The Five Year Plans: Building an Economy

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When India became independent in August 1947 it inherited an economy that had barely grown per head for half a century, a literacy rate below one in five, and an industrial base concentrated in a handful of cities. There was broad agreement across the political spectrum that the state would have to lead investment, because private capital was scarce, timid and unwilling to fund the kind of long gestation projects, dams, steel mills, power stations, that a poor country needed. What followed was five decades of five year plans, an experiment that shaped everything from where India's steel towns sit to why its engineering colleges exist.

The Planning Commission was created in March 1950 by a simple cabinet resolution rather than by statute, which meant it had no constitutional standing and drew its authority almost entirely from the fact that the Prime Minister chaired it. Jawaharlal Nehru took that role and kept it, and the body quickly became one of the most powerful institutions in Delhi, because plan allocations determined what money flowed to which state and which ministry. Its lack of legal foundation, invisible while a dominant Congress ruled at the centre and in the states, became a live problem later when coalition politics made central transfers contentious.

The Nehru Mahalanobis model

The First Plan, covering 1951 to 1956, was modest and largely a compilation of projects already under way, weighted heavily toward agriculture, irrigation and power. Its emblem was the Bhakra Nangal dam on the Sutlej, which Nehru famously described as a temple of modern India. The plan exceeded its growth target, partly through good monsoons, and the confidence this generated fed directly into the far more ambitious Second Plan.

The Second Plan, from 1956 to 1961, is the one that defined the era. It was built on a framework devised by the statistician Prasanta Chandra Mahalanobis, whose central argument was that a country with limited foreign exchange should invest first in the industries that make machines, because that capacity compounds and eventually allows everything else to be produced domestically. Consumer goods would come later. Paired with the Industrial Policy Resolution of 1956, which reserved a long list of strategic industries for the public sector, this produced the classic architecture of the Indian planned economy. Three integrated steel plants were built with foreign technical help from rival blocs at once: Bhilai in what is now Chhattisgarh with Soviet assistance, Rourkela in Odisha with West German assistance, and Durgapur in West Bengal with British assistance. Heavy engineering, machine tools, fertiliser and power plants followed.

The strategy delivered a genuine industrial base and a technical workforce, and the same period produced the first Indian Institutes of Technology and a network of national laboratories. It also produced its own crises. Capital goods industries employ relatively few workers per rupee invested, so employment lagged. Import substitution behind high tariffs and industrial licensing insulated firms from competition, and the licensing system, later nicknamed the licence raj, gave officials discretion over who could produce what and in what quantity, an arrangement that invited both rent seeking and paralysis. Foreign exchange remained scarce throughout.

Crisis, drift and the long fade

The Third Plan, from 1961 to 1966, collapsed under events. The border war with China in 1962 diverted resources to defence, the war with Pakistan in 1965 did so again, and two consecutive failed monsoons in 1965 and 1966 produced acute food shortages and dependence on American wheat shipments. Planning was suspended: three annual plans, remembered as the plan holiday, covered 1966 to 1969, and the rupee was devalued sharply in 1966 in a politically wounding decision.

Out of that emergency came the most consequential agricultural change in modern Indian history. Working with the agriculture minister C. Subramaniam and the geneticist M. S. Swaminathan, and drawing on high yielding wheat varieties developed by Norman Borlaug in Mexico, India pushed a package of new seeds, assured procurement prices, fertiliser and tubewell irrigation into Punjab, Haryana and western Uttar Pradesh. Wheat output rose steeply within a few seasons and the spectre of famine receded. The Green Revolution's costs, groundwater depletion, regional inequality and a subsidy structure that is still politically immovable, took decades to become fully visible.

Later plans were increasingly shaped by politics rather than by economic doctrine. Banks were nationalised in 1969 and the Fifth Plan carried Indira Gandhi's slogan of removing poverty, before being terminated early when the Janata government took office and briefly replaced it with a rolling plan. The Sixth and Seventh Plans, through the 1980s, cautiously loosened controls and growth picked up, though partly on borrowed money. When the balance of payments crisis of 1991 forced devaluation, an IMF programme and the dismantling of industrial licensing under Prime Minister P. V. Narasimha Rao and finance minister Manmohan Singh, the intellectual foundation of planning went with it. From the Eighth Plan onward the documents were indicative rather than directive: they projected and advised, they no longer allocated production quotas. The Twelfth Plan, covering 2012 to 2017, was the last. On 1 January 2015 the Planning Commission was dissolved and replaced by NITI Aayog, a policy think tank without the power to allocate funds.

A contested balance sheet

Judgement on the plan era remains genuinely divided, and it is worth resisting a tidy verdict. Critics point out that growth averaged roughly three and a half percent a year for decades, a rate the economist Raj Krishna sardonically labelled the Hindu rate of growth, while South Korea and Taiwan, starting from comparable poverty, grew several times faster by exporting rather than substituting imports. On this reading, planning bought self reliance at the price of a generation of prosperity.

Defenders answer that the comparison flatters the East Asian cases, which operated under authoritarian governments, benefited from privileged access to American markets, and were far smaller. They argue that the planning decades built things a market would not have financed at the time: dams, a national grid, public sector heavy industry, a scientific establishment, and the engineering and management schools whose graduates powered the software boom of the 1990s. Both readings can be partly right. What is not in dispute is that the physical and institutional map of India today was drawn in large part by decisions taken in those plan documents.

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