likely to be difficulties of adjustment. In some casss, there might appear a certain conflict between the need to reduce the social cost of maintaining unemployed labour and the need to raise the productivity of labour. To some extent, mobilisation' of idle manpower for the development programme will generate new money incomes, divert larger quantities of essential commodities like foodgrains into the hands of those with the additional purchasing power, and thus create problems for those whose incomes remain more or less fixed. In the nature of things there cannot be clear-cut solutions to these difficulties. Unemployment is not merely an economic problem, it is a social problem involving human values and has to be approached from a broader view-point. In framing employment policy in relation to development, the following criteria need to be kept in mind :

  1. unemployed manpower should be drawn upon to the maximum for the development programme ;
  2. money incomes in the initial stages should be expanded as little as possible ;
  3. capital formation should be speeded up and technical efficiency improved so as to increase productivity of labour ;
  4. the rate at which equipment in established indigenous industries, especially those which employ large numbers, is allowed to be competed out and discarded must be adjusted so as to safeguard against excessive unemployment in the process of technological change ; and, lastly,
  5. the distribution of capital in new lines should be planned keeping in viev/ the need to increase employment opportunities in the short run as well as the larger pattern of development necessary for an expanding economy.

43. A comprehensive development programme over a period of years along the lines outlined above will bring about a significant change in the occupational pattern of the country. At the rates of investment indicated it will become possible to divert, in stages, an increasing proportion of the annual increase in population to non-agricultural occupations. In a country in which even a moderate percentage increase in population means a large total to be found employment, the change in the over-all occupational pattern is likely to be slow at first. At the present rate of growth of population, the working force in the country goes up every year by about i • 8 million per annum. On an average, factory industries like cotton textiles, sugar and cement would seem to require per worker capital equipment costing (at current prices) anything between Rs. 3,000 and Rs. 8,000. Heavy industries like iron and steel, fertilisers and petroleum would probably involve capital investment of the order of Rs. 100,000 or more per employed person. Industries like ship-building, locomotive manufacturing, etc. are also highly capital-intensive. It will be seen from this that the possibilities of increasing employment in large-scale manufacturing industries directly are limited, especially when the emphasis has to be on expanding producer-goods industries. For absorbing all, or a large proportion, of the increase in working population each year in non-agricultural occupations, reliance will have to be placed mainly on small scale and cottage industries involving comparatively small capital investment. If these industries are to afford employment at reasonable rates of wages, their technical efficiency will have to be increased and every effort will have to be made to see that the producer's reward is not intercepted by middlemen. The scope for developing and expanding these industries will increase further with the development of power, communications and other ancillary facilities. Once the disguised unemployment in the tertiary sector (i. e; in services) is eliminated, every increase in commodity production—particularly in manufacturing industries—will lead to the absorption of a considerable part of the additional working force in transport, trade and other services. But, again, the stage when expansion of services requiring less capital would absorb a growing population of the working force is likely to come fairly late in the country's development. In the immediate future, therefore, attention has to be concentrated primarily on diverting the increases in working population to large and small-scale industries and the supporting services rather than on changing in any drastic way the over-all occupational pattern. The change in occupational pattern will no doubt follow— perhaps faster than can be foreseen now—but this is not an end itself and should be regarded more as a corollary of development rather than as a direct objective.

V. External Resources For Development

44. Another problem to which we would refer is the role of foreign invastment in relation to development. How much of the resources needed to raise national output and incomes should come from domestic effort and how much should come from external sources cannot, of course, be determined in advance or on any a priori basis. Very much depends upon the circumstances in which a country is placed and upon the general conditions affecting the flow of capital from surplus countries. The United States, for instance, relied a great deal in the initial stages of its development on foreign capital. This is probably explained by the shortage of manpower and the consequent heavy capital investment required for opening up the continent ; partly also it was conditioned by the policy of protection followed in the United States and the free movement of capital between countries which characterised the nineteenth century. On the other hand, Japan depended very little on external resources , the State played an active part in financing industrial development and introducing new forms of organisation needed for industrialisation. The Soviet Union provides another instance of a country which developed rapidly with its own resources ; in this case it meant even greater hardship and suffering than in Japan. That a plan of development today must, in the main, rely on domestic resources can hardly be over-emphasised. In the first place, the conditions governing international investment are no longer what they were when some of the highly industrialised countries of today like the United States, Australia and Canada began their career of development. Secondly, external assistance is acceptable only if it carries with it no conditions explicit or implicit, which might affect even remotely the country's ability to take an independent line in international affairs. There are also obvious risks in excessive reliance on foreign aid which depends on the domestic political situation in lending countries and which might be interrupted by any untoward international developments. And yet, external resources at strategic points and stages can be of so much assistance in a period of rapid development that it is desirable, consistently with other objectives, to create conditions favourable to their inflow.

45. Priority will no doubt go to such external investment as is available from institutions organised on an international basis. The resources of such institutions are however limited, and it would be short-sighted to exclude without good reason investment of funds from advanced countries, either on an inter-governmental basis or on the basis of negotiations between individuals or corporations in the countries concerned. The terms and conditions on which foreign investment may be received will of course have to be judged in the light of the basic objectives of national policy and also in the light of the contribution which the proposed investment will make to development along lines accorded a high priority in the country's development programme.

46. As will be seen from subsequent chapters, India has a programme of development larger than can be financed from the resources internally available. To a certain extent, the volume of domestic resources available for investment can be augmented through appropriate fiscal and economic policy, through compulsory savings, and through drawing on unutilised manpower. There will, however, still remain certain shortages which would tend to restrain the whole pace of development, and it is in meeting these that external resources can be of help. The precise role of external resources in relation to the first Five Year Plan is discussed in a later chapter.

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