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B. R. SHENOY, The Results of Planning in India - Ralph Raico, New Individualist Review [1961]

Edition used:

New Individualist Review, editor-in-chief Ralph Raico, introduction by Milton Friedman (Indianapolis: Liberty Fund, 1981).

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The Results of Planning in India

B. R. SHENOY*

PLANNING IS NOT, like Communism, a way of life, though planning and Communism necessarily go together. In democracies, planning may be defended only as a means to an end. The aim of planning in India is fourfold: abolition of poverty, liquidation of unemployment, reduction of income inequalities, and industrialization. By emphasizing the third objective—reduction of income inequalities—it is sought to establish, simultaneously with economic progress, a socialist pattern of society, the principal characteristics of which will be absence of concentrations of wealth, income and economic power, and prevention of the stifling of talent for want of opportunities.

Indian planners believe that these objectives cannot be achieved with the speed necessary to prevent a social explosion, if the economy and society are left free to trudge along on their own. In common with their counterparts in other countries, they have a deep-seated distrust of the ability of the free-market mechanism to realize striking overall progress; they believe that the profit motive animating it is apt to divert productive resources into fields where they may yield the highest private gains rather than the highest social good. They maintain that a planning commission, on the other hand, would be actuated by considerations of the advance of the community as a whole, not by any private or sectional interests. Though this assertion is unsupported by any rigorous reasoning or empirical evidence, it represents the conviction of the policy makers and of the people that count in India.

It is now possible to put to the test this claim of Indian planners by assessing our achievements during the past decade of planning. We shall attempt this in terms of each of the four objectives of Indian economic planning.

ORDINARILY, PROGRESS in the abolition of poverty may be broadly gauged by the expansion of production. From 1950-51, the last pre-Plan year, to 1961-62, Indian national income (at constant prices) rose by 47 per cent, or at an annual rate of 3.6 per cent. This figure, however, is highly misleading as evidence of our progress in overcoming poverty. For such evidence, the increase in national income must be modified by four deflators.

First, it must be adjusted for the rise in population, as per capita income is more meaningful as an indicator of well-being than the income of the community as a whole. According to the 1961 Census, Indian population rose by 22 per cent during the past decade. On this basis, per capita income rose by but 18.5 per cent, from $51.98 in 1950-51 to $61.61 in 1961-62, or by less than one-half of the increase in overall national income.

Secondly, since the ultimate test of economic welfare is the marketed output of consumer goods, due allowances must be made from national income statistics (a) for the unduly large output of non-consumer goods as reflected by excess production capacities, and (b) for excessive additions to inventories. Excess capacities exist both in the capital goods and consumer goods industries and in the public as well as the private sector. They are estimated at 35 per cent in the major and minor irrigation works, of a lesser order in the power projects and at an average of 40 to 50 per cent in 40 industries.

Additions to inventories are common under inflation, though it is not always possible to assess their precise magnitude. Circumstantial evidence confirms the build-up of inventories of foodgrains during the three years ending 1958-59 when foodgrains prices rose by 18 per cent. Total foodgrains supplies—domestic production plus imports—went up from 65.81 million tons in 1955-56 to 77.70 million tons in 1958-59. This was a much faster rate of increase (over 5 per cent per year) than the increase in money incomes (3.9 per cent per year). Since, in spite of this increased production, prices rose, it seems safe to infer that part of the increase in supplies was hoarded; if the whole of the enhanced supplies had flowed into the market, prices should have fallen. Since then, on the same reasoning, some decumulation of foodgrains stocks has probably taken place. This is evidenced by the fact that, though money incomes were 20.6 per cent higher in 1962 than in 1958-59, and foodgrains supplies rose by but 5 per cent, foodgrains prices remained steady, the index of foodgrains prices being 100.1 in 1959-60 and 100.0 in 1961-62 (1952-53=100). Apparently, the supplies placed on the market were larger than the domestic output plus imports, inventories being drawn upon for the difference.

Thirdly, as the well-being of a people must be assessed by the economic condition of the masses, not by the overall magnitude of the national income, due allowances must be made for the considerable sums of unmerited and illicit shifts of income which have taken place during the past decade in favor of the upper-income groups. Such income shifts have taken place (a) as a result of inflation, which has corroded the incomes of the fixed and “sticky” money income groups—the masses of the people—and has correspondingly added to the incomes of a fraction of the community—the traders, businessmen and industrialists; (b) because of controls which, in addition to corruption, have created sheltered markets and semi-monopolistic positions, bringing windfall gains to the beneficiaries of controls; and (c) from the great expansion of the public sector, which has added phenomenally to the illicit gains of contractors and other participants in this expansion.

In recent years, the magnitude of these income shifts may be of an annual order of $1.6 billion, or more than the rate of increase in the national income, which has averaged $1.5 billion per year during the past seven years. Large as this income shift might seem at first sight, it is, possibly, an underestimate, as is suggested by a review of the components of the income shifts.

The inflationary expansion of money—if this may be defined to be expansion of the money supply in excess of the needs of expanded production at constant prices—during the seven years ending 1961-62 amounted to $1.3 billion, or about $180 million per year. This may be taken as a rough measure of the “anti-social” income shifts resulting from inflation.

By law, private importers must buy a license from the government. Such licenses have been issued in an amount averaging $1.3 billion per year over the past seven years. However, the resale value of an import license is anywhere from 30 to 500 per cent or more above its face value, depending on the commodity concerned. Assuming an average mark-up of 75 per cent, total net gains from these licenses may be on the order of $1.0 billion per year. The bulk of the gains from these licenses accrues to well-to-do, or comparatively well-to-do, people, such as corrupt functionaries of the state, touts and “contact” men, and the recipients of the licenses.

Public sector investment outlays have shot up from $4.1 billion in the First Plan to $9.7 billion in the Second. However, when $100 is accounted as “invested” in a public sector project, all of this does not, in fact, go into the project concerned. A part, varying with circumstances, gets siphoned off into private incomes in the form of illicit payments made for obtaining business by the contractors and successful bidders. Assuming that such illicit payments, which again accrue to the well-to-do, average 20 per cent of “investment,” they have amounted to about $400 million per year in the Second Plan period.

If to the above is added monopoly revenues accruing from controls, the total anti-social income shifts, even excluding illicit earnings from price controls, distribution controls, and other restrictions, may come to $1.6 to $1.7 billion per year.

Fourthly, national income at constant prices is arrived at mainly by deflating national income at current prices by index numbers of prices. However, the latter understate the actual level of prices, since, where price controls apply, they are based on controlled prices, which are generally lower than free-market prices. This is evidenced by the disparate movements of the price index and the money supply. From 1960-61 to 1962-63, while the money supply rose by 15.3 per cent, prices rose by but 2.4 per cent. Allowance being made for the larger money requirements of the expanded national product, prices should still have risen by at least 11 per cent. The use of these defective index numbers has led to the national income at current prices being insufficiently deflated, the statistics of national income at constant prices being correspondingly exaggerated. This exaggeration may be of an order of 8 per cent during the three years ending 1962-63, so that the actual rate of growth of income during the period may be less than the rate of growth of population.

The net result of these adjustments may well be that the well-being of the masses of the people has stagnated during the past decade of planning. Eloquent evidence of this is in the consumption of food and cloth. In the context of Indian poverty, even apart from other data, the level of food and cloth consumption alone should be a sufficient indicator of plan achievements. Data on food consumption are in the Economic Survey, issued with the Union budget. Per capita “availability” of foodgrains per day fluctuated downward with the progress of planning, from 15.7 ozs. in 1954 to 14.0 ozs. in 1958, recovered to 16.2 ozs. in 1961, and was at 15.8 ozs. in 1962. These figures are not adjusted for additions to stocks by traders and farmers. With such adjustments, per capita consumption would be less than the “availabilities.” Jail rations are 16 ozs., army rations 19 ozs. and the nutritional norm 18-19 ozs. During the five years ending 1960, annual per capita consumption of cloth, statistics of which are published in the Indian Textile Bulletin, issued by the Textile Commissioner, Ministry of Commerce and Industry, declined from 14.66 metres in 1956 to 13.98 metres in 1960.

THE NET GAIN FROM PLANNING in the field of employment seems to be negative. The additional employment produced by the First Plan was 4.7 million and from the Second 6.5 million—an improvement of 35 per cent—despite the steep rise of 110 per cent in investment outlays from $7.9 billion in the First Plan to $16.6 billion in the Second. Moreover, since the increase in employment has been less than the natural increase in the labor force, the Second Plan will bequeath to the Third Plan vastly more unemployed—conjectured at 9 million—than it inherited from the First—conjectured at 5.3 million. These computations are based on a population increase of 5 million per year—the rate indicated by the 1951 Census—of which 40 per cent is treated as additions to the labor force. The 1961 Census, however, revealed that the population has actually been rising at a rate of 7.9 million per year. If we take the latter figure, plan achievements in the field of employment appear even poorer. These employment statistics, however, cannot be taken at face value. Though issued officially, they are guesses, and the margin of error they embody may be large. But perhaps it may be broadly correct to say that the expansion of employment has probably lagged behind the expansion of the labor force.

REFERENCE HAS BEEN MADE to the anti-social income shifts resulting from inflation and statist economic measures. The experience of West Germany appears to have been similar; we are told that, while planning lasted in West Germany, there emerged “a thin upper crust able to afford anything” on top of a “broad lower stratum with insufficient purchasing power.” Statism in India has concentrated power in the hands of the Administration—the politician and the civil servant. It has done this through public sector investment outlays, which amounted to $9.7 billion under the Second Plan and would be $16.9 billion under the Third—or a rise from 58 per cent to 66 per cent of total investment outlays, including foreign aid; and it has done this through permits, licenses, concessions and other instruments of statist direction and control of the economy, which enable their recipients to siphon from the community colossal gains to which they have neither economic nor moral claims. Unmerited and anti-social income shifts seem to be inevitable under statism.

Under economic freedom, on the other hand, control over investment resources would be acquired by tens of millions of entrepreneurs competing in the open market, and economic power would be correspondingly diffused over the community as a whole. Financial success would be governed by efficiency, quality and price of the output, i.e., in proportion to what the individual adds to the national product. Under statism, however, financial success often rests overwhelmingly on contacts and “pull” in obtaining patronage, and not wholly on the use of talent to contribute to the stream of the national product. Statism is apt to bring into being a body of parasitical functionaries.

IN CONTRAST TO the disappointing record in regard to the three objectives of planning reviewed above, production statistics exhibit striking progress in industrialization, the fourth objective of the planners, the General Index of industrial production going up at an annual rate of 6.7 per cent, from 100 in 1951 to 191.8 in 1961. This has not lifted up the overall national product at a comparable rate, because industries account for but a minor part, 16 to 19 per cent, of total economic activity. Though progress was recorded in all categories of production, the expansion in the output of capital goods—machinery, electrical motors, machine tools and automobiles—and intermediate goods—coal, iron and steel, other metals, cement, heavy chemicals, paints, tanned hides, rubber goods and electricity—was outstanding. In 1960, the output of capital goods ranged from 2.9 times (automobiles) to 8.9 times (diesel engines) their output in 1950; the corresponding rise in intermediate goods was from 1.6 times (coal) to 21 times (rayon yarn).

Among consumer goods, the output of cotton textiles showed the least progress, the index of cotton textiles production rising from 100 in 1951 to 117 in 1961 (1951=100). The production indices for consumer goods used by the relatively well-to-do classes of the Indian people—sewing machines, electric lamps, electric fans, radio receivers, sugar, vegetable oil products and cigarettes—went up much faster, their increases varying from 1.9 times (vegetable oil products) to 9.6 times (sewing machines) their output in 1950. Most of these goods are still little more than curiosities to the masses of the people.

This pattern of industrial production corresponds to the foregoing analysis. It reflects the unduly large diversion of resources into heavy industries to the neglect of agriculture. The pattern of consumer goods production reflects the anti-social income shifts and the vastly larger improvement in the well-being of the upper income groups as compared with the masses of the people, the well-being of the latter remaining stagnant at best.

Most of the industrial expansion has taken place in defiance of the doctrine of comparative costs; it is forced by official policy, rigorous import restrictions and exchange controls. The unsalability abroad of Indian sugar surpluses because of the heavy price differential—the price of Indian sugar is about $242 per ton as against the world price of $66 per ton—is an example of the unconscionably heavy costs of industrialization in a closed market. Fertilizer, penicillin and refrigerators provide other examples. The landed cost of imported penicillin is 2¢ per million units, while the estimated cost of production in India is 26¢ per million units. The import of refrigerators is banned. The cost of a refrigerator in India is about $473. The cost of a comparable refrigerator in England is about $190. These are but a few instances of what applies extensively to the whole range of industrial production in India, though there may be striking exceptions here and there.

The wastages of forced industrialization are examples of what we may term “Walt Disney economics.” Manifestations of waste may be seen in abundance in those under-developed countries which have embarked on the “exciting national pilgrimage” of “development” through “planned” industrialization, on which their economic salvation is believed to rest. Productive resources, which are extremely scarce, are devoted to fabricating commodities at home which may be imported—in unlimited amounts, in superior quality and at prices vastly lower than those charged for the poor quality home products. Were free competition permitted, the domestic manufactures would have little or no chance against the imported products. But the domestic manufactures are protected against this competition by autarchic policies reinforced by exchange restrictions.

A unique phenomenon of interest to this discussion is the vast gap between the landed costs and the market prices of virtually the whole range of import goods; these gaps have emerged as a consequence of inflation, an unrealistic exchange rate and exchange controls. The gaps vary from 30 per cent to 500 per cent or more of the landed costs, depending upon commodities. These price gaps are a rough measure of the unmerited windfall gains which accrue to the recipients of the import licenses; of the near-ransom prices paid by domestic consumers for imported goods and for their domestic substitutes; and of the waste of resources in producing goods at home which may be had much more cheaply through imports. If the resources thus wasted were employed in export industries with comparative cost advantages, the national product would rise commensurately. Such a policy would also put a stop to the prevailing anti-social income shifts from the general body of consumers to the holders of import licenses, dealers in imported goods and industrialists fabricating domestic substitutes for imported goods.

It is bad enough to produce goods at home which may be acquired at much lower costs from abroad. However, when the domestic output exceeds the demands of the home market, the surplus is sold abroad at knock-down prices subsidized by the government. The manufacturer-exporters have their losses made good by cash payments and other benefits which the government grants to certain categories of exporters as part of its “export promotion” schemes. Apparently, the under-developed countries are prepared to pay any price, however fantastic, to foster the growth of industry and “a technologically mature society.” It is interesting to note that a part of this price is paid by the industrially advanced countries in the form of massive “developmental” aid to the under-developed countries.

The phenomenal pace of progress in the industrialization of India is thus not a matter to be enthused over. It is a species of Pyrrhic victory. Obviously, the consumer does not stand to benefit from it. To continue the example of the refrigerator, what good can accrue to him to get mulcted of $473 and receive but a refrigerator in exchange, when, if imports were unrestricted—as in the pre-Plan days—he could not only have had a much better refrigerator, with fewer breakdowns and a longer life-span, but would still have had about $280 to furnish the kitchen with other goods.

Forced industrialization has been detrimental to the national product and to the expansion of employment, through the callous and wasteful disposal of resources which it has produced. Resources have been diverted from sectors where they produce greater output into sectors where real costs are higher and returns lower. It has been estimated that an additional investment of $2.1 million would yield a gross yearly output of $1.2 million to $1.4 million in agriculture and a gross output of $0.3 million to $0.9 million in five manufacturing industries—cement, paper, iron and steel, cotton textiles and sugar, the output in iron and steel being $0.4 million. The same amount of investment would provide employment for 500 persons in large-scale investment goods industries, 1,150 persons in large-scale consumer goods industries and 4,000 persons in agriculture and small-scale and household industries. To press the development of heavy industry in such a context is uneconomic and seems inhuman.

Historically, advances in agriculture appear to have almost always preceded industrial expansion, and progress in lighter industries to have preceded the development of heavy industry. Growth of agriculture provided a broad-based demand for the output of industry, and the growth of light industry provided an assured demand for the output of heavy industry. This pattern of economic development, one sector sustaining and aiding the progress of the other, would eliminate the present wastages and so contribute to a more rapid growth of the Indian economy.

Planning in India, however, has amounted to a reversal of this natural process. We are developing heavy industry ahead of light industry—among the latter, throttling the growth of cotton textiles, the most important consumer goods industry, accounting for about 36 per cent of industrial output—and developing both at the expense of agriculture. This topsy-turvy progress is inherently unstable. Persistence in such a policy might render the Indian economy more vulnerable to setbacks. The edifice that is being built might run into a storm, and it could even come crashing to the ground, if its principal support, foreign aid, should be drastically curtailed or withdrawn. If, on the other hand, production and international trade had been allowed to be directed by the basic economic forces of comparative costs and efficiency, India might have had both progress and stability. Indian national income might then have increased at a much faster rate than it actually has, perhaps at 8 to 10 per cent per year. This possibility is well supported by the striking economic and social progress made by countries—like West Germany, France, Italy, the Netherlands and Japan—which have pursued liberal economic policies.

STATIST TAMPERING with the market mechanism in the name of “planning” has brought on us the worst of both worlds—the evils of planning and the evils which the market mechanism produces when tampered with. The consequences of statist tampering have been the opposite of its intentions; we have had, if anything, an increase of poverty, unemployment and income inequalities. Statist policies might have been abandoned before now but for the intervention of three factors.

First, generous foreign aid—$479 million or 6 per cent of the outlay of the First Plan and $3.1 billion or 19 per cent of the outlay in the Second Plan—seems to have more than compensated for the prodigalities of “planning.” The actual significance of foreign aid is much greater than these percentages might indicate. The dollar amount of Plan outlays is given here as converted from Indian money at the highly over-valued official exchange rate of the rupee. To measure the real significance of foreign aid to the Indian economy, it must be assessed in terms of the market prices of the goods imported by its means. On this basis, foreign aid may represent 11 per cent of total investments in the First Plan and 33 per cent of total investments in the Second Plan. Currently, this percentage may be very much higher. Despite reductions in domestic saving, foreign aid has raised investment from 7 per cent of national income at the end of the First Plan to 11 per cent at the end of the Second. That per capita income has, nevertheless, remained semistagnant, is testimony to investment extravagance, wastages and corruption. To put it bluntly, our socialist policies in India are being supported by the savings of free societies overseas.

Secondly, the thinking behind statist policies, though much of it is fallacious, and empirical evidence against it is growing, has received considerable moral support from visiting economists. Their chits carry great weight with the Indian public.

The Indian public has been assured by others that inflation, born of a big Plan, could be contained if an abundant flow of foodgrains was provided under U. S. Public Law 480. This assurance is given on the ground that foodgrains constitute the major part of the budget of the average Indian laborer. The Government of India seems to have accepted this assurance. India has also been told by Professor J. K. Galbraith that there was no “alternative to extensive public enterprise;” this has been interpreted as expert blessing on the Indian policy of unrestrained expansion of the public sector. The latest appreciative pat is from Dr. T. Balogh, which comes after a two-month sojourn with kindred souls in a monastery at Calcutta. Dr. Balogh has commended “Soviet planning” for India, and he was confident that we might undertake this without damage to democracy “thanks to the great authority which the Prime Minister wielded.” He has also certified that Indian “economic thinking” was ahead of that of the rest of the world, though it is not clear whether this applied as well to the unrepentant adherents of a free society.

Somehow, visiting economists to this country, being hand-picked, have a habit of belonging to a certain economic persuasion. Professors Milton Friedman and P. T. Bauer were the exceptions which prove the rule. It is time that the Indian public had the advantage of hearing the views of those opposed to statism.

This is not to argue against foreign aid or against a voluntary Point Four program. The need for accelerated capital formation is obvious. However, if the burden of debt-service is not to break our back, aid must be channeled into the best among alternative investments. The best investment, the one which contributes most to national income, it must be noted, is not always the most spectacular. However, there seems to be no easy device to guarantee that aid will be so channeled in the absence of fiscal and monetary stability.

There is little hope of a reversal of the socialist policies of the Indian Government unless foreign aid is scaled down or abandoned—which might happen only in the event of the aid-giving countries’ running into serious trouble—or, unless the aid-giving countries adopt a positive foreign aid policy, linking aid to domestic economic, fiscal, monetary and social reforms. Though the linking of foreign aid to domestic policies may present many challenges to diplomacy, there is a precedent to such a linkage; the International Monetary Fund requires assurances of appropriate domestic policies before borrowings from a country’s third and fourth allotments are agreed to.

We seem to be living in peculiar times. Freedom-loving people, in the name of preserving and spreading freedom, are unwittingly financing and otherwise sustaining socialist policies which thus far—sensational projects and schemes apart—have yielded little else than social injustice, unemployment, poverty and conflict. Though the Indian planners and their overseas supporters are full of promises and hope, these policies can hold out prospects of nothing better for the future.

WE MAY NOW summarize the principal conclusions emerging from this discussion:

1. Judging from its four principal objectives and taking an overall view, statist economic policies have not been a success in India.

2. During the 11 years ending 1961-62, Indian national income rose by 47 per cent, or 3.6 per cent per year. However, this figure is misleading as evidence of Indian progress in overcoming poverty. For a more reliable measure, it must be deflated by the rise in population, the unduly large output of non-consumer goods, the creation of excess production capacities, the unduly large accumulation of inventories, the unmerited and illicit income shifts from the masses of the people to the upper-income groups, and the use of the general price index, which understates the actual price level, in computing national income at constant prices.

3. Progress in the welfare of the people in recent years is best reflected in the statistics of food and cloth consumption. Since 1952-53, the per capita consumption of food has fluctuated downward, being below the jail ration of 16 ounces per day most of the time; the nutritional norm is 18-19 ounces. The per capita consumption of cloth, which improved until 1956, has since declined, from 14.66 metres in 1956 to 13.98 metres in 1960.

4. The gain in employment from planning has been negative. The expansion of employment has fallen short of the natural growth of the labor force. The volume of unemployment has thus grown despite a more than doubling of Plan investments, from $7.9 billion in the First Plan to $16.6 billion in the Second.

5. Since planning began, the pattern of income distribution has probably become more unequal than ever. Statism in India has involved concentration of power in the Administration—in the politician and civil servant—on a Himalayan scale. It has centralized in the state control of over two-thirds of national investment resources, including foreign aid, and colossal powers of control of economic activity through licenses, permits, quotas and concessions. Antisocial income shifts are inevitable under statism. The magnitude of these antisocial income shifts may be of an order of $1.6 billion per year.

6. Alone among the four objectives of planning in India, industrial production has shown remarkable progress, the index of industrial production rising by 92 per cent in 10 years. However, much of this progress is in defiance of the doctrine of comparative costs. By diverting resources from other sectors of the economy, principally agriculture, where returns are vastly higher, it has detracted from a maximization of the national product, and, therefore, from the pace of progress in overcoming poverty and unemployment. In the context of a semistagnant agriculture, this development has rendered the Indian economy highly vulnerable to setbacks. The unstable structure that is being erected might topple over if its principal support, foreign aid, should be drastically cut or withdrawn.

7. Statist policies in India might have been abandoned long ago, but for the intervention of foreign aid, which kept the coffers of the prodigal replenished as they got depleted, the moral support lent to statist policies by visiting “experts” from overseas, and the colossal gains in money and power which these policies yield to the politician and civil servant.

[* ] B. R. Shenoy is Director of the School of Social Sciences at Gujarat University, in Ahmedabad, India. He is a contributor of numerous articles to scholarly journals, and a member of the Mt. Pelerin Society.