Nehru was a hostage to the development economics consensus of his times, both in terms of its insights as well as its policy flaws
Jawaharlal Nehru was an economic modernist. He believed that rapid industrialisation was the most effective way to win the battle against mass poverty. This was in stark contrast with the medieval Gandhian economic vision centred on household production.
Nehru, who died 50 years ago this month, was just one among several important nationalist leaders who were enthusiastic about modern industry. B.R. Ambedkar had argued in one of his earliest articles that the solution to surplus labour in agriculture was in the growth of modern industry. M. Visvesvaraya created a national plan in 1934 that aimed to double national income in a decade, led by a massive increase in industrial investment. Subhas Chandra Bose was Congress president in 1938 when he set up a National Planning Committee to examine how India could industrialise rapidly once it got political independence. V.D. Savarkar told Indians to embrace the age of the machine. All these leaders believed that the state should take the lead in the push towards industrialisation.
It was left to Nehru to actually put much of this into practice after he became the first prime minister of independent India. Economic modernization was an essential part of his overall vision of an India that could hold its own in the world after centuries of foreign domination. In his The Idea of India, a classic study of Nehruvian India published in 1997, the political scientist Sunil Khilnani wrote: “Discussions on national progress were now being formulated in the technical vocabulary of economics...Nehru’s intention had been to subordinate the civil servants to the superior rationality of economists and scientists." Nehru also invited some of the greatest economists from around the world to participate in the formulation of the landmark Second Five-Year Plan that was launched in 1956.
The statistician P.C. Mahalanobis built on a model developed by Russian economist G.A. Feldman to provide a theoretical core to the Second Five-Year Plan. An early discussion of the technical details underlying the Indian plans is available in a survey by economists Jagdish Bhagwati and Sukhamoy Chakravarty in the September 1969 issue of the American Economic Review. A clear analysis of the economics of Nehruvian planning was written in 1997 by Ajit Karnik of Mumbai University, who taught me growth models at university.
The theoretical debates about Indian planning models are numbing. Here, I try to focus on four broad principles in the Nehruvian economic strategy to show how Nehru was a hostage to the development economics consensus of his times, both in terms of its insights as well as its policy flaws.
First, the development economists of the day said that the basic challenge for a poor country such as India was to increase its stock of productive capital as well as absorb modern technology. This was in line with what many other nationalist leaders believed in the decades preceding independence. The Estonian development economist Ragnar Nurkse had put capital accumulation at the very centre of his 1953 book, Problems of Capital Formation in Underdeveloped Countries. A.K. Dasgupta, a renowned scholar who taught Amartya Sen, also argued that the primary challenge was capital accumulation, drawing inspiration from classical rather than Keynesian economics.
Second, the speed at which capital could be accumulated depended on the domestic savings rate. The West Indian Nobel laureate W. Arthur Lewis had succinctly presented the problem in terms of how a poor country can raise its voluntary savings rate from 5% to 20% of national income. In short, the main focus of the development strategy was on increasing savings to create resources for asset creation. The Harrod-Domar model that was popular at the time also sought to explain economic growth in terms of the savings rate and the productivity of capital. It is interesting that you will struggle to find subsidies or entitlements in the Nehruvian plans to lift India out of poverty.
Third, the government was to take the lead in industrialisation. This was very much part of the development consensus of those years. The early success of the Soviet experiment had, unfortunately, enchanted many intellectuals. But there was a deeper historical learning as well. The Russian economic historian Alexander Gerschenkron had argued in his theory of economic backwardness that countries that had not yet industrialised did not have to wait for the right conditions to appear. Gerschenkron had studied the development experience of Europe in great detail. He said that institutional innovation was the way forward for those who were late into the game: Germany had used investment banks to push its initial industrialisation, while Russia had used the state (he was referring to imperial Russia before the communists took over).
The Nehruvian plans had a similar logic of using the state as an entrepreneur as well as providing capital to private industry through special development banks in the absence of deep financial markets. This is the famous quest of controlling the commanding heights of the economy. A more technically correct explanation would be that Nehru wanted the state to dominate the production of capital goods and intermediate goods so that the Indian economy has enough strategic depth to withstand any future attacks on its political autonomy. It is a theme that still resonates in some parts of the Indian policy establishment that worries about the growing role of Chinese equipment suppliers in Indian power and telecom sectors. But it was eventually the shortage of food in the late 1960s that forced India to compromise on its foreign policy in return for wheat shipments.
Fourth, there was a deep suspicion of foreign trade. Some scholars believe that this was the reaction of a country that had initially been colonised by a trading company, while others argue it was a more practical response to the declining terms of trade for underdeveloped countries thanks to falling commodity prices after the end of the Korean War. Much of this export pessimism was based on the work of two economists: the Argentine Raul Prebisch and the Briton Hans Singer. There was no export strategy in the Nehruvian plans—a flaw pointed out in 1963 by a young economist named Manmohan Singh. The main focus was on import substitution: make at home rather than buy abroad. This not only meant that India failed to take advantage of an expanding world economy, but also that it remained dependent on foreign aid to fund its essential imports. The decision to go into a cocoon was perhaps the biggest economic flaw of the Nehru years.
The Nehruvian economic development strategy had its critics as well. The unsung prophet B.R. Shenoy—who was a student of the libertarian economist F.A. Hayek—wrote a famous dissent note in the memorandum of the panel of economists advising on the second plan. Shenoy made two very significant points: the dependence on deficit financing would be inflationary and the growing role of the government could eventually undermine democracy. Shenoy also more or less predicted the balance of payments crisis that hit India in 1957.
The Mumbai economists C.N. Vakil and P.R. Brahmananda (the latter was also my teacher) also warned that ignoring the production of what they called wage goods—essentially food and textiles—would lead to inflation as money incomes went up. Their model also took monetary expansion into account, unlike the government plans. Meghnad Desai said in an interview a few years ago that India would have been better off if it had taken the Mumbai critique more seriously. The British free market economist P.T. Bauer was worried about the dependence on bureaucrats rather than the market to set prices; in fact he brilliantly described many such national development plans as being “priceless"—a fatal flaw in economics.
To be fair to them, the planners had also accepted the fact that there was an inflationary bias to their plans, as higher production of capital goods would create money incomes while there would be a shortage of consumer goods to satisfy the new demand; and it was assumed that the Reserve Bank of India would passively fund the budget deficits by creating new money.
Was the Nehruvian economic strategy a success? It was in the initial years. The Indian economy had essentially been stagnant in the five decades before India became a sovereign republic. The economy grew at an average rate of 4.09% between fiscal years 1952 and 1965. The growth crisis came later.
It was the first economic boom that India had seen in nearly a century. Industrial output grew much faster than the overall economy, the first step towards a growing role for industry in the India economy since deindustrialisation began in the late Mughal period. The government also managed to run a tight ship. Fiscal deficits were low. A look at the financing pattern of the Second Five-Year Plan shows that Nehru’s economists had assumed that at least part of the ambitious investment programme would be financed by revenue surpluses as well as profits from the railways.
The longer-term report card is far less impressive, as is now well known. The Nehruvian economic model had already run out of steam by the time of his death. India was left with an inefficient industrial structure, too much government regulation of its economy, an inability to compete in the global market and inadequate supply of consumer goods. It also put India at the mercy of foreign aid givers—ironical because Nehru believed a strong economy was essential to protect Indian political autonomy.
Many other Asian countries switched their economic development strategy after 1965. India failed to do so. It became a laggard. Nehru was too impressed by the ability of governments to manage complex economies. He failed to see that the enlightened bureaucracy he hoped for would end up as the corrupt inspectors of the licence-permit raj that C. Rajagopalachari and Minoo Masani of the Swatantra Party had presciently warned against very early in the planning era.
Nehruvian planning failed to meet its grand hope despite an encouraging start. But important parts of the vision are still relevant in India today: the central role given to economic growth in the battle against mass poverty, a relentless focus on capital accumulation, a higher savings rate to fund asset creation, strategic depth to the industrial structure and fiscal conservatism. All this is a far cry from what recent profligate governments that claim to follow Nehru have done.
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