The Nehru Development Model

Title: The Nehru Development Model – History and its Lasting Impact
Author: Arvind Panagariya
Publisher: Penguin Viking, 2024 (First)
ISBN: 9780143466567
Pages: 519

At the time of her independence in 1947, India was ripe for an all-out change covering all sectors touching upon the lives of the people. It was like a lump of moistened clay waiting to be kneaded by a master sculptor into a masterpiece of art. Jawaharlal Nehru was bestowed that honour by destiny to craft a modern society. His efforts fell into two broad categories of political and the economic. He was immensely successful in the first in that the political model made by him stands unchallenged even now. Despite more than a hundred amendments to the Constitution, the essential foundations of Indian democracy have remained unshaken. This was not the case of his economic policy that proved to be an abject failure. In contrast to the political, Nehru’s economic policy framework has undergone a dramatic change in 1991. India turned away from an inward-looking and control-ridden economy into an outward-looking market economy. This book is a history of the development of Nehru’s policy and is divided into three parts. The first part establishes that the economic model India adopted was almost entirely due to Nehru. The next part explains in detail the policy regime, its implementation and the economic outcomes during the Nehru era. The final part develops the theme that by the time Nehru passed away, the socialist policy regime and thought had become sufficiently entrenched that a retreat from them in the foreseeable future was unlikely. Aravind Panagariya was the chairman of the Sixteenth Finance Commission holding the rank of a Union cabinet minister. He is also a professor of economics at the School of International and Public Affairs, Columbia University and was the first vice chairman of NITI Aayog. He has authored over twenty books.

The book describes the pathways Nehruvian economics followed in its quest for ideological nirvana rather than building up the country’s economy on sound and practical financial policies. Nehru was enamoured by socialism and favoured heavy industries to be installed first, which he fancied would make the nation self-sufficient. He then wanted to meticulously plan everything and to restrict the private industry to certain fields. He regulated the private sector through extensive licensing to keep large manufacturers away from products the small-scale industry was mandated to manufacture. Political ideology permeated the top echelons of decision making and the obsequious professionals engaged by the government based on their political opinion competed among themselves to be more loyal than the king. The panel of economists who evaluated the draft framework of the Second Five-Year plan formulated by Mahalanobis came out fully in support of it. They had no faith in the concept of prices and markets which was a sine qua non of economists and firmly believed that the government had to control and regulate every aspect of economic activity. They were out to outdo the socialists in socialism and planners at planning. Several foreign statisticians and economists who were consulted to finalise the second five-year plan were predominantly left-leaning and often admirers of the Soviet model. This went well as long as India enjoyed healthy foreign exchange reserves which she had built up through trade surplus during World War II. The surplus in foreign exchange (sterling balance) ran out in 1957-58 and the government adopted strict foreign exchange control. Even then, it frowned upon devaluation of the rupee to bolster exports.

Panagariya clearly elucidates his argument that Nehru singlehandedly moulded India’s policies and shall bear the blame for its dismal performance on the economic front. In his writings, Nehru described international trade as an instrument of imperialism and sought self-sufficiency for India. In an instance of sheer folly, Nehru discouraged exports by imposing an export tax on many items. While India had export controls on jute, Pakistan subsidized it and captured a good share of the world market. Even after the sterling balance ran out, government efforts to boost exports were lukewarm for five more years. India’s share of total world exports in 1947 was 2.5%. It fell to 2.1% in 1951, 1.4% in 1956, 1.2% in 1961 and to a measly 0.9% in 1966. This was Nehru’s track record! The presence of Sardar Vallabhbhai Patel ensured that the 1948 Industrial Policy Resolution (IPR) provided a larger space for domestic and foreign capital. Nehru’s dominance after Patel’s death in 1950 found expression in the 1956 IPR which expanded the areas of public sector monopoly. India was unique in placing the social revolution ahead of the economic revolution through its high protection of industrial labour in the organized sector. Furthermore, the government controlled distribution and fixed prices for several commodities such as cement and automobiles like scooters and cars. Only those few who obtained allocations could purchase them when stocks were replenished. This led to widespread corruption. A used scooter commanded a higher price than a new one because a new one could be obtained only after years of waiting. An entrepreneur needed to obtain a license to start an industry. Applications for such licenses were evaluated in terms of their technical feasibility but not economic efficiency. Aggressive applicants with superior knowledge of the system got their applications quickly approved while more efficient producers who were late in making their requests were denied a license.

The author shines a torch into the darkness surrounding Nehru’s policies and brings to light the shortcomings which are so glaring as to make us wonder why the top-notch economists and professionals of that time failed to notice them. Agriculture was subject to benign neglect during the Nehru era. Food grain production failed to keep pace with demand. Any unexpected increase in output may be attributed to an increase in the cultivated area. This curse was lifted only after the arrival of Lal Bahadur Shastri as the prime minister who initiated steps towards Green Revolution and Indira Gandhi sustained his efforts with equal vigour. The book provides a brief look at India’s import policies from the British period onwards and how Nehru continued to hold on to a war-time arrangement even long after the end of the war. India’s import policy was comparatively free and liberal from 1882 onwards with some protection for domestic industry allowed in tariffs during World War I. The Second World War brought with it foreign exchange control and systematic direct import controls for the first time. This was relaxed towards the end of the war, but the Balance of Payments crisis in 1957 made the regime to revert to more or less war-time severity for two more decades. Some piecemeal liberalization was seen in the 1980s, but the system was genuinely dismantled only in 1991. The 1957 crisis was also due to poor management of the economy. India had accumulated a decent foreign exchange reserve (sterling balance) due to trade surplus accumulated during World War II. In the early 1950s, higher inflation in India than abroad caused by huge deficit financing for infrastructure projects combined with a fixed nominal exchange rate rendered the domestic product progressively less competitive. This led to a steady rise in import demand and stagnation in export revenue. Sterling balance was near zero in 1957 and the government scurried to control imports. Devaluation of the currency was the best option but Nehru was dead against it. Even though the author does not mention it, this might have been because the measure would have adversely affected the British staying back in India after independence. In 1966, when Indira Gandhi devalued the rupee by 57 per cent in one stroke, all the British returned to their homeland.

The book also analyses the path India had chosen to move forward in economic planning after Nehru passed away. It is obvious from the discussion that greater damage to the national economy was inflicted during the time of Indira Gandhi. Nehru and Indira’s economic policies led them to nationalize partially or wholly several sectors and enterprises and subject private sector economic activity to strict government control. The result was low growth for many more decades that condemned India to continued high poverty levels for nearly half a century. The Nehru legacy was faithfully followed by Shastri and Indira. The years 1969 to 1976 saw India rapidly swerve to the political left. Banks were nationalized in 1969 and insurance in 1971. Corporations with Rs. 20 crore or more assets were categorized as monopoly and harassed through the MRTP Act of 1969. Foreign exchange transactions were tightened by FERA in 1973. Foreign equity share was capped at 40 per cent in enterprises. The modified Industrial Disputes Act made it impossible in 1976 to lay off workers in industries with a head count greater than 300. Urban land ceiling was enacted in 1976. Constitution itself was amended to include the new words ‘socialist’ and ‘secular’ in the same year during Emergency. Personal income tax brackets touched 90 per cent. Rajiv Gandhi was the first prime minister without a socialist baggage. He introduced a few piecemeal reforms but developed cold feet after two years. It was Narasimha Rao’s stellar achievement to scrap Nehru for good. Even after Rao liberalized the economy, the business community was not overly enthusiastic. They only wanted to be freed of the shackles of investment licensing but did not want the competition from abroad through liberalization of trade and foreign investment. Even the export-oriented enterprises from India did not care to support negotiations that led to greater scope for entry of foreign entities. Vajpayee carried forward the reform process at a brisk pace. The power behind the Manmohan Singh regime (2004-14) was Sonia Gandhi and she had none of the liberalizing instincts of her husband. The reform process came to a standstill in this period. Matters got much worse in the time of UPA 2. Modi continued the reforms steadily but his stress on import-substitution industrialization is a fall-back to the old ‘self-sufficient’ thinking.

When Modi scrapped the Planning Commission, its demise was little lamented because this institution had outlived its utility. The author argues that the Commission was riddled with short-sightedness and incompetence right from the early years because Nehru had stuffed the Planning Commission with academic stooges and only those economists who shared his political vision. The Commission earnestly believed that the root cause of food crisis ripping the country apart was hoarding by a few vendors and not the poor farm output. This made them suggest price controls and monopoly trading by the state. The food ministry was, however, right on their contrary finding. They stressed on the incentives for farmers to grow more food. Planning Commission again opposed this saying that this would increase the disparities between commercial farmers and the masses of subsistence cultivators and deprive the industry of much-needed investment. It was the stubbornness of the food ministry that led to the Green Revolution. After the 1991 reforms, entrepreneurial decisions rather than licensing authorities determined sectoral allocations and little rationale remained for formulating five-year plans. The Commission continued its purposeless existence for two more decades until Modi disbanded it in 2014. The 12th Five Year Plan was the final one India had and it ended in 2016-17. Panagariya affirms that Narasimha Rao spearheaded the 1991 liberalisation program by his own conviction that India needed to be guided to the right track of progress and not through any compulsion exerted by the IMF as claimed by some scholars. However, it's a fact that Rao never claimed credit for the 1991 reforms which were so profound in nature. The book also makes a crucial reference to the doubtful quality of economic thought being produced in our academic institutions. Left or left-leaning faculty in economics uniformly dominate Indian academia of higher education, whether they be public or private (p.381). Even though the academicians and the budding talents trained by them have been slower to shed socialist era economic thought, reform-minded economist-bureaucrats are overwhelmingly found in government.

Coming from an economist who had adorned the topmost positions in Indian macro finance, this book presents facts quite authentically and substantiated by immense research. It seems the author has perused all relevant reports of the period under consideration which were in any way connected with economic policy administration. Several charts and graphs are included and are very informative. However, they do not have the visual appeal in monochrome print because the lines and bars are created in different colours. The book provides the reasons for the 1957 BoP crisis in considerable detail, but the causes of the 1991 foreign exchange crisis which compelled Indian politicians to change course are not elucidated. This is a minor shortcoming of the book. In the final part, the book considers the hypothetical case of what would have happened had Sardar Patel became the prime minister and outlived Nehru, instead of the other way round. He concludes that in such a scenario, India would have followed the right path in the 1950s itself and would have eliminated poverty many decades earlier.

The book is highly recommended.

Rating: 4 Star