Evolution of Indian Planning: From Five-Year Plan to NITI Aayog

Part - I

India, on 15th August 1947, after years of difficult freedom struggle, attained independence from the oppressive British rule. At the time of independence, the Indian economy was predominantly rural and agricultural in character. About 85% of the Indian population supported their livelihood with agriculture and allied activities, but still, the country was not self-sufficient in food. Industries did exist then but accounted for very little in the GDP. The illiteracy rate in India was abysmally high, and so was the mortality rate. These issues of rampant poverty, poor healthcare services and widespread diseases were made more prominent by an unequal distribution of resources between different groups of people in the country. Taking all these together, the newly independent India was underdeveloped, and chalking out a proper developmental plan for the country was the responsibility of the leaders who fought for independence. In this backdrop, the Five-Year plan was implemented.

History of ‘Planning’ in India

The leaders in India, during independence, did not actually wait to plan India’s path to development once independence was achieved – instead, the discussion has been commenced much before the five-year plan was implemented as they were well aware of the significance of planned development. The social and economic issues of the masses, such as the issue of widespread poverty and hunger, protection of artisans and farmers, and reconstruction of the entire structure of economic and social life, concerned the national leaders, and the steps towards attaining political freedom were taken as means to fix the socio-economic issues.

Before gaining independence, our first Prime Minister, Pandit Jawaharlal Nehru, was fascinated by socialism. His ideological beliefs were strengthened in 1927 when he visited Soviet Russia for the 10th Anniversary of the Bolshevik Revolution. While travelling, he could relate the issues India faced during that time and how USSR resolved those very similar problems. Russia and its developmental plans had deeply interested Nehruji, and he was of the opinion that problems of similar nature, such as poverty and illiteracy, could be solved in an easier way if Soviet Russia could do. His interest and zeal toward developmental plans of Soviet Russia were enough to convince in All India Congress Committee resolution of 1929 that revolutionary changes were mandatory for the existing social and economic structure of the Indian society then, in order to remove the misery and poverty of Indian people, improve their standard of living and to remove gross inequalities. Hence, various plans were suggested by intellectuals, businessmen and politicians, some of which became the foundation of India’s future economic system.

The first plan made in India was proposed by a popular civil engineer and ex-Diwan of the Mysore state, M. Visvesvaraya, and the strategy of the plan proposal was outlined in his book “The Planned Economy of India”, published in 1934. The Visvesvaraya Plan suggested that Industrialization in India should be the main focus to double the national income of the country within a decade. In addition to this, it was also suggested that labour engaged in Agricultural activities should shift to industries. Although the Britishers denied this plan, but it definitely aroused an urge among the educated Indian citizens and leaders for national planning. This urge was strengthened in 1935 when the leading organization of Indian Capitalists, the Federation of Indian Chambers of Commerce and Industry (FICCI), recommended National Planning, covering the entire area of economic activities. Since FICCI was basically the voice of the capitalist class, National Panning Commission was recommended for the coordination of the planning process so that the economy could achieve its full growth potential. Considering the fact that FICCI was a group of industrialists and the business class would have their profit motive, nationalists such as M.G. Ranade and Dadabhai Naroji were in favour of the state playing a dominant role in the economy and were of the opinion that market mechanism could hamper the development of the poorer section of the society.

In 1937, after Congress won elections with Netaji Subhash Chandra Bose as the party president, a conference was called for the ministers of industries of the Congress party, in which it was agreed that for the economic revival of India, industrialization was mandatory. Hence, under the chairmanship of Nehruji, National Planning Committee (NPC) was set up in 1938. However, the work of the committee was disrupted due to World War II and the Quit India Movement, in which NPC members, including the chairman, were arrested.

The Department of Planning and Development, set up in 1944 by the British Indian Government with Sir Ardeshir Dalal, produced the Industrial Policy Statement, which suggested licensing of industries of national importance and nationalization of public utilities. Mr. Dalal and his colleagues wanted to ensure that the people of India received maximum benefits from the Industrial Development and proposed that in the domestic companies, the foreign capital would be holding a minority interest. The department was disbanded in 1946 as the British government did not approve of such a proposal. Hence, as a replacement to this, an Advisory Planning Commission was created for the coordination of economic management of the country. But as Independence and Partition gained primacy, not much could be done in economic matters.


The economic planning was not forgotten when India got its Independence, and the riots post-partition were violent. The Constitution and Economic Programme Committee, set up in 1947, suggested setting up the Planning Commission. As a result of reports submitted by this committee, the socialists within Congress disapproved of it, asking for greater state control over private assets. These developments led to the publishing of the first Industrial Policy Resolution in 1948 by Congress – a less stringent approach in comparison to Mr. Dalal’s recommendation in 1945. Some of its features, which indicated that India was finally on an economic path including the best of public and private sectors, are:

  • Emphasis on the mixed economy.
  • The monopoly of the state in the manufacturing of atomic energy, defence equipment and railways.
  • Setting up of enterprises in steel, minerals, coal, shipbuilding, aircraft and communication industries by the government only.
  • The rest of the industries were open to private players.
  • Assured to the business entities that for the next 10 years, nationalisation would not take place.

A society was witnessed where, on the one hand, it was trying to establish state dominance simultaneously, respecting private property rights, and on the other hand, there was a strong commitment to democracy and equality. Nehruji’s economic vision was defined by this aspect and was considered to be a pragmatic approach. A middle path was regarded as a suitable step where there was no strict commitment to a particular ideology, emphasising the maximisation of production with equal opportunity for all.

Initial years after 1947 saw various activities related to constitution-building, and as they were winding up, the question of establishing Planning Commission revived once again. After the formal adoption of the Indian Constitution on 26th January 1950, it was on 15th March 1950, when the resolution was passed for the formal establishment of the Planning Commission, with Nehruji as its chairman. Some of the basic functions the Planning Commission had that time are as follows:

  • Formulation of Five-Year Plan in India.
  • The financial sanction for projects was dependent on its approval, and hence, it gained importance in shaping the investment decision.
  • Responsible for devising national planning and settling any conflicting claims that arose between states and ministries.
  • Enabling employment opportunities.
  • Responsible for evaluating the country’s available resources, enhancing scarce resources, for productive and balanced use of resources, a plan would be drafted with certain preferences.

The Central and State governments were asked to submit their resource and development project budget so that the Commission could commence its work on the First Five-Year plan immediately. As per experts, the first plan, drafted by economist K.N Raj, was a reconstruction effort made in a hurry, which was meant solely to rectify the immediate economic condition of India, which was the outcome of droughts, war and partition. In this backdrop, the country was having severe food shortages, an influx of refugees and increasing commodity prices. The First Five-Year Plan (1951-56) had a target of laying the foundation for industries, providing proper healthcare and education at an affordable price, and focused mainly on developing the primary sector, particularly irrigation and agriculture. It was based on the Harrod-Domar model with few modifications. Harrod-Domar model implied that economic growth depends on policies of increasing investments achieved by increasing savings, and these investments could be used more efficiently through technological advancements.

The total estimated budget of the plan was Rs.2069 crore, which was later increased to Rs.2378 crore in order to meet the rising unemployment, allocated to seven broad areas:

T 1

The actual expenditure incurred was Rs.1960crore out of which the public investment was Rs. 1560crore. Summation of public and private investment (Rs. 1800crore) was Rs.3360crore

As per data, the amount allocated for the industry was inadequate; although this decision was taken collectively but later, the planners exposed themselves to criticism. Rs. 117crore, which was allocated for industries, was wholly for consumer commodity industries only. Such allocation was justified by the Planning Commission on the grounds that there had been a serious agricultural crisis faced then, low levels of food rations and high cost of food imports, for which agriculture was given the highest priority. In addition to this, it was also stated that if there is an absence of an increase in food and raw material production required by industry, there would be difficulty in sustaining the high tempo of industrial development.

Chart 1As per data, the amount allocated for the industry was inadequate; although this decision was taken collectively but later, the planners exposed themselves to criticism. Rs. 117crore, which was allocated for industries, was wholly for consumer commodity industries only. Such allocation was justified by the Planning Commission on the grounds that there had been a serious agricultural crisis faced then, low levels of food rations and high cost of food imports, for which agriculture was given the highest priority. In addition to this, it was also stated that if there is an absence of an increase in food and Table 2raw material production required by industry, there would be difficulty in sustaining the high tempo of industrial development.

The public sector pattern shows that financial resources of 73% came from budgetary sources, whereas 17% came from deficit financing. 10% of external sources were used to procure commodities such as steel, wheat, and other equipment required for developmental projects.

Some of the notable changes brought in by the plan in various fields are as follows:

  • INDUSTRY –when the final version of the plan was published in December 1952, the approach of the plan toward industrial development was quite strong. The private sector was to operate within the provision of the Industries (Development and Regulation) Act, 1951, as per which new industrial units and subsequent expansion of the existing plants would be made only with a license issued by the Central Government. However, this had a very prominent opponent, the founder of the Swatantra Party, C. Rajagopalachari, who coined the term ‘License and Permit Raj’ to show that this system was no different from that of the British Raj and the damage caused to the Indian economy.
  • For the steel plant construction, three separate agreements were signed with three countries by the government – Germans building in Rourkela (Orissa), British in Durgapur (West Bengal), and Russians in Bhilai (Madhya Pradesh).
  • AGRICULTURE – Indian agriculture of independent India was not modernized, and Nehruji, who admired science and technological advancements, dealt with a different aspect of agriculture rather than modernizing it. To inhibit agricultural growth, the zamindari system was abolished. As observed by the planners, inequitable distribution of landholding also affected agricultural productivity. The farmers were not the owners of the land they worked on; hence, they had very little incentive to make improvements on agricultural land to increase its productivity. The proposal of the final version of the plan was land reform which would involve significant land redistribution, with a new principle of ‘having an upper limit of land an individual can hold’. As a result, the state governments passed laws to abolish landlordism, protect tenants, and distribute land by imposing ceilings.
  • Table 3Projects related to irrigation and hydroelectricity have been initiated during this phase and the dams which are built are as follows:

The construction of dams was necessary to build India’s power generating capacity. In addition to this, it would provide the required water for irrigation, prevent floods, and make India self-sufficient in food production.

  • EDUCATION –At the end of the 1st Plan, five IITs started as technical institutions. In addition to this, to take care of the funding and higher education in the country, the University Grants Commission (UGC) was set up.

The target of the Plan was 2.1% GDP growth for the fiscal year, which recorded actual growth of 3.6%. Some of the achievements of the Plan were as follows:

  • National Income increased by 18% – where per capita consumption increased by 8% and per capita income by 11%. Here, one thing is to be noted that the increase in per capita income was less than that of the increase in national income, and this is due to the immense rise in population. The issue of population growth arises here.
  • The rate of investment from 1st year of the Plan to the last year went up from 5% to 7.3% of national income, resulting from various development programmes undertaken.
  • As a result of the good monsoon (1953-54 and 1954-55) and irrigation investments, the agricultural sector benefitted too. The surge in agricultural output eased inflationary pressures and revived the demand for manufactured goods.
  • Boost in exchange reserves.

Apart from formulating it in a rush, insufficient data at that time can be another reason why it was weak. When the final version of the Plan was released, Nehru himself accepted the Plan to be ‘not perfect’. After the above results, the Planning Commission found the achievements of the Plan satisfactory, but upcoming years would prove otherwise. The successful completion of the irrigation projects did not give much results, and nearly 3/4th of the cultivated land and villages were improved solely by good monsoon. The issue of unemployment hardly improved; rather, it worsened during the course of the Plan. As mentioned earlier, the focus of the Plan was on the primary sector, secondary and tertiary sectors had not witnessed significant changes. Also, the primary sector did not provide a surplus so that it could support the expansion of other sectors in the economy.

Jawaharlal Nehru was deeply influenced by industrialization, which swept in USSR. In his opinion, the production should be state-owned and controlled for the benefit of society, where the private players are also a part. But only expanding the consumer goods industry by importing heavy machineries for that purpose will not be capable of addressing India’s poverty and unemployment issues. Hence, necessary steps have to be taken to strengthen the domestic capacity of capital formation. Production of metals, steel and heavy machinery should be done within the country to attain self-sufficiency. Based on this very idea, the Second-Five Year plan (1956-61) was commenced in India. While the first Plan was implemented to tackle the shocks of WWII and Partition, the 2nd Plan was done for industrialization – building and industry were required for the young nation to go with the pace of the rest of the world. The public sector was expected to play an important role. The profits from industrial and commercial activities would be utilized to raise the required resources for public use. Renowned Statistician Professor P.C Mahalanobis was the architect of the Plan, who used Soviet Economist GA Feldman’s idea of resource allocation. For the long-term economic benefits, the 2nd Plan focused on shifting towards developing capital goods and heavy industry. A higher level of investment in capital goods will be beneficial, as they will then be utilized to produce other commodities and services – resulting in higher levels of output and growth. Some of the objectives of the 2nd Plan are:

  1. The rapid industrialization of the country.
  2. Address the issue of unemployment – developing labour-intensive projects and small-scale industries.
  3. Reduction of income and wealth inequalities and evenly distribution of economic power.
  4. Increase in national income to raise the living standard.

The contrast between the 1st and the 2nd Plan becomes evident when the distribution of outlay is seen towards industry and agriculture. Agriculture and irrigation saw a reduction from 26.3% to 14%, while the industry saw an increase from 7.6% to 18.5%. The actual public sector outlay was Rs.4600crore (original – Rs.4800crore), Of which Rs. 959crore was current developmental expenditure and Rs. 3650 was an investment. The summation of public and private investment (Rs.3100crore) was Rs. 6750crore.

Table 4After the launch of the plan, the progress was disrupted by three things:

  • The Indian agricultural sector faced difficulty in the summer of 1957, when the monsoons failed, leading to a shortage of production and escalating prices. In 1956-57, the government had already imported 2million tonnes of food grain (this being 1/3rd of the total allowed for a 5-year period), and an additional 4million in the following year. The imports include the first PL480 agreement with USA to import cotton, rice and wheat over 3 years. Hoarding activities by traders made situations worse in India.
  • Chart 2Large imports of essential raw materials and producer goods required to sustain the programme of industrialization created a foreign exchange crisis.
  • Price rise, which occurred due to international pressures, combined with deficit financing incurred towards the end of the 1st Plan, had raised costs of various projects included in the 2nd Plan.

Hence, it was realized that the financial resources required to successfully complete the 2nd Plan were higher than the actual investment provided. Some of the other notable changes are as follows:

  • Although setting up of three new steel plants was an achievement, but the combined output of steel was not as expected.
  • There were delays in the expansion of new plants (fertilizer plants, heavy electrical projects, heavy machinery, mining machinery). As a result, industrial projects were delayed, and the targets set were not met.
  • A persistent price rise characterized the 2nd Plan – prices of food articles increased by 27%, industrial raw materials by 45%, and manufacture by 25%. This had consequences on the cost of living and exports, along with cost estimates and the progress of the Plan.
  • There were widening inequalities in wealth and income distribution – the big business and their foreign collaborators were at a profit, while the condition of the disadvantaged section of the country, mostly the labouring population, was deteriorating.
  • To overcome the situation of foreign exchange depletion, the food ministry decided to start its own procurement and distribution, along with price control implementation. This marked the beginning of PDS, through which distribution of food grains occurred through Fair Price Shops.
  • High dependence on food imports had deteriorated India’s external sector, where the actual imports stood at Rs. 537 crores being, far more than the target. On the other hand, India’s total world exports fell – from 1.5% in 1952 to 1.2% in 1960.
  • The national income increased to only 20% against the target of 25%.
  • Estimates of population growth were 1.2%, whereas the actual growth was 2%, keeping the per capita income almost stagnant (target 18%, actual 9%).
  • The Plan succeeded in creating 8 million jobs, but at the end of the Plan, 9 million people were jobless – implying the investment rate was less than the population growth.
  • To tackle the financial issues, taxation became a reliable source of revenue, and such increased taxes did not please the masses.
  • The standard of living in terms of life expectancy increased from 32 to 47.5 years.
  • Nehruji being a believer in the merits of science and technology, worked towards establishing technical institutions for higher studies. There was an increase from 134 to 380 in the number of polytechnics and engineering colleges.

 The circumstances under which the 3rd Plan began were different from that of the 2nd. There was poverty, unemployment, immense food crisis, and foreign exchange crisis. It was against this background that the general pattern of resources and outlay of the Third Five Year-plan (1961-66) was discussed around November 1958 by the Planning Commission. The meeting of the National Development Council (NDC) held in 1959 talked about the main aim of the 3rd Plan – ‘bring about institutional change’ – implying setting up village cooperatives and state trading of food grains. Even though there was external criticism of it, the final version of the Plan continued with what was decided.

Some of the objectives of the Plan are as follows:

  • To achieve self-sufficiency in food grain and increase the agricultural output to meet the needs of the exports and industries.
  • Expansion of basic industries like chemicals, steel, fuel and power and establishing the capacity to build machines to meet the necessary requirements of industrialization with the country’s own resources.
  • Manpower resources of the country to be fully utilized and expand employment opportunities.
  • To rectify the missteps taken in the 2nd Plan and bring agriculture to attention again.

The implementation of the Plan collided with some unexpected early difficulties. Some of the notable changes are as follows:

  • The Sino-Indian conflict took place in 1961-62, and at the end of the Plan, there were Indo-Pakistan hostilities. Further, to make things worse, a severe drought-led famine took place in 1965-66, which disorganized our agriculture, and foreign aid was also suspended, which disorganized our industry. This led to rising inflation and cost of living. This resulted in targets pending in the fields of irrigation, power, agriculture and housing. There was an alarming increase in the dependence on food grain import and other agricultural commodities – food grain of 25million tons, cotton 3.9million bales, jute 1.5million bales. A meagre growth rate of 2.5% was neutralized by the growth rate of the population, which resulted in per capita real income in 1965-66 being the same as that of 1960-61.
  • The previous strategy to increase agricultural production was brought by expanding the area under cultivation, but now, a different approach of intensive cultivation has been taken up. Along with this, there was the introduction of High yielding variety of seeds. For example-in, wheat and Mexican seeds were selectively used, and Paddy seeds of Taichung natives were introduced. This strategy was supported by new institutions like National Seeds Corporation, Agro-Industries corporation in the States, Agricultural Refinance Corporation and Cooperative Development Corporation.
  • Industrial production was not bad, but due to war and disruption in foreign aid, there was a shortage of raw materials and components which ultimately slowed down the growth.
  • The 3rd Plan was characterized by growing debt obligations and trade deficits. Although the exports grew, but rising imports developed serious strains on the Balance of Payments – further aggravated by famine and war. Consequently, the country was looking for larger external assistance besides frequently borrowing from the IMF.
  • The unemployment situation worsened further as unemployed people at the end of the Plan were more than that at the beginning.
  • During this period, the targeted growth rate was 5.6%, whereas 2.5% was the actual growth rate.
  • In addition to all the economic difficulties, third year plan had political instabilities as well – the death of Pandit Jawaharlal Nehru in 1964. His socialist economic policies were continued by the next Prime Minister of India, Lal Bahadur Shastri. He promoted the ‘White Revolution’ to increase the production and supply of milk and created National Dairy Development Board (NDDB). Also, the promotion of the ‘Green Revolution’ in 1965 was done by him, resulting in increased food grain production in UP, Punjab and Haryana. The famous slogan ‘Jai Jawan Jai Kisan’ was given by Shastriji during the Indo-Pak war. After his demise in January 1966, Indira Gandhi succeeded him.

Looking at the failures of the Third Five-Year Plan, the Fourth Plan due in 1966 was cancelled, and instead, the government was forced to declare “Plan Holidays” from 1966-69. During this Plan, annual plans were made, and equal priority was given to all the sectors of the economy. During this time, the Indira Gandhi government devalued Indian Rupee from Rs.4.76 to Rs.7.50 per dollar, due to which it faced bitter criticism from Parliament and the media. In spite of trade deficits and dependence on foreign aid, a constant value of the Rupee was maintained for a long time. Due to a series of wars and famine, military spending skyrocketed, and deficit spending increased, accelerating the already severe inflation. The government took the devaluation step to maintain existing exports by bringing a better alignment of external and internal prices, and thus, giving greater competitive strength to exports and, to counter soaring inflation. However, this step led to a decrease in the trade deficit, but as such, no sustainable improvements were witnessed in India’s external economy. Inflation rates were also increasing.

Under the leadership of Indira Gandhi, the Fourth Five-Year Plan (1969-74) was adopted with two main objectives, based on the Gadgil formula:

  • Growth with stability
  • Progress towards self-reliance

The country was already fighting with the existing social issues of poverty, economic recession, increasing population, and increasing unemployment – the issue of food shortages added to the problem. After six consecutive good monsoon years, rain failed in 1972, leading to famine. Buffer stock created during the successful years of the Green Revolution was gradually replenished due to the influx of Bangladeshi refugees during the Bangladesh Liberation War of 1971. Price escalated as food became scarce, resulting in an eroded standard of living faced by most of the population. There was no solution for poverty to be expected as well from the industrial sector because funds earmarked for industrial development were diverted to Indo-Pak War and Bangladesh Liberation War. No new jobs were being created, and from the previous decade, there were already 18 million people unemployed.

The agricultural production levels declined sharply after 1970-71, caused mainly due to soil fertility depletion, fertilizer shortages and their increasing price, power cutbacks, etc.

The nationalization of 14 commercial banks, which took place in 1969, was regarded as an admirable step to extend credit facilities to the lower segment of the population – ordinary farmers, small entrepreneurs and businessmen could now make improvements by taking loans and accessing banking facilities. However, some regarded the nationalisation step as undesirable due to a lack of follow-up plans as to how the deposits would be invested further in the economy.

Industrial production also witnessed a decline during the Fourth Plan. The threat of nationalization and the stringent licensing policy imposed dampened investment sentiments – the growth rate of industrial production between 1956 and 1961, which was about 8%, had reduced to less than 4% per annum between 1969-74.

Family Planning Programmes have been brought during the Fourth Plan to combat the population explosion.

The growth rate achieved was only about 3.3% against the target of 5.7%.

 We’ve seen how Five-Year Plans were planned and implemented in this article and how they provided a foundation for nation-building. There were numerous hurdles while implementing the Plan, although the leaders had set India globally to keep pace with the rest of the world in reviving its economy and building up the nation. In the next part of the article “Evolution of Indian Planning: From Five-Year Plan to NITI Aayog (PART-II)”, we will look into the remaining Five-Year plans and also the era of NITI Aayog.



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