3.10 The Five Year Plan as a Tool of Government

Once the Planning Commission had been set up in March 1950, India's first task was to draft an actual five-year plan. Following the Soviet model, the Government of India agreed that the central and state budgets would be split into a plan portion (long-term, project-based, five-year horizon) and a non-plan portion (routine yearly expenditure on administration, salaries and interest). A five-year plan would let the government look beyond next year's budget and focus on the larger picture — building dams, raising literacy, founding steel plants, modernising agriculture — that no annual budget could capture.

India would eventually go through twelve Five Year Plans between 1951 and 2017. The first three plans (1951–1966) defined the Nehru–Mahalanobis era; the period from 1966 to 1969 was the "plan holiday"; later plans saw incremental shifts towards mixed and then market-oriented strategies; and in 2014, the Planning Commission itself was replaced by NITI Aayog and the era of formal Five Year Plans came to an end.

3.11 The First Five Year Plan (1951–1956) — Agriculture First

The First Five Year Plan sought to lift the country's economy out of the cycle of poverty. The plan was drafted by a small team that included K.N. Raj^?, a young economist from Kerala. Raj argued that India should "hasten slowly" for the first two decades — that an excessively fast rate of development might endanger democracy itself. The plan therefore deliberately set modest targets (a national-income growth rate of about 2 % per year) and channelled most resources into the agrarian sector, including investment in dams and irrigation.

This was not a romantic preference for the village. Agriculture had been hit hardest by Partition: the canal-fed wheatlands of West Punjab and the jute lands of East Bengal had gone to Pakistan, leaving India short of both food and raw materials. The First Plan therefore identified the pattern of land distribution in the country as the principal obstacle to agricultural growth and made land reforms central to development. Huge allocations were made for large-scale projects like the Bhakra-Nangal Dam^? and the Damodar Valley Corporation^?.

3.11.1 The Logic of Saving — Why Capital Was the Bottleneck

One of the basic aims of the First Plan's authors was to raise national income. This could be done only if the country produced more than it consumed — that is, if its savings rate went up. But Indians of the early 1950s were spending almost everything they earned just to live, so consumption could not be cut further. The planners therefore sought to push savings up by incentives, taxation and the savings of the public sector itself. That too was difficult, because the country's total capital stock was very low compared with the total number of employable people. Nevertheless, savings did rise in the first phase of the plan process — until the end of the Third Five Year Plan. From the early 1960s till the early 1970s, however, the proportion of savings in the country actually dropped consistently.

3.11.2 Bhakra-Nangal & the Damodar Valley

The First Plan's most dramatic legacy was its multi-purpose river-valley projects. The Bhakra-Nangal Dam on the Sutlej, the Hirakud Dam on the Mahanadi, and the Damodar Valley Corporation across the Bihar–West Bengal border were modelled, in part, on the U.S. Tennessee Valley Authority. Each combined irrigation, hydro-electric power, flood control and navigation in a single integrated scheme. Nehru memorably called these dams the "temples of modern India". Bhakra alone irrigated several million hectares of Punjab and Haryana farmland and provided cheap electricity that made the later Green Revolution possible.

3.12 The Second Five Year Plan (1956–1961) — Mahalanobis & Heavy Industry

The Second FYP stressed heavy industries. It was drafted by a team of economists and planners under the leadership of P.C. Mahalanobis^?. If the First Plan had preached patience, the Second wanted to bring about quick structural transformation by making changes simultaneously in all possible directions. Before the plan was finalised, the Congress at its Avadi session (near Madras, January 1955) passed an important resolution declaring that the "socialist pattern of society" was the party's goal. This was reflected in the Second Plan.

3.12.1 The Mahalanobis Four-Sector Model

Mahalanobis built his strategy on a simple but powerful insight. To grow fast, India had to produce more capital goods — the steel, machine tools, electricity and chemicals that allow other industries to grow. Imported capital goods would be too expensive and would drain India's foreign exchange. India therefore had to build a domestic capital-goods sector first, even if it meant accepting slower growth in consumer goods in the short run. Mahalanobis divided the economy into four interdependent sectors and let his model show how investment in heavy industry would, in time, accelerate the growth of all of them.

3.12.2 Bhilai, Rourkela, Durgapur — Three Public-Sector Steel Plants

The Second Plan's most visible legacy was the construction of three giant integrated steel plants in the public sector, each built with foreign aid from a different power. Bhilai in Madhya Pradesh (now Chhattisgarh) was built with Soviet technical and financial assistance; Rourkela in Odisha was built with West German aid; and Durgapur in West Bengal was built with assistance from the United Kingdom. A fourth plant, at Bokaro, was begun later (Third Plan period) with Soviet help after a planned U.S. partnership fell through. Together these plants made India one of the world's larger steel producers within a single generation. Other landmark Second-Plan projects included the Sindri Fertiliser Plant (Jharkhand), the Chittaranjan Locomotive Works (West Bengal), the Hindustan Aircraft Factory (Bangalore) and the Gauhati Refinery in Assam (commissioned in 1962).

3.12.3 Tariffs, Public Sector and Import Substitution

The government imposed substantial tariffs on imports in order to protect domestic industries. This import-substitution industrialisation^? (ISI) strategy gave both public and private sector industries a protected environment in which to grow. As savings and investment grew, a bulk of these industries — electricity, railways, steel, machineries and communication — could be developed in the public sector. The push for industrialisation marked a turning point in India's economic development.

3.13 The Costs of the Second Plan

The Second Plan also had its problems. India was technologically backward, so it had to spend precious foreign exchange to buy technology from the global market. As industry attracted more investment than agriculture, the possibility of a food shortage loomed large. The Indian planners found balancing industry and agriculture really difficult, and that imbalance would haunt the next decade.

The Third Plan (1961–1966) was not significantly different from the Second. Critics argued that, from this time onwards, plan strategies displayed an unmistakable "urban bias". Others felt that industry was wrongly given priority over agriculture. Still others wanted the focus to move from heavy to agriculture-related industries — fertilisers, tractors, food processing — that would directly serve the rural economy. These criticisms anticipated the policy shifts of the late 1960s, particularly the Green Revolution.

3.14 Wars, Drought and the "Plan Holiday" of 1966–69

Between 1962 and 1966, three external shocks battered the Third Plan and drove the country into an acute economic crisis. The 1962 war with China diverted resources to defence; the 1965 war with Pakistan did the same; and the severe droughts of 1965 and 1966 caused food grain output to collapse, sending the country to the United States with a begging bowl for food aid under the PL-480 programme. Foreign exchange dried up, the rupee was devalued in June 1966, and the Fourth Plan, scheduled to begin in 1966, was simply not announced. Instead, the government issued three annual plans in 1966–67, 1967–68 and 1968–69 — a period known as the "plan holiday". The Fourth Five Year Plan finally began in 1969.

3.15 Achievements of the First Three Plans — A Balance Sheet

For all the criticisms, the first three Five Year Plans laid the foundations of India's modern economy. By 1966 India had a heavy industrial base — steel mills at Bhilai, Rourkela and Durgapur; locomotive works at Chittaranjan; aircraft manufacture at Bangalore; oil refining at Gauhati. It had multi-purpose dams at Bhakra-Nangal, Hirakud and the Damodar Valley. The country's savings rate had risen from about 8 % to 14 % of GDP. The number of universities and engineering colleges had multiplied. The Indian Statistical Institute, the IITs (the first at Kharagpur in 1951, then Mumbai, Madras, Kanpur, Delhi) and the Atomic Energy Commission were all products of the planning era. The "commanding heights" — banks, insurance, railways, atomic energy, electricity — were now firmly in public hands.

3.16 The Limits of the Strategy — Why It Could Not Continue

The first three plans nonetheless ran into deep limits. Food shortages exposed the cost of neglecting agriculture: India became dependent on PL-480 wheat from the United States and had to humiliate itself politically to keep it flowing. Foreign exchange shortages made every import a crisis. The protected industries lost the spur of competition and produced costly, low-quality goods — Hindustan Motors' Ambassador car would barely change for 40 years. The licence–permit Raj created opportunities for corruption and rent-seeking, with permits becoming more valuable than entrepreneurial talent. And the distributive justice goal made limited progress: poverty fell, but only slowly, and inequality remained entrenched. Meanwhile, criticisms came from every direction — from those who wanted faster growth, from those who wanted more focus on agriculture, from those who wanted village industries, and from those who wanted free markets. The next part of this chapter follows what happened when these tensions broke open in the late 1960s, and what the Green Revolution did next.