Rethinking India’s Economic History
In spite of nationalistic sentiments defining the mood of the nation at present, we see increasing calls for privatisation of state-owned banks, and other public-sector companies for reasons ranging from debt-laden finances to operational inefficiencies. Increasing number of op-eds and articles have been penned over the last decade lashing out against and deriding the post-independence and pre-liberalisation economic policies and the politicians who orchestrated those policies, namely Jawaharlal Nehru and Indira Gandhi. And by doing so they pose the question of whether India would have been better off had it not been entrapped in the quagmire of socialism which defined our country for about three decades, and instead enjoyed the prosperity commensurate with deregulation and free markets.
Yet the laissez faire proponents often commit the mistake of raking up and analysing different aspects of Indian economic history in isolation. They overlook the fact that free markets work efficiently if and only if there exist independent and stable political institutions in the country and the state enjoys a consolidated infrastructure which can be measured on several parameters. Any layman would concede that India did not enjoy a robust and sound infrastructure or stable political institutions post-Independence. Hence, it was imperative on the part of Jawaharlal Nehru to recognise the fragility of the Indian economy, and initiate certain consolidative measures which took the form of what came to be known as the ‘Nehruvian brand of socialism’.
In this piece, I do not intend to defend the economic policies of the Nehru-led Congress government, or suggest their reinstatement, since that would be nothing short of blasphemous at this juncture and it would be tantamount to relinquishing the benefits attached to free markets, that we have come to enjoy.
Instead what I wish to establish is that Nehru was justified in concluding that the state had to play a consolidative role and he attempted to do this through the Planning Commission and the consequent Five-year plans, an economic model that was borrowed from the USSR.
According to his critiques the biggest plunder on Nehru’s part was probably getting entrenched in the Mahalanobis Model, the industrialization strategy articulated by Professor Prasanta Chandra Mahalanobis, which placed emphasis on the development of basic and heavy industries or the machine making sector as a driver of economic growth in a situation where the economy’s export prospects were bleak, and thereby ignoring the agricultural sector entirely. The rationale behind this strategy was simple: the success of an economy which is primarily constituted of interdependent sectors is ultimately limited by the malaise of the bottleneck sector. The bottleneck sector had been identified as the basic and heavy industry sector. Hence, according to the proponents of the model, raising the growth of the economy as a whole required initially directing a chunk of the nation’s resources towards the removal of this bottleneck. There is a peculiar theorem in Economics known as the ‘Turnpike Theorem’, which established that the highest rate of growth of a bundle of goods in a closed economy is achieved in the long run by concentrating resources, to initially start with, on the bottleneck sector. The Nehru-Mahalanobis model, as pointed out by other eminent economists, is a unique case of the ‘Turnpike Strategy’. Agriculture and related activities at that time accounted for around half of the gross domestic product (GDP) and modern industry in the form of factory establishments accounted for just above 6 per cent. Thus, colonial rule had eroded the industrial foundation of India, and merely restricted it to an agrarian economy which exported raw materials to the British, and imported the finished goods, albeit at a premium. Hence the Nehru Government found it important to exorcise the balance of payment conundrum which had been created, by way of upholding the apostle of self-reliance.
At the onset, the strategy seemed to flourish and accrued the benefits that were envisaged. The years after 1951, and especially after 1956, did see large and rapidly rising investments in industry and infrastructure. But, it is clear, in hindsight, that the process lost momentum rather early. The share of manufacturing in GDP did rise from around 9 per cent in 1950–51 to 16 per cent in 1961. But it did not cross the 18 per cent mark for a little more than a decade after that, and touched 20 per cent at its peak only in 1996. This was well short of what had been achieved in many other comparable economies. In 1971, the share of manufacturing in GDP stood at 29 per cent in Brazil and 35 per cent in China. In 1996, the figure was 27 per cent in Korea, 28 per cent in Malaysia and 26 per cent in Thailand. The contribution of manufacturing to employment in India was, as expected, even more dismal.
The two plausible reasons one could assign to explain the tepid growth of the manufacturing industry would include, the failure to grow the mass market for manufactures through appropriate measures and especially through the implementation of land reforms that would have raised the incomes of the majority agriculture-dependent population. The other was the fiscal crunch of the state which impeded its efforts needed to drive and facilitate the process of industrialisation.
The expansion of domestic demand for the still-nascent factory sector came to depend on government expenditures. But the inability of the state to raise the resources needed to finance these expenditures through taxation, and the limits to other forms of potentially inflationary financing, like indirect taxation and borrowing, meant that growth of the manufacturing industry remained at a disappointing pace.
Professors Vakil and Brahmanand of Bombay University, one of the most vocal dissenters of the Nehru-Mahalanobis strategy, criticised this policy on the grounds that it ignored the production of wage goods, being those consumed by the workers who were majority of the nation. Although most economists were unanimously in favour of India’s self-reliance strategy, they opined that the agriculture sector was the real bottleneck, and not the machine making sector. Hence, on account of the misplaced strategy, food grain prices increased, which prevented an increase in the consumption of food grains and consequently perpetuated poverty.
Against the criticism levelled against the model, Nehru and Mahalonobis reasoned that by focusing on industrialisation, they didn’t intend to ignore the agricultural sector. Instead they sought to increase its output by other means, notably through the increase in the effectiveness of investment, i.e. through an increase in the output-capital ratio. Moreover, they argued that to increase the productivity in agriculture, the nation required more irrigation canals, better storage facilities, etc. Provision of which hinged on the supply of steel and other industrial inputs by the basic and heavy industries.
However, what was lacking and emerges to be one of the most pertinent issues is that the strategy lacked land reform, which is the most potent way of ensuring increasing investment and productivity of the agricultural sector. And this fallacy continues to haunt the Indian economy as approximately 60% of the agrarian population contribute merely 10% to the national income.
Yet, it would be wrong on our part to blame socialism for India’s inability to grow at a rate which was at par with the world, if not the global leaders such as South Korea and Taiwan. Nations have done wonders under the socialist model and the foremost case in point would be the French dirigisme which was established after the Second World War which resulted in unprecedented economic and demographic growth, leading to the coinage of the term Trente Glorieuses (“Thirty Glorious years”). And had India not been struggling under the socialist framework during Indira Gandhi’s first term, she wouldn’t have been forced to reform the very policies that the Congress previously staunchly stood for.
I do not intend to harp on the malaise that defined the post-independence and pre-liberalisation era, since that has been extensively analysed and spoken about in the press. Instead what I wish to establish that just like a young bird that has just fledged isn’t set free by its mother to fend for itself, the Indian economy post Independence can be thought of as a fledgling economy which couldn’t have possibly been thrown open to the world and expected it to work in complete sync.
I wish to crystallise my argument with the help of the case of the Bolivian government, which was forced to privatise water supply in several cities in the late 1990s. Coming out of a long era of military dictatorships — a situation ripe for political instability — Bolivia borrowed heavily from the World Bank in order to prevent a complete economic collapse. In 1997, the World Bank refused to renew $600 million USD of debt relief to Bolivia unless the country agreed to privatise water. World Bank decision-makers reasoned that putting water in the private sector would help to broadly stimulate the Bolivian economy.
In 1999, massive protests erupted throughout the city as water prices soared and supply dropped sharply. Access to piped water in Cochabamba dropped from 70% to 60%. Amid escalating and increasingly violent protests, the government finally decided to roll back the privatisation policy.
The costs of early privatization could have been similar in a newly independent India. Emerging from a colonial economy in which indigenous industries were systematically dismantled to bolster the importation of British goods, the fledgling India simply lacked the industrial and human capital to sustain a well-functioning market economy.
In retrospect, the fact that the banking and finance sector which was among the first to opened up is struggling with the NPA problem, which is a clear reminder of the perils of unregulated liberalisation. Nehru’s vision incorporated a strong state which would help develop a foundation on which a market economy could later flourish. To fault the Nehruvian strategy on account of it not adopting an ‘outward looking strategy’ holds little merit. And with regard to the argument that the ‘liberalisation’ era unleased far impressive growth rates than in the Nehru Era, it is not accident that the per capita food grain availability which had climbed up to 180 kilograms at the end of the 1980’s is now reeling at around 160 kilograms, which is considerably lower than it was at the time of Nehru’s death. Moreover, it is important to note that countries which had supposedly forged ahead of India, on account of an ‘outward looking economic strategy’ are facing acute economic difficulties, a case in point being the Japanese economy. Yet this inflection point wherein the curvature of India’s graph should have changed from that of a regulated to an unregulated economy should have come before the 1980s, especially since there was a leadership vacuum that existed for almost a decade-and a half after Nehru’s death which lead to severe economic instability.
