Unit 1.
1 The Recovery of India: Economic Growth in the Nehru Era -Pulapre
Balakrishnan, 2007
Introduction
The paper aims to serve two purposes - (i) as the period of 1950-64 shows a growth
transitioning trend, it is imperative to get an idea of what factors drive growth. (ii) and
as the period saw high-state directedness, it enables us to assess how, if at all, such
intervention can facilitate growth and even contract it.
Nehru-Mahalanobis Strategy
The model for the Second Five-Year plan, representative of the 'Mahalanobis model'.
The model was intended to raise the level of income via industrialization. This model
served to rapidly raise the level of income through accelerating growth, as raising the
level of income was considered as a means to eliminate poverty.
> The model conceived of an economy with two sectors, each producing and capital and
consumer goods. Being a closed economy, their output would thus sum up to GDP or
national income. The capital good was assumed to enter into the production of the
consumer good and of itself. However, the capital is not subjected to diminishing
returns. This implies that a greater initial allocation of investment to the production of
capital goods would leave the economy with a higher stock of the same in the future.
The Heavy Goods Sector
> The core of the Nehru-Mahalanobis strategy was a fast-growing heavy goods' sector
which can be generally described as machine-building complexes with a large
capacity for the manufacture of machinery to produce steel, chemicals, fertiliser,
electricity, transport equipment, etc. The means of bringing a fast-growing heavy
goods sector was to invest disproportionately in these machine-building complexes.
> The underlying idea of the model was accounting. It estimates growth prospects based
on current investment allocation, and chooses the allocation that maximises the rate of
growth for any given investment outlay. It also implicitly adopts a lower social rate of
discount than what could have been actually. It has been castigated as having been
based on ideology.
> The model had been inspired from the Soviet growth expansion and is criticised to be
based upon the Feldman model of Soviet planning literature. However, in the 19S0s
newly independent countries could hardly be faulted for aspiring to what the Soviets
had achieved, namely rapid industrialization and the consequent rise in income within
a short time period.
> So, a relevant criticism of the model on economic logic is that it had no
unemployment. Inflation or balance of payments. But again, it is important to exclude
models from the strategy and most of these except inflation were addressed by
Mahalanobis in the Second Five-Year plan.
Supply-side Model
> There was a flaw in the model as it was exclusively a supply-side model, with no
recognition of the demand constraint to capital accumulation and little scope for
slackening demand growth to subvert the growth process.
The model of command economy where the surplus could be constantly reinvested
irrespective of market signals, thus maintaining a constant growth dynamic for some
time. So, savings are always invested in a command economy which cannot happen in
India with a ubiquitous private sector which only invests in response to anticipation of
profits in the future.
Another criticism of the model was the failure to recognize the importance of the
agriculture sector. An alternative development plan was also proposed by CN Vakil
and PR Brahmananda of the Bombay school.
Wage Goods
> The centrepiece of the Vakil-Brahmananda plan was a 'wage-goods' sector. A
scepticism of relevance of Keynesian model in India which assumes excess capacity
including stocks of wage goods and other circulating capital while in India
unemployment of labour exists because of supply of labour wage goods to sustain
labour as a cooperant factor with land and labour in inadequate.
Essentially, for Vakiland Brahmananda the multiplier mechanism cannot work in the
absence of wage goods, and this led them to the proposition that employment cannot
expand without wage goods. For them, the service and industry sectors cannot absorb
more than a small proportion of the labour force. The service sector is important, but
services can be expanded only with growing wage good surpluses.
Appraisal of Vakil-Brahmananda Plan
The authors of this plan appear to have underestimated the importance of capital
goods for raising agricultural production. Also, The suggestion that capital goods
could have been imported in return of wage goods, does not make sense as if wage
goods were scarce enough to limit the expansion of employment in the first place, it is
unclear how sufficient export surplus could have been generated. This precedes any
proclivity to 'export pessimism".
> The absence in the wage-goods model of the 'engine of growth' makes it inapplicable
during the period. The model was classical in nature, with employment being
determined solely in the labour market. There is no autonomous investment function,
which would imply that the demand for labour as a derived demand gets determined
in the goods market - independent of its price and independent of whether there is an
adequate supply of wage goods.
> The strange symmetry between the Mahalanobis and wage-goods models is with the
former downplaying the importance of capital goods and the latter downplaying the
importance of consumer goods. However, at least, Mahalanobis' model saw
industrialization as an input into agricultural growth and industrialization was to be
promoted by public investment.
The crucial role of demand in the sustained expansion of an economy that the
Mahalanobis plan gives it an edge over the Wage goods model. Also, direct force in
shaping development was ruled out of court by Nehru who held firmly to the belief
that the only kind of economic progress worth having was 'progress by consent'.
Link between Agriculture and Industry
In the 1950s, Indian agricultural growth was severely constrained by the availability
of the most basic kind of industrial inputs. Thus, agricultural growth was itself linked
industrialization even though the extent could have been debated.
> As per Krishna, an economist, the technical linkages between agriculture and industry
are such that even a 4% of growth in agriculture is not possible without a high rate of
growth in industries which supply the input requirements of a growing agriculture.
Increasein Income Levels
> The objective of planning in the Nehru era was not only to raise the level of income
but also to release India from the balance of payments constraint. After all, autonomy
was the core of the Nehruvian vision of economic development.
> A rapid increase in the level of income was to be brought about via greater investment
in heavy industry. This was also central to the plan of transformation of agriculture, a
process that would require increased industrial inputs.
º This was to be resourced using two plans -(i) no major foreign assistance was
envisaged. This was in keeping with the idea of an independent development, a
project incompatible with excessive reliance on foreign aid, or even, foreign direct
investment. So, the foreign assistance was put down at less than 5% of total public
expenditure in the proposed plan budget for 1956-57 to 1960-61. (ii) The envisaged
contribution of the public enterprises was significant, revealing the Indian state's
understanding of their role in the economy. The item 'additional taxes and loans and
profits from state enterprises' along with the 'contribution from the railways' together
equaled 'loans from the public' and were twice what was taken to be of foreign
assistance.
A Record of Growthin the Nehru Era
> Growth in the Nehru era amply exceeded what was attained in the final half-century
of colonial rule, but the quickening of the economy observed in the second-half of the
20 century may be seen to have been already achieved in the Nehru era.
Also, not only is there an acceleration of growth across all sectors but also the
commodity-producing sectors are seen to be growing faster than services which had
been the fastest growing sector during the colonial cconomy.
Drawing Parallels: Industrial Revolution
> On the account of Joel Mokyr, a historian of technology, has observed that growth
after the industrial revolution was not just higher but qualitatively different in at least
three different aspects -(i) Growth ceased to be a 'niche phenomenon' being limited
to relatively small areas or specific sectors. (i)While pre-1750 growth had seen
technological change it was far too slow and localised compared to what occurred
after the industrial revolution. (ii) 'pre-modern' growth was vulnerable to setbacks
and shocks both man-made and natural that made its sustainability doubtful.
> The Nehru years witnessed widespread growth across the economy, a technological
advance was fostered, and growth in income has sustained for over 50 years after the
Nehru era. Also, in response to argument that growth achieved in the carly stage of
the revolution was not that much, it can be responded that change must not be seen as
one of the mere degrees There is a qualitative difference between an economy in
which GDP per capita grows at l.5% and the one where it grows at 0.2%.
> While the 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 industrial'. The greatest
expansion of economy in the Nehru years was that of the primary sector, largely
consisting of agriculture, exceeding that of the secondary sector.
Growth Comparisons
> The growth rates compared to other Asian economies show that India has grown
faster than most of Africa in the last five decades, however, it has performed worse
than east Asia. Korea's growth rate is 50% higher than India during this period but
India's growth rate is 25% higher than that of China. So, the falling behind of India in
the growth-league tables, owes itself to causes other than leadership of Nehru.
Comparison with OECD Economies
> In the perspective of Raj Krishna, he lamented that India's record of growth till late
1970s placed it lowver than 100 economies world-wide. Krishna had used per capita
GDP as his measure. This masks the degree of progress made in the Nehru era.
The rate of growth of per capita income during 1950-64 would have exceeded 3%,
which is more than twice the rate of growth of per capita income obtained of the US
and UK during 1820-1922 and exceeds that of Japan during the same period.
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º Life expectancy rose from 32 years in the 1940s to 37 years in the 1950s and to
years in the 1960s. Demographers have put the rise in the rate of growth of population
in the period that we are studying down to the increase in the fertility rate itself due to
the decline in the incidence of malaria and widowhood, and presumably due to
improving public health outreach.
> In the presence of increasing returns to scale the observed growth rate cannot be
dismissed merely as the arithmetic consequence of measuring agiven increase against
a 'low base'. It misses that from an economic standpoint, initiating growth in the
presence of increasing returns to scale, a low base is actually a serious impediment to
growth, for the lower the scale of production the lower, proportionately, is the surplus
available for investment. Thus, high growth on a low base is non-trivial; and the
recognition as a substantial achievement began in the 1950s - after half acentury of
stagnation.
Caricature of a Vision: Through a Glass, Darkly
Addressing misperceptions regarding Nehru-Mahalanobis strategy
The Neglect of Agriculture
º There are two ways a sector can be ignored. First, it can be ignored in the policy
discourse itself. with insufficient attention devoted to its problems. Second,
negligence of the sector as insufficient resources being devoted to the desired
expansion of the sector.
> As per VKRV Rao, of the total investment taken during the first three Five-Year
Plans, agriculture accounted for 22.7% while economic infrastructure accounted for
37.7% and social services at 18.1%. Industry accounted for only 17.2% of the
investment in the public sector during the 15 years of three Five-Year Plans.
> And Raj Krishna, an economist had stated nearly one-fifth of the public sector plan
outlay has been consistently allocated to agricultural development. This set of policies
can hardly be described as embodying the neglect of agriculture. Moreover,
agriculture production was relatively free from controls in the Nehru era while private
industry was subject to stringent policy controls, notable licensing.
The Public Sector Enterprise as a Black Hole
> In India today, there is an unmistakable frustration with the public sector associated
with its poor performance, lack of innovation and disdain for its contempt of social
responsibility and considered as a draft on the public resources. However, the belief
that this outcome is intrinsic to the Nehruvian conception of the public sector is
incorrect.
> In the context of Indian industrialization, launched in the 1950s, a large part of this
mobilisation would necessarily have had to be in the public sector as it was intended
that the state would have the leading role here. Where an economy is at a low-income
level requires the productive surplus to come progressively into the public sector thus
enabling it to maintain command over resources.
Resource Mobilisation
As the second Five-Year Plan constituted the single largest instance of resource
mobilisation during the Nehru era, we find that the official idea of the public sector
was not welfarist. The idea of having a public sector at all was to raise resources for
public purposes.
> The independent economists had recognized the serious resource mobilisation effort
entailed in the plan to industrialise. Also, the complete absence of populism in the
recommendation that in the short run even the convention of excluding the essentials
from taxation may have to be put in abeyance.
Performance of Public Sector
º It is to reiterate that a surge in public investment had been achieved in the Nehru era,
a 15-year record that has not been surpassed. The share of public savings in the total
savings had risen by the end of the period. Though the extent of increase was not
much greater than that of the private corporate sector, it is noteworthy that expansion
of investment was led by an expansion of public saving.
> While the expansion of savings in the public sector as a whole is as it 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
mobilisation for development. Its transmigration into a flaccid employment-granting
welfarist agency was to come only after the death of Nehru.
Neglect of Primary Education
As stated by Krishnamurti, an economist, he had lamented against the low importance
given to education and other social services, and had called for reallocation of
expenditure on this account from the outlay on heavy industries. As per him, 'A
concerted effort to educate the mass of the population, specially in the rural areas,
would undoubtedly have far-reaching benefits of a cumulative expansionist character.
This would greatly lighten the task of the government in bringing about economic
development.
This verdict is very close for it is indeed correct that primary education was severely
neglected in the Nehru era. However, it is crucial to note that 'Education' being a state
subject - was then partially a responsibility of the states, but this does not absolve the
policymaker of the Nehru era of a grave error of judgement regarding the factors that
drive growth, leave alone development.
Conclusion
º The public policy of the Nehru era had set in motion a more or less stagnant colonial
economy. A proliferating bureaucracy, corruption, closedness to foreign capital and
the consequent technological backwardness in production, the lack of competition and
the consequent shoddiness of the consumer goods, an unaccountable public sector and
the consequent low productivity came along as wel.
> A course-correction could well have been applied, but it was not. Instead, after the
death of Nehru increasing trade and industrial policy controls and at times reckless
expansion of public-sector employment. Many of these policies were at a tangent
from those of the Nehru era, notably the deteriorating performance of the public sector
and the use of public monies to buy out economic disaffection with subsidies. This
came to be termed 'Nehruvian Socialism' even though the elimination of economic
waste, unaccountable governance and inefficiency of resource use were the very
arguments of socialism.
> The controls, restriction, interventions were paradoxically often resorted to in the
name of introducing socialist' principles and equity but actually ended up building a
distorted, backward capitalism.
> Today, when people criticise the Nehruvian model, little do they know that it began
with the daughter, and not the man himself- Desai
Achievements of Nehru Era
> The Nehru era witnessed the recovery of India and the igniting of a growth process
that has remained undimmed for over five decades. The repeated acceleration of the
growth rate implies that drawing a likeness between the policies of the Nehru era and
the Soviet Union is false as growth in India has been sustained in a way that it was not
in the former Soviet Union.
> The two specific achievements of the Nehru era can be said to be: the transformation
of agriculture as reflected in the acceleration of production and the unprecedented
mobilisation of resources by the Indian state as reflected in the hike in public
investment.
