1) P BALAKRISHNAN

Nehru Era – 1950-1964

1st 5 year plan – 1951 to 1956 main focus was
agriculture. 2nd 5 year plan --1956 to 1961 main focus
was industry. 3rd 5 year plan – 1961 to 1966 – focus was
on both industry and agriculture.
PC Mahalonobis was a leading statistician of this time.
He devised a model which was intended to raise incomes
via industrialization. He conceived of an economy with 2
sectors: 1 producing capital goods and 1 producing
consumer goods. Capital was not considered to have
diminishing returns. This meant that a greater initial

PMG
allocation of investment to the production of capital
goods would leave the economy with a higher stock of
the same in the future. Now, the planner s problem was
to arrive at the share of investment to be allocated to the
capital goods sector given the level of income. At the
heart of the Mahalonobis-Nehru model was a fast-
growing heavy goods sector. Heavy goods sectors refer
to machine-building complexes with a large capacity for
the manufacture of machinery to produce steel,
chemicals, fertilizers, electricity, transport equipment etc.
There was disproportionately high investment in these
machine building complexes. In the long run this was
supposed to make growth higher. Since, an investment in
the heavy goods sector would enhance capacity across
the economy and also increase consumer goods. The
problem of this model was that it was exclusively a
supply side model. There was no recognition of a
possible demand side constraint to capital accumulation.
The model was very similar to the Feldman model used
in soviet planning. The model given by Feldman was
very successful in USSR since it turned USSR from an
agrarian economy to a fully industrialized economy in
just 30 years. The USSR achieved in 30 years what the
west could in 150 (rapid industrialization). USSR also
witnessed various embargoes and sanctions by the
capitalist west which prevented it from doing much trade
etc. A civil war between Bolsheviks and Mensheviks,
various invasions by capitalist countries and the highest
casualties in WW2 (almost 1/3rd of all casualties).
Despite all these USSR (along with Japan) had the

PMG
highest growth rate in the 20th century. Calorie
consumption in USSR was higher than USA till 1990,
although the work performed in USSR was also more
tiresome and the quality of food wasn t as good as it was
in the US. The model was fine as is evident from the
spectacular growth of the Soviet Union. The problem
was that it didn t work that well in India. There were
some reasons for that. Firstly, USSR was a command
economy and a model based on purely the physical
relationship between inputs and outputs could work
there, since investment was centrally planned by
commissars. India was a mixed economy and investment
wasn t centrally planned. Demand was the lubricant in
India s case which was ignored. The private sector
makes uncoordinated investment which solely depends
upon growing profits. Therefore, the model worked great
in a command economy but not in a mixed economy.
Even someone as capitalist as Milton Friedman said that
India s model was too mechanical, and India ignored
human capital.

PMG
VAKIL BRAHMANANDA PLAN

Capital
goods are goods used by
one business to help another
business produce consumer
goods. Consumer
goods are used
by consumers and have no
future productive use. Capital
goods include items like
buildings, machinery, and
tools. Examples of consumer
goods include food,
appliances, clothing, and
automobiles.

PMG
Bombay plan – state helped capitalism to set up in India.
1944-45 – 8 industrialists were given the control of the
economy of the whole nation. It was financed mostly by

PMG
deficit financing and taxes. Moreover, after
independence 75% taxes came from indirect sources and
75% of the population had agriculture as their
occupation. So a huge part of the Bombay plan was
actually financed by our farmers.
Link between agriculture and industry Nehru realized
that Indian agricultural growth was severely constrained
by the availability of the most basic kind of industrial
inputs. Thus, agricultural growth was itself linked to
industrialization. Also, food is needed to reproduce labor
power and to produce energy to workers to use their
labor to work and produce goods. Food is obtained
through agriculture. The aim of the Mahalonobis model
was to bring about freedom from the balance of
payments constraint, and a rapid increase in income via
greater investment in the heavy goods sector. Nehru s
speeches show us that he recognized the importance of
agriculture. Agricultural growth was about 3% and
secondary sector growth was about 7% during 1950-64.
This growth rate was higher than the growth rate
achieved in 15 years after the reforms of 1990-91.
Neglect of agriculture: Economists suggest that this was
just a perceived criticism of the Nehruvian era. They
argue that agriculture had received direct attention and
considerable resources during the Nehru era. Nearly 20%
of the public sector plan outlay has been consistently
allocated to agricultural development. Almost all
agriculture inputs were subsidized, agriculture income
was lightly taxed. There was a massive increase of credit
to the agriculture sector from 70 crore in 1950 to 2,000
crores in 1975.

PMG
Performance of public sector: Investment in the public
sector in the Nehru era showed a 15-year expansion
which has not yet been surpassed. The public sector was
originally conceived of as an agent of resource
mobilization. In the Nehru era, the savings of the public
enterprises actually grew faster than the savings of the
private sector. The growth of the central governments
tax revenues as a share of GDP in the 15 years since
1950 had not been exceeded even by 2000. The
foregoing discussion must have served to dispel the
notion that the policy in Nehru s era had neglected the
crucial role of agriculture and the savings potential of the
public sector enterprises.
True criticism of the Nehru era: Severe neglect of
primary education which continues into the 21st century.
Absurdly low sums were allotted for education in the
Mahalonobis plan.
Conclusions: The public policy of Nehru had set in
motion a stagnant colonial economy. A proliferating
bureaucracy, corruption, closedness to foreign capital
and the consequent technological backwardness in
production, the lack of competition, low productivity,
lack of accountability of public sector all tragically came
along. Despite the many flaws a stagnant economy was
set in motion with a decent growth rate.

PMG