DIRECTION OF PLANNING AND ECONOMIC DEVELOPMENT IN INDIA AND CHINA BY ALEXANDER ECKSTEIN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83-00423R002000250005-7
• Release Decision: RIPPUB
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• Document Page Count: 16
• Document Creation Date: November 9, 2016
• Document Release Date: December 22, 1998
• Sequence Number: 5
• Publication Date: April 1, 1955
• Content Type: REPORT

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RUS3Th.N RESE&RCH CENTER
MIRVARD UNIVERSITY
Direction of Planning and Economic Development in India
and China
by
Alexander Eckstein
A paper read at the Washington D.C. meetings
of the Far Eastern Association on March 30, 1955
This manuscript has been reproduced as a
convenience to scholars working in this field.
All rights of publication and reproduction remain
with the author. The manuscript must not be quoted
or reproduced in any form without written permission
from the author,
Cambridge, Mass.
Aprils, 1955
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DIRECTION OF PL&NHING &ND ECONOMIC DEVILO.PMx"NT IN INDIA
AND CHINK*
India and China .G, the two largest countries in the underdeveloped
3
part of the world with a combined population of close to one billion
and an economic inheritance compounded of many analogous elements, are
both pursuing programs of economic development within the context of
their first Five-Year Plans. Whatever the parallelism in the drive for
e.cmpomic. growth which motivates,_:the. ie4er..s and the peo.nle: of the two
countries, the paths which each intends to follow are markedly dissimilar.
These oaths represent, in a very real sense, two vastly different
types of approaches to economic development. India is usually cited as
the orototyoe of democratic planning in an underdeveloped area, while
China is the carrier of the communist model in Asia. This dichotomy
inevitably poses a host of questions as to the power implications and
the political aopeal of the two models. Within this broader context, this
paper will focus upon an analysis of actual plan performance in agriculture
and industry against the background of the two development models,
1. The deve o meet models
In China, the new Communist regime formulated an industrialization
program patterned largely on the Soviet model, Thus, the Chinese
In this paper the author has drawn upon the research he and Professor
I4alenbaum of MIT have been enraged in concerning contrasting patterns of
economic development in India and China. I am indeed greatly indebted to
Prof. Idalenbaum, Mrs. Helen Lamb and Dr. Joseph Froomkin for their
comments on this paper,
1
According to the 1951 Census, the population of the Republic of India
was 35669 million; official results of the 1953 China Mainland Census
point to a population of 581,8 million.
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CPYRGHT
Communists envisage a development focused on the rapid expansion of
prgducerss goods and defense industries. This is to be accompanied. by
a more modest rate of growth in the manufacture of textiles needed for
barter with the countryside. At the same time, agriculture is to be
developed primarily through mobilization of underemployed farm labor
for water conservation and other labor-intensive projects.
In essence, it is a model which envisages industrial development at
the expense of agricultural development. Industrialization is accelerated.
at the outset, by virtue of the very fact that since agriculture is kept
on, a short investment ration, a larder share of investment resources can
be concentrated in industry. This policy,' in turn, sets up ?-its own vicious
circles; just because agricultural development Is sluggish,, while the
demand for farm products grows - owing to an increasing population,
urbanization, and exports the regime is forced to extract a rising
proportion of farm output if this demand is to be met. This very
process, however, further interferes with agricultural development so that
the screw must be apulied even tighter and under such circumstances ear;a
output is sacrificed for control and strong compulsions are set in force
that drive the system towards collectivization,
Within the framework of this tyre of a development model, the
state provides a guaranteed market for the goods and services produced
so that deficiency in effective demand is not one of the factors limiting
a
erowth, except possibly in` short-run frictional sense. On the contrary,
l
See for instance Chou En-lai s Report on Government work to the First
Session of the First National People's Congress NCN Supplement No. 2l8 ,
Oct. 14, 1954.
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CPYRGHT
the more effectively consumption can be kept in check the higher will be
the rates of growth under cater is ribus asenmotions. Under such
conditions, government nolcy will be dedicated to keeping consumption at
the lowest levels compatible with (a) political stability, i.e.
maintenance of the regime in power and (b) the requirements of raising
nonfarm labor productivity. Thus, in this type of a totalitarian
model,, changes in consumption need not be a function of changes in income
even in a long-run sense.
The Indian path, on the other hand, is based upon a more or lees
democratic framework. Consequently, freedom of consumer choice and
resource allo cation through the pricing and market mechanism plays a
much more important role. This, in turn, yields a number of corollary
effects. Thus, great reliance is placed upon voluntary saving. The
nationalized sector of the economy is much teller and generally the
state's participation in the economy Is much more modest.
As a general rronasition# one may consider the Chinese Communist
Program as primarily oower.orientede i.e. designed to maximize the rate
it which internal control is extended and consolidated while the external
'u "maki.ng, defense, and international political -potential is augmented,
he central focus is upon the develipment of heavy industry, with a
ower order of priority assigned to consumer Foods industries and
agriculture. In contrast, the Indian -orogram is largely-welfare-oriented,
th one of its central objectives the, improvement of rural welfare.
is necessarily implies a high order of priority for agricultural develop-
vent and the expansion of industries serving agriculture, with less
emphasis upon industrialization . ,fie, Thus, while in the Chinese case
%e central objective is to maximize the rate of industrial, growth, the
 Rndian focus is upon maximizing the rate of improvement in standards
of living.
Apart from these broad ideolog.ct1 considerations there are
certain specific factors which account for the much greater rural
emphasis in the first Indian .Five Year Plan at least. One of these in
certainly the whole C,a dhian tradition and influence. i.nother0 is the
serious food shortage problem facing India after Partition. And a third
is the comparatively low crop yields per unit of land in India, or
instance, rice yields were half, wheat yields were about two-third, and
cotton yields were at about 40 per cent of the Chinese mainland levela1
Therefore, the opportunities for raising yields relatively ra,)idly,
through improved farm practices and extension of the irrigated area are
much better for India than for China.
The differing roles assigned to aPriculture and industry in the-
development plans of India and China may -oerhaps best be illustrated by
a comparison of the pattern of investment allocation in the two countries.
This comparison is based on 1934-38 yields for India and 1931-37 yields
for 9? provinces of China.
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a
Table I
I.xzvestment Allocation In India and China
Per Cent
India China
Investment Plane 1951/52-545/56 A-ctual investments.,
Public 'fly Pub
1953-54
i.gri cul Lure 17 15 )
1.
Irrigation 71 14 )
Transport and
Com'Au ications 18
15
Induotry 14 75
49
Other P4 2
24
Sources to Table I: Government of India, PlanningCommission, Live Year
Plan Pro,eress Report for 1953?54, New Delhi, September 1954, pa 11.
Wilfred Malenbaum: Savines and Investment in India (Mimeogro) CENTS
No, C 54.10 May 17r 19549 P. 9.
Teng Hsiao-ping: Report of Minister of Finance on the 1954 State
Bum at the 31st Meeting of the Central People's Government Council held
on June 16 and 17, 1954 -- NCN . Bulletin, London, Supplement No. 704, June
?4, 1954.
Before apnraising these figures, it must be pointed out that they
are not completely comparable. In China, public investment through the
state budget is virtually equivalent to total investments it of course
excludes self financed outlays by small entrepreneurs and farmers, however
these could not have constituted a very significant item by 1953-54.
On the other hand, in India,, about 40 per cent of planned investment was
to come from the vrivate sector. As a matter of fact, there are no
reliable estimates for private investment, planned or actual, so that the
only firm items are planned government outlays. Moreover, sector defini.
tions are somewhat different in India and China and the planners in the
two countries work with somewhat varying investment concepts. However,
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even if one discounts for all of these possible sources of error, the
differences in the two investment patterns are striking. In China,
industry?s share of investment resources is twice as high as in India,
while the position of agriculture is exactly reversed.
A similar picture emerges if one looks at the reverse side of the
coin, namely the land tax burden borne by agriculture. In China apnroxi-
mately 15 to '0 per cent of net agricultural product goes into direct
1
taxes, while in India the corresponding share is only 1 to 1;5 per cent,
plan Performance in Agri. culture
The differences in the roles of the rural sector in the development
of India and China have been greatly reinforced by the patterns of
p^oduction as they actually emerged during the first planning years.
Thus, in the case of India, agricultural -production targets were markedly
exceeded, while in China farm outout has been lagging below planned levels,
By the end of the third planning year (1953-54). Indian grain production
targets for the whole Five Year Plan period were exceeded by 50 per cent.
By the same time, three fourths of the cotton output increase programmed
for 1955/56 was attained.2 In China, on the other hand, on the basis of
official figures, the output of grain ro se only by about 4 per cent in two
years, as compared to a highly unrealistic five year expansion target of
30 percent. For instance, the official 1953 -production figure is 165
1
These percentages do not, of course, measure the total tax burden borne
by agriculture, since they leave out of account proceeds from indirect
taxes and quasi--taxes. While there is no way of measuring this total burden
with the limited data available, indirect tax rates in India would have to
be much higher than in China to make up for the much lower yield from direct
taxes. On basis of all of the available evidence this does not seem to be
the case. The estimate for China is based oh the Chinese Communist budget
figures adjusted for under-valuation of the tax grain price and on the author s
estimate of national -product.. For India it is based on aggregate_ land and
agricultural income tax revenue of the States, given in the an Prr}rrens
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million tons compared to an annual target of 175 million. In cotton,
1
output actually declined between 195> and 1954,
It would, of course, be erroneous to ascribe these divergent tendencies
exclusively to "differences in vlanriing techniques or patterns of invest-
ment allocation. India, after several successive droughts, was blessed
by two exceptionally favorable monsoons.
App
4cco rdi ng to the Planning
Commissions own tentative estimate, "out of the total increased productio3
of foodgrains of 11.4 million tons, something like 5 to 6 million tons
represent a more or less permanent gain" attributable to an extension of
irriga tion and land reclamation and to growing use of fertilizer. There
may also have been some increase in "invisible" investment in Indian
agriculture, i.e. investment which is non-monetary in character, performed
with materials and labor available on the farm. These are the types of
Investment that are very difficult to measure and thus tend to be greatly
underestimated in the national accounts for most of the underdeveloped
areas. They are the kind of investments that may be uarticularly responsive
to changes in the structure of incentives. `While there are no data that
would hermit one to really document this, given the general orientation
of planning, the emphasis upon village development, the beginnings of,
land reform, and the favorable weather conditions, it would indeed be
surprising if there had been no rise in peasant. Incentives in India.
On the Chinese mainland, the pattern was almost exactly reversed;
three increasingly favorable crop years were followed by a bad drought
in 1953 and a very serious flood in 1954. However, just as in India
larger inputs of capital and production requisites contributed to the
improvement, so the failure to aprly similar measures in China - on any-
thing approaching a comparable scale - was undoubtedly a factor in hampe-
ring agricultural growth there.
Pe ' l
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 CPYRGHT
3o Plan Performance in Industry
Quite a different picture emerges if one eomnares industrial per-
formance under the two plans. As is shown by the data in Table III o::
all products listed - except for cement =- growth was significantly more
rapid in China during two years than in India during three. This does
not gainsay the fact that in some fields such as textiles and cement
significant advances have been registered in India. However, moot of the
increase in India could be attained with better utilization of previously
underutilized capacity. In China, on the other hand, capacity limits
were being approached on the eve of the plan, so that the increases for
1953 and 1954 reouired rapidly expanding capacity.
Tab 1e1I
Out ,out of Selected Industrial Pr ducts in India and China
Product Pr Plain Year P oducti n
Production Increase Attained
During the Planning Period
x die
China
ndia
ni
1: 0
12=2
1201
51` 12 SJ
i
,
.
.
Pig Iron ; 19572
1,580
79
75
Finished. )i,n
steel )000vs 976
1,945
105
756
of metric
Coal tons
37,300
57,400
3967-
15,737
Cement )
2, 69;?
9E, 460
1.336
1, ?- j-
Cotton yarn
(in 000,000 lbs,)
1,179
341
Electric power
(in 000?000 kwh)
5,300
6,811
1,6o0
39764
Sources to Table It
Five Year
an Progress $eport, op.cit,
.The Pronpecte for Communist China, appendix One.
22mmunioue by the State Statistical Bureau
Current Events Handbook, Peiping, Sept. 12, 1;54
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Thus, the differing rates of industrial expansion reflect to a
large extent the differing investment policies pursued in the two
countries. Just for purposes of illustration, 1954 industrial Invest-
ment in India may be roughly estimated at less than 2 per cent of GNP,
For China, on the basis of rather crude calculations, it may be placed
at about 6 per cent.
Perhaps it may be fair to say that in some respects the Indian
plan has been an outstanding success, in that during the past three
years output has been appreciably raised in all commodity sectors.
However, there is a real question as to what extent the Plan or planning
can take credit for these favorable developments, and whether this could
not have been accomplished in the absence of a live Year Plan. In a
very real sense, the investment program represents the core, the major
strategic lever of an economic plan. However, this is precisely the
field in which there is a significant shortfall with only about 40 per
cent of the total outlay programmed for the five year period, actually
Invested during the first three years.
For industrial investment, plan fulfillment was even lower, less
than one-third of expenditure proerammed for the plan period was dis-
bursed by the end of the third year. It is particularly notable that
the governments investment plan, which was quite modest to begin with,
fell far behind the much more sizable private investment program.
A case could be made for the view that the Indian eovernment's economic
policy places it in a position where it lives in the worst of two
This includes both private and public investment; see Five Year Plan
REggress Report, op.cit., p. 164.
CPYRCHT
By the end of the third year the government bad invested only 19 per cent
of the five year outlay programmed for industry; the private industrial sector
the other hand, completed about 41 per cent of its program. rive Year Plan
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possible worlds. On the one hand, it has pursued a very cautious and
orthodox monetary fiscal and balance of payments policy, has been quite
conservative in its own investment commitments, and on the other hand
it has done very little to encourage and foster private investment.
Behind Indian fiscal and monetary management there always seemed to lur.:
the shadow of a feared inflation. Actually, it is very questionable
whether an active and vigorous development policy, doesn't almost
tably bring with It a certain measure of inflationary pressure, n upward
pressure on prices of modest and gradual proportions need not necessarily
bring with it the usually cited maleffects inherent in runaway infla-
tion.
However, there are definite signs that Indian government policy
is gradually changing in this as well as in some other respects.,
Possibly were one viewing this period from a perspective of say 1960 or
1965, one might date development planning in India as beginning in the
fourth year of the first Plan and then merging into the second Plan.
These indications seem to point to a less orthodox fiscal and monetary
policy, combined with higher levels of government investment, and with
greater emphasis placed upon industrialization.
In the past, the Indian government's policy towards private
enterprise has been suite ambivalent. To some extent it is based on a
mixture of socialist and populist attitudes, combined with a certain
mistrust of the Indian entrepreneur, a fear of large concentrations of
private wealth and power, counterbalanced by a recognition of the
important managerial and technical contribution to be made by the
.: erttrepreneur1, Actually, however, it would be very difficult to establien
whether these government attitudes really play a major role in shaping
private management and investment decisions. It would seem that
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insufficiency of effective demand, the narrowness of the market, plays
a much more important role than government-enterprise relations. One
could go even further and maintain that in a rapidly expanding economy
the gains to be made by getting on the bandwagon would more than outweigh
the fears and suspicions of private entrepreneurs. In effect, I would
argue that the crux of the problem is more active government participa-
tion in the Indian economy, both as an investor and as a buyer. Such
a policy would not only stimulate growth in the public sector but would
also tend to contribute to a much more favorable vrivate investment
climate, therefore, it need not be incompatible with objectives of
democratic planning or of private entrepreneurial activity.
Of course, these are problems which the. Chinese Communist planners
need not face. They are, an the other ?.;:i;, confronted with difficulties
of an almost opposite kind. That is, the Chinese Communist economy is
permanently on the verge of inflation, which is however arrested through
a wide network of economic controls. This state of chronic repressed
inflation is of course a function of a number of factors. However, the
high rate of investment and military expenditure combined with a very
marked concentration upon investment in producer goads industries is
undoubtedly the most Important single factor contributing to an imbalance
between the flow of money income and the flow of goods and services
available for consumption. More generally, the economy and the whole
society is constantly driven to operate at the very limits of its
capacity. Programs are formulated in terms of maximum objectives, with an
attempt made to proceed on all fronts at once. In other words, it is an
economy and society which is permanently overextended in relation to its
stage of development and the human resources at its disposal. All of this
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is then reflected in chronic economic and social strain and in structural
bottlenecks.
0 nclusions
The foregoing analysis has been focused upon an appraisal of
agricultural and industrial performance in Tndia and China against the
backdrop of the economic development models implicitly or explicitly
formulated within the context of the two Five Year.Plans. It was shown
that the agricultural sector is assigned a very important role in India,
while in China development is identified with industrialization in the
narrow sense, with a major emphasis placed uoor the expansion of producer
mods Industries. These divergeiatFpatterns of planning have been
reinforced in practice by the vagaries of weather and a shortfall in
industrial investment in India, On the whole, the Indian Plan has been
a modest one, while Chinese Communist targets are very ambitious. This
should naturally facilitate plan fulfillment in India as compared to
China.
What impact do these trends have upon the aggregate rates of growth
in the two countries, and what are their implications for an assessment
of the economic race -- real or imagined -- between India and China?
In looking at the two countries, it is natural to focus on the most
dramatic, i.e. the rapid rate of industrial advance in China. It is
essential, however, to bear in mind that the moddtrn industrial sector is
suite small in both countries. It contributes less than 10 per cent to
national product, and possibly its relative size is smaller in China than
PYRGHT
? B
more rapid in China, this does not necessarily mean that in the short
run the economy as a whole Is growing more rapidly. Since we have as
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yet no firmly based measures of Communist Chinas GN? for successive
years, all statements in this realm are necessarily speculative.
However, in view of the marked agricultural expansion in India, it is
perfectly conceivable that the increase in India's GNP was greater than
that of China's during the past two years,
on the other hand, we may be confronted with an entirely different
outlook in the long run. Unless the present gap between the rates of
investment in the two countries is narrowed, the Chinese economy as a
whole is bound to grow much more rapidly than the Indian. Moreover,
in China the whole process of economic growth is intimately and consciously
linked to rapid and far-reaching changes in the social' structure, One
could say that the Chinese Communist regime is bent uuon systematically
undermining and bombarding traditional social institutions in order to
extend its controls and bring about changes in the society. It to a
orocesss in which the whole system is gradually changed through the
interaction of social, political and economic dynamism mutually reinfor-
cing each other? Thus the institutional barriers to economic growth are
Preatly diminished.
A system such as this, pursuing the types of-polities the Chinese
Communists are engasred in, in obviously faced with a number of ?roblemss
the most crucial in our context here involves agricultural development,
In a more or less closed economy, where rates of population growth are
high and increasing economic growth continuously focused upon industrial
development to the neglect of agricultural expansion will tend to strain
the economy to a point at which a major crisis may be in the making,
In India, this whole process of change is proceeding at a much
more leisurely pace. The comparatively low rate of saving and investment
is but one of its economic symptoms as well as one of its determinants,
auelf~rtleleen~8s981Qiled~`ldeR,~83d~Q2~(i1~S25Q(Mfied in its broadest
 CPYRGHT
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?-i4_
long-run perspective may perhaps be stated in form of a question; Are
current plans and governmental measures of a sufficient scope and mag-
nitude to impose the kind of all.pervading dynamism in the system which
is one of the prerequisites for sustained economic growth?
In a sense. one could view the Chinese Comr.-unist and Indian develop-
ment models as representing two extremes. The first involves such high
rates of aggregate and industrial investment that there is not too much
room left for agricultural development and for raising per-capita
standards of living, Moreover, such a pattern threatens to undermine
peasant and worker incentives and tends to subject the Tsystem to severe
structural strains. In the Indian case, the problem is almost reversed.
Rates of aggregate investment may be too low to insure a sustained rise
in per-capita product and consumption amidst rapid rates of population
growth. At the same time, industrial investment may be too low to permit
a rate of industrial expansion sufficient to provide an avenue for
relieving agricultural population pressure, the relief of which is an
essential prereouisite for the-very program of agricultural development.
Beyond this, one may legitimately question whether the aggregate
rate of growth as reflected in GNP is the sole or most relevant criterion
for comparing performance in two or more countries. Obviously, from the
standpoint of military and war waging potential, the rate of industrial
growth is of prime importance. From an economic welfare point of view
the rate of growth in per-canita personal consumption may be the most
meaningful criterion. In terms of political appeal, both, rising standards
of living and dramatic industrialization programs accompanied by an
aggressivenower posture may be competing with each other. Thus the out-
come of an India-China eomnarison may yield different results depending
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Paper read at Wash., D. C. meetings
for the Far Eastern Association on
March 30, 1955 by Alexander Eckstein,
entitled "Direction of Planning and
Development in India and China".
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