Opinion | The relevance of an old debate to the economic scenario today

Economics is a discipline without a good sense of its own history. This is unfortunate because the past can often illuminate the present, especially in times of trouble. For example, it was only when the inadequacy of the dominant view became evident after 2008 that economists began to reach for the wisdom of older masters such as John Maynard Keynes, Michal Kalecki, Irving Fisher and Hyman Minsky. The selective amnesia is one reason why this column tends to wander off into history every now and then.

This year marks the 40th anniversary of a paper by Sukhamoy Chakravarty that should resonate in current debates about the Indian economy. Chakravarty was, by all accounts, one of the most brilliant minds of his era, who straddled the worlds of theory and practice. His theoretical work on how much a country should optimally save was as important as his modelling for the Fifth Five-Year Plan. As Paul Samuelson wrote in the foreword to one of the most celebrated books by Chakravarty, on development planning: “What makes for a beautiful problem in science? It may be logical beauty: proof that the set of prime numbers cannot be finite... is as aesthetically neat in our times as it was in Euclid’s. But a problem takes on extra lustre if, in addition to its logical elegance, it provides useful knowledge. By the above test, we must judge Professor Chakravarty’s book to be fascinating.”

Forty years ago, Chakravarty wrote a paper titled On The Question Of Home Market And The Prospects of Indian Growth. Several of its insights connect to the current debates on the Indian economic slowdown, and especially whether the loss of momentum is because of supply rigidities or aggregate demand weakness.

The original Nehruvian growth strategy was to focus on the supply side of the economy. The early plans argued that India needed rapid economic growth to roll back the scourge of mass poverty. To do that, it had to ease constraints on the supply side—a domestic savings constraint, a foreign exchange constraint, a food constraint, and an energy constraint.

India had initial success, but economic growth slowed down after 1965. Part of the reason was a problem inherent in an investment strategy directed by the state. The Indian government had decided to focus on building heavy industry first to give the country strategic depth as well as to produce machines that would eventually help increase the output of consumer goods. There was also bad luck. The Indian economy was also hit by a series of exogenous shocks—three wars, four droughts and two oil shocks between 1962 and 1980.

Chakravarty asked in his 1979 paper why Indian industrial growth had stalled even after many of the major supply side constraints had eased. His core argument was that despite easing supply constraints, demand for industrial growth was being held back by a narrowing home market. Three of his specific points are especially relevant to the contemporary debate.

First, Chakravarty argued that the Green Revolution had benefited only a certain class of farmers rather than the entire rural population. The rise in rural inequality had restricted demand for basic consumer goods produced by Indian industry.

Second, he pointed out that the internal terms of trade had moved against agriculture and in favour of industry. This was explained by political strategy rather than by the prevailing trend in the marginal cost of production.

Third, whatever economic growth was taking place was not creating enough employment. Chakravarty argued that one solution was for public investment to be more employment intensive.

Many of these themes echo in our current debates. Rathin Roy of the National Institute of Public Finance and Policy has perceptively argued that India faces a contemporary version of the home market problem, as the entire economic structure has focused on the consumption needs of the top deck of the population, thus narrowing the domestic market rather than growing it. He has cited the Chakravarty paper in some of his recent writing.

The home market problem was not the only response from economists to the industrial stagnation after 1965. The trio of Jagdish Bhagwati, T.N. Srinivasan, and Padma Desai persuasively showed that the problem had its roots in the strategy of import-substituting industrialization under the infamous Licence Raj. Isher Judge Ahluwalia backed this argument in her detailed work in the 1980s on industrial stagnation. It is interesting that Chakravarty did not pay enough attention in his paper to foreign markets as a solution to the narrowness of the home market, or exports, though he did not dismiss that option either.

There is a parallel debate raging in India right now. The home market question may get a new resonance in our era of growing protectionism, though the Indian economy is now structurally very different. As Chakravarty wrote in 1979: “Structurally speaking, the factors that tend to produce ‘demand deficiency’ in relative terms have a lot to do with growing rigidity in the structure of prices throughout the economy…, insufficient generation of employment opportunities, absence of bargaining power on the part of the rural poor, and the myopic character to private investment.”

Niranjan Rajadhyaksha is a member of the academic board of the Meghnad Desai Academy of Economics