Nehruvian Socialism - an assessment of Indian economy after independence

  • Posted on: 24 January 2017
  • By: Vivek

Image Credits: Life magazine

Much blame is directed at Nehru for pushing India towards a socialist economic policy. How much blame is justifiable, and who can claim to cast the first stone? What was the economic policy of Jana Sangh during 1950’s and 60s?

Nehru went to Trinity College, Cambridge in October 1907 and graduated with an honours degree in natural science in 1910. In his Autobiography, he gives some clues on the early influences on him

I took the natural sciences tripos, my subjects being chemistry, geology, and botany, but my interests were not confined to these. Many of the people I met at Cambridge .. talked learnedly about books and literature and history and politics and economics.

I left Cambridge after taking my degree in 1910. For the next two years I hovered about London. My law studies did not take up much time, and I got through the Bar examinations, one after the other, with neither glory nor ignominy. For the rest I simply drifted, doing some general reading, vaguely attracted to the Fabians and socialistic ideas, and interested in the political movements of the day.

Fabian Society

The Fabian Society was founded on 4 January 1884 in London. Its founders were in favour of a capitalist welfare state modelled on the Bismarckian German model. It was behind the founding of the Labour party in Britain in 1900, which led to the the postwar creation of the modern welfare state in the UK. This society was also instrumental in creating the London School of Economics (LSE), which has been an incubator of influential politicians, economists, journalists, prime ministers and liberal billionaires.

Many contemporary leaders, including Jawaharlal Nehru, Clement Attlee and Lee Kuan Yew were influenced by the Fabian society.

From a Privileged Elite to a Socialist

Nehru was from a very privileged background. Born into a rich lawyer’s family in Allahabad, he was educated in the elite Harrow boarding school in London, and went on to study at Cambridge. How then, did he end up being influenced by Fabian Socialism?

His own analysis of the post World War I Indian scene in his Autobiography shows familiarity with the significance of economic factors as the essential ingredients of the political situation.

“Industrialisation had spread and the capitalist class had grown in wealth and power. This handful at the top had prospered and were greedy for more power and opportunity to invest their savings and add to their wealth”.

Nehru’s orientation towards socialism owed its origin to his contact with peasants, India’s teeming millions, during some of the mass movements started by Gandhi. Surveying the Indian scene of the nineteen-twenties, he said,

“My politics had been those of my class, the bourgeoise. Indeed all vocal politics then (and to a great extent even now) were those of the middle classes..”

Just then a new interest developed in my life which was to play an important part in later years. I was thrown without any will of my own, into contact with the peasantry.”

Early in June 1920, about two hundred farmers from Pratapgarh had marched to Allahabad, and were seeking to draw attention of prominent politicians to their issues. Nehru heard their plight and agreed to visit them.

That visit was a revelation to me.

They showered their affection on us and looked on us with loving and hopeful eyes, as if we were the bearers of good tidings, the guides who were to lead them to the promised land. Looking at them and their misery and overflowing gratitude, I was filled with shame and sorrow, shame at my own easygoing and comfortable life and our petty politics of the city which ignored this vast multitude of semi- naked sons and daughters of India, sorrow at the degradation and overwhelming poverty of India.

A new picture of India seemed to rise before me, naked, starving, crushed, and utterly miserable. And their faith in us, casual visitors from the distant city, embarrassed me and filled me with a new responsibility that frightened me.

The contemporary world

Free Market and and belief in laissez-faire had dominated much of the thought in the leading countries of the world till the beginning of World War I. The Bolshevik revolution in Russia and formation of USSR was the first signal of the brewing discontent within the industrialised societies.

It was, however, during the Great Depression of the thirties that regulation of the economic system in the interest of general welfare became a cardinal principle of public policy in many countries. For the first time, the world economy faced a scenario where the market was unable to function without government getting involved in it. Eminent economists like Keynes told the world how demand can become stuck in the scenario of a recession, and unless there was intervention by the government in the form of welfare and infrastructure spending, there was no way in the classical free market economy to recover from it.

Even Roosevelt, the president of the capital of capitalism, USA, had announced the New Deal and was talking of

“weeding out the over-privileged and effectively lifting up the under-privileged”

One nation to have avoided the Great Depression was the USSR. It had also industrialised very rapidly during the intra-war period, and by the time of the Second World War, in a span of two decades, had moved from being a feudal society to become a reasonably  self sufficient industrial and technological power.

The Bombay Plan

Given how depression had shaped economic thinking in the 1930s, it was no accident that Socialism was indeed in much vogue.

The idea of planned economy got crystallized during this era, when our national leaders came under the influence of socialist philosophy. M. Visvesvarayya who was a civil engineer and Dewan of Mysore published his book “Planned economy in India”. In this book he presented a constructive draft of the development of India in 10 years. He actually laid a plan to shift labour from agriculture to industries and double up National income in 10 years. 1938 was the year that witnessed the first attempt to develop a national plan for India when National Planning Committee was set up. This committee was set up by Subhash Chandra Bose and chaired by Jawaharlal Nehru.

In 1944, a group of prominent Indian industrialists and technocrats came together in Mumbai, and created a fifteen year investment plan for India. This came to be known as The Bombay Plan. Its eight signatories included JRD Tata, GD Birla and John Mathai, who would become the Finance Minister under Nehru’s all party cabinet.

The basic objectives were a doubling of the (then current) output of the agricultural sector and a five-fold growth in the industrial sector, both within the framework of a 100 billion Rupee (£72b, $18b in those days) investment (of which 44.8% was slated for industry) over 15 years.

A key principle of the Bombay Plan was that the economy could not grow without government intervention and regulation. Under the assumption that the fledgling Indian industries would not be able to compete in a free-market economy, the Plan proposed that the future government protect indigenous industries against foreign competition in local markets.

Indian economy Under Nehru

During the years of the British Raj from the 1850s to 1947, the Indian economy had largely remained stagnant, growing at the same rate (1%) as the population. An important objective of Nehru, based on India’s experience with imperialism and colonialism, was independence from foreign control. This meant that he was not willing to allow foreign firms to control strategic sectors, like heavy industry. On the other hand, the resources of India’s private firms were insufficient.  As a result, a large role for the public sector was unavoidable. So, and pursuant to the Bombay Plan, Nehru formed the Planning commission in 1950, which launched the First Five Year plan for 1951-56.

  1. The First Five-year Plan

    The First Five-year Plan was based on the Harrod–Domar model and mainly focused in development of the primary sector. This model concludes that a less developed economy does not “naturally” find full employment and stable growth rates. In such countries, economic growth depends on policies to increase investment, by increasing saving, and using that investment more efficiently.

    The total planned budget of Rs.2069 crore was allocated to seven broad areas: irrigation and energy (27.2%), agriculture and community development (17.4%), transport and communications (24%), industry (8.4%), social services (16.64%), land rehabilitation (4.1%), and for other sectors and services (2.5%). The most important feature of this phase was active role of state in all economic sectors. Such a role was justified at that time because immediately after independence, India was facing basic problems—deficiency of capital and low capacity to save.

    Many irrigation projects were initiated during this period, including the Bhakra, Hirakud and Damodar Valley dams. The plan also addressed children’s health and reduced infant mortality, indirectly contributing to population growth.

    At the end of the plan period in 1956, five Indian Institutes of Technology (IITs) were started as major technical institutions. The University Grants Commission (UGC) was set up to take care of funding and take measures to strengthen the higher education in the country.

    The target growth rate was 2.1% annual gross domestic product (GDP) growth; the achieved growth rate was 3.6% the net domestic product went up by 15%,per capita income, which increased by 8%. Contracts were signed to start five steel plants, which came into existence in the middle of the Second Five-Year Plan.

  2. Second Plan (1956–1961)

    The Second Plan focused on “rapid Industrialisation”, which Nehru believed, unlike many of his Congress colleagues, to be “the only way to raise the standards of living of people substantially, and combat poverty”.

    The plan attempted to determine the optimal allocation of investment between productive sectors in order to maximise long-run economic growth. It used the prevalent state of art techniques of operations research and optimization as well as the novel applications of statistical models developed at the Indian Statistical Institute. 

    Hydroelectric power projects and five steel plants at Bhilai, Durgapur, and Rourkela were established with the help of Russia, Britain (the U.K) and West Germany respectively. Coal production was increased. More railway lines were added in the north east.

    The Tata Institute of Fundamental Research and Atomic Energy Commission (AEC) was established as research institutes. In 1957 a talent search and scholarship program was begun to find talented young students to train for work in nuclear power.

    The target growth rate was 4.5% and the actual growth rate was 4.27%.

     

  3. Third Plan (1961-1966)

    With wars in 1962 and 1965, and a severe drought in 1965, the third plan proved to be a relative failure, with growth rates falling to 2.4% against a target of 5.6%.

India in 1964

Nehru died in May 1964. During his rule, India’s GDP grew at an average of 4%, which was 4 times the growth rate during the British Raj. The Real GDP went up by 75%, Steel production capacity went up 6 times, Electricity generation went up 6.5 times, Overall Industrial production went up 2.6 times. In most other indicators too, the growth was reasonably good. Had there been no wars during the third plan, India could have perhaps even achieved the Bombay plan goals of the first 15 years.

Indian Economy under Nehru

Category

1951

1964

%Growth

 

Population (millions)

345.0

472.0

36.81

 

Real GDP (Rs Crore)

279,618.0

488,247.0

74.61

 

Per Capita Net National Income (Rs)

7114.0

9400.0

32.14

 

Index of Agricultural Production

46.2

75.6

63.72

 

Index of Industrial Production

7.9

20.6

160.76

 

Steel Production Capacity (million tonnes)

1.0

7.0

600.00

 

Foodgrains (million tonnes)

50.8

92.6

82.20

 

Electricity Generated (billion kWh)

5.0

32.6

552.00

 

Birth Rate (per 1000)

30.9

41.7

34.95

 

Death Rate (per 1000)

27.4

19.0

-30.66

 

Life Expectancy at Birth (in years)

32.1

43.0

33.96

 

Education: Literacy Rate (%)

18.3

31.0

69.40

 

The literacy rate grew from abysmal 18.33% in 1951, to around 30%. Life expectancy in India had gone up from 32 years in 1947 to 47 years by 1965. The improved health services post independence had led to the a population explosion too, as population growth shot up to 2.8% from a low of 1%. India’s population had grown from around 345 million in 1947 to around 472 million in 1964. Thus, if we look at the Per Capita GDP figures, they do look somewhat less impressive than the raw GDP growth figures. We should look at this failure of Nehru in light of the very low literacy rates, and the lack of medical staff and health services. Even then, looking at the long term data, it is clear that 1950 is an upward turning point in the long term flat trend of the British Raj period

The planned economy did help kick-start growth in India, and laid the foundations of the economy from having no base, technology, savings and human capital at all.

Many major banks were still privately run in 1964, as were many electricity, steel companies and coal mines. Tata’s still had a significant stake in Air India, which was run professionally under the leadership of JRD Tata.

In other words, India in 1964, still had significant presence of private sector in many key areas, some of the socialist nationalisations were done subsequently by Indira Gandhi and others.

Indira Gandhi

Due to the failure of the Third Plan the government was forced to declare “plan holidays” (from 1966–67, 1967–68, and 1968–69). Three annual plans were drawn during this intervening period. During 1966–67 there was again the problem of drought, that resulted in a sharp drop in grains production, and resulted in the Bihar Famine.

After successive years of droughts, and food shortages during 1965-67, the focus shifted on Agriculture. India did have a very successful green revolution during Indira Gandhi’s period. Foodgrain production of both wheat and rice jumped up significantly, and India’s dependence on imports for food grains disappeared.

During late 60’s and 70’s, Indira Gandhi nationalized the banks, coal mines and several other core industries. Congress veered towards even more Socialist path under her. While technically Indian remained Non-Aligned even under Indira Gandhi, she had taken India much closer to the former USSR by signing a friendship treaty that assured her of USSR support during the 1971 Bangladesh liberation war.

The fourth plan (1969-74) was also affected by the refugees from East Pakistan, a massive cyclone in the Bay of Bengal, and finally the Bangladesh liberation war, the target growth rate was 5.6%, but the actual growth rate was only 3.3%. While the green revolution was very successful, it is also clear that by this time, state intervention in Industry was proving to be counter-productive. By 70s, India had the basic foundations in place, and could have attempted reforms to open up the manufacturing sector.

Alternative ideas in India

So, during 1950-60s when Nehru was pursuing these Economic Policies in India, much criticised by the BJP now, how did the BJP leaders react to it? Were they openly advocating a private sector led growth?

No.

The only major party in India that spoke of supporting private sector and free market economy to some extent during the 50s and 60s was C Rajaji’s Swatantra Party.

  1. The Swatantra party

    Chakravarti Rajagopalachari, informally called Rajaji or C.R, was an influential INC leader of the Madras Presidency. He served as the last Governor General of India, and was Nehru’s preferred candidate for the post of the first President of India. However, Sardar Patel supported Dr Rajendra Prasad, and Rajaji bowed out. Rajaji served in Nehru’s cabinet, and was also the Chief Minister of the Madras State for a few years.

    In January 1957, Rajaji parted ways with Congress, and in 1959, formed Swatantra Party. Conceived by disgruntled heads of former princely states such as the Raja of Ramgarh, the Maharaja of Kalahandi and the Maharajadhiraj of Darbhanga, the party was conservative in character. The party also had the noted supporter of economic liberalism Minoo Masani in its ranks.

    He outlined the goals of the Swatantra Party through twenty one “fundamental principles” in the foundation document. The party stood for equality and opposed government control over the private sector. Rajagopalachari sharply criticised the bureaucracy and coined the term “license-permit Raj” to describe the system of permissions and licenses required for an individual to set up a private enterprise.

    “I want the corruptions of the Permit/Licence Raj to go. […] I want the officials appointed to administer laws and policies to be free from pressures of the bosses of the ruling party, and gradually restored back to the standards of fearless honesty which they once maintained. […] I want real equal opportunities for all and no private monopolies created by the Permit/Licence Raj.”

    The Swatantra party too advocated state control in some sectors, so it was not advocating full free market capitalism, however it did support a “smaller government”, In its 21 founding principles, (#10) it stated:

    The party stands for the restriction of state enterprise to heavy industries such as are necessary to supplement private enterprise in that field, such national services as Railways and the starting of new enterprises which are difficult for private initiative.

    The party believes that in the field of production, the free choice of the producer and the consumer must be given basic place and importance.

    While Swatantra Party opposed Leftist Economic policies, it was different from Communal Right Wing, was fiercely secular in character, and did not indulge in identity politics. Writing in 1968, C. Rajagopalachari remarked that the Jan Sangh

    “has quite a few good leaders… What is needed however is a broad-mindedness that not just practices toleration but looks upon Mussalmans, Christians, Parsis and others as politically and culturally as good as Hindus.”

  2. The Jan Sangh

    Jan Sangh ideologue Deendayal Upadhyay shaped its economic vision, and it was not that of a free market utopia. In fact, his ideas can be seen as an attempt to bring Communism and Capitalism together with some religious concepts from Hinduism. It has some Gandhian principles included as well. I have listed some of his ideas on economy below:

    • EFFECTS OF URBANISATION – the need of the times is not new cities but - industrialisation of villages.

    • INDUSTRIAL CORPORATIONS – They should have freedom in their day-to-day conduct but should be under parliamentary control.

    • PROSPERITY VERSUS DHARMA – NOT only an absence of material prosperity but also an excess of material prosperity leads to an end of Dharma.

    • OWNERSHIP RIGHT FOR WORKERS – along with the share-holder the worker should be given ownership rights and a share in its management and profit.

    •  NO RIGHT ETERNAL – NO fundamental rights, whether related to property or other things, are eternal. They are all dependent upon the interest of society.

    Even today, Deendayal Upadhyay is BJPs ideologue as its ideologue
    In 1966-67, Balraj Madhok rose to become the President of the Jana Sangh. He led the party in the general elections of 1967, when the party won 35 seats in the Lok Sabha, its highest tally before BJP days. Madhok tried to create a coalition of rightist forces along with the Swatantra Party. However, the strategy was opposed by AB Vajpayee, who represented the hardline RSS faction inside the party.

    Madhok denounced what he called the party’s `leftist’ leanings and the influence of the RSS on its functioning. His stand led to his marginalisation in the party. In 1973, LK Advani, who became the president, expelled Madhok from the party for three years. Right from his expulsion in 1973, Madhok remained a pungent critic of Bharatiya Janata Party leaders Atal Bihari Vajpayee, Lal Krishna Advani and their policies.The Janata Party (1977-79)

  3. The Janata Party (1977-79)

    After the death of Rajaji in 1972, Swatantra Party declined rapidly, and Indira Gandhi’s main opposition during the 70’s was not from the right-wing, but from forces like Jaiprakash Narayan, who were even more socialist than Indira Gandhi. Janata Party’s brief rule led to the high-profile exit of corporations such as Coca-Cola and IBM from India.

    It was around this time that Deng Xiaoping was unleashing the reforms in China, and it started moving ahead of India. Situation was ripe for reforms in India since 70’s, but it was something that successive prime ministers, Indira Gandhi, Morarji Desai, Rajiv Gandhi and VP Singh had missed.

Economic Reforms since 1991

A few months after the Narasimha Rao government launched reforms in 1991, several Sangh Parivar organizations came together and formed the Swadeshi Jagran Manch (SJM). During the Rao tenure, BJP also kept a contradictory position. While the Maharastra state ruled by it negotiated a power plant deal with Enron, some BJP leaders took an anti-MNC and pro-swadeshi stand.

In 1995, the BJP adopted swadeshi and self-reliance, It voted against the bill to amend the Indian Patent Act then and again in 1997. It adopted the same attitude on two occasions over the Insurance Regulatory Authority Bill which invited foreign investment in the insurance sector.

Since the 1996 elections, BJP had to walk a tight rope satisfying both the SJM lobby and also the middle class voters who were supportive of reforms.

BJP’s record on support to the reforms has not been very consistent – it has opposed several reforms, such as GST, FDI, when in opposition even during the UPA-2 government. GST, that looks likely to be launched in 2017, could have been ready at least 5-6 years earlier, had BJP cooperated with the UPA-2 government in national interest.

It is clear that 1991 reforms perhaps came to India at least a decade too late. However, all parties are guilty of causing delays to subsequent reforms such as GST and FDI.

Conclusions

  • Nehru’s ideas on state control were shaped by India’s experience with colonialism, and also the contemporary events and ideas such as the Great Depression, Fabian Socialism, Roosevelt’s new deal in the USA, USSR’s rapid industrialisation and Keynesian views on fiscal stimulus and intervention by the state.
  • These ideas were broadly endorsed by the experts as well as the Indian Industrialists themselves.
  • The first two five year plans were reasonably successful in laying the foundations for industry, and human capital for future industrial development in India.
  • However rapid population growth due to a fall in death rates negated some of the gains, also the third plan was badly hampered by the wars of 1962 and 1965.
  • It was during Indira Gandhi’s rule that many other industries were nationalised. As per the Bombay plan, and with benefit of hindsight, perhaps it would have been better for state to pull out of certain industries by early 70s.
  • Barring Swatantra party, and Balraj Madhok to some extent, there was not much opposition to Nehruvian socialism at the time. Even Rajaji was not seeking government disinvestment from all sectors.
  • By 70’s, with Swatantra Party’s decline,  Indira Gandhi’s opposition was even more socialist/leftist than her.
  • BJP expelled Balraj Madhok. Even later, BJP’s own approach towards economic reforms has not been consistent, but opportunistic.

 

References

  1. Nehru and Socialism
  2. The Bombay Plan, a forgotten document
  3. Nehru’s economic legacy
  4. Understanding India’s economic growth
  5. Statistics at a Glance 
  6. How Prasad (Not Rajaji) became the first President of India
  7. Five-Year Plans of India

The author can be contacted on twitter handle @raisaahab

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