Man with a Plan
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My recent column on Jawaharlal Nehru ('Raising democracy', IE, November 30), analysing his place in modern Indian history, generated enormous response. Clearly, many thought that a reassessment of Nehru was needed. In recent years, the cultural as well as the economic right has pilloried Nehru. The cultural right finds Nehru's unfailing commitment to minority rights deeply problematic, and the economic right thinks that his preference for central planning and disregard for markets caused incalculable harm to India's economic welfare. Both groups have ignored Nehru's signal contribution to the birth and sustenance of India's democracy.
I would now like to engage the contemporary economic debate on Nehru. Was the edifice of central planning, put in place by Nehru, responsible for India's failure to attack mass poverty in the first few decades of Indian independence? Was Nehru not only the father of Indian democracy, as I argued, but also the father of a wrong-headed economic policy? Was his political contribution monumental, but his economic contribution dismal?
The economic facts are quite revealing. During 1950-1980, when central planning ruled India's economy, the nation's economic growth rate was 3.5 per cent per annum, which the late Raj Krishna famously — though, in retrospect, incorrectly — called the Hindu rate of growth. Since the annual population growth rate in this period averaged roughly 2.5 per cent, India's per capita income grew at a mere 1 per cent per annum.
Contrast this with the next 30 years, 1980-2010. India started moving away from the rigidity of central planning and towards markets in the 1980s; and in 1991, the government abandoned central planning altogether. With that, businessmen were free to invest where they wanted, to the extent they liked, in goods that attracted their attention, with a technology they chose on their own, borrowing capital where they could, buying inputs wherever preferable, selling products at prices generated by markets, not fixed by the government. Today, the Planning Commission does not tell industrialists where to invest and how much. During 1950-1980, it did.
In the second period (1980-2010), India's economic growth rate climbed to roughly 6.5 per cent per annum (rising further to 7.5 per cent during 2000-2010). Since the population growth rate declined to 1.9 per cent per annum, India's per capita income grew at 4.6 per cent annually. To put it commonsensically, Rs 100 in 1950 became a mere Rs 134.80 in 1980, but Rs 100 in 1980 turned into Rs 385.40 by 2010. The two 30-year periods were radically different.
Even more significantly, India's poverty rate remained more or less unchanged during 1950-1980, but declined in the three decades thereafter. The higher economic growth rate was accompanied by a lower poverty rate. One may still find the extent of India's poverty deeply disturbing and its riches in some quarters ethically reprehensible, but it cannot be statistically denied that while India's wealthy may be richer today than ever before, the nation is less poor than ever before.
For an economic assessment of Nehru, the most damning statistics are not about the relationship between economic growth and mass poverty. It is a mistake to assume that Nehru devalued the importance of economic growth, concentrating only on distribution. He did not. Rather, he thought that government planning would step up the nation's economic growth rate such that with rapid industrialisation and economic growth, India would be able to eliminate mass poverty.
Central planning, clearly, did not achieve that goal. In the three decades of rigid planning, India's economic growth rate was abysmally low — and its poverty rate remained unchanged. Should Nehru, then, be castigated for India's economic failures until the onset of the 1980s? Could India have adopted a post-1991 style economic policy framework in 1950?
These questions require nuanced reasoning. We need to ask whether economists and intellectuals, not simply Nehru, trusted markets in the 1950s. What ideas were available to economic policy makers at that time?
In a review of economic theories, the late Albert Hirschman, a great economic thinker of the second half of the 20th century, argued that central planning was not only the dominant paradigm of development in the 1950s, it had the same role as Keynesianism in the developed world. Of the major development economists of the time, only P.T. Bauer (London School of Economics) demurred. For all else, planning had become an article of faith.
Why was this so? There were two reasons. First, with unemployment rates at 15-25 per cent, the Great Depression of the 1930s had undermined faith in the welfare-enhancing capacities of markets. Second, by the 1940s, the Soviet Union had become the most heroic example of industrialisation in history. The UK had taken over a century to industrialise, the US nearly a half-century, but the Soviet Union, primarily agrarian at the time of the 1917 revolution, had become an industrialised nation by the late 1930s. Problems of planning might have become all too obvious by the 1970s and the Soviet Union also collapsed in 1990, but by the 1940s, central planning had created an industrial miracle.
Central planning, thus, became the beacon of industrial hope for poor nations as they emerged from colonialism. Development economics, as a field of inquiry, lodged planning at its core. And for its economic and statistical rigour, accounts of India's Second Five Year Plan (1957-62) entered textbooks of development economics. Students read about Indian planning all over the world.
Belief in the virtues of planning got deeply embedded, both in theory and practice. In one of his first articles, a young Amartya Sen wrote that India actually planned too little: it should have planned even more comprehensively. And in 1995, Jeffrey Sachs and Andrew Warner showed that at the time of their independence, only eight developing countries could be called open economies. The list included Singapore and Malaysia. All others were centrally planned.
It is only after Nehru's death in 1964 that serious criticisms of planning began to appear. In 1970, Jagdish Bhagwati and Padma Desai published their pathbreaking critique of Indian planning. Many more followed. By the late 1960s, the tide had begun to shift.
In short, Nehru's belief in central planning was not simply a mistaken individual faith. It was a failure of an entire generation of economists, intellectuals and statesmen. The post-1991 framework of economic policy was simply not available as a viable mode of economic reasoning and policy. Planning had to fail before the virtues of markets could be rediscovered.
Why Nehru did not change his thinking by the late 1950s is, thus, the wrong question to ask. Why Indira Gandhi in the late 1960s mired India's economy into deeper government control is the more relevant question. She made the government bigger, not smaller, even as the failings of planning were becoming obvious to scholars and economic bureaucrats. Markets were not deemed relevant to mass welfare. It is only with Rajiv Gandhi in 1985 that India's turn towards markets began in real earnest, culminating in the 1991 reforms.
Indira Gandhi, not Nehru, is the architect of India's delayed attack on poverty. Under her leadership, India lost 10-15 years of economic progress.
The writer is Sol Goldman Professor of International Studies and the Social Sciences at Brown University, where he also directs the India Initiative at the Watson Institute. He is a contributing editor at 'The Indian Express'