Humanitarian Growth and Institution Builder: Nehruvian Socialism
In continuation with the previous article, We have seen how technological and industrial investment led to the foundation of a self-reliant India. Despite this, we had seen the Balance of Payment crises precipitating more than once. Inflation too touched double digits. However, these problems are particular in the foundational stages of economic growth in developing countries. It was, however, clear that the focus on industrialization had lost steam in the early 1960s. It can be attributed to geopolitical instability. The manufacturing process became stagnant and never after that, received a significant fillip. Thus, we could witness a direct shift from the agricultural sector to the services sector. This was not seen in the Asian economies of China, Vietnam, Taiwan etc. India ran into budgetary deficits in the early years of economic growth, inhibiting the state’s capability to expand manufacturing. The agricultural sector also never seems to have been freed of inequality. The agricultural sector, which is still the largest employer, did not go through a massive transformation. In this article, we will look at how farming and service sectors fared under the socialist model. We will also see how this model had a humanitarian shade to it and also how PM Nehru was a true institution-builder. Towards the end, we will see how the mixed economy model proved insufficient to rake up growth after a certain point.
Food security in a large country like India, where poverty rates were skyrocketing post-independence; was perhaps the gargantuan economic challenge faced ever. Mahalanobis model is said to be heavily inclined towards the industrial sector rather than the agricultural sector. Land reforms did take place to abolish the well-entrenched Zamindari system. The Agrarian sector wasn’t the real focus of government- critics have often raked up this point. Under British rule, India was turned into an agrarian economy while the West went under rapid industrialization. JL Nehru had famously said, anything else can wait but not agriculture! The focus on the industrial sector thus ensured the development of heavy agricultural machinery, equipment, canals that would enhance agricultural productivity. The first five-year plans saw agricultural production increase by about 17%. However, the government remained dependent on foreign countries for food grains. The trend continued until; Green Revolution ushered in. According to Prof. Vakil and Prof. Brahmanand of Bombay University, emphasis on heavy machinery led to a rise in the price of food grains and that perpetuated poverty. Unlike the Communist regime in China, land reform did not hinge upon democratic rights. These reforms were successful in very few pockets of the whole country. Despite that, agricultural production increased by 16% after the 2nd Five Year Plan. Agricultural production increased by 1/3rd amount. Cooperative and institutional loans to farmers surged indicative of an elaborative farm credit network that was going to be built. Cooperative farming did not show the level of success as cooperative commodity production as AMUL did. States like Punjab which built upon scientific models of agriculture- like electricity, canals became a harbinger of change during the Green Revolution. The last years of Nehru witnessed multiple food shortages emerging in different parts due to successive failures of monsoons. Despite the snags, the groundwork had been done to face challenges. Multiple inefficiencies still plague Indian agriculture, but still, we have expanded our agricultural production massively like no other nation. Yet, neglect of agriculture led to 60% of the working force contributing to less than 20% of output- something that would perpetuate inequality for a long time. However, despite the massive agricultural production hasn’t made India self-sufficient to fulfil the hunger of millions still in poverty- reflected in rankings on countries on the basis of hunger index. Per capita food grain availability remained low in colonial and neo-liberal policy times, then in the Nehruvian period; speaking much for itself!
In the early stages of nation-building, the Five-Year Plans had established Indian Institute of Technology, All India Institute of Medical Sciences, Indian Institute of Management, National School of Drama, Indian Institute of Sciences, National Institute of Design, Delhi School of Economics amongst others. These institutions were going to be the drivers of big-ticket reforms of later years. Nehru’s investment in human capital formation undoubtedly deserves our admiration. The highly skilled workforce who had their education in these institutions contribute to the global economy significantly. IITs and IIMs roles in India emerging as an IT hub could not be challenged. These institutions have unleashed the real animal spirits in our economy. The public education system was strengthened massively.
Some of the monumental achievements of the socialist model were the creation of institutions at the nascent stage of economic growth. Several development institutions like IDBI and ICICI had been established to channel credit to the industrial sector. The tight monetary policy during those years meant that the savings of the populace could be utilized for industrial growth. The private sector would have been the biggest beneficiary of these institutions. The Employment Provident Fund established during that period is a resilient economic device in the hands of the salaried middle class. Life Insurance Corporation remains one of the most monumental achievements of socialist planning. The nationalization of insurance remained a landmark moment that ensured financial cover reaches every individual. The insurance giant might become the largest Indian firm by market capitalization. A very interesting anecdote about LIC goes as such, Mundhra Scam- the first biggest financial embezzlement brought major embarrassment to the Nehru government. However, what followed was an immediate judicial investigation that was speedy and transparent, something which we randomly see in recent times. Indian Oil Corporation, one of the largest oil companies, had been nurtured in that era. Vividh Bharati and Lalit Kala Akademy were also nurtured- the socialist model had that humane touch. Surprisingly, Air India, which today symbolizes the financial mismanagement of PSUs was the gold standard for aviation back in those days. It so happened, JRD Tata, the chairman of Tata Airlines, was disappointed at the nationalization of airlines and he contacted Nehru. Nehru offered JRD Tata, the chairmanship of Indian Airlines and it was Tata who micromanaged all the nuances of aviation. It was indeed, a glowing model of private-public partnership. The aspirational middle class was an outcome of the people-centric policies.
It was true that the economic strategy had been successful in building an industrial base which was, however, smaller as compared to those of Japan, Taiwan and Korea. These nations too had implemented state planning in the early years, but they had exposed the domestic market to foreign competition much earlier than India did. Chinese and Korean comparative advantages in the steel and automobile industry developed gradually because of the collusion between state powers and industrial forces. In India, the entire responsibility of building the industrial base fell squarely on the public sector driven by the state machinery. Domestic capitalists had become wary of the license raj. This strategy could not have been stretched for long, given that the state was going to face a fiscal crunch sometime later. Asian nations had put a plethora of strict restrictions on its domestic industry driven by private players which would not have been successful in a liberal democracy like India. The Balance of Payment crisis was bound to explode, given that domestic investments were replacing export earnings. Later on, during the successive Congress governments, state-led domestic industries had diminishing returns to investment. A political turmoil followed that robbed the Indian economy of an opportunity to reform. The undue licensing regime for a long period clamped down the private sector’s zeal for profit maximization. To counter this, we can rely on the argument that it was politically correct, and various countries had done the same.
State intervention was the much-needed nudge to feeble, non-existent private industry. The development of the private sector was only possible through the public sector. Leading industrialists had realized it, and the Bombay Plan reflected the combined aspirations of both the public and private sector for India’s economic growth story. The only substitute for foreign capital whose opportunity cost was economic sovereignty was an indigenous public sector. India had felt the pangs of pain accrued from free trade in the colonial era when finished products had been dumped into the sub-continent. There has been a tendency to blame the socialist model for India failing to catch up with the West. We easily tend to forget that democratic rights came later when industrialization had set in. Nehru never had the liberty to sidestep individual liberties as in the case of China, South Korea or Vietnam to increase growth drastically. Opening up the economy at that point would have meant that possibility existed, of India turning into an economic protectorate of foreign powers like certain African nations. The famous Bolivian case of privatization accentuates that liberal approach to the economy after years of political instability would wreak havoc on the economically weaker sections. Given the mess plaguing the Indian banking system, one might be forced to think that lack of regulations can become a lag on economic growth. The manufacturing base remains uncompetitive, with liberalization having not done that much to help India gain a superlative comparative advantage in certain industries. Indian economy remains highly consumption-driven, something which had been envisaged in the Five-Year Plans. The Nehruvian model envisioned a strong state that would pave the way for a flourishing market economy. Liberalization would not have been that successful if not for years of state protection. Countries like Japan and Korea have reached inflexion points in their growth curves. Acute inaccuracies of these models have been highlighted. We can agree on the fact that the shift from unregulated to the regulated economy should have taken place before the economic instability crept in. The strong independent institutions Nehru built continue to embellish his legacy. The man himself left an indelible impression on Indian economy- that economy had been nurtured and protected enough so that it could take high flights to compete with the world’s very best!