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Five-Year Plans and the myth of Harrod-Domar

Students learning economics and preparing for competitive tests have always been taught that the First Plan’s model was Harrod-Domar. But that may not be wholly correct

Published: 18th September 2021 12:05 AM  |   Last Updated: 17th September 2021 11:39 PM   |  A+A-

(Express Illustration: Soumuadip Sinha)

In an earlier column, I wrote about thoughts on planning immediately before and after Independence, the trigger being 75th Independence Day. Going back to those times, there was the Industrial Policy Resolution in 1948. This stated that the government proposed to set up a National Planning Commission. For industry, it also clearly articulated principles of complete state monopoly in some sectors and new enterprises in others, possible nationalisation of existing private sector enterprises and majority Indian equity in instances involving foreign capital. Statutory formalisation of these principles came through the Industries (Development and Regulation) Act (IDRA) of 1951. The Bill was ready in 1949 and mentioned the Central government’s powers to license new undertakings, and register and regulate existing ones.  A quote will illustrate what this piece of legislation achieved. In Section 2, “It is hereby declared that it is expedient in the public interest that the Union should take under its control the industries specified in the First Schedule.” Eventually, almost everything one could think of came to be included in the First Schedule. The original First Schedule had 37 heads, which increased to 42 in 1953. Over time, the heads were also reclassified so one can’t simply look at the number of heads and deduce an increase in the importance of IDRA. For instance, in 1951, hurricane lanterns were a separate head. Later, they became an item under the head of commercial, office and household equipment.

To the 1951 statute, bits and pieces would continue to be added. A 1953 amendment gave the Centre powers to assume control of an existing industrial undertaking. That amendment also gave it powers to control supply, distribution and prices. In books on economic policymaking, rarely is there a reference to statutes, though they provide the backing for policy. A recent book by Gautam Chikermane (70 Policies that Shaped India) is a rare exception. In the list of statutes that form the bedrock of economic policy, the most important is the Constitution, enacted in 1950. Today’s Constitution is not identical to the one adopted in 1950. The Constitution has been amended several times. The Preamble to the Constitution has the word “socialist” now. It didn’t then. There were Fundamental Rights and Directive Principles of State Policy and there were bound to be tensions between the former and the latter. A case in point is the First Amendment to the Constitution. The year was 1951. While the First Amendment changed many Articles in the original Constitution, of particular interest was the insertion of Article 31A, 31B and the Ninth Schedule. The Ninth Schedule moved laws listed in the Schedule outside the ambit of judicial scrutiny. Have all Amendments to the Constitution been desirable? Was the Ninth Schedule desirable? I don’t think everyone will categorically say yes to either question.

This was the context in which the Planning Commission was set up through a Cabinet Resolution dated 15 March 1950. The Resolution mentioned both Fundamental Rights and Directive Principles of State Policy. The First Five Year Plan was for the period 1951-56. What does an economy’s output depend on? It depends on inputs used (land, labour, capital) and the productivity of these inputs in the process. That’s the domain of growth theory; approaches to developmental economics have connections with it. Back then, in 1951, theories of growth were simple. Over time, they became more complicated and sophisticated, and the developmental economic lens also changed. Over time, models used by the Planning Commission also became more complicated. In 1951, growth theory primarily meant Harrod-Domar, a model independently developed by Roy Harrod in 1939 and Evsey Domar seven years later. In its very simple statement, the growth rate is determined by the savings rate divided by the capital/output ratio. If the capital/output ratio is given, you need to increase the savings rate to raise growth rate, which in turn will increase investment rate.

As a student learning economics, I was taught that the First Plan’s model was Harrod-Domar.  As a teacher teaching economics, I taught that the First Plan’s model was Harrod-Domar. Every student preparing for a competitive examination and opting for Indian economic policy studies this. But I think it is a myth. The Plan document didn’t mention the Harrod-Domar model by name. In all probability, that explicit link between the two was first mentioned in a paper authored by P R Brahmananda in 1955 and popularised through another paper by K N Raj in 1961. Apart from anything else, the statistical base for modelling didn’t exist then. In April 1951, the first report of the National Income Committee highlighted problems with the statistical system. The CSO (Central Statistical Organisation) and NSSO (National Sample Survey Organisation) were in their formative years. The Collection of Statistics Act would be passed in 1953. This Harrod-Domar myth is post-facto rationalisation by economists of what the First Plan did. Before a Plan could be prepared, the fledgling Planning Commission had to prepare (in July 1950) a six-year programme for the Commonwealth Consultative Committee. This later became part of the Colombo Plan and was for the period between 1950 and 1956. In July 1951, this document formed the basis of the draft outline for the First Five Year Plan. When finalised in December 1952, no wonder critics said it wasn’t much of a Plan.

Bibek Debroy
Chairman, Economic Advisory Council to the PM
(Tweets @bibekdebroy)



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