His Economics

His Economics

by Sanjeev Ahluwalia - Nov 14, 2017 03:57 PM +05:30 IST
His EconomicsJawaharlal Nehru

He shared his self-doubts, aspirations and hopes directly with the people in the expectation that they would pass it on through the generations. We have to decide how wise his message was.

Deep economic thinkers like John Kenneth Galbraith were not impressed by Jawaharlal Nehru’s grasp of economics. Nehru had studied natural and social sciences at Cambridge and trained to be a lawyer. But the outrage of the Jalianwallah Bagh massacre in 1919 pushed him at the age of 30 into active nationalistic politics. He never looked back.

An aristocrat’s lament

The reason why the dismal science of economics was too narrow to interest Panditji lay in the aristocrat’s disregard for the mechanics of making money, managing a business or bothering about the determinants of economic success. His nephew B.K. Nehru recounts in his 1997 autobiography Nice Guys Finish Second that Panditji had problems with accounting for zeros. He purchased a Raleigh bicycle in 1923 for Rs 300—at 10 times the price of a Japanese bicycle, to transport himself about Allahabad as the President of the Municipality.

This incident illustrates the charming combination of high social commitment—abjuring the use of a motor car which he could afford—coupled with his naïve disregard for getting “value for money”, a concept familiar to anyone who works to a budget. This disconnect between lofty thoughts and practical action was to bedevil all the economic initiatives of the Nehruvian era. But, two caveats to this proposition are in order.

First, Panditji was Prime Minister and it is not uncommon for those in such command roles to have a broad vision, which is subsequently put into practice by technically-oriented, like-minded subalterns. A successful example of such a partnership is of the 1991 economic reforms under P. V. Narasimha Rao as the Prime Minister, assisted by the technocrat Dr Manmohan Singh as his Finance Minister. An ongoing experiment is of Prime Minister Narendra Modi who has the vision but the mechanics are dealt with by others.

Panditji never seemed to find his economics alter ego and this showed in the poor political economy underpinnings of the Five-Year Plans. C. Rajagopalachari could have filled this role. But the ideological differences between the liberal-thinking free-market advocate and the “Statist” Panditji were irreconcilable.

Second, as Prime Minister from 1947 to 1964, the economy was but one of the many challenges before him. Weightier political security issues were non-trivial challenges and would surely have occupied his mind and his time overwhelmingly.

Given the context, it is unfair to delve deeply into the quality of Panditji’s economics which depended on implementation of the first three Five-Year Plans. The details and the economic logic of the allocations of capital were the work of P.C. Mahalanobis, the architect of the Second and Third Plans. But Panditji was such an overpoweringly visible brand, through his writings and speeches, that even the minutiae of economic strategy came to be irretrievably associated solely with him.

And it didn’t end with his death in 1964. Even five decades later, the Congress feels his absence sorely. “A return to the Nehruvian vision would restore the balance in favour of inclusive growth,” Mani Shanker Aiyar writes in a 2015 essay, Interpreting Nehru in the 21st Century.

The reason why this brand of Nehruvian “economics” survives is because it was built around motherhood principles like the virtues of a caring, socialistic State; democratic decentralization of power to the people; cooperative agriculture and community development. These are flags that are not easily knocked down. It is only when the institutional prerequisites for the implementation of these concepts are spelt out that inconsistencies begin to emerge between the vision, the practice and the potential for implementation.


Jawaharlal Nehru was no Stalinist. He abhorred bureaucracy and the complete subservience of the individual to the State, which is the hallmark of socialism. He also had little stomach for violent social change which accompanies the transfer of power from entrenched elites to the marginalized.

He was, however, not a status quo-ist. He had little patience for religion or traditional Indian values, many of which he considered as mere rituals to trap the poor in an endless cycle of servitude and ignorance.

He also was uneasy in the company of native big business, which he instinctively distrusted as being little more than money-grabbing materialists. Born into a wealthy upper-caste family of professionals and schooled in England, it is not surprising that this sensitive, morally upright humanist leaned towards the “welfare State” model of England.

The conundrum, of course, lay in transposing an organically grown economic system from an industrial economy like England to a colonial, de-industrialised economy like India. Add to that the hierarchical compulsions of caste, the debilitating after-effects of colonialism, including the creation of a class of zamindars who were intermediaries between the colonial government and the peasants and the religious strife assiduously fanned by the colonial policy of divide and rule.

It is unsurprising, therefore, that the economic policy of Panditji’s governments (which comprised mostly of similar folks—middle class professionals, landowners and business people) eschewed class struggle completely. The downside was that, in doing so, they lost the opportunity to discipline the government as well as big business, which thrived under the cover of protection from import competition, considered necessary to achieve the objective of import substitution.

The tight regulation and licensing of private business further reduced even domestic competition. The “License Raj” proliferated under the Industrial Policy Resolution 1948, which benefited incumbents against potentially disruptive innovators and new entrepreneurs.

Panditji’s preference for avoiding social disruption served to preserve the overlay between caste and class and perversely perpetuated poverty and ignorance, as capital and income inevitably accumulated at the very top.

Market economics

Ironically, his belief in an interventionist welfare State, individual liberty and democracy, would have been better realized had he created an export-oriented economy like Japan, Korea or Taiwan. During the post-World War period, these three countries also had broadly similar economic parameters. They implemented a “developmental State” model which was as interventionist; which manipulated market structures and prices as much and which also built large public sectors, but with very different outcomes.

The principal difference seems to have been the ability or capacity of the State in these countries to work with the private sector—to discipline it when necessary and to make it competitive by targeting its output for export. A major feature was the high degree of collaboration across these three countries which combined their individual comparative advantages, in the “flying geese model” to capture export markets and integrate their industries into global supply chains.

The Indian State remained incapable of harnessing the private sector in this productive manner. Its motive for industrialization was coloured by export pessimism. It encouraged import substitution. It protected domestic industry from import competition, thereby reducing, over time, its competitiveness, while also hurting domestic consumers.

Export pessimism was not confined to India alone in the 1950s, but others used the export opportunities available from the 1960s whilst India, as Vivek Chibber, professor of sociology at New York University, notes in his 2003 book Locked in Place: State Building and Late Industrialization in India, held steadfast to the “import substitution” route well into the late 1970s.

Were the Marwaris and the Parsis ready to Tango?

The wealth of the Parsi and Marwari entrepreneurs during the 19th century came from trading in opium and through speculative trading during the war years in the 20th century. It is these pools of capital which enabled the Birlas, Poddars, Dalmias, Tatas and Wadias to invest in jute, cotton textile and ship building and later in sugar mills, iron and steel, and cement. Tellingly, however, Thomas A. Timberg, in The Marwaris: From Jagat Seth to the Birlas (2014), points out that even mills owned by native businessmen were managed by British Managing Agencies because of their ability to network and access business opportunities.

Panditji’s pessimism about the willingness of native businessmen to fund developmental schemes could also be because the bulk of them had been loyal supporters of the colonial rulers. Parsi businessmen had profited from collaborating with, and sometimes financing, the colonial government in its struggle against the Marathas. During the inter-war years, the colonial government went out of its way to enlist the support of native businessmen against the nationalist movement.

In western India, Indian businessmen faced less competition from British business. Economist Amiya Kumar Bagchi has noted that traders of Ahmedabad and Baroda had shares in the “Malwa trade” in opium. The princely states of the west—the Gaekwads of Baroda, the Scindias of Gwalior and the Holkars of Indore—set up State enterprises and supported native business to establish industries. The native rulers of south India in Travancore-Cochin and Mysore helped in similar ways.

But Panditji, and most of his cabinet colleagues from the hinterland, could never have envisaged an economy driven by private investment, with the government playing only a facilitating role. Panditji’s address to the annual meeting of the Indian Chemical Manufacturing Association in December 1950 is illustrative of how dismissive he was of private business:

“Is our private enterprise going to take up our river valley schemes? It cannot because they are too big for it. These schemes do not pay dividend quickly. Therefore the State inevitably has to take them up. In America the railways are owned by private companies. Here we own the railways…Private enterprise in this country…may be clever in making money but it is not wise enough.”

The political leaders equated native business with the extortive village bania. In their contempt for business, they were not dissimilar to the Conservative Party of the UK, till Margaret Thatcher, proud daughter of a grocer, took control in 1979 and changed the country forever. India had to wait till 1991 for this to happen.

Planning for growth

The “planning” bug had seized the Congress Party early. An economic programme was adopted, followed by an agrarian plan in 1937 and a National Planning Committee was set up. But these efforts were slowed by the onset of World War II. Unexpectedly, native industry stepped in to fill the breach. Business stalwarts like J.R.D Tata, G.D.Birla, Sir Ardeshir Dalal, Lala Shriram, Kasturbhai Lalabhai, D. Shroff, John Mathai, and Purshottamdas Thakurdas, conceived a national plan well before the government initiated their exercise. The Bombay Plan, 1944, proposed an investment of $30 billion (Rs 10,000 crore) over 15 years.

In comparison, the outlay of the government’s first, second and third Plans together eventually came to around Rs 15,000 crore over the 15-year period of 1952 to 1966—quite a close match, accounting for inflation and since actual expenditure was less than the proposed outlays. Even the allocations of capital across sectors were very similar.

The Bombay Plan sank without a trace. The principal reason was that the Communist parties attacked it as industry’s sly attempt to obtain an early stranglehold over public finances and to extract subsidies to boost their bottom lines. Panditji, forever shy of establishing an explicit link with business, allowed this initial attempt for genuine industry-government collaboration to lapse. This set the tone for the future of government’s relationship with business as a one-way street, with the government directing and business coping overtly but covertly snuggling up to political leaders for individual favours.

The following extract from the assessment of the planning experience till 1966 in the Fourth Plan Document is revealing:

“A growing trade deficit and mounting debt obligations characterized the situation. Despite larger utilisation of foreign aid there was frequent recourse to borrowing from the International Monetary Fund. The temporary suspension of foreign aid in 1965 put further pressure on the already strained foreign exchange position. This was increased by the need to import large quantities of food that year. The rupee was devalued in June 1966. This did not immediately improve the balance of payments as in 1966-67 exports registered a decline as well as imports. However, there was some improvement in 1967-68 which has continued.”

The Fourth Plan document also identified inefficient use of public investment as the key reason for the crisis:

“Despite larger outlays, actual development has often fallen short of targets….Delay in construction, escalation of costs and the failure to utilize capacity fully have added to the difficulties. Many of the projects undertaken in the public sector represent new and complex ventures….But…the fact remains that the concern for speed, economy and efficiency has not been as pervasive as it ought to be”.

Agriculture: the step child of planning?

Neglect of agriculture is a misplaced charge against Panditji. The first Plan (1952-56) allocated 20 per cent of Plan funds for agriculture and irrigation. The Second Plan (1957-61) and the Third Plan (1962-66) increased the nominal allocation for agriculture, although the share decreased to 15 per cent.

Economists of different persuasions—the venerable V.K.R.V. Rao and the redoubtable Raj Krishna—agreed that the steps taken to increase the flow of credit, establish public sector extension and research networks and subsidize modern agricultural inputs all provided effective support. A slew of legislations—abolishing zamindari, imposing a ceiling on ownership of land and distribution of the surplus land thus identified—transferred land ownership, albeit imperfectly, to cultivators who had better incentives to invest in the land.

During the first three Plans, barring the drought year of 1965-66, agricultural production grew by 3 per cent per year, well above the population growth, unlike in the last phase of colonialism (1891-1946) when growth in production was just 0.37 per cent per year, according to historians Aditya Mukherjee and Mridula Mukherjee in their essay The Indian Economy in the Nehru Era in the collection Nehru’s India (2015). The First and Second Plans were also the period when agriculture marketing was fairly unburdened with regulations and controls which were to follow in the 1960s and stifle agricultural productivity.

Cooperative agriculture, community development

The misguided attempt to “collectivise” the management of agricultural production and marketing while retaining individual ownership of land arose out of the application of socialist principles to agriculture under the Nehruvian “mixed” model of development. Ostensibly, the idea was to retain the incentives which spring from individual ownership combined with the advantages of collective, large-scale agriculture.

Where the programme failed was in being imposed from above with little or no grassroot underpinnings. The emerging small landowners, recently empowered by the allotment of zamindari land, were suspicious and loath to subvert their independence to a collective which would inevitably be controlled by entrenched elites. A status quoist bureaucracy was ill-equipped to implement central templates in an innovative, locally relevant manner. These barriers and pervasive illiteracy became yet another subsidy-grabbing opportunity for the elites .

The community development programme, begun in 1952, was formalized by the 1957 Balwant Rai Mehta report. Panditji seized the opportunity to democratize power to the villages. Allocations amounting to 5 per cent of the First and Second Plans were made. But the programme sank into a morass of process-oriented bureaucratic mismanagement. It never acquired the local flavour Panditji wanted of it. It failed to revive the community spirit, the sense of active participation and the sense of ownership in building the nation, which he expected.

Hindsight is often unforgiving while looking at the actions of people in power, who have the obligation to decide and act under the stress of time and events. But even Panditji’s most strident critics would admit that he shaped the manner in which politics was done in his time, was a committed rationalist and a modern, socially conscious man devoted to the cause of India. His last will and testament says it all:

“…the Ganga has been to me a symbol and a memory of India, running into the present and flowing on to the great ocean of the future…I have discarded much of past tradition and custom and am anxious that India should rid herself of all the shackles which bind her…divide her people and suppress vast numbers of them….Though I seek all this yet…as my last homage to India’s cultural inheritance (let) a handful of my ashes be thrown into the Ganga at Allahabad to be carried to the great ocean which washes India’s shore”

He left us in 1964. Like us he was conflicted. But he shared his self-doubts, his aspirations and his hopes directly with the people in the expectation that they—each one of them—would absorb his message and pass it through the generations. It is for us to decide how wise that message was.

Sanjeev Ahluwalia is Advisor, Observer Research Foundation. He specializes in economic governance and institutional development.
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