Economic Growth in the Nehru Era: Comprehensive Notes

The Recovery of India: Economic Growth in the Nehru Era

This paper by Pulapre Balakrishnan investigates the relationship between policy and economic growth in India during 1950-64, the "Nehru era." It contrasts this period with both pre- and post-Nehru eras, emphasizing the distinctiveness of its economic policies and the political conditions that enabled growth-inducing interventions. The paper addresses perceptions of the time, including its impact on agriculture and the governance of public enterprises.

Introduction

The paper is motivated by public interest in India's recent past and academic research on growth transitions. It challenges negative judgments about the Nehru era, which some blame for an allegedly "wasted past" due to policies adopted under Nehru's leadership. It builds on the work of researchers like Hatekar and Dongre (2005), who identified a significant economic growth break around 1950.

The study aims to identify factors driving growth during this period of high state-directedness and assess the impact of such intervention on facilitating or hindering growth. It also seeks to contribute to the global debate on the drivers of growth.

Nehru-Mahalanobis Strategy

The Nehru-Mahalanobis strategy, iconic of the economics of the Nehru era, aimed to rapidly raise income levels through accelerated growth via industrialization. It originated from deliberations in the National Planning Committee of the Congress, chaired by Nehru.

Mahalanobis's model envisioned an economy with two sectors producing capital and consumer goods. It departed from conventional economic theory by not subjecting capital to diminishing returns. The model suggested that a greater initial allocation of investment to capital goods production would result in a higher stock of capital in the future, which in turn would enable higher investment and higher output. The planner's problem was to determine the optimal share of investment to allocate to the capital goods sector.

The model served as a guide to industrialization, focusing on the practical aspects manifested in "the plan frame."

The Heavy Goods Sector

Central to the Nehru-Mahalanobis strategy was a fast-growing "heavy goods" sector, comprising machine-building complexes for producing machinery for steel, chemicals, fertilizer, electricity, and transport equipment. Achieving this required disproportionate investment in these complexes. Although this strategy resulted in lower short-run growth compared to investing in consumer goods production due to gestation lags, it promised higher long-run growth as it enhanced productive capacity across the economy.

The model estimated growth prospects based on current investment allocation and selected the allocation that maximized the rate of growth. While criticized for its ideological foundation (inspired by the Feldman model from the Soviet planning literature), any such criticism would be ideological of itself, given the spectacular expansion of the former Soviet Union at the time. Nehru was clear that India would avoid forced collectivization and the suspension of democracy, even at the cost of a lower rate of growth. Desai (2007) criticized the model for neglecting unemployment, inflation, and balance of payments issues.

Supply-side Model

The Mahalanobis model was exclusively a supply-side model, with no recognition of a possible demand constraint to capital accumulation. This approach made sense in the Soviet "command economy," but less so in India with its ubiquitous private sector that invests in response to growing profits. While the state could direct investment within the economy, critics often ill-informedly claimed that planners failed to recognize the importance of agriculture. The role envisaged for agriculture within the Nehru-Mahalanobis strategy is discussed below.

Wage Goods

The Vakil-Brahmananda plan centered on a "wage-goods sector". These economists were skeptical regarding the relevance of the Keynesian problematic for India, arguing that unemployment existed because the supply of wage goods to sustain labor was inadequate. They identified "corn and clothing" as essential wage goods. Consequently, they believed that employment could not expand without wage goods, making agricultural development fundamental.

Appraisal of Vakil-Brahmananda Plan

The Vakil-Brahmananda plan correctly focused on unemployment and the centrality of agriculture. However, it underestimated the importance of capital goods for raising agricultural production. It was unclear how a sufficient export surplus could have been generated to import these goods, given the scarcity of wage goods. Furthermore, Indian export and import possibilities in the late 1940s were limited due to the scarcity of capital goods and raw materials after the war.

The wage-goods-led model lacked an "engine of growth" and a source of demand for expansion in the macro economy. With hindsight, it is evident that the Vakil-Brahmananda model was classical, with employment determined in the labor market and no autonomous investment function. The model downplayed the importance of capital goods. The Mahalanobis strategy's oversight of consumer goods was less than the wage-good's model underestimation of the importance of capital goods. Mahalanobis saw industrialization as an input into agricultural growth and promoted it through public investment. The Mahalanobis plan demonstrated an eye for the big picture by addressing the crucial role of demand in sustained economic expansion.

Critics of Indian economic policy in the 1950s who viewed the Mahalanobis plan as violative of economic freedoms were unlikely to have found comfort in the Vakil-Brahmananda plan, as its authors had placed it in the field of planning. Jawaharlal Nehru ruled out direct force in shaping development, holding firmly to the belief that the only kind of economic progress worth having was "progress by consent."

Link between Agriculture and Industry

Mahalanobis recognized agriculture's role and incorporated this awareness into his strategy. He understood that agricultural growth was constrained by the availability of industrial inputs, linking it to industrialization. Raj Krishna stated that in a subcontinental economy with a large market and abundant natural resources, building a strong and diversified capital-goods base was a historical necessity. The technical linkages between agriculture and industry were such that even a 4% rate of growth in agriculture was not possible without a high rate of growth in industries that supply inputs. The Nehru-Mahalanobis strategy did not ignore these links.

The Second Five-Year Plan document appreciated that surplus is key to industrialization. Agriculture and manufacturing industries are completely interlocked, and economic progress depends on the advance of both.

Increase in Income Levels

Mahalanobis aimed to release India from the balance of payments constraint, viewing this as the logic of planning for industrialization. Autonomy was at the core of the Nehruvian vision of economic development. The accelerated growth of income was to be brought about via greater investment in heavy industry, central to transforming Indian agriculture. The planners were fully aware that the step-up in investment was very substantial.

No major foreign assistance was envisaged, in keeping with the idea of an independent development. The contribution of the public enterprises was significant, revealing the Indian state’s understanding of their role in the economy. The public sector was expected to contribute resources to national development.

Nehru's Speeches

Nehru's speeches reveal the arduous process of deliberation by which policy was formed. He had a grasp on economic matters. As early as 1952, he spoke of industrialization as a goal to raise incomes, even before the Mahalanobis model. He also recognized the importance of agricultural growth to the industrialization project, emphasizing that if the agricultural foundation is not strong, the industry will not have a strong basis.

Speeches made close to the end of his life reflect an understanding of the inter-temporal distribution of gains and the uniqueness of India. He noted that the fundamental factor was growth in agricultural production and that one has to find a healthy balance between immediate and long-range benefits.

Later speeches show Nehru somewhat despondent regarding progress on the agricultural front. He even suggested that agriculture has been neglected relative to its importance. In 1963, he stated that agriculture is more important than industry because industry depends on agriculture.

Despite his pessimism, an agricultural growth transition was to come within years of this speech. He did not live to see its beneficial effects spread across the Indian economy, but this transition had much to do with the policies implemented by his government.

A Record of Growth in the Nehru Era

Two sets of comparators can be used to evaluate an economy's growth performance: the record of preceding growth in that economy itself and the contemporaneous growth of other economies similarly placed and the growth of leading economies at early stages of their own growth. Growth in the Nehru years exceeded that attained in the final half-century of colonial rule, and the quickening of the economy observed in the second half of the 20th century was already achieved in the Nehru era. There was an acceleration of growth across all sectors, and the commodity-producing sectors grew faster than services, which had been the fastest growing segment of the colonial economy.

Drawing Parallels: Industrial Revolution

The broad-based expansion of the economy during the Nehru era was a transformation of the economy. Joel Mokyr observed that growth after the industrial revolution was qualitatively different from what had gone before. While it may not be entirely appropriate to transfer this description to the transformation of India during the Nehru era, the parallels are there to see. The Nehru years witnessed widespread growth across the economy, a technological advance was fostered, and growth in income has been sustained.

While growth in the Nehru era was distinctly Indian, in that it was not dependent on either foreign trade or foreign aid, it certainly was "not all that industrial". Indeed the greatest expansion of the economy in the Nehru years is not in industry at all. The data reveal that growth acceleration in the primary sector, largely comprising agriculture, had exceeded that of the secondary sector, more or less synonymous with industry.

The economic recovery of the Nehru era was "swift, smooth and remarkable."

Growth Comparisons

Two sets of economies have been chosen here for comparison with India during the Nehru era: Asian economies that were more or less on par with India in terms of per capita income in 1950 and the world’s best-performing economies of all time. Korea's growth rate is 50% higher than India's for this period. However, India's growth rate is 25% higher than that of China. China was to pull ahead of India only in the late 1970s. Nehru had not left the Indian economy at any great disadvantage.

Growth in India during 1950-64 had exceeded that of the leading Organisation for Economic Cooperation and Development (OECD) economies. An unexpected consequence of the transformation of the economy had been a very significant rise in the rate of growth of population. The rise in the rate of growth of population per se serves as an indicator far more vivid of the extent and nature of the economic transformation than any estimated rise in the rate of growth. The rise in population can be attributed to the decline in the incidence of malaria and widowhood due to improving public health outreach.

The high growth on a low base is non-trivial; and the recognition as a substantial achievement its initiation in the 1950s – after half a century of stagnation – the compelling conclusion.

The Nehru era witnessed resurgent growth achieved mainly by a step-up in public investment within the guiding framework of the Nehru-Mahalanobis strategy.

Caricature of a Vision: Through a Glass, Darkly

Allegations that we continue to pay for a misguided road map must be addressed.

The Neglect of Agriculture

Agriculture received direct attention and considerable resources during the Nehru era. V K R V Rao stated that the emphasis placed on capital goods industries was the result of an understandable desire to furnish the country with domestic supplies of the crucial inputs of economic growth. He emphasizes that planning under Nehru did not give sufficient priority to agriculture.

Raj Krishna stated that Nehru, as indeed all planners, attached prime importance to agriculture. The allocations for agriculture and for rural infrastructure and social services could and should have been higher. Planned industrialization was hardly a rival to agricultural expansion. Faster agricultural growth needed more industrial inputs. Moreover, agricultural production was relatively free from controls in the Nehru era while private industry was subject to stringent policy controls, notably licensing.

The agricultural sector grew very impressively under Nehru, recording the highest growth among all sectors and making a dramatic recovery from the colonial era. This can hardly be seen to result from negligence. The scale of this achievement is fully comprehended only when we study the state of Indian agriculture in 1947. The decimation of the countryside is perhaps the leitmotif of the British raj.

Under the Raj, the rate of growth of foodgrains as a whole far lower than the rate of growth of population implying, declining availability.

The performance of the economy in the Nehru era must be evaluated in light of the agricultural legacy of colonialism. To have brought about two accelerations in the rate of growth of agriculture within two decades of the end of colonial rule is nothing short of spectacular. We need to recognize the reversal of the retardation of the agricultural sector in the first-half of the 20th century as one of the great achievements of independent India, and this was entirely achieved in the Nehru era.

The Public Sector Enterprise as a Black Hole

In India today there is an unmistakable frustration with the public sector. However, the belief that this outcome is intrinsic to the Nehruvian conception of the public sector is far from correct. The rationale for setting up a public sector in India and its performance during the Nehru era must be examined within the overall project of resource mobilization.

For planning to be effective, there is required, if not a concentration in its hands, at least an adequate fund base for the state. In the context of Indian industrialization, launched in the 1950s, a large part of this mobilization would necessarily have had to be in the public sector as it was intended that the state would have the leading role here.

The Industrial Policy Resolution of 1956 states that the public sector was expected to “…augment the revenues of the state and provide resources for further development in fresh fields”. The official idea of the public sector was not welfarist. In particular, the idea of having a public sector at all was to raise resources for public purposes. Independent economists also recognized the serious resource mobilization effort entailed in the plan to industrialize. Unlike today, populism was clearly treated with contempt by the architects of economic policy in early independent India.

The official views of the government on the role of the public sector was to raise resources for public purposes. Resources must be mobilized by taxing citizens. The architects of the plan were not populists.

Performance of Public Sector

A surge in public investment had been achieved in the Nehru era, a 15-year record of expansion that has not been surpassed. The share of public savings in total savings had risen by the end of the period. The expansion of investment was led by an expansion of public saving, as was intended.

While the expansion of savings in the public sector as a whole is faster than the expansion in savings of the private corporate sector, within the former the non-departmental enterprises turn in a vastly superior performance compared to all groups.

The public sector was originally conceived of as an active agent of resource mobilization for development. Its transmigration into a flaccid employment-granting welfarist agency was to come only after the death of Nehru.

The extraordinary record of public sector savings is very likely to have been taken as acceptable by Nehru himself because they were reinvested.

Neither the official approach to them nor the actual record of the public enterprises during these years suggest that the public sector was one of the wasteful legacies of the Nehru era. Their drift in this direction owes more to the pure politics of a subsequent era when the public sector was turned into a vast machine for dispensing patronage and buying out politically the vested interests of the day.

Neglect of Primary Education

One area that appears to have been neglected very severely then is primary education. Krishnamurti criticized the sums allotted for education in the Mahalanobis plan as being absurdly low. He argued that a concerted effort to educate the mass of the population would have far-reaching benefits.

In all the counterfactual scenarios that are sketched for India it is openness to trade that tends to get emphasised, the implicit suggestion being that the possibilities of trade were neglected. One cannot overlook the likelihood that the very face of India, not to mention the rate of growth of output via human capital accretion, may have been vastly different had much more attention been paid to primary education at the very outset. The verdict is very close for it is indeed correct that primary education was severely neglected in the Nehru era. It is of course technically true that, given the constitutional distribution of powers in India, “Education” – being a “state subject” – was then at least partially a responsibility of the states, but this does not absolve the policymaker of the Nehru era of a grave error of judgment regarding the factors that drive growth, leave alone development. Of course, even into the 21st century, we continue to neglect the continued neglect of primary education.

Conclusions

The public policy of the Nehru era had set in motion a more or less stagnant colonial economy. But it cannot be denied that the economy had been got moving, and in any case specific policies were open to correction. A course-correction could well have been applied, but it was not. Instead, after the death of Nehru was witnessed a “lurch to the left” characterized by increasing trade and industrial policy controls and at times reckless expansion of public-sector employment.

Achievements of Nehru Era: This paper restores some perspective to the recent economic history of India. The Nehru era witnessed the recovery of India and the igniting of a growth process that has remained undimmed for over five decades. I have flagged two specific achievements of the Nehru era: the quite spectacular transformation of agriculture as reflected in the acceleration of production and the unprecedented mobilization of resources by the Indian state as reflected in the hike in public investment. There have been errors of commission, such as the proliferation of an unregulated economic bureaucracy, and of omission, such as the gross neglect of primary education.

Under Jawaharlal Nehru the Indian economy had been transformed from a colonial enclave to one with at least some of the prerequisites for sustained long-term growth while at the same time maintaining an autonomy from the superpowers vying for influence on a newly independent subcontinent.

I believe that in the light of my account of the growth of the Indian economy in the Nehru era, views that claim Nehru failed appear without credibility. Mahalanobis’ forecast for the economy, made in the late 1950s, is markedly free of confidence intervals! He had remarked that it will be impossible to go back to a stagnant economy, and that through his leadership, he has brought about profound changes in social and productive forces which will continue to influence the course of events in India in the most decisive way".

This forecast has accredited itself. It must encourage us to begin to view the recovery achieved by the policies of the period as a bridgehead to the higher growth rates that have followed.