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INDIA'S Second Five-Year Plan commenced on the first of April 1956. Largely under the Prime Minister's personal direction, a Plan Frame for the Second Plan had been made available fully 12 months earlier and during that year there was much lively debate on its contents.[i] But the final document presented to Parliament on May 15, 1956, was based substantially on the original estimates. This is largely because the range of choice at this time is remarkably small, both in a political and economic sense.
Those who read into India's Second Plan a leftist turn must appreciate this point: that the size of the Plan and its structure have been fixed by non-ideological considerations.[ii] While undue emphasis was placed on controls, and although it certainly restricted private organized industry, it was not totalitarian. In any case, the major bias against the private sector has been corrected; under the new Industrial Policy Resolution, Indian organized industry has a substantial and honored place.
The Second Plan is no more based on ideology than the First was. True, the debate concerning the Socialistic pattern of society continues, but anyone who knows the capacities of the private and public sectors in the Indian economy knows that this is really a minor issue. The private sector is fully extended and its order books are largely filled for the next five years. On its own account, organized industry will probably have a seventh of the Plan and will be acting as agent of the public sector perhaps for another third. Housing and other activities in the private sector might account for still another third. It is doubtful if the national income accruing from the activities of the private sector will be less than 80 percent at the end of the Plan, as against about 90 percent today. In other words, at the end of this Plan, based (as one is all too frequently reminded in the final document) on the concept of a Socialistic pattern of society, the Indian Union may well be less "Socialistic" than the United States is today. Indeed, the public sector cannot augment its resources or its capacity by further ventures in nationalization, such as its unwise nationalization of life insurance in January 1956. It is already too heavily burdened in both respects. This is a view of which Mr. K. C. Neogy, a member of the Planning Commission, has made no secret although he signed the Plan Report without a dissenting note. It is also the view forcefully argued by Dr. John Matthai, a former Finance Minister of India and chairman of the Indian Taxation Enquiry Commission, which has done much to present the case for heavier personal and indirect taxation. But these controversies, like the issues on which they are based, belong to the second order of magnitude. There is more noise than substance in the verbal duels on the disputed area which the public sector in India unwisely occupies.
The conditions which have determined the shape of the Second Five-Year Plan flow logically, and even structurally, from performance in the First Plan. Natura non facit saltum. Again and again, the eminent British economist, Alfred Marshall, drew attention to the basic continuity in the pattern of national economic growth. India's Second Plan, although it looks far more ambitious than the First, might be described properly as a rational projection of the best performances of the last five years. Thus, in the last three years of the First Five-Year Plan the rate of economic progress has been as high as 4 percent per year; it would be inconceivable that India's Second Plan, which had necessarily to be more satisfying both politically and economically, could start with an income figure of less than 5 percent per year. Thus it was that the planners set as their goal a 25 percent increase in the national income in five years.
Again, it was obvious that major shortages in the period 1955 to 1960 would be in steel, cement, fertilizers, electrical machinery and what might be described comprehensively as capital goods, particularly for the consumption goods industries already established. This was no choice in favor of the Soviet pattern of heavy industry as against consumer goods. It was nothing more than a balancing act designed to provide the opportunities for development of the economy on a sound industrial base. The individual targets have all been designed to meet actual shortages, not to build any idle monuments to heavy industry. No authoritative spokesman of the private sector has at any time questioned the wisdom of the allocations for steel, cement, fertilizers or railway transport, which among them absorb half the financial investment in the Second Plan. To speak, therefore, of India's Second Plan as containing a bias towards heavy industry because of an ideological twist has no warrant of any kind.
There are dramatic stories to tell about the rise in both agricultural and industrial production. Although none of the great multi-purpose projects included in the First Five-Year Plan has been completed or has contributed significantly to irrigation, the planned target of 7,000,000 additional tons of food grains has been exceeded by 4,000,000 tons. Again, the cotton target of 1.2 million bales was also surpassed by 50 percent in 1955-56. The performance of the economy in the sphere of organized industry was even more spectacular. The Interim Index of Indian Industrial Production recorded an all-time peak of 170 in December 1955--a gain of 53 points since the inauguration of the Plan. Average industrial production in organized industries has thus risen by more than 50 percent in five years; even if the new Plan were not designed for industrialization, the mere extension of this trend would have meant that about the same volume of industrialization would have been generated by the "normal" growth of the Indian economy.
However, this "normal" pattern could not have continued without the addition of much steel, which has been in desperately short supply in the last year, and which had necessarily to occupy a central place in any new plan. A similar argument applies to cement; production is to increase from under 5,000,000 tons to well over 10,000,000 tons per year within the next five years. The provision for transport and communications, which now comprise 29 percent of the Plan against 24 percent in the first five years, is the natural corollary to the industrial development program. Thus in a vital sense the main targets of the Second Plan were determined by the belief that existing trends of development in agriculture, industry and transport should be maintained. They form a consistent set of figures which should permit the national income to exceed targets, as in the First Five-Year Plan, if the new resources are properly utilized. One of the virtues of this Plan is that it is largely designed to follow existing channels of the economy. If it had sought a violent change of direction, its success would have been far more open to question.
Is India's Second Five-Year Plan likely to be the resounding success which the First Plan was in terms of overfulfillment of targets and the absence of the dreaded foreign exchange gap? In the First Five-Year Plan the aim was to raise national income by 11 percent; the latest figures show an increase of 18 percent, surpassing the goal by 50 percent. These gains are fairly evenly distributed throughout the economy, although agriculture's share is not as great as is generally supposed. The main pacemakers were factory establishments, commerce, transport and communications, and the expansion of professional and government services.
How far the Second Five-Year Plan will follow this particular course may be questioned. The Plan figures for factory establishments, small enterprises and construction have now been raised so high that they do not permit much leeway for "unplanned" production, which contributed substantially to the success of the First Five-Year Plan. It would appear, however, that expansion of markets in areas where Plan figures have not been fixed still offers important opportunities. One unofficial source predicts that the national income will surpass the goal by something like 25 percent, thanks to unplanned income estimated at nine billion rupees.
If one accepts this view that the buoyancy of the Indian economy has again been underestimated by about as much as in the First Five-Year Plan, one might not be unduly concerned about the projected rupee gap of four billion rupees. It is quite otherwise with the foreign exchange gap. In the First Five-Year Plan there was, indeed, a foreign exchange gap of seven billion rupees. But it represented items which the Indian economy could well produce for itself, such as food grains and raw cotton. In fact, Indian imports of food grains were two billion rupees less than scheduled, and there was also a large reduction in cotton imports. For the rest, a moderate improvement in the terms of trade and the rise of capital goods production in the last three years have dispelled the gap totally. This cannot happen in the Second Five-Year Plan where imports include three large steel plants each producing 1,000,000 tons of ingots, two steel expansion projects, three fertilizer factories and imports of about 6,000,000 tons of finished steel over the next four years. No contingency of Indian economics will permit the production of these items; the hard core of the foreign exchange gap in the Second Plan cannot, therefore, be broken.
It is in this refractory foreign exchange gap that the largest discrepancy between India's two plans appears. The shadow of this gap has already appeared with the steel imports of the current year which are changing a markedly favorable payments balance into an adverse one. Because of inflationary pressures, the adverse balance of trade is welcome. But it cannot be financed indefinitely unless some major developments take place in the foreign exchange field. It is not unlikely that with transport and defense requirements growing somewhat more than was anticipated, the gap may reach ten billion rupees over the five-year period. It is possible that two billion rupees of this figure might be financed by a further utilization of sterling balances, which have been drawn on very conservatively. Nevertheless, there is likely to remain a hard core of about eight billion rupees which has still to be resolved. The greatest weakness of India's Second Five-Year Plan is that it exhibits this gap without giving any indication how the problem can be solved.
This is partly because Indian authorities are not by any means agreed on a solution. Some would place their faith in the International Bank for Reconstruction and Development, which has an important mission in India at the present time. Others have argued that a drive to develop exports, and in particular agricultural exports, might conceivably bridge another two billion rupees. If the International Bank could invest four billion rupees in this country over the period of five years the balance of about two billions would cause no great concern. But neither the International Bank nor the capital markets of the world have yet shown their hand. It is certain, however, that little can be expected of private foreign capital. The "climate," it is said, is not good, though there are few countries in which a rate of growth of better than 4 percent can be foreseen for so long a time.
As long as major uncertainties remain in regard to the foreign exchange balance, the whole of India's Second Five-Year Plan is clouded with uncertainty. The achievements of the First Five-Year Plan have been so remarkable and the aspirations of the people have been raised to such a point that a serious reverse in the rate of growth might have major political consequences. The search for assurance against failure of the Second Plan has brought cold war controversies to India's door. Eastern European countries have not been slow to enter into the arena which this situation provides. Soviet Russia has undertaken the building of one of the steel plants on terms of deferred payment which have not been matched either by the Germans or the British. The Russians have offered technical assistance in oil exploration and in the development of other mineral resources, notably the diamond mines of Panna. Through UNESCO they are to take part in a large training scheme with headquarters at Bombay. In view of India's large foreign exchange gap--and so long as no strings are attached to these offers--it is clearly not in India's interest to decline the proffered aid. This is a view held almost without exception by the Indian people.
The political implications of India's Plans extend far beyond the national frontiers. For one thing, there is the challenge across the Himalayas of the People's Republic of China. India's First Five-Year Plan has shown that Asian countries can surmount huge economic obstacles without substantial foreign assistance and within the framework of democratic institutions. Indeed, the rate at which these obstacles have been surmounted in India should give the free world faith and courage. There is no conclusive evidence that China has achieved a comparable advance in her First Five-Year Plan. In this sense India's comparative success belongs to the whole free world, because she has used the free world's means.
While India has thus served the free world, she has also astutely served herself. There is no doubt that the Communist influence within India has declined very steeply in the last few years. This decline is shown in four opinion surveys recently conducted by the Indian Institute of Public Opinion in the States of West Bengal, Travancore-Cochin and Delhi. It is true that the controversies of the States Reorganization have weakened Congress Party prestige to some extent, but other political parties have suffered even more. There can be no reasonable doubt that the political stability of India has been strengthened by Congress policies such as those contained in the Second Plan.
Friends of the free world in India do not doubt the effectiveness of India's foreign and domestic policy in maintaining the morale of the people and the prestige of Congress governments inside India. Nor do they, by and large, view with any serious concern the volume of Russian assistance now available. The reason for this confidence arises from the structure of opinion inside the country. While public opinion in India is predominantly neutral in outlook in foreign affairs, it remains strongly anti-Communist and essentially democratic and freedom-loving within.
The character of the internal political challenge that India faces at the present time is often misunderstood in the United States. It is not merely a matter of generating economic progress on the substantial scale envisaged in the Second Five-Year Plan. Almost equally important has been the objective of providing a substantial volume of new employment in order to offset Communist activity, which thrives more on unemployment than on other forms of economic distress. It is significant that Communism in India has its roots not among the very poor but among the educated unemployed. The middle classes, in spite of the severe pressure of prices, exhibit a sturdy devotion to stability which has confounded the Communists even after 35 years of sustained work in the fertile soil of Calcutta. There are thus defenses in India even against unemployment. But it is clearly unwise to place too heavy a reliance upon them, and India's Second Five-Year Plan has, therefore, set itself the objective of providing 8,000,000 new jobs within five years, a figure which is twice as large as total unemployment in organized industry, mining and railway transport. The scale at which new employment is planned has no parallel in Indian history; this may be treated as a measure of the determination with which Communism is to be rooted out of the country.
Because India's Plans are thus buttressing the democratic way of life, one might have expected them to command more approbation in the free world than has been the case. There is no doubt that if the true facts of the Indian political and economic situation were understood in the United States, there would be a spontaneous upsurge of popular appreciation. By and large, the Indian people have done this job for themselves. Government planning and development finance have aided purchasing power far more than production. The victories of the First Five-Year Plan were essentially free enterprise victories, though the Government's policy in holding the ring has been magnificent.
One of the unfortunate by-products of the cold war is this failure on both sides to see clearly the common bonds of political philosophy and economic practice between India and the United States. In an important sense, it is the United States, more than any other country, that India is copying. The character of Indian expansion bears more than superficial resemblance to the expanding economy of the United States after 1868. The growth of the American and Indian economies springs from the same basic economic strength--the presence of large internal markets and the means to supply them from within. With their continental character both countries can develop their own supplies of food grains and industrial raw materials enabling them to finance a far higher rate of economic development than hard-pressed economies such as those of Britain or Japan.
The parallels with the United States, both in politics and economics, are now becoming so clear that one might hazard the guess that between 50 and 100 years from now the Indian Union will possess an economy as massive in terms of productive capacity and of welfare as that of the United States today. It is appropriate that this should be accomplished with the active assistance of democratic countries which have both an ideological and strategic interest in assisting Indian development, now running a classic race with the People's Republic of China. The fact that India has already done so much to demonstrate the vitality of the democratic way and in the first stage of her journey has outstripped the People's Republic should be a source of special satisfaction to the United States.
It might be remembered that it was in his search for a new route to India that Columbus first stumbled on the Americas. Out of that great accident there came a faith; and after a faith there came a civilization; out of that civilization came abounding prosperity. In a sense, therefore, India, or at least the vision of her splendor, was a condition in the making of America. The wheel is coming full circle. India's expanding economic needs are driving her hard, albeit vaguely, in search of a new route to prosperity. In this search she may well stumble on the pattern developed in the United States, with which she has so much in common. If, under the altered circumstances of the twentieth century, the American experiment could be successful in India, that would be evidence of its abiding character. In this sense, the United States is also being tested on Indian soil.
[i] This advance preparation is itself some indication of progress. The First Five-Year Plan appeared in draft nearly 12 months after the period covered by the Plan had begun, and was finally approved by the National Development Council six months later (November 1952). This inordinate delay was, however, somewhat less than that which occurred in the publication of China's First Plan.
[ii] It is unfortunate that the Plan Frame was designed in the Indian Statistical Institute, Calcutta, a laboratory financed by the Government of India, but under the direction of Professor P. C. Mahalanobis whose personal views are known to veer towards the left. Because of this personal equation it is often forgotten that, while the Indian Statistical Institute has been host to a number of scholars from Eastern European countries and particularly from Soviet Russia, it has offered its hospitality in an even larger measure to economists from the free world. There was in any case nothing in the Plan Frame which suggests that its structure was designed by visiting economists.