India at independence was in the top rung among the poor countries. It had experienced industrialisation for a century since the mid-1850s. It had cotton and jute textile mills, railroads, a steel mill, and glass and cement factories. It was the seventh largest industrial country in terms of total output. But it was, even so, a predominantly rural, agricultural economy where poverty was the daily experience of the overwhelming majority of the population. Gandhi understood this well but his solutions were to avoid mechanisation, stick to handicrafts and share rather than eradicate poverty. The modernisers, such as Nehru and Ambedkar, were for urbanisation and modernisation, mechanisation and rapid growth.
The perception of the nationalists was not that India was high up on the list of industrialised countries but that it had been de-industrialised by the colonial power.
India had to re-industrialise and eschew the imperialist/capitalist policies which had led to its backwardness. The British, they believed, had drained India of its surplus. Now was the time to use that surplus for India’s development. In reality, that was just the trade surplus (exports minus imports). Large as it was (up to 5 per cent of GDP) in the late nineteenth century, it had dwindled by the 1940s because India got locked in a low-growth trajectory during the interwar period just as Great Britain did.
With the collapse in agricultural prices during the Depression, India’s trade balance shrank. But India had amassed sterling balances by supplying the British war effort. This was the latest version of the drain. The entire £1.17 billion sterling balances (£100 billion in today’s money) were spent within ten years of independence, in the words of Finance Minister CD Deshmukh, “like there was no tomorrow”. Much of this was spent on Indian businessmen buying out outgoing British business. There was also some hurried buying of foreign goods on the government’s account. The “Jeep scandal” which haunted the career of Krishna Menon was one such expense.
Indian economic thinking was also influenced by a desire to break free of the colonial arrangements. Instead of continuing trading relations with Britain and the Western countries, the desire was for self-sufficiency or autarky which had been a feature of the Soviet development model. Information available about the USSR was systematically falsified but the world at large was not to know that till much later. It was also thought that India should not depend on foreign loans but be self-reliant.
The key was to industrialise as rapidly as possible. Private business, despite its contribution to the nationalist cause, was not trusted. Business itself lacked the confidence to be its own master. The major business houses in the Bombay Plan looked forward to State initiative to quicken development. If India had, in the then popular Marxist parlance, a national bourgeoisie, it was pretty tame. In any case, Nehru had an aversion to the profit system.
Thus the economy relied to a great extent upon the State initiating development in new areas, especially to build heavy industries. Capital goods would no longer be imported from the West but made at home. The primary task of planning was to build up the capital goods sector. Since these industries were highly capital-intensive and savings were a small proportion of income, even a simple saving-investment calculation could predict that growth would be low. What was more important, employment generation would also be poor.
When the young LSE-trained economist KN Raj tried to tell Nehru that growth would be lower than what he had hoped for, Nehru’s rejoinder was that Raj’s Western education had made him pessimistic.
Raj was to be proved right.
Agriculture constituted the bulk of the economy in terms of output and employment. Land tenures differed across India but it was agreed that the major issue in agriculture was not productivity but distribution of output. The cultivator had to get more. The key was legislating for land reform and giving the land to the tiller. Productivity would be adequate. Agricultural development was not a priority, but industrial development, especially of heavy industries, was. In fact, India had low agricultural productivity, whether in terms of output per acre or per worker. India had been a low-productivity economy through its modern history but its relatively large population and the ability of the rulers to extract surplus from its people created vast fortunes. Between 1600 and 1850, per capita income in India had zero rate of growth. For the next 100 years, per capita income grew at 0.5 per cent per annum–1 per cent per annum, faster in the nineteenth century than in the twentieth. The growth, when it came, was from the nascent manufacturing and services sectors.
People who were doubtless well-meaning and sincere thus relied on a wrong theory and elitist development strategy to saddle India with a low growth path. While other Asian economies such as Malaysia or South Korea began with agriculture and agri-based industries, India scorned this path as consumption-oriented. India was to build its own industrial structure so as to be independent of the West. Nehru also explained to Marie Seaton, a film critic and friend, that he was doing this to make India a military power. India suffered from a Great Country syndrome. It had decided that it would and could be a Great Nation now that it was independent. It did not have to behave like other smaller countries – Malaysia or South Korea, for example – but could trace its own unique path of development. Ambition was running way ahead of achievements.
The First Five-Year Plan (1 FYP) 1951–56 was just a stocktaking of existing schemes, some launched by the British before they departed. There were urgent problems of refugee rehabilitation due to Partition. But India was lucky and the harvest of 1954 was extraordinarily good. This reinforced the notion that agriculture did not need extra investment, which proved to be a mistake. The 1 FYP gave a quinquennial growth rate of 18 per cent which was much higher than what the Indian economy had registered during the early twentieth century. Low-lying fruit had been picked.
It was the ambitious Second Five-Year Plan (2 FYP) which ran into problems. The plan framework was prepared by the internationally renowned statistician Prof. PC Mahalanobis. The Mahalanobis model became a cause celebre in the contemporary growth literature. It was mathematically elegant. It reproduced, unbeknownst to Mahalanobis, the Soviet Five-Year Plan framework of Feldman from 1928. Feldman had used a two-sector framework for the economy – wage goods and machine goods. This was the framework Marx had used in Capital, vol. 2, to model the economy. Feldman’s scheme concentrated on investment in the machine goods sector to the neglect of the wage goods sector. The Soviet plan was based on squeezing consumption to build industry. As the Soviet Union could not import capital goods (due to existing international sanctions) this option was the only one open. Marx was the pioneer in this two-sector modelling of the economy and Feldman was the first to use Marx’s framework in planning for a non-capitalist economy. Mahalanobis followed the same logic of concentrating resources on the capital goods sector though India could have imported them more cheaply as South Korea and other Asian countries did. This reinforced Nehru’s bias towards capital goods. No investment was to go into the manufacture of consumer goods; the cottage industries were to take care of the growing demand. Agriculture was low priority. Investment had to be made in machines to make machines.
It is hard to imagine now how thrilled large sections of the Indian elite were by the sheer unrealism of the Mahalanobis model.
I lived through that period as a teenager studying economics and I can personally attest to it: to admire and support Mahalanobis was to be left wing; any demand for agricultural investment or consumer goods production was criticised as hopelessly right wing.
The approach was Brahminical in its rigour and in its disregard for the problems of the real economy and the ordinary people. It led to many learned articles and countless PhDs. Early on, it was realised that India could not generate the savings to finance the investment programme as envisaged by Mahalanobis. There was a crisis. The plan had to be pruned. But luckily for India, the Cold War helped.
China was reputed to be growing fast (that too turned out to be false but it took thirty years before anyone found out). India had to be helped by Western powers to meet the challenge of communism versus the Free World. The widely held belief was that whatever India’s pretensions (non-alignment and so on), everyone knew that when push came to shove India was a part of the Free Democratic West. Senator John F Kennedy proposed US aid for India to supply foodgrains. The agricultural sector had not been able to keep pace with the rising demand for foodgrains and inflation was rising. From the late 1950s till the late 1960s, India relied on food aid from the US under the USA’s Public Law 480, otherwise known as PL480.
The Second Five-Year Plan (2 FYP) gave a quinquennial growth of 23 per cent. The ten-year period of 1951-60 registered a GDP growth of 4.5 per cent per annum, the highest India had seen in centuries. Nehru could feel vindicated. He had faced other problems – with China, with the opposition to his favourite policy of cooperative farming from Charan Singh and the farmers’ lobby. He died a broken man in 1964 but he had laid the basic strategy down. He was, however, lucky – his efforts had made the easy conquests. The real difficulties lay ahead. In subsequent decades, the Nehruvian approach was to grind the economy down to a low growth path.
Two developments made it clear that India had chosen the wrong path. The neglect of agriculture through the 1950s now hit the economy. There had been warnings during the late ’50s. They had warned about the shortage of marketable surplus in foodgrains which remained the single largest item of purchase for most families. Nothing was done to change this. Even in the investment allocation for the third Five-Year Plan, agriculture was downgraded in favour of industry. Two successive years of famine, 1964–65 and 1965–66, followed. The third FYP performed dismally in its first two years, so the targets were scaled upwards for the next three years. Numbers were more real to the planners than the economy.
Lal Bahadur Shastri who succeeded Nehru in May 1964 had a different perspective. He was the first to question, during a speech in the Lok Sabha, if all the dams and factories were helping the common man. He wanted to scale down planning and declared a postponement to the headlong rush into the Fourth Five-Year Plan. There were to be annual plans. The left denounced him. Shastri also was more positive about the US. But he died early in 1966 in Tashkent while negotiating Pakistan’s surrender for the battle of 1965. With his death, a golden opportunity for correcting the growth path had been lost.
Excerpted with permission from The Raisina Model, Meghnad Desai, Penguin Random House India.