15. These are aspects of the problem of economic development which have to be constantly kept in view. Given these basic conditions of rapid and sustained progress, institutional as well as others, the key to higher productivity and expanding levels of income and employment

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lies really in stepping up the rate of capital formation. The level of production and the material well-being a community can attain depends, in the main, on the stock of capital at its disposal, i.e., on the amount of land per capita and of productive equipment in the shape of machinery, buildings, tools and implements, factories, locomotives, engines, irrigation facilities, power installations and communications. The larger the stock of capital, the greater tends to be the productivity of labour and therefore the volume of commodities and services that can be turned out with the same effort. The productivity of the economy depends on other things also, as for instance the technical efficiency and attitude to work of the labour that handles the available capital equipment. But the stock of capital reflects in a concrete form the technological knowledge that underlies the organised processes of production, and while other factors are important and essential a rapid increase in productivity is conditional upon additions to and improvements in the technological framework implicit in a high rate of capital formation.

16. The conditions in which economic development was achieved in the course of the last century have naturally differed from country to country, but a common feature of almost all of them is the high rate of capital formation which characterised periods of expansion. In times when the whole capital structure of a country is being transformed, the normal replacement of existing equipment becomes itself to some extent a means for introducing improvements in the technological framework of production, so that, in assessing rates of capital formation achieved, the resources set apart for this purpose must be also regarded as a material factor in determining the tempo of development. For Britain statistics on national income and investment are not available for the first half of the nineteenth century, which was perhaps the most significant period in its economic development, but the available data for 1870-1913 show that net investment in this period was on an average more than 10 per cent of the national income and in prosperous years as much as 15 per cent. In the United States, the rate of capital formation was higher over the years 1869-1913 net investment represented 13 to 16 per cent of the national product while gross investment ranged between 21 and 24 per cent. In Japan, new capital formation in the decade 1900-1909 is estimated to have averaged about 12 per cent of the national income ; this rate appears to have risen to 17 per cent in the following decade, though it declined again to 12 per cent. in the period 1920-1929. More recently, the U.S.S.R. furnishes an instance of a high rate of investment being achieved as a matter of deliberate State policy and action. The First Five Year Plan of the Soviet Union had a target of net investment amounting to "between a quarter and a third of the national income" ; the actual achievement was perhaps slightly lower. At any rate, though the Second Five Year Plan envisaged a somewhat lower ratio of capital formation to national income, it would appear on a fairly conservative estimate that the rate of net investment in the U.S.S.R. in the decade 1928-1938 was of the order of 20 per cent of the national income, if not more.

17. The data given above are not of a nature which would warrant any firm relationships being deduced between rates of investment and rates of development, nor can they be used for making comparisons as between countries or as between widely separated periods within the

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same country. Even conceptually, these relationships are very complex. It is virtually impossible to evaluate in quantitative terms the psychological and social forces which have played a part in shaping the pace and pattern of development under different circumstances. Nevertheless,, the available evidence, however scanty, may be used for judging broadly the scale of effort involved in relation to the results obtained. In the United Kingdom, a rate of net investment which fluctuated between 10 and 15 per cent of the national income went hand in hand with an increase of over 150 per cent in the national income between 1870 and 1913. In the United States, with a somewhat higher rate of investment, which was accompanied also by large scale immigration and settlement in virgin territory, national income increased nearly five-fold between 1869 and 1913 ; the increase in per capita income in this period is estimated at over 130 per cent In Japan, with the population growing at an average annual rate of about 1 1/4 per cent per capita income is estimated to have been doubled between 1878 and 1912; it was doubled again between 1913 and 1938. Varying estimates have been made of the achievements of the Soviet Union in terms of national income, but, taking again a conservative estimate, it would appear that with a rate of net investment of about one-fifth (or probably a little more) of the national income the increase in the national product in the period from 1928 to about 1940 was around 130 per cent.

18. These relationships are more suggestive than conclusive, but it is fairly obvious that a doubling of per capita incomes within a generation or so (that is in 25 to 30 years) required, in most of these countries, a rate of net investment of the order of 12-15 per cent of the national income. More rapid rates of development have required, apart from other things, still higher rates of investment as in the U.S.S.R. It would appear on the whole that, in under developed countries with low standards of living and rapidly increasing population, a rate of growth commensurate with needs cannot be achieved until the rate of capital formation comes up to around 20 per cent of the national income.

19. Very little information is available on the rate of investment and on the trends in national income in India in the last few decades. Rough estimates based on scattered data suggest that as in other underdeveloped countries, the resources devoted to net capital formation today probably amount to about 5 per cent of the national income. It is true that, where manpower is plentiful relatively to the land and other capital equipment available, develop- ment has to be based to a great extent, at least in the initial stages, on labour-intensive processes. Even so, without a big increase in the rate of investment and through it in productive capital, substantial and progressive improvement in the level of incomes and of living standards cannot be secured. India has considerable resources of water, minerals and power still to be harnessed or exploited. Large areas of the country remain undeveloped for lack of basic services like transport, communications, irrigation and power. The use of machinery is limited to narrow spheres of industry, and the bulk of the country's labour force works with tools and implements which add little to the productivity of labour and thus keep real incomes low. There is also shortage of buildings for residential purposes as well as for schools, hospitals, welfare centres, factories and the like. All these have therefore to be built up, side by side of course with the knowledge of how to use the capital equipment thus built up to the best advantage. It has

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been estimated that for a population growing at the rate of 1 1/4 per cent per annum, the rate of investment needed for maintaining per capita incomes constant is generally between 4 and 5 per cent of the national income. Such a generalisation cannot obviously be interpreted literally, but the nature of the relationship suggested may explain broadly the failure of the Indian economy in the last few decades to respond adequately to the needs of a growing population and of higher standards of living and employment.

20. A somewhat low rate of capital formation might have been adequate for countries like the U.K. and the U.S.A., in which modern industrialism took root early. The under developed countries which make a late start have to aim at comparable development within a briefer period. Japan and the U.S.S.R are instances in point. Some of the countries in South Eastern. Europe which are now planning for rapid development have also envisaged high rates of investment. In Hungary, 10 per cent of the national income was devoted to net investment in 1947, the first year of her planning, but this appears to have been stepped up to 18 per cent in 1949. In Poland, gross investment in the post-war period has ranged between 20 and 25 per cent. Outside this region and under more normal conditions, Norway is known to have attained a rate of net investment of 15 per cent and Finland a rate of 18 per cent even before the Second World War. The question therefore is not whether a high rate of investment could be aimed at or achieved by relatively under developed countries, but rather under what conditions and in what stages it could be attained.

21. Investment implies applying productive resources to the building up of capital equipment. These resources could come either from utilisation of resources hitherto unutilised or by way of diversion from the production of consumer goods. An underdeveloped country has a certain advantage in that it has large resources of unutilised or underutilised manpower. By utilising these, capital formation can be stepped up without drawing away to any larger extent resources employed in the production of consumer goods. Idle manpower thus constitutes a large investment potential. But it must be recognised that, in the initial stages of development, the scope for directly utilising such manpower tends to be somewhat limited. For one thing, the unutilised labour available for productive work is often also unskilled labour, which would have to be trained before it could be recruited for the new works to be undertaken. Some of the problems involved in direct investment of under employed manpower, could be overcome by efficient Organisation. Still, in practice, mobilisation of idle manpower on a large scale cannot but result in the generation of considerable money incomes in advance of a corresponding increase in output. This is likely to create inflationry pressures which might be felt strongly at particular points in the system, impinging more heavily on the real income of some sections of the population than on others. A measure of privation to Start with and austerity for a fairly long period are thus unavoidable under conditions of rapid development even in countries with vast unutilised resources. The strain of development on the economy might be felt in a variety of ways : scarcities, high prices, disparate movements of incomes of different classes, bottlenecks in production, strain on transport, etc. To some extent, this strain can be moderated through appropriate measures of policy, but the fact of strain on, the economy will remain. In determining the tempo of

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development, which, as has been indicated above, would mean raising the rate of investment from about 5 per cent of the national income to a level of something like 20 per cent, a view has therefore to be taken as to the pace, at which the required organisational and institutional changes can be made without engendering too much economic and social instability.

22. The level of saving is to a great extent dependent on the level of national income the higher the national income the higher normally should be the proportion saved. However, this is not always true. In the United States, considering the rate of increase in income per capita and the high level of this income even to begin with, the rate of net saving achieved in the period 1870 to 1913, viz., 12 to 15 per cent, was relatively low. On the other hand, Japan with a lower level of incomes was able to attain a remarkably high rate of investment out of its own savings. The proportion of national income that is saved and made available for investment depends upon psychological and institutional factors. Social customs and habits, the distribution of incomes, the rates at which incomes of different classes go up and the efficacy of banking and other institutions for mobilising savings-all these-play a part in determining the rates of saving attained. The high rate reached in Japan has been explained by the fact that "the Japanese capitalists spend very little on personal consumption, that the rural population and urban working proprietors are exceptionally thrifty and, indeed, the wage earners themselves save a substantial proportion of their incomes". There is also a further factor which may be noticed here. Between 1878 and 1940 the price level in Japan rose by about 400 per cent while, in the United States in the corresponding period, the increase was less than 100 per cent. Rising prices tend to enforce rates of savings which would not otherwise be possible. This factor has probably played a not insignificant part in the U.S.S.R. also where it is clear that prices of consumer goods went up sharply in the decade 1928-1938.

23. The programme of investment that can be undertaken at any particular time depends primarily on two factors : the rate of saving in the community, and the volume of unutilised human and material resources which can be used for direct investment. In the earlier stages of development, as already mentioned, though the unutilised resources would be considerable the cope for using them for stepping up the rate of capital formation might be restricted by either lack of technical skill or shortages of specific commodities and services. In this period, therefore, the reliance on savings has to be correspondingly greater. As capital formation gets under way and the basic framework of services like transport, communications, irrigation and power is built up, the scope for utilising underemployed resources will expand rapidly. The problem is to get the right start. Once this is secured and fresh capital formation started on a significant scale, it increases the ability to undertake further complementary investments, thus creating also new opportunities for employment. Further investments then get the benefit of `external economies' which lower costs and increase the profitability of stiff further expansion. It is thus that the vicious circle of low output, low savings and low investment is broken and the economy started on an upward course.

24. In the initial stage-which is the critical period in development-there are clearly two alternatives open. One is to impose on the community a high rate of saving through taxation, loans, price inflation, or by any other means and to utilise the resources thus made available for

THE PROBLEM OF DEVELOPMENT

a sharp increase in the rate of capital formation. This has certainly its merits, as., in this way, not only would development be rapid but there would be immediately a large increase in employment. But, this increase in employment will not lead to a corresponding increase in spendable incomes ; the community as a whole will have every little more to consume than before and there would be set up severe inflationary pressures. This is the price for more rapid development later. The other alternative is to step up the rate of capital formation more gradually, but this would mean that progress would be correspondingly less rapid. Since the objective of planning is, in fact, to promote rapid development, the problem is one of stepping up the rate of investment by defined stages, so as to minimise the hardships in the initial period, but taking are at me same time that the community does put forth within a relatively brief period the big effort needed.

25. On this analysis, the question is in what manner and how quickly the rate of capita formation in India can be stepped up, consistently with other objectives, from about 5 per cent of the national income to, say, about 20 per cent. The answer depends upon the rate at which the national income increases as development proceeds and the proportions of this increase which can, so to say, be ploughed back into investment. The larger the proportion of the increments to national income that can thus be ploughed back into investment, the greater is the pace at which development can be accelerated. The principle is, in essence, simple. If, for instance, a community starting with a 5 per cent rate of saving increases its total output by, say 10 per cent, and if in the following period capital formation is stepped up by an amount equal to half the additional output, the rate of saving would almost get doubled in the process. If it is not desired to secure a high rate of capital formation right at the start at a cost of excessive privation which a reduction in the initial levels of consumption would entail, the goal of policy must be to ensure that a high proportion of the additional incomes that accrue as a result of development is saved and invested. This will, no doubt, mean that the rate at which the initial levels of consumption can be allowed to go up will rise only slowly, but the pressure on consumption standards will at least be no worse than before and it might well become possible to permit moderate improvements. In other words, such a programme for stepping up capital formation calls for sustained austerity rather than any excessive degree of privation and suffering.

26. It is necessary to visualise the problem of development over a period of twenty-five or thirty years and to view the immediate five year period in this broader context. In formulating a plan of development for a particular period, an estimate of what is feasible must, no doubt, carry more weight than abstract reasoning as to a desirable rate of growth. But, there is clearly need for looking beyond immediate possibilities and for taking a view of the problem even from the beginning in terms of continuing and over-all requirements, and for preparing the ground in advance. Precisely for the reason that the development of a country is a somewhat long-term process, the institutional and other factors which affect it can be changed to the desired extent and in the desired direction through conscious effort. Moreover, a programme of development even for the short period would fail to have direction and perspective unless it is in some way linked to certain long-term targets and objectives relating to the kind of economy and social framework which it is proposed to evolve. In other words, while it is

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important to preserve throughout a pragmatic and non-doctrinaire approach, and also to bear in mind the limitations involved in any calculation of long-term development possibilities, it is of the essence of planning that it must have a wider time-horizon than immediate requirements and circumstances might seem to indicate.

27. In estimating possible rates of development in India, what they would involve in terms of effort required and what they would achieve, there are two or three major factors to be taken into account. We have already referred to the central role of capital accumulation in economic development, and how it can be stepped up by, so to say, ploughing back additions to national income. The proportion of the addition to the national income in each period which it is decided to plough back is thus one of the major determinants of the rate of development. But this proportion cannot itself be fixed in a given situation without reference to two other factors. These are (a) the rate of growth of population, and (b) the increase in national output and income likely to follow a given increase in the capital stock.