The Recovery of India: Economic Growth in the Nehru Era

Pulapre Balakrishnan

This paper investigates the relationship between the policy regime and economic growth in India over
the period 1950-64 which I term “the Nehru era”.

Economic policy of the Nehru era had a certain integrity to it, a characteristic that needs to be
understood far better than is even attempted in this paper. Intergrity meant to describe economic
policymaking that is relatively free of narrow political considerations, when the goals adopted are
independent of economic vested interests and party politics.

I. Introduction
This paper is prompted by two developments an unusual.

In the public sphere , today there is an interest in India’s recent past, especially the Nehru era. Much
of this is negative in its judgment. Some talk of wasted past due to its low growth rates compared to
extraordinary current rates of growth of the Indian economy., many blame Jawaharlal Nehru and the
policies adopted under his leadership for it. These are serious allegations and need to be addressed

Reseachers on economic growth in India, are interested in growth transitions. Majority of the
studies narrow the focus on the last two decades of the 20th century.

Hatekar and Dongre (2005) have taken the entire 20th century when they search for a shift in
the growth of the gross domestic product (GDP). And to our great surprise, findings of the
research shows that the most significant break of the century is now found to be centred
around 1950.

If it is so then what has led to this transition. In order to get an answer one must look at the
relationship between public policy and economic growth in the Nehru era.
This may be expected to serve two purposes.

First, as the period appears to mark a growth transition, we may get an idea of what factors
drive growth.
Secondly, as it was also a period of high state-directedness, it enables us to assess how, if at
all, such intervention can facilitate growth and how it can hold it back. In the context of the
current global debate [Rodrik 2006] on the drivers of growth the exercise may even be
expected to have an audience beyond those interested in the recent history of India.
2. Nehru-Mahalanobis Strategy

Nothing is more iconic of the economics of the Nehru era and representative of the means
adopted to pursue its goals than the “Mahalanobis model” often referred to as the Nehru-
Mahalanobis strategy. The famed model had first appeared in an essay on growth by the
polymath.

The model was intended to provide the analytical foundation for the project of raising the
level of income via industrialisation. This was a model to serve the end of rapidly raising the
level of income through accelerating growth, as raising the level of income was considered
the means to eliminating poverty.

Mahalanobis had conceived of an economy with two sectors, each producing capital and
consumer goods, respectively. Being the model of a closed economy without government,
their outputs would thus sum up to GDP or national income. The capital good enters into the
production of the consumer good and of itself. In an interesting departure from the economic
theory of the time, capital was not subjected to diminishing returns. This implies that a greater
initial allocation of investment to the production of capital goods would leave the economy
with a higher stock of the same in the future. With these capital goods being the physical
counterpart of investment, a higher initial allocation to capital goods production enables a
higher investment in the future. Assuming that all thus feasible investment is undertaken, a
higher level of investment – in the context no more than “putting (all of) the capital good to
work” – is actualised. Now future dated output is higher than what would have been the case
were the initial allocation skewed more towards the production of consumer goods. Higher
too would be the rate of growth of the economy in relation to the starting point. Now the
planner’s problem is to arrive at the share of investment to be allocated to the capital goods
sector given the target level of income. I have here provided a bare-bones description of the
model and its logic. However, it is important when trying to understand the economic policy
of the 1950s to recognise that, even for its architect, the model was meant only as a guide to
a strategy for industrialisation. Therefore, it is equally important to understand the practical
aspects of the strategy as manifested in what in the language of the day was referred to as
“the plan frame”.

Features of the Nehru-Mahalanobis strategy

1.The Heavy Goods Sector

At the heart of the Nehru-Mahalanobis strategy was a fast growing “heavy goods” sector. By
heavy goods they meant “machine-building complexes with a large capacity for the
manufacture of machinery to produce steel, chemicals, fertiliser, electricity, transport
equipment, etc. Planners strategy was to invest disproportionately in these machine-building
complexes as they felt thet this sector suffer from long gestation gaps. Planners recognised
that rate of growth of output resulting from the investment in heavy goods can be low in short
run but they were sure that the long-run rate of growth would be higher, even for the
consumer goods sector, as it enhances productive capacity across the economy.

In a sense the underlying idea of the model is a kind of accounting. It estimates growth
prospects based on current investment allocation, and chooses the allocation that maximises
the rate of growth for any given investment outlay.

It has been castigated (criticised) as having been based on ideology. Many believe that the
model had been inspired by the Feldman model. But Mahalanobis has stated that he was not
aware of the work of Feldman at the time of formulation of his own model.

Many believe that a relevant criticism of the strategy is its economic logic rather than of its
provenance(origin) (i.e.it originated from feldman’s work/ soviet ideology). One such criticism
put forth by Desai (2007) is more relevant that Mahalanobis’ model has in it no
unemployment, inflation or balance of payments . Author says that except inflation , other
two were duly recognised by mahalanobis.

2. Supply-side Model

Many believe that a major flaw(related to its origin) of Mahalanobis model was that it was
exclusively a supply-side model. There was no recognition of a possible demand constraint to
capital accumulation and little scope for slackening demand growth to subvert(destroy) the
growth process.such a SS side model based on the purely physical relationship between inputs
and outputs made sense in the Soviet Union, the classical “command economy” where
investment can be decreed (forced) by planners and enforced by commissars (govt. officers).
But in India following such a strategy will not be successful as India had a active private sector
that invests only in response to growing profits or its anticipation. For private sector to invest,
demand is the lubricant. So giving no importance to demand was wrong

According to author-before criticising model on being Ss side model, it is important to draw

the distinction between model and plan(strategy actually in India)adopted as it were, and the
plan did explicitly recognise the role of demand. Those who criticise this model actually failed
to recognise that due importance was given to agriculture sector (as a demand creating
sector) in plan adopted. How agriculture/consumer good sector was dealt with by planners
can be best explained by comparing it (actual plan adopted in India) with wage good model.

3. Wage Goods (how wage goods were dealt with)

The centre-piece of the Vakil-Brahmananda plan was a “wage goods sector”.

Wage goods-The portion of the national product that represents the aggregate paid for all
contributing labor and services as distinguished from the portion retained by management
or reinvested in capital goods.(means for consumption)
An entrée into what had gone on in the minds of these two economists is made when we
appreciate the reason for their scepticism (disbelief) regarding the relevance of the Keynesian
problematic for India.

As recaptured by Brahmananda in an interview more recently [see ‘Brahmananda’ in

Balasubramanyan 2001] Keynesian unemployment assumes “excess capacity” including “stocks of
wage goods and other circulating capital” while in India “… unemployment of labour exists because
supply of labour wage goods to sustain labour as a cooperant (operating together) factor with land
and labour is inadequate.” So if the supply of wage goods is inadequate investment in agriculture
should be given primacy.

According to Vakil and Brahmananda the multiplier mechanism cannot work in the absence of wage
goods, and this led them to the proposition that employment cannot expand without wage goods.
“For these reasons, agricultural development becomes fundamental. It has to be accorded priority
independent of whatever you posit (place/assume) for industry.”

And again, an observation quite relevant for India 50 years later, “The service and industry sectors
cannot absorb more than a small proportion of the labour force. The service sector is (more?)
important, but services can be expanded only with growing wage goods surpluses.”

Appraisal of Vakil-Brahmananda Plan

No doubt while focusing on unemployment they(vakil and brahmanand) had honed

(sharpen/gave more focused) in on a key reality of India in the 1950s. Also, the centrality
accorded to agriculture could not have been faulted. However----

a. they appear to have underestimated the importance of capital goods for raising
agricultural production. There is the suggestion [Ibid] that these could have been
imported in return for the wage goods, but since this model assume wage goods were
scarce thus, it is not clear how easily a sufficient export surplus could have been
generated. This question precedes (come before) any proclivity (inclination) to
“export pessimism”.
b. Next there is the question of competitiveness to be reckoned (include) with. After
second world war we were having nothing on the name of capital goods and wage
goods were also scarce. Moreover much of our raw cotton and jute producing areas
were there with Pakistan. Agriculture was not able to take care of our own need of
wage goods. So our export prospects were very dim as we were unable to stand with
world as far as trade possibilities were concerned.

c. But the egregious (shocking) absence in the wage-goods-led model is the economist’s
“dues ex machine”, the “engine of growth”. It is evident in Brahmananda’s assertion
that, “If the system is expanding and you have a supply of food, people could stay in
their homes and produce wage goods” thus it seems that in their employment gets
determined in the labour market independent of its price.
 d. It is possible to espy(notice) a strange symmetry between the Mahalanobis and the
wage-goods models with the former downplaying the importance of capital goods and
the later downplaying the importance of consumer goods! In fact, in the Mahalanobis
two-sector model per se the absence of consumer goods cannot constrain output
growth. However, once the overall Mahalanobis strategy is taken into account, we
find that its oversight(neglect) of a crucial ingredient for growth of the Indian economy
– namely consumer goods – is arguably less than that of what had been projected as
a rival, the underestimation of the importance of capital goods by Vakil and
Brahmananda. At least, Mahalanobis saw industrialisation as an input into agricultural
growth and industrialisation was to be promoted by public investment.

e. No serious scheme for transformation of the wage goods sector appears in the Vakil-
Brahmananda plan. But it is with respect to the crucial role of demand in the
sustained expansion of an economy that the Mahalanobis plan looks set to win us
over. Explaining its logic even before the launching of the Second Plan in
1956,Mahalanobis had this to say-
The basic strategy is (now) clear. We create demand by a planned expansion of
the basic industries and of the social sector, that is, health, education, etc. We
meet the demand by a planned increase in the production of consumer goods as
much as possible in the small and household industries, and the rest in factories.
As both production and income increase, we divert a portion of the increase in
income for new investments again in a planned manner to balance new demand
by new production, and the process continues. At each stage, we must be careful
that the right quantity of raw materials is available at the right time for
production; and the right quantity of consumer goods is available at the right
time to meet the demand.

Of course, mehlanobis took heroic assumptions of physical planning- planning without full
control of prices in a private enterprise economy but still this plan a little better than anything
else that was on offer for India at that stage in history as it demonstrated an eye for the big
picture.

f. Critics of Indian economic policy in the 1950s who saw the Mahalanobis plan as
violative of economic freedoms due to its reliance on controls [notably Shenoy 1955]
are unlikely to have taken much comfort from the Vakil-Brahmananda plan as it also
will end up forcing labour migration. Indeed, once employment rather than output is
targetted it is difficult to conceive of reallocation of labour without envisaging forced
migration, Brahmananda’s vision of cottage industry notwithstanding(despite of).
Direct force in shaping development was ruled out of court by Jawaharlal Nehru who
held firmly to the belief that the only kind of economic progress worth having was
“progress by consent”.

4. Link between Agriculture and Industry (How model took care of agriculture
sector)
Mahalanobis was acutely (clearness of perception) aware of its role in the scheme of things
and had incorporated this awareness into his strategy, if not so fully into his model. He had
instantly recognised that in the 1950s Indian agricultural growth was severely constrained by
the availability of the most basic kind of industrial inputs. Thus agricultural growth was itself
linked to industrialisation. Nevertheless the suggestion of a role for industrialisation in
launching the transformation of Indian agriculture is not so entirely far-fetched (impractical).
Acc.to him ---- In India agriculture and manufacturing industries are completely
interlocked. Economic progress depends on the advance of both. Advance of one step in
agriculture would supply food and raw materials for advance of one step in
manufacturing industries which again, in its turn, would speed up irrigation and increase
the supply of fertilisers and pesticides and help in the promotion of scientific research,
which would lead to further advances in agriculture.

5.Increase in Income Levels

While the raising of the level of income is widely recognised as the main objective of planning
in the Nehru era, Mahalanobis himself was additionally engaged with another objective--
to release India “permanently” from the balance of payments constraint. This was the very
logic of planning for industrialisation and is seldom recognised, but it needs to be.

Returning back to the more recognisable objective of the economic policy of the time -
accelerated growth of income. This was to be brought about via greater investment in heavy
industry. It was thought essential for the transformation of Indian agriculture. To speed up
investment in 2nd 5 yr plan ----
1. No major foreign assistance was envisaged.
2. The envisaged contribution of the public enterprises was significant

From this, we can make it out that planners appear to have had a better sense of the role of
resources in a credible economic plan than is found in the public discourse on growth today
when the issue of the “policy regime” is given much too important a role.

Nehru’s Speeches

In last section of aticle, author was trying to tell what were in the nehru’s mind as the ends
and means.From nehru’s speeches this will get more clear.

The first of these, made in 1952, reveals that the idea of industrialisation as a goal to raise
incomes was adopted even before the Mahalanobis model. Further, it conveys the full
recognition among the planners of the importance of agricultural growth to the
industrialisation project.

2nd speech is really a politician’s justification of the policies pursued by his government, and
reads as such, but it does contain a clear understanding of the inter-temporal distribution of
gains that was central to the economic strategy that was being pursued. It also reflects a
certain understanding of the uniqueness of India, not in a civilisational sense but in the sense
of the challenges it faces given its economic backwardness and its democratic polity. A clearer
articulation of the central issues in investment planning, namely, the choice of the long-run
output-maximising allocation of investment across activities would be hard to find.
It reveals that planners were not trying to copy America or Russia or any other country but
trying to learn from their experiences. The problems of India were seen as her own.
Agriculture was looked upon as basic to planning. However much importance was attached
to industry they recognised that without surplus from agriculture, economy cannot progress.
They put money in heavy industries for tomorrow’s benefit, though some benefits were for
today also.

The 3rd speech (made to the chief ministers at the annual meeting of the National
Development Council in 1963) is included by author to show Nehru somewhat depressed
(despondent) regarding the extent of progress made on the agricultural front. He rather
accepted that there is no development if agriculture fails. Moreover eradication of poverty is
also not possible without developing agriculture. In a speech six months before his death he
accepts that agriculture has been neglected relative to its importance and disclosed of
irrigation projects that can bring a change in future.

3 A Record of Growth in the Nehru Era

Table 1: The Trend Growth Rate of GDP (in 1948-49 prices)

Sector 1900-01 to 1946-47 1947-48 to 1999-2000 1950-51 to 1964-65

Primary 0.4 2.5 2.6
Secondary 1.5 5.5 6.8
Tertiary 1.7 5.0 4.5
GDP 0.9 4.1 4.0
GDP per capita 0.1 1.9 1.9
Population 0.8 2.0 2.0
The pre-1947 figure is for ‘Undivided India’ which includes the Indian princely states and
Pakistan, but excludes Burma. Population growth is the compound growth rate.
Source: Sivasubramonian (2005).

Table enables us to see the economic performance of the Nehru era in century-wide
perspective. Data convey two important points.

First, not only does growth in the Nehru years amply exceed what was attained in the final
half-century of colonial rule, but the quickening of the economy observed in the second half
of the 20th century may be seen to have been already achieved in the Nehru era.

Secondly, not only is there an acceleration of growth across all sectors but also the ranking of
sectors by growth is reversed early with the commodity-producing sectors now growing faster
than services which had been the fastest growing segment of the colonial economy.

Following Kuznets’s work on economic growth, high services growth in a low-income

economy would be treated as pathologically (caused by disease). In a poor economy with a
low level of consumption of even the most basic goods, a faster growth of the commodity
sectors is a desirable outcome.

Drawing Parallels: Industrial Revolution

The broad-based expansion of the economy during the Nehru era amounts to a
transformation of the economy is, perhaps, more likely to readily recognised as such by
economic historians. To stretch my argument a bit, author refer to a debate among economic
historians on the true significance of the industrial revolution agreed by them to have taken
place in Europe in the middle of the 18th century.

In this connection Joel Mokyr, a historian of technology, has observed that growth after the
industrial revolution was not just higher but qualitatively different in at least three
differentrespects from what had gone before.

First, growth ceased to be a “niche phenomenon”. Before 1750, it had been limited to
relatively small areas or specific sectors.

Second, while pre-1750 growth had seen “institutional change in the widest sense”,
technological change though not absent was far too slow and localised compared to the role
it was to play afterwards.

Third, “pre-modern” growth was vulnerable to setbacks and shocks both man-made and
natural that made doubtful its sustainability.

Though not all three of Mokyr’s observations are evident from the data I have presented in
FromTable 1 it is clear that Nehru years witnessed widespread growth across the economy,
a technological advance was fostered, and we now see that the growth in income has not only
been sustained for over 50 years but the growth rate itself has actually been
“hastening(increasing) slowly”.

However, two of Mokyr’s comments on the significance of the industrial revolution appear to
have been tailor-made for the period that we are studying here.

First, in response to the observation that the growth achieved in the early stage of the
revolution was not that much, he has responded that the change must not be seen as one of
mere degree: “There is a qualitative difference between an economy in which GDP per capita
grows at 1.5 per cent and one in which it grows at 0.2 per cent” [Mokyr 2005: 286]. While the
parallel here between the data for the period Mokyr speaks of and India for our period is, as
is evident from Table 1, close indeed, it is Mokyr’s more general commenton the significance
of the industrial revolution that is, in my view, of greater import. His evaluation is that, “It
may have been slow, it may have been not all that industrial and even less revolutionary, it
may not even have been wholly British, but it was the tap root of modern economic growth”
[Ibid: 286].

To seek parallels between the growth following the industrial revolution in Britain and the
growth of India during the Nehru era is a promising line of inquiry for a historian of the Indian
economy. On the other hand, I shall now put to use Mokyr’s characterisationof the industrial
revolution not to draw a parallel but to highlight a difference between the two periods under
comparison here. While growth in the Nehru era was distinctly Indian, in that it was not
dependent on either foreign trade or foreign aid, it certainly was “not all that industrial”.
Indeed the greatest expansion of the economy in the Nehru years is not in industry at all.
While the categories for which growth is recorded in Table 1 are some what broad, the data
reveal that growth acceleration in the primary sector, largely comprising agriculture, had
exceeded that of the secondary sector, more or less synonymous with industry.

This has generally gone unrecognised, and I shall return to consider at length both the
approach to agriculture and the record of its performance in these years. But for now it is
worth repeating Sivasubramonian’s (2005) apposite assessment of the economic
achievement of this period. He speaks of theeconomic recovery of the Nehru era as having
been “swift, smooth and remarkable.”

About data used Before moving on I might raise a point crucial to the comparison of growth
over time. As the comparison has to be made at constant prices to be of any value, the choice
of the base year for prices is crucial. I have used Sivasubramonian’s estimates of GDP as they
provide data at constant prices for the entire 20th century. There are of course alternative
estimates for the period 1900-47 and these give way to a very different insight into the period.
For instance, Angus Maddison’s estimates of GDP growth in 1938-39 prices for this period
show the average annual growth rate of per capita output during this period almost stagnant
at 0.04 per cent per annum. This estimate would suggest a far more significant turnaround
following the end of the colonial era.

Growth Comparisons

Note-*The Great Leap Forward of the People's Republic of China (PRC) was an economic and social
campaign of the Communist Party of China (CPC), reflected in planning decisions from 1958 to 1961,
which aimed to use China's vast population to rapidly transform the country from an agrarian
economy into a modern communist society through the process of rapid industrialization and
collectivization.

Do rest from article

Prepare following topics from this article-

1. Nehru-mahalanobis strategy/plan model adopted

2. Growth record (very specific)
3. Neglect of agriculture and role of public sector
4. Mis perceptions

This article is very important from examination point of view.