The Second Plan (1956-61): Mahalanobis, heavy industry and the socialist pattern

Detail

1. Background: the road to the Second Plan

• Planning before Independence:
• The Congress set up a National Planning Committee in 1938 [2].

• Then came the Bombay Plan and the Gandhian Plan (both 1944), the People's Plan (1945) and J.P. Narayan's Sarvodaya Plan (1950) [2].

• Planning Commission: set up in March 1950 by a resolution of the Union government [2]. It was not created by the Constitution or by an Act of Parliament.

• First Plan (1951-56): it put farming first. It asked people to be patient while the economy grew slowly.
• The Second Plan was planned in calm conditions. Harvests were good and prices were steady. So planners felt agriculture could get lower priority [2].

2. The politics behind the plan: the "socialist pattern of society"

• Socialist pattern of society means a goal of economic policy. Under it:
• the state controls the key parts of the economy;
• growth is meant to cut gaps in income and wealth;

• private business still exists inside this framework.

• Order of events (a common exam trap):

Step	Date	What happened
1	December 1954	The Lok Sabha passes a resolution accepting the socialist pattern as the aim of economic policy
2	January 1955	The Congress session at Avadi, near Madras, adopts it as the party's goal
3	1956	The Second Plan reflects this goal. The Industrial Policy Resolution 1956 builds on it

• The Second Plan's own wording:
• One of its general objectives was to "advance to a socialist pattern of society" [5].

• It said this pattern needs wide participation by the people in all activities. It also needs constructive leadership at various levels [5].

• Industrial Policy Resolution 1956:

• It was based on making the socialistic pattern of society the goal of economic policy [2].

• Schedule A listed basic and strategic industries. Only the state could set up new units in these industries.

• The political effect, through the Socialists:

• The Congress took over a socialist goal.
• So the Socialists found it harder to present themselves as a real alternative.
• This helped keep one-party dominance (the Congress system) in place.

3. The Mahalanobis model

• P.C. Mahalanobis: a statistician. He set up the Indian Statistical Institute (ISI) in Calcutta on 17 December 1931. It was registered as a society in April 1932 [3].
• His role in the plan:
• In 1954, PM Jawaharlal Nehru asked Mahalanobis and the ISI to prepare the draft Second Five Year Plan [3].
• He was central to building India's strategy for industrialisation [4].

• The plan is often called the "Mahalanobis Plan" [2].

• The method behind the model:

• The Harrod-Domar growth model (a simple model that links growth to savings and investment) was used for the overall estimates [2].

• Mahalanobis's two-sector and four-sector models decided how much money went to broad sectors such as agriculture and industry [2]. This mathematical picture of the economy became known as the Mahalanobis model [4].

• Main idea:

• Invest heavily in capital goods, meaning machines and materials used to make other goods.
• Build heavy industry, mostly in the public sector (businesses owned by the government).

• As savings and investment rise, the economy changes its structure quickly.

• What changed from the First Plan:

	First Plan (1951-56)	Second Plan (1956-61)
Priority	Agriculture, irrigation, price stability	Rapid industrialisation, with heavy and basic industries [2]
Attitude	Patience and slow growth	Quick structural transformation, with change in all directions
Lead role	Mixed	Public sector in key industries

• Sectors stressed: electricity, railways, steel, machinery and communication.
• Public sector steel plants: three steel plants came up in this period: Bhilai, Durgapur and Rourkela [2].
• Bhilai: built with help from the USSR.
• Rourkela: built with help from West Germany.

• Durgapur: built with help from the UK.

• Growth: the target was 4.5% a year. Actual growth was 4.3% [2].

• NCERT's verdict: the Second Plan was a turning point in India's development.

4. Import substitution: how it worked

• Import substitution means making goods at home that India used to import.
• The tool used:
• The state put high import tariffs (taxes on goods coming from abroad).
• Foreign goods became costly, so Indian goods could sell.

• This protection helped both public and private industry grow.

• The limit:

• The strategy held back export-led growth, meaning growth driven by selling goods abroad.
• It also reduced India's economic links with the rest of the world.

5. The costs of the strategy

• Foreign exchange problem:
• India's technology was backward, so it had to buy machines and know-how from abroad.
• This used up scarce foreign exchange, the foreign currency needed to pay for imports.
• The plan relied on large imports paid for with foreign loans [2].

• An acute shortage of foreign exchange forced cuts in the plan's targets [2].

• Prices: prices rose by about 30% during the plan. In the First Plan, prices had fallen [2].

• Result: the Second Plan was only "moderately successful" [2].
• Agriculture versus industry:
• Industry drew investment away from farming.
• That raised the risk of food shortages.
• Balancing industry and agriculture proved hard.
• The Third Plan (1961-66) later moved agriculture back to top priority [2].

6. Frankel's reading (NCERT exercise 7): a party pulling two ways

• Francine Frankel, India's Political Economy (1978), saw two opposite tendencies inside the Congress:
• Party side: the Congress national executive backed socialist state ownership, regulation and control of key sectors.

• Government side: Congress governments followed liberal economic policies. They gave incentives to private investors to raise production as much as possible.

• Political effects:

• Broad coalition held together: the vague position kept many groups inside the Congress, including industrialists, landowners, workers and the poor.
• Attack from the right: the Swatantra Party (1959) opposed statism, meaning too much state control, licences and planning.
• Attack from the left: the Communists and Socialists said the Congress leaned towards big business.
• Gap between the Centre and the states:
  • State leaders depended on landed groups for support.
  • So land reform laws were watered down when states carried them out.
  • Promises made at the Centre were weakened at the state level.

Prelims Hooks

• Avadi session (January 1955) → Congress adopted the "socialist pattern of society". The Lok Sabha resolution (December 1954) came first.
• The Second Plan (1956-61) is also called the Mahalanobis Plan. It used two-sector and four-sector models together with the Harrod-Domar model [2].
• P.C. Mahalanobis founded the Indian Statistical Institute on 17 December 1931 [3]. Nehru asked him to draft the Second Plan in 1954 [3].
• Second Plan growth: target 4.5%, achieved 4.3% [2].
• Industrial Policy Resolution 1956 → Schedule A = industries where only the state may start new units. It was based on the socialistic pattern goal [2].
• Steel plant and partner: Bhilai – USSR; Rourkela – West Germany; Durgapur – UK. A common trap is to swap Rourkela and Durgapur.
• Swatantra Party (1959) → criticised the statism of the planning era from the right.
• Planning Commission (March 1950) was set up by executive resolution. It was not a constitutional or statutory body [2].
• Import substitution uses high import tariffs to protect home industry. Its known side effect is weak export growth.

Mains Points

• Industry-first versus agriculture-first (GS-I/GS-III):
• The Mahalanobis model built a base of heavy industry and public sector units such as the steel plants.
• But it gave farming lower priority [2]. It also caused a foreign exchange crunch and about 30% inflation [2].

• The food crisis of the 1960s showed the cost of that imbalance.

• Planning as politics (GS-I):

• With the socialist pattern (Lok Sabha 1954, Avadi 1955), the Congress took over the Socialists' agenda.
• This strengthened one-party dominance.

• Frankel shows the gap between the party's words and the government's practice. That gap held a broad coalition together but drew attacks from both Swatantra and the Communists.

• Gap between the Centre's goals and state action (GS-II, federalism):

• Landed elites in the states diluted land reform.

• Central plans depend on state governments to carry them out. This is still true in NITI Aayog-era cooperative federalism.

• Import substitution versus openness:

• Protection built domestic capacity.
• But it limited exports and access to technology.
• This history is useful when judging today's self-reliance policies (Atmanirbhar Bharat) against integration with world trade.