In these times, socialism has become a more redundant concept. There have been nationalistic calls to undo the wrongs of the past- which are perceived to be the cause behind the ‘lackadaisical’ economic growth. The realization of neo-liberal economic policies is being celebrated with grandeur. India’s Aramco movement might arrive sometime soon with the listing of state-owned LIC. India would finally get rid of the inefficiencies that have plagued the state-owned banks after their privatization. The liberalized economic framework would indeed quell the hindrances and unleash the magnanimous economic growth we had aspired for. Had India not been strangled in the socialist quagmire, we would have been much better off!
We can often find these verses in our public discourse reflecting disdain for post-independence and pre-liberalization economic policies. A fair share of this anger is particularly directed towards the Nehruvian socialist model. It is here, we really miss the plot. Time series analysis is one of the most important components of econometric analysis. However, we often analyze economic policies in different eras without taking into account the factors that shaped policies. The evaluation by different metrics which have not been adjusted according to the different circumstances in different eras would lead to a wrong outcome. In the course of the article, I’ll be trying to point out why there was really no feasible and tangible alternative to the Nehruvian socialistic model at that point in time. In no way, we can choose to ignore the immense benefits of the laissez-faire economy. Still, we very easily net out the importance of stable political machinery in economic growth. We don’t realize how political rights are interspersed with economic ones and without the latter, the former has no meaning. The socialist model might not have been sufficient enough to accelerate growth rapidly but without an iota of doubt, it was necessary for the Indian nation to become self-reliant. It was the mixed economic model tilting towards state control, that became necessary at the time of Independence.
Questions have been put on the efficiency of state-owned companies and to a fair extent, they are justified. In recent years, there has been a growing tendency to discredit the socialistic economic labyrinth for economic lapses. India would have been much better off if it did not find itself entrapped in the socialist mire. Critics point out the overwhelming role of the state in policy-making proved detrimental for the prospects of free markets. They have pointed out how early years of lacklustre growth would be a lag on the country’s high economic growths in recent decades. Hardly, they realize the impact of independent and credible institutions that would propel economic growth. Nehruvian economic policies played a significant role in ‘Recovery of India’- of a country that had been squeezed of resources by the avaricious colonial policies, a country that had to bear the brunt of the division of resources by the hands of partition, a nation impoverished to a large extent. However, economic deprivation wasn’t the only challenge, newly independent India faced- rehabilitation after the world’s largest exodus, integration of more than 500 princely states into Indian union and more importantly establishment of stable democracy. All the macroeconomic indicators pointed out the abysmal state of development. The average life expectancy of below 30 years, towering illiteracy rates, abysmally low per capita incomes, high infant mortality rate prevented the growth of human capital. The below 1 per cent growth rates of GDP, agricultural productivity, industrial growth was the malaise left behind by the long colonial rule. Adding to the woes, Indian agriculture had suffered a lot at the hands of the colonial power. Grave inequality stemmed through the agricultural system that had perpetuated a land-owning class that enjoyed political power. Colonial policies had made India a net exporter of raw material and cash crops and an importer of finished products. These policies had led to a fatal blow to indigenous industries. The state had really no option left other than to lend a helping hand to the disenfranchised in the country. All the infrastructural establishments at the time of Independence were designed to suit the colonial needs. Experts at that point would have expected India to land off in the notorious basket case with an unstable political system. But post-Independent India spectacularly turned around all the speculations. Not only this, the strong economic foundations and the liberal democracy would help India gain position amongst major emerging economies in the 21st century. Much of the credit goes to the post-independent socialist policies. The socialistic policies of Congress were crystallized in the Karachi Resolution. Nehru had decided to implement the Soviet-style of planning to be driven by Five-Years Plans. The world had witnessed the Great Depression of the 1930s which pointed out how the absence of the state in the market could be detrimental. The Indian model of socialism derived its legitimacy from the non-violent freedom struggle and democratic idealization. Thus, the abolition of the Zamindari system was by far peaceful and led to a significant change in political matrix.
Critics have directed towards the intensive industrialization plan. The foundation of the industrial base never took place during the British period. Nehru and PC Mahalanobis- the chief architect of the 2nd five-year plan focused on the development of heavy basic industries that would propel economic growth. Capital goods are basically those complex machines and equipment that help in further production of goods and services-electricity, iron & steel etc. Let’s not forget, Indian industry was feeble at that stage, it needed protection, it needed support to compete against the predator firms. The Mahalanobis plan emphasized that massive and disproportionate investment in capital goods in a closed economy would propel the growth in the consumer goods industry thus helping the middle class raise its income. Empirical evidence concurs that import of capital equipment fell from 90% to 43% in 1960 and subsequently below double-digits in the 1970s. The rate of return in investment would have been higher in the capital goods industry. The consumer goods industry did increase by 70%. The first five-year plans were instrumental in bringing about an industrial growth rate of 7%. The contribution to GDP from manufacturing increased from 9% to 16% after the first two Five Year Plans. SAIL, BHEL, HMT had way back created an aspirational middle class that would spend heavily in turn creating more demand. Prof. Mahalanobis argued that the remedy to malice of massive unemployment was the capital good industry that would aid in equilibrium reaching around that full employment level. The creation of an organized workforce with efficient purchasing parity could have been attributed to these five-year plans.
The scientific temper Nehru pursued was channelized to the Indian public. Technological prowess remains firmly etched in the Nehruvian socialism economic model. Technological role in economic development has been empirically proven by Kuznets, Solow, Cobb and Douglas. The multi-purpose hydroelectricity projects, which he called the temples of modern India proved to be beneficial in the long-term. Bhakra Nangal Dam, Hirakud Dam, Nagarjuna Sagar Project and Damodar Valley Corporation all exemplified the tenacious modern Indian spirit to transform rapidly. India had to present a picture of herself away from the grim past of famines and starvation. Nehru focused on establishment of a wide range of technical institutes like Defense Research & Development Organization, Bhabha Atomic Research Centre, Indian Space and Research Organization, Indian Council of Medical Research etc. Technological development was laying groundwork for the upcoming Green Revolution. The White Revolution or AMUL reflected the emergence of aspirational rural India driven by technology. Nehru did not believe even in the Gandhian economic model that was aimed to create employment opportunities in villages itself. Nehru strived for scientific excellence and today, we can see the immense value of these imminent scientific institutions. It would have been so risky and visionary to think about the Space Program at a time, when indicators pointed towards the impoverished state of the nation. Yet, today we bask in the glory of our glorious space program.
The External Sector and Economic Diplomacy
It would be totally correct of critics to point out that the import substitution would have left the Indian consumers bereft of the advantages of a competitive market. Developing countries often relish the concessional international trade. The 2nd Five Year Plan prioritized investment in the domestic capital good industry over incomes from exports. The times in which India got independence were difficult. The world had been polarized into two camps. The opportunity cost of an unregulated competitive market was the self-reliance of a nation that had been clutched by colonial powers for two centuries. The economic policies were in total sync with the Non-Aligned Movement. Had India not opted for building its capital good industry, it would never have broken the shackles of foreign dependence. In Nehru’s years, foreign aid from both East and West paved the way for development in critical sectors. Much before the lucrative investment summits, technology transfer was the real deal. The steel plants in Bokaro and Bhilai stand testament to Indo-Soviet’s flourishing relationships. The Durgapur Steel Plant was established with the help of the UK. The import substitution strategy ensured no foreign power would dictate terms to India. Foreign assistance was required but at the same time curtailed to such an extent that development won’t suffer. Massive foreign role would have imperiled India’s sovereignty. Development of the capital goods industry led to the building of a self-reliant India in the truest sense.
Table 1: The trend growth rate of GDP (1948-49 prices). Data are annual average compound growth rates Source: Sivasubramanian (2005)
These figures actually show that the Nehruvian period was as good as if not better off than the later periods of economic growth.
If we look at the GDP growth rates of India, China and South Korea (miracle economy), India had by far maintained a GDP growth rate of around 5%. We shouldn’t ignore that the political systems of China & South Korea were totally in contrast to India’s.
This line graph picks up the trend of per capita income till 2000 of the three countries: India, China and South Korea. Surprisingly, till the 1970s, the three countries had nearly the same per capita income. South Korea went through rapid reforms then, and India & China had nearly the same per capita incomes till the 90s. We can conclude that big bang reforms should have taken place once political stability had been deeply entrenched.
The inflexion point in the above graphs of countries other than India came around in the late 1970s. We had failed to capitalize on a strong groundwork. Mahalanobis strategy provided India at least some of the much-needed industrial capacity and human capital to become competitive in the global market. Indian industry in her infancy, needed protection and support to compete against the world’s best. Indian economy at independence needed some support before it could set its flight soaring high. Mixed economic planning did that!
HUMANITARIAN GROWTH AND INSTITUTION BUILDER
We have seen how technological and industrial investment led to the foundation of a self-reliant India. Despite this, we had seen the Balance of Payment crises precipitating more than once. Inflation too touched double digits. However, these problems are particular in the foundational stages of economic growth in developing countries. It was, however, clear that the focus on industrialization had lost steam in the early 1960s. It can be attributed to geopolitical instability. The manufacturing process became stagnant and never after that, received a significant fillip. Thus, we could witness a direct shift from the agricultural sector to the services sector. This was not seen in the Asian economies of China, Vietnam, Taiwan etc. India ran into budgetary deficits in the early years of economic growth, inhibiting the state’s capability to expand manufacturing. The agricultural sector also never seems to have been freed of inequality. The agricultural sector, which is still the largest employer, did not go through a massive transformation. In this article, we will look at how farming and service sectors fared under the socialist model. We will also see how this model had a humanitarian shade to it and also how PM Nehru was a true institution-builder. Towards the end, we will see how the mixed economy model proved insufficient to rake up growth after a certain point.
Food security in a large country like India, where poverty rates were skyrocketing post-independence; was perhaps the gargantuan economic challenge faced ever. Mahalanobis model is said to be heavily inclined towards the industrial sector rather than the agricultural sector. Land reforms did take place to abolish the well-entrenched Zamindari system. The Agrarian sector wasn’t the real focus of government- critics have often raked up this point. Under British rule, India was turned into an agrarian economy while the West went under rapid industrialization. JL Nehru had famously said, anything else can wait but not agriculture! The focus on the industrial sector thus ensured the development of heavy agricultural machinery, equipment, canals that would enhance agricultural productivity. The first five-year plans saw agricultural production increase by about 17%. However, the government remained dependent on foreign countries for food grains. The trend continued until; Green Revolution ushered in. According to Prof. Vakil and Prof. Brahmanand of Bombay University, emphasis on heavy machinery led to a rise in the price of food grains and that perpetuated poverty. Unlike the Communist regime in China, land reform did not hinge upon democratic rights. These reforms were successful in very few pockets of the whole country. Despite that, agricultural production increased by 16% after the 2nd Five Year Plan. Agricultural production increased by 1/3rd amount. Cooperative and institutional loans to farmers surged indicative of an elaborative farm credit network that was going to be built. Cooperative farming did not show the level of success as cooperative commodity production as AMUL did. States like Punjab which built upon scientific models of agriculture- like electricity, canals became a harbinger of change during the Green Revolution. The last years of Nehru witnessed multiple food shortages emerging in different parts due to successive failures of monsoons. Despite the snags, the groundwork had been done to face challenges. Multiple inefficiencies still plague Indian agriculture, but still, we have expanded our agricultural production massively like no other nation. Yet, neglect of agriculture led to 60% of the working force contributing to less than 20% of output- something that would perpetuate inequality for a long time. However, despite the massive agricultural production hasn’t made India self-sufficient to fulfil the hunger of millions still in poverty- reflected in rankings on countries on the basis of hunger index. Per capita food grain availability remained low in colonial and neo-liberal policy times, then in the Nehruvian period; speaking much for itself!
In the early stages of nation-building, the Five-Year Plans had established Indian Institute of Technology, All India Institute of Medical Sciences, Indian Institute of Management, National School of Drama, Indian Institute of Sciences, National Institute of Design, Delhi School of Economics amongst others. These institutions were going to be the drivers of big-ticket reforms of later years. Nehru’s investment in human capital formation undoubtedly deserves our admiration. The highly skilled workforce who had their education in these institutions contribute to the global economy significantly. IITs and IIMs roles in India emerging as an IT hub could not be challenged. These institutions have unleashed the real animal spirits in our economy. The public education system was strengthened massively.
Some of the monumental achievements of the socialist model were the creation of institutions at the nascent stage of economic growth. Several development institutions like IDBI and ICICI had been established to channel credit to the industrial sector. The tight monetary policy during those years meant that the savings of the populace could be utilized for industrial growth. The private sector would have been the biggest beneficiary of these institutions. The Employment Provident Fund established during that period is a resilient economic device in the hands of the salaried middle class. Life Insurance Corporation remains one of the most monumental achievements of socialist planning. The nationalization of insurance remained a landmark moment that ensured financial cover reaches every individual. The insurance giant might become the largest Indian firm by market capitalization. A very interesting anecdote about LIC goes as such, Mundhra Scam- the first biggest financial embezzlement brought major embarrassment to the Nehru government. However, what followed was an immediate judicial investigation that was speedy and transparent, something which we randomly see in recent times. Indian Oil Corporation, one of the largest oil companies, had been nurtured in that era. Vividh Bharati and Lalit Kala Akademy were also nurtured- the socialist model had that humane touch. Surprisingly, Air India, which today symbolizes the financial mismanagement of PSUs was the gold standard for aviation back in those days. It so happened, JRD Tata, the chairman of Tata Airlines, was disappointed at the nationalization of airlines and he contacted Nehru. Nehru offered JRD Tata, the chairmanship of Indian Airlines and it was Tata who micromanaged all the nuances of aviation. It was indeed, a glowing model of private-public partnership. The aspirational middle class was an outcome of the people-centric policies.
It was true that the economic strategy had been successful in building an industrial base which was, however, smaller as compared to those of Japan, Taiwan and Korea. These nations too had implemented state planning in the early years, but they had exposed the domestic market to foreign competition much earlier than India did. Chinese and Korean comparative advantages in the steel and automobile industry developed gradually because of the collusion between state powers and industrial forces. In India, the entire responsibility of building the industrial base fell squarely on the public sector driven by the state machinery. Domestic capitalists had become wary of the license raj. This strategy could not have been stretched for long, given that the state was going to face a fiscal crunch sometime later. Asian nations had put a plethora of strict restrictions on its domestic industry driven by private players which would not have been successful in a liberal democracy like India. The Balance of Payment crisis was bound to explode, given that domestic investments were replacing export earnings. Later on, during the successive Congress governments, state-led domestic industries had diminishing returns to investment. A political turmoil followed that robbed the Indian economy of an opportunity to reform. The undue licensing regime for a long period clamped down the private sector’s zeal for profit maximization. To counter this, we can rely on the argument that it was politically correct, and various countries had done the same.
State intervention was the much-needed nudge to feeble, non-existent private industry. The development of the private sector was only possible through the public sector. Leading industrialists had realized it, and the Bombay Plan reflected the combined aspirations of both the public and private sector for India’s economic growth story. The only substitute for foreign capital whose opportunity cost was economic sovereignty was an indigenous public sector. India had felt the pangs of pain accrued from free trade in the colonial era when finished products had been dumped into the sub-continent. There has been a tendency to blame the socialist model for India failing to catch up with the West. We easily tend to forget that democratic rights came later when industrialization had set in. Nehru never had the liberty to sidestep individual liberties as in the case of China, South Korea or Vietnam to increase growth drastically. Opening up the economy at that point would have meant that possibility existed, of India turning into an economic protectorate of foreign powers like certain African nations. The famous Bolivian case of privatization accentuates that liberal approach to the economy after years of political instability would wreak havoc on the economically weaker sections. Given the mess plaguing the Indian banking system, one might be forced to think that lack of regulations can become a lag on economic growth. The manufacturing base remains uncompetitive, with liberalization having not done that much to help India gain a superlative comparative advantage in certain industries. Indian economy remains highly consumption-driven, something which had been envisaged in the Five-Year Plans. The Nehruvian model envisioned a strong state that would pave the way for a flourishing market economy. Liberalization would not have been that successful if not for years of state protection. Countries like Japan and Korea have reached inflexion points in their growth curves. Acute inaccuracies of these models have been highlighted. We can agree on the fact that the shift from unregulated to the regulated economy should have taken place before the economic instability crept in. The strong independent institutions Nehru built continue to embellish his legacy. The man himself left an indelible impression on Indian economy- that economy had been nurtured and protected enough so that it could take high flights to compete with the world’s very best!
By Pranav Jha
The featured image is borrowed from Sakshi Samachar’s article dated, June 29, 2019.