The record of planning, 1950-1990

Detail

1. The planning timeline, 1950–1990 (what was being judged)

• Planning Commission: set up on 15 March 1950 by a Cabinet Resolution. It was not created by the Constitution or by a law. It was replaced by NITI Aayog through another Cabinet Resolution on 1 January 2015 [2].
• Five Year Plan (FYP): a centrally made, national programme that sets targets and spending priorities for five years. The Soviet Union under Stalin started the first FYP in the late 1920s [2].
• The sequence from 1951 to 1990 [2]:
• First Plan (1951–56) → Second (1956–61) → Third (1961–66).
• Three Annual Plans (1966–69), often called the "Plan holiday". They followed the 1965 war with Pakistan, two years of drought, the devaluation of the rupee and rising prices.
• Fourth Plan (1969–74) → Fifth (1974–79, ended early by the Janata government in 1978).
• Rolling Plan (1978–80) → Sixth (1980–85) → Seventh (1985–90).

• The Eighth Plan could not start in 1990 because of political uncertainty. 1990–91 and 1991–92 were Annual Plans, and the Eighth Plan finally began in 1992 [2].

• Trap: the first three Plans set their growth targets in terms of National Income. The Fourth Plan used Net Domestic Product. Every later Plan used GDP [2].

2. Plan-wise growth: target vs actual (per cent a year)

Plan	Target	Actual	Verdict (MoSPI)
First (1951–56)	2.1	3.6	Successful, helped by good harvests; used the Harrod-Domar model
Second (1956–61)	4.5	4.3	Moderately successful; the Mahalanobis Plan, focused on heavy industry; shortage of foreign exchange; prices rose about 30%
Third (1961–66)	5.6	2.8	A "thorough failure" (wars of 1962 and 1965, drought of 1965–66)
Fourth (1969–74)	5.7	3.3	A "big failure" (refugees, 1971 war, inflation)
Fifth (1974–79)	4.4	4.8	Goals were Garibi Hatao and self-reliance; oil-price inflation; ended early in 1978
Sixth (1980–85)	5.2	5.7	A success; IRDP, TRYSEM and NREP launched
Seventh (1985–90)	5.0	6.0	"Very successful"; the economy was moving out of the "Hindu rate of growth"

Source: [2]

• Pattern: the plans before 1980 mostly missed their targets, except the First and Fifth. Both plans of the 1980s beat their targets [2].
• Harrod-Domar model (a growth model): growth rate = savings rate ÷ capital-output ratio, or g = s / v.
• Worked example: s = 10% of GDP and v = 3 (it takes ₹3 of capital to make ₹1 of output a year).
• Then g = 10 ÷ 3 ≈ 3.3% a year. To grow faster, a country must save and invest more, or use capital more efficiently.

3. Structural change: how the shape of the economy changed

• Structural change means the shift in each sector's share of output (GDP) and of jobs (workforce) as an economy develops.
• Sector shares from the Class 11 tables:

Sector	GDP 1950–51	GDP 1990–91	Change	Workforce 1950–51	Workforce 1990–91	Change
Agriculture	59.0	34.9	−24.1	72.1	66.8	−5.3
Industry	13.0	24.6	+11.6	10.7	12.7	+2.0
Services	28.0	40.5	+12.5	17.2	20.5	+3.3

• Data mismatch you must flag: the NCERT text gives the agricultural workforce as 67.5% (1950) → 64.9% (1990). The table gives 72.1 → 66.8. Quote the table figures, and note that the text differs.

Output fell fast, but jobs did not move

• Agriculture's share of GDP fell by about 24 points. Its share of workers fell by only about 5 points.
• Industry and services grew in output, but they did not absorb the workers leaving farming.
• Many economists call this an important failure of 1950–90 policy.

Worked example: relative productivity

• Formula: relative productivity = sector's GDP share ÷ sector's workforce share. A value of 1 means average productivity.
• Agriculture: 59.0 ÷ 72.1 ≈ 0.82 (1950–51), falling to 34.9 ÷ 66.8 ≈ 0.52 (1990–91).
• Industry: 24.6 ÷ 12.7 ≈ 1.94 (1990–91). Services: 40.5 ÷ 20.5 ≈ 1.98 (1990–91).
• By 1990 a farm worker produced only about one-quarter of what an industry or services worker produced. Too many people depended on too little farm income. This is linked to disguised unemployment: more people work on a farm than are needed, so taking some away would not reduce output.

4. Box 2.4: the "peculiar" path of structural change

• The usual path in developed nations:
• Agriculture shrinks first.
• Then industry becomes the largest sector.

• Services lead only at high income levels.

• India's path: India skipped the industry-led stage.

• By 1990 services were 40.59% of GDP (Box 2.4; the table rounds this to 40.5). That was more than either agriculture or industry, as in developed nations.

• The catch: this happened while most workers were still on farms.

• The trend sped up after 1991 (see sectors-of-economy).

5. Industry: the success story

• Industry grew at about 6% a year (1950–90). Its share of GDP rose from 13% to 24.6%. NCERT calls this rise "an important indicator of development".
• Diversification: in 1947 Indian industry was mostly cotton textiles and jute. By 1990 it was well diversified, "largely due to the public sector".
• The strategy behind it:
• The Second Plan pushed heavy and basic industries using imports paid for with foreign loans.
• The Industrial Policy Resolution of 1956 set the "socialistic pattern of society" as the goal [2].
• For the first eight Plans, the stress was on a growing public sector with big investment in basic and heavy industry [2].

6. The growth record and the "Hindu rate of growth"

• Hindu rate of growth: a term coined by economist Raj Krishna (1978) for India's long spell of low GDP growth.
• GDP grew about 3.5% a year (1950s to about 1980).
• Per capita income grew only about 1.3% a year, because the population grew about 2% a year.

Worked example: why per capita growth is so low

• Approximate formula: per capita income growth ≈ GDP growth − population growth.
• 3.5% − 2% ≈ 1.5%. NCERT's more exact figure is 1.3%.
• Rule of 70: the number of years it takes for income to double ≈ 70 ÷ growth rate.
• At 1.3% a year, per capita income doubles in 70 ÷ 1.3 ≈ 54 years.

• At 5.7% a year, GDP doubles in 70 ÷ 5.7 ≈ 12 years.

• Criticism of the label: it wrongly suggests that religion or culture caused slow growth.

• The real causes were policy choices: controls, low productivity and an inward-looking economy.

• "Inward-looking" means producing for the home market behind trade walls instead of competing in world markets.

• IMF researchers describe India's development strategy after 1947 the same way. They list "import protection, complex industrial licensing requirements, financial repression, and substantial public ownership of heavy industry". "Financial repression" means the government controlled interest rates and told banks where to lend [3].

7. The 1980s: faster growth, built on borrowing

• Growth rose to about 5.7% a year (1980–90) (Class 11, Comparative Development Experiences). The Seventh Plan recorded 6.0% against a target of 5.0% [2].
• A partial policy shift in the late 1980s [3]:
• Policy moved from import substitution (making at home the goods a country used to import, protected by tariffs and import bans) towards export-led growth.
• Import and industrial licensing were eased. Tariffs replaced some quantitative restrictions. A tariff is a tax on imports; a quantitative restriction is a direct limit on how much can be imported.

How borrowing led to the 1991 crisis

• Current account deficit (CAD): in any year, the amount by which a country's payments to the world for imports, interest and similar items exceed its earnings from exports, remittances and similar items.
• The current account was in surplus in most years until 1980. It stayed below 1.5% of GDP in the first half of the 1980s [3].
• In the late 1980s the deficits grew. They were paid for more and more by commercial borrowing (loans at market interest rates) and by NRI deposits. Both were costly and short-term [3].
• External debt: about $35 billion (end 1984–85) → $69 billion (end 1990–91) [3].
• NRI deposits: $3 billion → $10.5 billion over the same period [3].

• Short-term external debt reached $6 billion. Debt-service payments (interest plus repayment) took nearly 30% of current receipts [3].

• The shocks of 1990–91 [3]:

• Because of the Gulf crisis, the oil import bill rose by $2 billion to $5.7 billion (1990–91).
• Remittances fell.

• Political uncertainty grew and India's credit rating was downgraded. Lenders stopped rolling over (renewing) short-term loans, and NRI deposits flowed out.

• Result: with foreign exchange reserves almost gone, the rupee was devalued in two steps against the US dollar, first by 9.5% and then by 23%, on 1 and 3 July 1991. India then adopted an IMF-supported stabilisation and reform programme [3].

• Fiscal deficits (government spending above its revenue) were financed by borrowing, including foreign borrowing. This helped create the external problem [3]. This is the 1991 crisis the scaffold links to the borrowing of the 1980s.

8. NCERT's verdict on 1950–90

Achievements	Failures
Industry became far more diversified	Many public sector enterprises (PSUs), companies owned by the government, made losses
Self-sufficiency in food grains (Green Revolution: high-yielding seeds, fertilisers and irrigation, introduced during the Annual Plans of 1966–69 [2])	Too much regulation, the "permit licence raj" (a business needed government permits to start, expand or import), held back entrepreneurs
Zamindari abolished (land reform that removed the intermediaries who stood between the farmer and the state)	Protection from imports gave firms no reason to improve quality
	India failed to build a strong export sector

• These failures, together with a changing global economy, led to the New Economic Policy of 1991.
• Cross-links: the detailed appraisal of PSUs and the licence raj is in industrial-policy-psu-msme. The agricultural record is in land-reforms-green-revolution.

Prelims Hooks

• Hindu rate of growth was coined by Raj Krishna (1978). It means about 3.5% GDP growth and about 1.3% per capita growth. The cause was policy, not religion.
• GDP shares, 1950–51 → 1990–91: agriculture 59.0 → 34.9; industry 13.0 → 24.6; services 28.0 → 40.5. By 1990 services were the largest sector.
• Trap: agriculture's workforce share fell only 72.1 → 66.8 (NCERT table). The NCERT text says 67.5 → 64.9.
• Second Plan = Mahalanobis Plan, focused on heavy industry. The First Plan used the Harrod-Domar model (g = s/v) [2].
• Plan holiday = 1966–69 (three Annual Plans). Rolling Plan = 1978–80 [2].
• Third Plan: target 5.6%, actual 2.8%, the worst gap. Seventh Plan: target 5.0%, actual 6.0% [2].
• Growth-target measure: Plans 1–3 used National Income, Plan 4 used NDP, and later Plans used GDP [2].
• Planning Commission: set up on 15 March 1950 by a Cabinet Resolution, not by the Constitution. Replaced by NITI Aayog on 1 January 2015 [2].
• The rupee was devalued in two steps (9.5% + 23% against the US dollar) on 1 and 3 July 1991 [3].

Mains Points

• Growth without jobs moving out of farming: agriculture's GDP share fell about 24 points, but its workforce share fell only about 5 points (1950–90). Heavy, capital-intensive industry created few jobs. This shows why labour-intensive manufacturing matters for today's jobs debate (GS-III: growth and employment).
• Self-reliance vs efficiency: import substitution and PSUs built a diversified industrial base. But protection and the licence raj removed pressure to improve quality, and exports stayed weak. Use this to argue for reforms, and to contrast India with export-led East Asian economies.
• The 1980s as a warning: growth rose to about 5.7%. But because it was financed by commercial debt and NRI deposits (external debt $35 billion → $69 billion, 1984–85 to 1990–91 [3]), the economy became exposed to the oil shock of 1990 and to a loss of lender confidence. Link this to fiscal discipline, CAD management and foreign exchange reserve buffers today.
• Was planning a failure? The record is mixed. Before 1980 most Plans missed their targets; both Plans of the 1980s beat them [2]. The main successes were food self-sufficiency and a diversified industry. This background explains why planning moved from command-style to indicative planning (plans that guide and signal rather than direct) after the Ninth Plan (1997), and later to NITI Aayog [2].