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Indian Economic Policy

Notes Development Strategy and Employment Objective
The Mahalanobis strategy of planning was essentially to achieve the objective of self-sustained
long-term growth via investment in the heavy sector. For “rapid industrialisation and diversification
of the economy”, the Mahalanobis strategy considered the development of “basic industries and
industries which make machines to make machines needed for further development as the crucial
element. This strategy naturally came in conflict with the employment objective of our plans. For, a
fast and self-sustained economic growth could be ushered in only through emphasis on capital-
intensive production, namely, “by building of economic and social overheads, exploration and
development of minerals and promotion of basic industries like steel, machine building, coal and
heavy electricals”. To solve the conflict between rapid growth on the one side and immediate increase
in employment opportunities on the other, Mahalanobis strategy adopted a “policy of encouraging
labour-in-tensive techniques in consumer goods industries even as the capital-intensive sector of
heavy industry was being expanded rapidly.”
Strategy to Achieve Social Objectives : Use of Fiscal Policy
The Mahalanobis investment strategy broadly implied that increase in production would be accompanied
by better and more equal distribution of income and wealth. Apart from this assumption, Indian planners
relied on Fabian socialist strategy of using fiscal policy of taxation and public expenditure to achieve
the two social objectives of planning, viz., the removal of inequalities of income and wealth on the one
hand and the establishment of a socialist society based on equality and justice, on the other.
Fiscal policy aiming at the reduction of inequality of income and wealth had two aspects. Highly
progressive income tax was to be imposed to lop off the high incomes beyond a certain level (marginal
rate of income tax at one time was 97.25 per cent). Estate duty was to be highly progressive so as to
remove a portion of large fortunes; other taxes falling exclusively on affluent sections of the community
included wealth tax, capital gains tax and gift tax. While direct taxes attempted to transfer part of the
income and wealth of the rich to the Government, public expenditure was specifically used to promote
the welfare of the lower income groups and weaker sections of the community.
A fast and concerted development of education was to be an important means for ensuring greater
equality of opportunity to different sections of the population. Public expenditure on public health
and sanitation, housing, etc. was used to achieve “a measure of redistribution in the consumption of
basic necessities such as health and medical care, sanitation, water supply and cheap housing. Tribals,
Dalits and other backward classes were to receive favoured treatment under special programmes.”
Apart from the use of fiscal policy, the planners did not adopt any measures for direct redistribution
of property and wealth to achieve reduction of disparities of income and wealth and to prevent
concentration of economic power. The only exception was the half-hearted attempts at land reforms
and ceiling on land holdings in rural areas.
Appraisal of the Heavy Industries Development Strategy
The “heavy industries” investment strategy formulated during the Second Plan was the basis of the
development of the Indian economy during the last five decades, except for the short period of two years
or so — 1977-79 when the Janata Party attempted a shift in favour of small industry and consumer goods.
The heavy industries strategy was hailed during the Second and Third Plans but came in for
considerable criticism later. It was commended for the smart rise in saving and investment rates in
the country, for the impressive development of economic infrastructure specially in irrigation, energy,
transport and communication, etc., considerable expansion in the capital goods sector via the dominant
role of the public sector, self-sufficiency in consumer goods and in basic commodities, diversification
and expansion of industrial capacity and impressive growth of science and technology. However,
this development strategy was severely criticised for its inadequate emphasis on agriculture and
small-scale and cottage industries, for the emergence of continuous trade deficits, for growing
unemployment in the country and above all, for growing inequality of incomes and wealth on the
one side and very slow reduction of poverty on the other.

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