The economics of Jawaharlal Nehru

Niranjan Rajadhyaksha in mint has this piece on economic thinking and its critics at the time. It is quite a short summary of history of the time and times to come

Nehru was essentially a economic modernist, who believed in industrialisation for poverty elimination. 5-years plans was formulated at the time. Inspite of being highly impressed by the growth in Russia in 30’s and 40’s he regarded socialism rather than communism to be soul of new India.  Niranjan put forward the contributors and critics of the time.

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 Nurksehad 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 Prebischand 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 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.



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s