Economic History: Nehru's economic policy : Context & Contribution
Economic History: Nehru's economic policy : Context & Contribution
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{ Picture :Nehru switching on the power house of the Bhakra hydro-electric project}
The counterfactual & casual narrative in India today has condemned Nehru as an amateur in economic policy. Neoliberal Indian economists in Ivy Leagues and those in India influenced by them claim that the country skipped a big chance to play catch-up to the rich West because of Nehru’s fatal flirtation with socialism. This infatuation, they insist, put clamps on the animal spirits of India's private enterprise, withdrew the country from the benefits of world trade and plagued it with inefficient and corrupt public sector undertakings for decades.
Even Nehru’s supporters – while admiring his insistence on a “scientific temper” and industrialisation - tend to claim that he was focussed on State intervention & role of PSUs at the cost of private initiative . Nehru, writes Ramchandra Guha, “at once an Indian Brahmin, an English aristocrat and a European social democrat” naturally despised moneymaking, and hence the profit motive that usually drives private enterprise.
It follows from this narrative that India was finally free once the 1991 reforms were enacted to drastically cut the regulatory framework and substantially liberalise international trade of capital and goods. Besides inspiring a spate of books about “India Rising”, the watershed year of 1991 has not only reduced the complicated Indian economic history to a pre-1991 “socialistic” and post-1991 “free-market” phase in the popular mind, but it underpins the editorials of practically every financial newspaper clamouring the new government for more “structural reforms”.
Building industries
But what exactly was the Nehruvian consensus? Colonialism had equipped India with modernity by fully monetising its economy and building a centralised state that allowed the smooth movement of goods and capital. However, it had used these very instruments to keep India a largely agricultural economy. Excessive free trade made manufacturing in India uncompetitive and the capital markets were dominated by metropolitan capital that was not very hospitable to Indian interests. Whatever little manufacturing India had originated during the brief protectionist phase of World War I. This laissez faire India – the India many of our commentariat clamour for – was responsible for the less than 1% annual growth.
This was the baggage borne by Nehru and the other founding fathers at the time of independence. The Nehruvian economic strategy, therefore, was to pursue an artificial increase in total investment, micromanage that investment through extensive economic planning and licensing of private enterprise, pursue high tariffs for the protection of such industry, and boost infrastructural investment and land reforms for agricultural production. Much of this was enacted improperly. Land reforms, in particular, suffered as they were to be implemented by the state governments, who often depended on the vote banks of the very landlords they were trying to target.
But did this strategy succeed in building an industrial base? Definitely. The average economic growth rate increased to more than 3% in the 1947-1965 period, and India grew a substantial industrial base. However, the growth rate remained low in comparison to the growth of East Asian economies. This dichotomy is often held as an example of free market success versus statist failure.
State support
However, contrary to conventional wisdom, most of the successful East Asian tigers – Japan, Korea and Taiwan – pursued extensive state intervention to boost their economies. Import substitution was the norm, while state subsidies to industries on the basis of exports were encouraged.
For instance, entrepreneur Chung Ju Yung, with no background in car-making, created Hyundai Motors Company in the 1960s. Korea’s enlightened despot, Park Hee, understood the need for a strong domestic industrial base. So, Hyundai Motors became a target for cheap credit, state subsidies and a protected domestic market – everything that neoliberals tend to despise. Yet, it was protection that allowed Hyundai to fail, learn and eventually flourish. If Korea had to follow its “comparative advantage”, it would still be selling the world textiles and fish than cars and steel.
Similar collusion between the state and capital has powered the Chinese growth. Academics Usha and George Haley, in their works of scholarship, have shown that state subsidies, preferential financing and intervention have been central to making China the largest maker of steel, and increasingly the largest maker of solar panels.
Competitive drive
Then what went wrong with India? The cause lies in Nehru’s unwillingness to push the domestic capitalist class to do the hard task of building an industrial base by laying all the burden on the public sector, and the refusal to base industrialisation on foreign markets and technology. Japan, Taiwan and Korea, like India, bankrolled their infant industries, but, unlike India, almost always subjected them to an extremely strict export discipline. This way their companies would be subjected to the highest competition, while using the home base to consistently learn and grow.
The legendary MITI (Ministry of International Trade and Industry) in Japan had substantial control over the distribution of foreign exchange earnings and would allocate it to firms on the basis of export performance. Korea’s Park Hee would jail leaders of chaebol (a form of conglomerate) if they did not do the hard task of running factories as opposed to easier sectors like retail, trading or construction.
Therefore, Nehru was not at fault in pursuing state intervention in principle. Rather his mistake lay in getting state intervention wrong. Relying excessively on the domestic market for the growth of infant industries would make domestic industrialists lazy, whereas undue licensing and reservation of key sectors for the state killed the important drive that comes from the profit motive. Shunning exports would mean that domestic demand had to be maintained at the cost of investment. However, the pursuit of heavy industries, five-year plans and import substitution was something that virtually every nation playing catch-up to the West had to do.
Our wrong reading
Unfortunately, the reading of Nehruvian years in the popular mind today is largely erroneous. It is considered synonymous with stagnation and incorrect policy choices. If Nehru got state intervention wrong, then probably the idea of state intervention is wrong (or so goes the narrative). Labour regulation, rather the absence of scale, technology, skills and trade protection, is blamed for the alarming absence of manufacturing in India. And almost every call for “reforms” by pundits at home and abroad is a cry for further deregulation, privatisation and liberalisation.
With a severely uncompetitive manufacturing base and a growth built on services, credit booms and bouts of hot money (which leave as rapidly as they come) – perhaps India would do well with some measure of Nehruvian planning, statism and protectionism, if it is to chart a course of plentiful jobs and sustainable growth.
Nehru's Contributions -- Indian Economy
Contribution # 1. Industrialisation:
Industrialisation was the third component of the national ideology. Though Nehru was persuaded that India needed to encourage cottage and small-scale industries to ease the problems of poverty and unemployment, he saw them as a temporary expedient only necessary until the country became fully industrialised.
Unlike Gandhi he was convinced that India could not permanently eliminate poverty and satisfy the legitimate aspirations of its people without large-scale industrialisation. More importantly the modern world was industrialised, and a country that failed to keep pace with it remained weak and vulnerable to foreign domination.
For Nehru industry, not agriculture, was the lever of economic development. He thought that industry-led growth transformed the economy far more quickly and effectively than agriculture-led growth. For Nehru agriculture was a primitive and culturally inferior activity.
It was tied to land, parasitic upon the forces of nature, made man a plaything of nature and encouraged ‘fatalistic’ and ‘obscurantism’ ways of thought. It also fragmented the country, confined man’s vision to the narrow limits of his village, and was a breeding ground of ignorance, traditionalism, passivity, narrow- mindedness and superstition.
As such it lacked the power and energy to haul the country out of its ‘traditional grooves’ and ‘propel’ it along the path of modern ways of life and thought. As Nehru repeatedly argued, villages had been responsible for India’s degeneration and changing their ‘antiquated’ ideas and habits was the ‘very basic problem’ of independent India. He did not therefore think much of agriculture as an activity and of the peasantry as a social class.
Contribution # 2 : The Nehru Strategy:
The principal components of the Nehru Strategy of building modern India were the institution and strengthening of the planning process, establishment of the public sector in Industry, laying the base of modern agriculture by the overthrow of the feudal system, creation of a modern scientific and technological base and attainment of economic independence by systematic development of heavy and basic industries and maximum development of our natural and human resources.
Within the framework of mixed economy, the public sector was to be built up to attain the commanding heights of the economy’. The concept of mixed economy itself was, and remains valid for mobilising all productive classes including the national bourgeoisie for promoting sustained and rapid economic growth.
In the rural areas, while the concept of private ownership of land was an indispensable element for ushering in modernisation of agriculture, a co-operative sector was promoted along with the community development organisations to assist the process of social transformation.
Politically the strategy implied an alliance of all productive classes, including owners of property. Hence the broad anti-imperialist alliance forged by Gandhiji was continued. This continuity imparted a great deal of strength to the process of modernisation in the initial stages.
Contribution # 10. Industrial Development: Policy and Relation:
India must be industrialised as rapidly as possible. And industrialisation includes, of course, all kinds of industry—major, middling, small, village and cottage. However, rapid our industrialisation may be, it cannot possibly absorb more than a small part of the population of this country in the next ten, twenty or even thirty years. Hundreds of millions will remain who have to be employed chiefly in agriculture.
These people must, in addition, be given employment in smaller industries like cottage industries and so on. Hence, the importance to agriculture and food and matters pertaining to agriculture. If agricultural foundation is not strong then the industry will not have a strong basis either. Certain basic and key industries have been given due consideration. The essential basis for development of industry is power-electric power. The progress made by a country can be judged by the electric power it has.
There is much discussion about the public sector and the private sector. He attached great importance to the public sector. The pattern of society that he look forward to is a socialist pattern of society that he looks forward to is a socialist pattern of society which is classless, casteless.
As the socialist pattern grows, there is bound to be more and more nationalized industry, but what is important is not that there should be an attempt to nationalize everything, but higher production and employment. In a country like India, where money, trained personnel and experience are lacking, we have to take advantage of such experience, training and money as we have. We want to make this business of building up India a co-operative enterprise of all the people.
Some people might talk about private enterprise and laissez faire, but practically nobody now believes in laissez faire. There is regulation and control all-over the world in regard to industry and imports and exports. Everywhere, even in the most highly developed countries of the capitalist economy, the State functions in a way which possibly a socialist fifty years ago did not dream of.
Contribution # 3: Breaking Poverty Barrier through planning & equitable resource distribution :
India is struggling to get out of the morass of poverty, and to reach the stage of what is called “the take-off into sustained economic growth”. It wants to cross the barrier of poverty and reach the stage where growth becomes relatively spontaneous. The under-developed country is on this side of the barrier.
There are certain cumulative processes at work which in a developed country, tend to encourage its growth further and further and which, in an under-developed country, pull it back all the time. The poor becomes poorer. Poverty becomes is own curse. It repeats itself. Planning is essentially a process whereby we stop those cumulative forces at work which make the poor poorer, and start a new series cumulative forces which make them get over that difficulty.
Nehru’s contribution in the articulation of the concept of planning has been best summarised by Dr. P.C. Mahalnobis as follows:
“Under the leadership of Nehru, India made big advances. He initiated thinking on planning in India. Through his speeches and through planning committees and the Planning Commission, he has exercised a profound educative influence and made India conscious of the need for national planning, Through the Congress Party and the Government, he has made planning an instrument of national policy on the biggest scale outside the communist countries, and has persuaded India to accept socialism as her goal. He has brought to Indian planning a full appreciation of the scientific revolution which is transforming the world, a sensitive awareness of human values and cultural traditions, an inherent sense of democracy and an international outlook”.
Source : (a) A.Khadelwal (b)An Uncertain Glory: India and Its Contradictions by Jean Dreze and Amartya Sen (c) Indian Economy by Ramesh singh (d) Scroll (e) The Tribune
*************************
{ Picture :Nehru switching on the power house of the Bhakra hydro-electric project}
The counterfactual & casual narrative in India today has condemned Nehru as an amateur in economic policy. Neoliberal Indian economists in Ivy Leagues and those in India influenced by them claim that the country skipped a big chance to play catch-up to the rich West because of Nehru’s fatal flirtation with socialism. This infatuation, they insist, put clamps on the animal spirits of India's private enterprise, withdrew the country from the benefits of world trade and plagued it with inefficient and corrupt public sector undertakings for decades.
Even Nehru’s supporters – while admiring his insistence on a “scientific temper” and industrialisation - tend to claim that he was focussed on State intervention & role of PSUs at the cost of private initiative . Nehru, writes Ramchandra Guha, “at once an Indian Brahmin, an English aristocrat and a European social democrat” naturally despised moneymaking, and hence the profit motive that usually drives private enterprise.
It follows from this narrative that India was finally free once the 1991 reforms were enacted to drastically cut the regulatory framework and substantially liberalise international trade of capital and goods. Besides inspiring a spate of books about “India Rising”, the watershed year of 1991 has not only reduced the complicated Indian economic history to a pre-1991 “socialistic” and post-1991 “free-market” phase in the popular mind, but it underpins the editorials of practically every financial newspaper clamouring the new government for more “structural reforms”.
Building industries
But what exactly was the Nehruvian consensus? Colonialism had equipped India with modernity by fully monetising its economy and building a centralised state that allowed the smooth movement of goods and capital. However, it had used these very instruments to keep India a largely agricultural economy. Excessive free trade made manufacturing in India uncompetitive and the capital markets were dominated by metropolitan capital that was not very hospitable to Indian interests. Whatever little manufacturing India had originated during the brief protectionist phase of World War I. This laissez faire India – the India many of our commentariat clamour for – was responsible for the less than 1% annual growth.
This was the baggage borne by Nehru and the other founding fathers at the time of independence. The Nehruvian economic strategy, therefore, was to pursue an artificial increase in total investment, micromanage that investment through extensive economic planning and licensing of private enterprise, pursue high tariffs for the protection of such industry, and boost infrastructural investment and land reforms for agricultural production. Much of this was enacted improperly. Land reforms, in particular, suffered as they were to be implemented by the state governments, who often depended on the vote banks of the very landlords they were trying to target.
But did this strategy succeed in building an industrial base? Definitely. The average economic growth rate increased to more than 3% in the 1947-1965 period, and India grew a substantial industrial base. However, the growth rate remained low in comparison to the growth of East Asian economies. This dichotomy is often held as an example of free market success versus statist failure.
State support
However, contrary to conventional wisdom, most of the successful East Asian tigers – Japan, Korea and Taiwan – pursued extensive state intervention to boost their economies. Import substitution was the norm, while state subsidies to industries on the basis of exports were encouraged.
For instance, entrepreneur Chung Ju Yung, with no background in car-making, created Hyundai Motors Company in the 1960s. Korea’s enlightened despot, Park Hee, understood the need for a strong domestic industrial base. So, Hyundai Motors became a target for cheap credit, state subsidies and a protected domestic market – everything that neoliberals tend to despise. Yet, it was protection that allowed Hyundai to fail, learn and eventually flourish. If Korea had to follow its “comparative advantage”, it would still be selling the world textiles and fish than cars and steel.
Similar collusion between the state and capital has powered the Chinese growth. Academics Usha and George Haley, in their works of scholarship, have shown that state subsidies, preferential financing and intervention have been central to making China the largest maker of steel, and increasingly the largest maker of solar panels.
Competitive drive
Then what went wrong with India? The cause lies in Nehru’s unwillingness to push the domestic capitalist class to do the hard task of building an industrial base by laying all the burden on the public sector, and the refusal to base industrialisation on foreign markets and technology. Japan, Taiwan and Korea, like India, bankrolled their infant industries, but, unlike India, almost always subjected them to an extremely strict export discipline. This way their companies would be subjected to the highest competition, while using the home base to consistently learn and grow.
The legendary MITI (Ministry of International Trade and Industry) in Japan had substantial control over the distribution of foreign exchange earnings and would allocate it to firms on the basis of export performance. Korea’s Park Hee would jail leaders of chaebol (a form of conglomerate) if they did not do the hard task of running factories as opposed to easier sectors like retail, trading or construction.
Therefore, Nehru was not at fault in pursuing state intervention in principle. Rather his mistake lay in getting state intervention wrong. Relying excessively on the domestic market for the growth of infant industries would make domestic industrialists lazy, whereas undue licensing and reservation of key sectors for the state killed the important drive that comes from the profit motive. Shunning exports would mean that domestic demand had to be maintained at the cost of investment. However, the pursuit of heavy industries, five-year plans and import substitution was something that virtually every nation playing catch-up to the West had to do.
Our wrong reading
Unfortunately, the reading of Nehruvian years in the popular mind today is largely erroneous. It is considered synonymous with stagnation and incorrect policy choices. If Nehru got state intervention wrong, then probably the idea of state intervention is wrong (or so goes the narrative). Labour regulation, rather the absence of scale, technology, skills and trade protection, is blamed for the alarming absence of manufacturing in India. And almost every call for “reforms” by pundits at home and abroad is a cry for further deregulation, privatisation and liberalisation.
With a severely uncompetitive manufacturing base and a growth built on services, credit booms and bouts of hot money (which leave as rapidly as they come) – perhaps India would do well with some measure of Nehruvian planning, statism and protectionism, if it is to chart a course of plentiful jobs and sustainable growth.
Nehru's Contributions -- Indian Economy
Contribution # 1. Industrialisation:
Industrialisation was the third component of the national ideology. Though Nehru was persuaded that India needed to encourage cottage and small-scale industries to ease the problems of poverty and unemployment, he saw them as a temporary expedient only necessary until the country became fully industrialised.
Unlike Gandhi he was convinced that India could not permanently eliminate poverty and satisfy the legitimate aspirations of its people without large-scale industrialisation. More importantly the modern world was industrialised, and a country that failed to keep pace with it remained weak and vulnerable to foreign domination.
For Nehru industry, not agriculture, was the lever of economic development. He thought that industry-led growth transformed the economy far more quickly and effectively than agriculture-led growth. For Nehru agriculture was a primitive and culturally inferior activity.
It was tied to land, parasitic upon the forces of nature, made man a plaything of nature and encouraged ‘fatalistic’ and ‘obscurantism’ ways of thought. It also fragmented the country, confined man’s vision to the narrow limits of his village, and was a breeding ground of ignorance, traditionalism, passivity, narrow- mindedness and superstition.
As such it lacked the power and energy to haul the country out of its ‘traditional grooves’ and ‘propel’ it along the path of modern ways of life and thought. As Nehru repeatedly argued, villages had been responsible for India’s degeneration and changing their ‘antiquated’ ideas and habits was the ‘very basic problem’ of independent India. He did not therefore think much of agriculture as an activity and of the peasantry as a social class.
Contribution # 2 : The Nehru Strategy:
The principal components of the Nehru Strategy of building modern India were the institution and strengthening of the planning process, establishment of the public sector in Industry, laying the base of modern agriculture by the overthrow of the feudal system, creation of a modern scientific and technological base and attainment of economic independence by systematic development of heavy and basic industries and maximum development of our natural and human resources.
Within the framework of mixed economy, the public sector was to be built up to attain the commanding heights of the economy’. The concept of mixed economy itself was, and remains valid for mobilising all productive classes including the national bourgeoisie for promoting sustained and rapid economic growth.
In the rural areas, while the concept of private ownership of land was an indispensable element for ushering in modernisation of agriculture, a co-operative sector was promoted along with the community development organisations to assist the process of social transformation.
Politically the strategy implied an alliance of all productive classes, including owners of property. Hence the broad anti-imperialist alliance forged by Gandhiji was continued. This continuity imparted a great deal of strength to the process of modernisation in the initial stages.
Contribution # 10. Industrial Development: Policy and Relation:
India must be industrialised as rapidly as possible. And industrialisation includes, of course, all kinds of industry—major, middling, small, village and cottage. However, rapid our industrialisation may be, it cannot possibly absorb more than a small part of the population of this country in the next ten, twenty or even thirty years. Hundreds of millions will remain who have to be employed chiefly in agriculture.
These people must, in addition, be given employment in smaller industries like cottage industries and so on. Hence, the importance to agriculture and food and matters pertaining to agriculture. If agricultural foundation is not strong then the industry will not have a strong basis either. Certain basic and key industries have been given due consideration. The essential basis for development of industry is power-electric power. The progress made by a country can be judged by the electric power it has.
There is much discussion about the public sector and the private sector. He attached great importance to the public sector. The pattern of society that he look forward to is a socialist pattern of society that he looks forward to is a socialist pattern of society which is classless, casteless.
As the socialist pattern grows, there is bound to be more and more nationalized industry, but what is important is not that there should be an attempt to nationalize everything, but higher production and employment. In a country like India, where money, trained personnel and experience are lacking, we have to take advantage of such experience, training and money as we have. We want to make this business of building up India a co-operative enterprise of all the people.
Some people might talk about private enterprise and laissez faire, but practically nobody now believes in laissez faire. There is regulation and control all-over the world in regard to industry and imports and exports. Everywhere, even in the most highly developed countries of the capitalist economy, the State functions in a way which possibly a socialist fifty years ago did not dream of.
Contribution # 3: Breaking Poverty Barrier through planning & equitable resource distribution :
India is struggling to get out of the morass of poverty, and to reach the stage of what is called “the take-off into sustained economic growth”. It wants to cross the barrier of poverty and reach the stage where growth becomes relatively spontaneous. The under-developed country is on this side of the barrier.
There are certain cumulative processes at work which in a developed country, tend to encourage its growth further and further and which, in an under-developed country, pull it back all the time. The poor becomes poorer. Poverty becomes is own curse. It repeats itself. Planning is essentially a process whereby we stop those cumulative forces at work which make the poor poorer, and start a new series cumulative forces which make them get over that difficulty.
Nehru’s contribution in the articulation of the concept of planning has been best summarised by Dr. P.C. Mahalnobis as follows:
“Under the leadership of Nehru, India made big advances. He initiated thinking on planning in India. Through his speeches and through planning committees and the Planning Commission, he has exercised a profound educative influence and made India conscious of the need for national planning, Through the Congress Party and the Government, he has made planning an instrument of national policy on the biggest scale outside the communist countries, and has persuaded India to accept socialism as her goal. He has brought to Indian planning a full appreciation of the scientific revolution which is transforming the world, a sensitive awareness of human values and cultural traditions, an inherent sense of democracy and an international outlook”.
Source : (a) A.Khadelwal (b)An Uncertain Glory: India and Its Contradictions by Jean Dreze and Amartya Sen (c) Indian Economy by Ramesh singh (d) Scroll (e) The Tribune
nice post
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