Nehru’s economic policies: A wrong step at crossroads?
Updated: Mar 11, 2020
By Sanhitha Jugulam
Now, it is well known, and we have often stressed this, that production is perhaps one of the most important things before us today: that is, adding to the wealth of the country…..production comes first and I am prepared to say that everything that we do should be judged from the point of view of production first of all. If nationalization adds to production we shall have nationalization at every step. If it does not let us see how to bring it about in order not to impede production. That is the essential thing.
-Prime minister Jawaharlal Nehru in constituent assembly (legislative) on the 17th of february 1948
Before beginning there is an implicit exigent demand of my mind that I ought to pay heed to. There is no denying that Panditji housed clear and unalloyed intentions- to foment inclusive growth in India. It is neither acceptable nor desirable to lodge any liability upon this great man who endeavored to do all he could to make India a powerful and a wealthy nation. Hence, it is desirable to view these policies in a parlance common to an economist rather than a politician.
While there is a wide consensus among some of the thinkers that Panditji’s policies did teem with economic rationale, they do not appear to be completely tenable to me. Panditji’s predilection towards socialist ideology of the erstwhile Soviet Union is not as explicit, but there is no reason to believe that he did not embark on policies that were largely socialist in character. It would be wrong to say that he blindly picked up Marxist dogma, but his propensity towards nationalization is enough an evidence to prove his inclinations.
The cardinal mistake (in fact a fundamental and a fatal flaw) was to assume that socialist ideology and the much applauded idea of DEMOCRACY could be taken along on parallel and non conflicting paths. While it is true that the incongruity is not as apparent, a fairly deep probe could have revealed that conflict. To use organizational templates of the government, at that time far better developed as compared to the private sector, ostensibly seems to be an idea that best exploits existing resources. But if one looks at it, there is a glaring reality called the BUREAUCRACY that cannot be overlooked. What is to be noted is that incentives to the bureaucrats in the USSR (the union’s model was emulated in India to a certain extent and bureaucratic control on public sector is one among various other ideas that were elicited) initially stemmed from competitive fervor (Against America) but as time passed this seemed to evaporate. But the government did reinforce this fervor with a ‘dose of terror’ .So do any of you believe that this ‘ dose of terror ‘ could even be considered as an option to fortify enterprises from the lackadaisical bureaucracy in a democratic nation like India?
The next mistake in order of gravity is the policy of absolute self-sufficiency. It might seem quite queer as to how one can contend against self-sufficiency. To quell such misconceptions I must say that I do not stand staunchly against self-sufficiency ( though I do have my reservations against complete self-sufficiency which was then proposed) but what I do disapprove of is the fierce agenda of ‘ import substitution’ and policies that favored the same, which entailed the preceding ideology ( we all know trade allows specialization and hence expansion of consumption set). Consequent upon this, what was unpremeditated happened. The general truth at that time was that both private and public sectors were far from being well equipped, initially, to tread such a path.
Also what is called ‘export Pessimism’ reinforced the argument for self sufficiency. This ‘means that if you cannot export more cotton to buy machinery you need to promote investment, then you need to produce this machinery yourself’ as Jagadish Bhagawati put it.This pessimism, he says, came from the early views that exports of traditional primary and agricultural products were under strain because of continuous abandoning of their use and their substitution by cheap synthetics. It also emerged from the speculation that the western countries would enact trade barriers soon to curtail their growing imports from the developing nations.
With all these beliefs in place, the only panacea that Panditji could see was ‘progressive nationalization’ ( which means a gradualist approach) given that he was deeply mired in the belief that there was a grave lacuna of resources in the private sector ( even if they did, private sector growth, for him meant widening the inequality gulf). There no denying that the private sector was weak, but why it was weak is a question that transpires but often goes ignored by economic thinkers. Well, let me attempt to answer. There was a grave paucity of credit to the private sector. The credit availability was worrying because of the underdeveloped banking sector and frivolous distribution of the same to the government to invest in the PSU’S( These PSU’s only engulfed that credit) . However, it seems as if Panditji channelized all his efforts to infuse strength in rural banking[note 1] and paid little or no attention to fortify and strengthen private and public banking. There was preponderance of enthusiastic entrepreneurs but no money for them. They craved for loans to venture out into a plethora of sectors (including those that had long gestation periods) and also expressed their concerns, but to no avail. What could have served as an alternative is the redistribution of credit i.e, disbursing it to the private sector businesses. This way we could have promoted efficiency (we know what this thing called the ‘PROFIT MOTIVE’ can do) and this could have also fetched taxes in the form of corporate taxes.
Let’s take a look at the facts:
1) It is widely accepted that rates α 1/size of the banking sector (ECONOMIC WEEKLY 1960) and that there were less than 8000 bank branches in the country (with more than 6000 categorized under ‘rural, semi urban and urban category) which implies that there were less than 2000 ‘metropolitan banks’.
2) We also need to note that a multitude of restrictions were imposed on the banks. Banks could lend only after considering several aspects including the type of output, ownership and a limit on the bank’s absolute capacity to grant a loan to a would-be borrower.
3) Short term loans constituted a lion’s share in the total loan disbursements (refer to the paper by George Rosen pg
4) Long term interest rates were minimum 6.5% (ICICI) and minimum 7.75%(ICICI) on foreign currency loans (additional charges and stamp taxes effectively increased this by anywhere between 0.25% to 1%). While this may seem moderate, the average return on capital during 1950-58 which was 7.5% (inclusive)- implying that there was no profit for any investors from undertaking productive activities!( just a light read of the economic weekly’s essay that I have referred to seems to furnish evidence to prove the opposite (we cannot ignore the fact that this weekly is essentially leftist and Nehru was its founder’s hero) . However, the essay when viewed with a certain perspective in mind uncovers true facts)
5) The Savings to GDP ratio in 1950-51 was mere 10.4% and12.7% in 1960 with most of it coming from households and almost diminutive amount of private sector savings. The difference between investment and savings as a proportion of GDP began at -0.2% in 1950, but reached its highest level of 3.0% in 1960. [Asia Pacific development Journal]. So this is enough an evidence that the government functioned on deficit financing through colossal loans from the RBI and hence left a limited room for private lending.
Hence, it can be conclusively said that Private sector had limited or no impetus under Panditji.
So ultimately, this myopic view of both Panditji and his advisers leading to a stagnant private sector, left no option but ‘nationalization’. Now, it is time to recall his words that I have quoted in the beginning of the article. It seems as if he wanted to convey this: ‘let us push nationalization at any cost’. He used an euphemism though. “ If nationalization adds to production we shall have nationalization at every step. If it does not let us see how to bring it about in order not to impede production.”, these words suggest that he was not ready to relinquish the idea even if it did not add any productive value. This kind of obdurate stance can prove to be disastrous, and it did.
This belief over time led to to reserving certain key sectors for the public sector. This, most obviously, led to protectionism and government monopoly, a monopoly left at the disposal of avaricious bureaucrats who thought that the material incentives they are offered to accomplish such behemoth tasks were grossly insufficient.
Also, a relatively minor mistake (according to me though) is the constitution of the PLANNING COMMISSION. I see the venture as something aimed at fostering planning, but I don’t see why we needed this despite the presence of an array of ministries to plan. This did nothing but imposed an unnecessary monetary load on the government. If a step to foment the planning revolution was so required, It could have been in the form of an expert employed by each ministry. These expert with their respective teams could have forged plans for their respective ministries . This would have sufficed. In fact, there were experts employed by ministers. I wonder why, in such a scenario the planning commission was constituted. Also, such an action perhaps would have stalled the largely ineffective clubbing of various sectors under the five- year plans and probably might have led to a more concentrated approach on each sector handled independently by the respective ministries.
I know I have taken a stance quite uncommon, given a prodigious volume of literature in favor of Panditji’s policies. But I am being true my economic sense and acumen. Also to assure you readers, I have based my inferences on data published by reliable and authentic sources such as RBI. Now to conclude, I would only say one thing “Intentions don’t confer credence and efficiency upon the plans”.
Panagariya, Aravind and Jagadish Bhagawati. India’s tryst with destiny. 2013. New Delhi: Penguin Books.
Panchamukhi, V R. “LESSONS FROM THE NATIONAL EXPERIENCE OF INDIA IN MOBILIZING DOMESTICAND EXTERNAL RESOURCES FOR DEVOLOPMENT.” Asia-Pacific Development Journal.
rajan, Raghuram g. fault lines chapter: exporting to grow.
Rosen, George. “The structure of interest rates in india.” Economic Weekly, 1960.
[note1]: Refer to http://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/69367.pdf pg no 5
[note 2] Mitra, Ashok. “Sixty years ago.” pragoti.