Jawaharlal Nehru was an economic modernist.

He believed that rapid

industrialisation was the most effective way to win the battle against mass
poverty. This was in stark contrast with the medieval Gandhian economic
vision centred on household production.

Nehru, who died 50 years ago this month, was just one among several
important nationalist leaders who were enthusiastic about modern
industry. B.R. Ambedkar had argued in one of his earliest articles that the
solution to surplus labour in agriculture was in the growth of modern
industry. M. Visvesvaraya created a national plan in 1934 that aimed to
double national income in a decade, led by a massive increase in industrial
investment. Subhas Chandra Bose was Congress president in 1938 when
he set up a National Planning Committee to examine how India could
industrialise rapidly once it got political independence. V.D. Savarkar told
Indians to embrace the age of the machine. All these leaders believed that the
state should take the lead in the push towards industrialisation.

It was left to Nehru to actually put much of this into practice after he became
the first prime minister of independent India. Economic modernization was
an essential part of his overall vision of an India that could hold its own in the
world after centuries of foreign domination. In his The Idea of India, a classic
study of Nehruvian India published in 1997, the political scientist Sunil
Khilnani wrote: Discussions on national progress were now being
formulated in the technical vocabulary of economics...Nehrus intention had
been to subordinate the civil servants to the superior rationality of economists
and scientists. Nehru also invited some of the greatest economists from
around the world to participate in the formulation of the landmark Second
Five-Year Plan that was launched in 1956.
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 plansa
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 Nehruvian economic development strategy had its critics as well. The
unsung prophet B.R. Shenoywho was a student of the libertarian
economist F.A. Hayekwrote a famous dissent note in the memorandum
of the panel of economists advising on the second plan. Shenoy made two very
significant points: the dependence on deficit financing would be inflationary
and the growing role of the government could eventually undermine
democracy. Shenoy also more or less predicted the balance of payments crisis
that hit India in 1957.

The Mumbai economists C.N. Vakil and P.R. Brahmananda (the latter
was also my teacher) also warned that ignoring the production of what they
called wage goodsessentially food and textileswould lead to inflation as
money incomes went up. Their model also took monetary expansion into
account, unlike the government plans. Meghnad Desai said in an interview a
few years ago that India would have been better off if it had taken the Mumbai
critique more seriously. The British free market economist P.T. Bauerwas
worried about the dependence on bureaucrats rather than the market to set
prices; in fact he brilliantly described many such national development plans
as being pricelessa fatal flaw in economics.

To be fair to them, the planners had also accepted the fact that there was an
inflationary bias to their plans, as higher production of capital goods would
create money incomes while there would be a shortage of consumer goods to
satisfy the new demand; and it was assumed that the Reserve Bank of India
would passively fund the budget deficits by creating new money.

Was the Nehruvian economic strategy a success? It was in the initial years.
The Indian economy had essentially been stagnant in the five decades before
India became a sovereign republic. The economy grew at an average rate of
4.09% between fiscal years 1952 and 1965. The growth crisis came later.

It was the first economic boom that India had seen in nearly a century.
Industrial output grew much faster than the overall economy, the first step
towards a growing role for industry in the India economy since
deindustrialisation began in the late Mughal period. The government also
managed to run a tight ship. Fiscal deficits were low. A look at the financing
pattern of the Second Five-Year Plan shows that Nehrus economists had
assumed that at least part of the ambitious investment programme would be
financed by revenue surpluses as well as profits from the railways.
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 giversironical 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.