At the time of India’s first Five Year Plan, the government focused primarily on the agriculture sector. A large part of capital and technology was devoted to increasing agricultural production. This was effective at the time and is now referred to as the green revolution. The success of this plan convinced the Indian Planning Commission to shift their strategy. The NM strategy drew inspiration from the USSR and suddenly focused on rapid industrialisation in the second Five Year Plan rather than the agricultural sector as they had done in the previous plan.
The NM strategy focused on industrialisation, mostly on the idea that manufacturing industries enjoy economies of scale, while agricultural production would face secularly diminishing returns. The productivity of labour could also be increased in capital intensive manufacturing industries while the surplus gained per labourer from agricultural production would be lower. Therefore, the available quotient for re-investment and the resultant growth would be higher from basic and heavy capital industries.
Major developed capitalist countries like Japan, the U.S.A and the U.K took an alternate path to industrialisation called the “demand-pull” process. This involves starting with establishing consumer good industries, intermediate good industries and light engineering industries to supply simple materials and equipment to the consumer good industries. Agricultural development would lead to the growth of consumption good industries that supply basic consumption needs such as food and clothing and this in turn would lead to growth in agriculture.
Under this system, even small increases in capital invested in agriculture would increase output and employment as opposed to the large amount of investment required for setting up heavy capital industries. This increase in agricultural growth would enhance the demand for consumer goods and gradually, basic and heavy capital industries would emerge. This path ensures a self-financing system without inflationary pressures, as profits generated in the consumer goods industries would be re-invested in infrastructural industries. This could have been highly advantageous.
The booming population in India, i.e. the growing labour force in the country was not accounted for due to the nature of capital-intensive industries. The growth of the basic and heavy capital goods industries did not increase the supply of essential consumption goods for an increasingly poverty ridden population. The large investment in infrastructural industries led to an increase in monetary demand and the slow growth in the supply of consumption goods could not match it. This led to growing inflationary pressures. In order to control the flow of private investment, policy makers implemented a system of licenses to ration industrial capacity between the existing firms. Therefore, private investment was not profitable and thus, efficiency, product innovations, technological advancements and competitive pricing were foregone.
It can be seen that the fundamental problems of poverty and unemployment faced by India were not addressed by the N-M strategy. The neglect of agriculture can be seen from the allocation of the total outlay that was given to this sector in the Five Year Plans that followed the first one. Only large irrigation projects were financed and therefore the vast majority of small, marginal and subsistence farmers were neglected.
The protection that these industries were given from foreign competition made India a high cost and technologically stagnant economy. In conclusion, it can be seen that only 25% of the plan expenditure was directed towards the rural economy which comprised 70% of the labour force of the country. Government employees and white and blue collar employees of public and private large-scale industries were the only people who benefited from the strategy.