Economic Growth in India

History and Prospect

PULAPRE BALAKRISHNAN
 2 A Moribund Economy Quickened, 1950–6464*

The whole philosophy … is to take advantage of every possible way of growth and not to do
something which suits some doctrinaire theory or imagine we have grown because we have
satisfied some text-book maxim of a hundred years ago.
—Jawaharlal Nehru (1956)

There exists an account of the recent history of economic growth in India that
proceeds as follows. Following the end of colonialism, the Indian national
leadership, fascinated by the Soviet view of economic development, adopted the
path of a dirigiste inward-looking industrialization. The economy settled down
to an anaemic rate of growth till 1991 when the economic policy regime was
liberalized. Only then, finally, did the economy begin to show signs of an
inherent dynamism, vindicating the critique of the economic policy followed in
India for over four decades. We are about to embark on a study of economic
growth in India which will resolve the veracity of such a reading. However, even
a passing familiarity with history, as reflected by the time series of gross
domestic product (GDP) graphed in the ‘Introduction’, is enough for us to be
able to detect in it an inadequacy. For one, it underplays the dynamism of the
economy in the early 1950s which had brought about the first sustained growth
transition of the twentieth century in India. Second, it overlooks the fact of a
second wind, so to speak, for the economy, in the form of a growth transition in
the late 1970s. But not even recognition of these transitions can adequately
account for the choice of periodization in this study. In particular, it can be
asked: why have we chosen to treat the period 1950–64 as a distinct phase as far
as growth is concerned?
The years 1950 to 1964 mark the period from the constitution of the Planning
Commission to oversee planned economic development to the exit of Jawaharlal
Nehru from the political stage. The decisive role of India's first and longest-
serving prime minister suggests the label ‘Nehru era’ to this phase of Indian
economic history. Nehru's substantial influence on his party, on the issue of
economic policy at least, and the Congress Party's own domination of parliament
gave a particular edge to politics as it affected the making of economic policy of
this time. Economic policymaking of the era had certain integrity to it, the term
being used here strictly in the descriptive sense. It is meant to connote a process
of decision making that is relatively independent of economic vested interests
and free of the narrow party-political considerations that have increasingly come
to characterize India's Westminster-style system of governance. The
distinctiveness of the Nehru era draws from the feature that almost never since
has the political leadership of India enjoyed as much relative autonomy. This
ensured some integrity at least to the choices made, even when it may not always
have carried over as much to the implementation. That after Nehru, within the
same overall framework of state-directedness, much of the intervention was
aimed largely at maintaining the ruling dispensation's hold on power, provides a
rationale for viewing the mid-1960s as the end of an era in India's history.
The year 1950 marks the beginning of any concerted approach to economic
development by the state in independent India, no significant intervention
towards the goal having taken place prior to this date. The delay is hardly
surprising, as at least a couple of years from 1947 were spent by the political
leadership in consolidating the Union of India, made vulnerable by the Partition
and handicapped by the lack of experience of governance. In 1950 the Planning
Commission, the body entrusted with the task of steering the economy, was
formed. The First Five Year Plan was launched within a year. However, it may
be said that this had not amounted to a coherent strategy for growth and
development, having been no more than a collection of projects aimed mainly at
agriculture and infrastructure. For India's political leadership, notably
Jawarharlal Nehru, it was very likely only a dress rehearsal. Having convinced
itself that both the nation's Independence and the people's well-being lay in
industrialization, the leadership was ambitious. It did of course help that the
initial interventions were mostly successful, instilling confidence and buying
time for some serious thinking on a strategy for accelerated growth and the
instruments for achieving it. It is a mark of the determination and capacity of the
political leadership of the time that the latter had been more or less worked out
even before the First Plan was to end in 1956. The Second Five Year Plan was
the vehicle by which the strategy was launched. That strategy, which was to
dominate thinking about the economy for the rest of the Nehru era, and the
associated record of growth constitute the focus of this chapter.

IMAGINING ECONOMIC GROWTH: THE NEHRU–MAHALANOBIS STRATEGY AND

ITS CRITICS
Though narrowly identified as the basis for the Second Five Year Plan, nothing
is more emblematic of the economics of the Nehru era and representative of the
means adopted to pursue its goals than what is referred to as the Mahalanobis
Model. The best known version of the eponymous model had appeared in an
essay on growth by Mahalanobis.1 This was intended to provide the analytical
foundation for the project of raising the level of income via industrialization,
already deliberated upon in the National Planning Committee of the Congress,
which was chaired by Nehru at the request of Subhash Chandra Bose in his
capacity as the party president in 1938. For this reason, the larger vision that had
encompassed the Model is often referred to as the Nehru-Mahalanobis Strategy.
Its objective was to raise the level of income through rapid growth as this was
considered the means to eliminating widespread poverty.
Mahalanobis had conceived of an economy with two sectors, producing
capital and consumer goods, respectively. Being a model of a closed economy
without government, their outputs would sum up to the gross national income.
Within the Model, the capital good enters into the production of the consumer
good and of itself, while the consumer good is not an input into production at all.
In an interesting departure from the economic theory of the time, capital was not
subjected to diminishing returns. This implies that a greater allocation of
investment to the production of capital goods would leave the economy with a
continuously rising stock of capital. With the capital good being the physical
counterpart of investment, a higher allocation to capital goods production
enables higher investment in the future. Assuming that all such feasible
investment is undertaken, a higher level of investment is actualized. Now future-
dated output is higher compared to the case where the share of capital goods in a
given investment outlay is lower. The outcome is strongly related to the feature
that the capital good is required in all lines of production while the consumer
good is not. So, a higher share of capital goods in investment yields a higher rate
of growth of the economy. 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.2
However, when trying to understand the economic policy of the 1950s, it is
important to recognize that, even for its architect, the Model was meant only as a
guide to a strategy for industrialization. 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’. But before moving on to
an exposition of the strategy by Mahalanobis himself, it would help to be
acquainted with the mathematical structure of the model.
Let Yt = national income, Ct = consumption, and Kt = investment at time t;
with Y0, C0, and K0 the corresponding values at the initial period. λk and λc (with
λk + λc = 1) are fractions of investment allocated to industries producing capital
goods (K-sector) and consumer goods (C-sector), respectively. Let βk = ratio of
the increment of income to investment in industries producing investment goods
and βc = ratio of increment of income to investment in industries producing
consumer goods, and β = the ratio of increment of income to investment for the
economy as a whole, with β = λk βk + λc βc necessarily. We also have Kt+1 − Kt =
λkβk Kt and Ct+1 − Ct = λcβcKt. We then get Kt = (1 + λkβk)tK0 and, finally,

giving national income in terms of the initial income Y0, the initial rate of
investment α0 and the allocation parameters λk and λc (which are at the planner's
choice), and the contingent coefficients βk and βc (which are determined by the
pattern of investment and conditions of production).3
In the application of the Model to Indian planning, the critical choice was that
of λk, the share of investment devoted to capital goods. How in the context this
was arrived at is best described in the author's own words:
We found from available data that βk is usually much smaller than βc (that is, the marginal increase of
income per unit of investment is much less in basic industries producing capital goods than in industries
producing consumer goods). This being so, the larger the value of λk, the smaller is the increase of income
in the short run; but, after a critical period of several years, income begins to rise steeply. Using the initial
rate of investment, α0 = 7 per cent, βk = 0.2 and different plausible values of βc we found that to attain a
fairly rapid increase of income over, say about 30 years, it would be desirable that λk should have a value
between 0.3 and 0.5. We adopted the value λk = 1/3, as we felt it would not be possible to go beyond this
value under present conditions. (Mahalanobis 1955a: 28–9)

While aware that his model implied income ‘steeply’ rising beyond some
critical stage, Mahalanobis had not dwelt on this aspect particularly. As seen
from the aforementioned quote, he had only treated it as information relevant to
the problem of the allocation of investment across sectors. However, it is of
interest in a study of growth in India, such as this, that he had imagined a
mechanism whereby growth accelerates in a planned economy. While conceding
that some improvement in the productivity of investment would be feasible via
an optimum utilization of resources at the given level of investment, he foresaw
further increases following directly from the investment in capital goods
production itself:
The value of β would also depend on the rate of investment and on the stock of capital already accumulated.
With a low rate of investment and a small stock of capital it would not be possible to utilize the resources in
a complementary way to the fullest extent owing to indivisibilities in the scale of production. The higher the
rate of investment and the greater the stock of available capital the greater is the possibility of making the
fullest use of the resources mobilized in the plan. As already pointed out in a country (like USA) with a
very high stock of capital it may become progressively easier to secure external economies and hence to
have higher values of β. In India an important object of planning must be to increase the rate of investment
and to build up quickly a large stock of capital which may, in its turn lead to an increase in the value of β.4
(Mahalanobis 1955a: 46)

Both Mahalanobis' radical idea that the purpose of public investment was to
raise the productivity of capital and the implication of his model that the growth
rate would accelerate over time were to be quickly forgotten by both India's
political managers and academic economists, respectively. We shall return to
both these issues.
We now turn to a discursive review of the Nehru-Mahalanobis Strategy for
growth as a means of entry to the criticism that it has received. At the heart of
the Strategy was a fast-growing heavy-goods sector. What are these ‘heavy’
goods and what was their perceived relevance? They have been described as
‘machine-building complexes with a large capacity for the manufacture of
machinery to produce steel, chemicals, fertilizer, electricity, transport equipment,
etc’ (Mahalanobis, quoted in Joshi 1982: 28). The means to bring about a fast-
growing heavy-goods sector was to invest disproportionately in these machine-
building complexes. The significance of the heavy-goods sector itself stemmed
from the premise that Indian industrialization was essentially constrained by the
availability of capital goods and that since foreign exchange was limited, it paid
to build them at home.5 As we have seen from Mahalanobis' account of how the
value of λk was chosen, it was believed that as the investment goods sector was
characterized by a higher incremental capital-output ratio, the rate of growth that
adheres to the Nehru-Mahalanobis Strategy would in the short-run be lower than
that resulting from titling investment towards consumer goods production.
However, the long-run rate of growth of the economy resulting from a shifting of
the investment allocation towards heavy goods would be higher.6 Whether this
feature of the Model only emerged out of the simulation of his Model or was
intuitively available to Mahalanobis is surely of interest; but either way, once
revealed, it must have provided a strong justification for adopting the Nehru-
Mahalanobis Strategy.
In a sense the underlying idea of the Model is no more than accounting. It
estimates growth prospects based on the pattern of investment and chooses the
allocation that yields the target rate of growth. It is not entirely value-free of
course, in that by preferring a higher income in the future it implicitly adopts a
lower social rate of discount than could have been the case. But its author was
not unaware of the trade-off, and in the choice of λk had been guided—as we
have seen—by a concern for not imposing ‘too great a sacrifice of immediate
benefits’ given the low levels of consumption in India.
The Nehru–Mahalanobis Strategy, with planning in particular, has been
particularly castigated for having been based on an ideological predilection.7
This criticism begins to make sense only when one is told that the Model had
been inspired by that of Feldman from the Soviet planning literature.
Mahalanobis had stated8 that he was not aware of this work at the time of
formulation of his own Model. Presumably then, the criticism justifies itself by
identifying any policy orientation influenced positively by the Soviet experience
as ideological. However, in light of the quite spectacular expansion
demonstrated by the former Soviet Union by the mid-1950s such a criticism can
in turn be termed ideological, even if today, armed with knowledge of the
collapse of the Soviet Union, we might aver that the model was not sustainable.
In the 1950s, however, newly independent countries with ambition could
hardly have been faulted for aspiring to what the Soviets had achieved, namely,
rapid industrialization and the consequent increase in income within a
remarkably quick time.9 It is not as if the entirely compromised politics of the
Stalin regime, with the gulags and the ethnic genocide, were overlooked. Only
that Nehru was clear that India would avoid them through democratic practice
even at the cost of achieving a lower rate of growth. It was clear that neither
forced collectivization as a route to raising the rate of growth of agriculture nor
the suspension of democracy as a way of quelling dissent on the chosen strategy
were conceivable to the Indian leadership. So a relevant criticism of the strategy
would only be of its economic logic and what it leaves out rather than of its
alleged provenance. Here the comment by Desai (2007) that Mahalanobis'
Model has in it no unemployment, inflation, or balance of payments is far more
to the point. But once again, it is important to separate out the Model from the
strategy, and each of these issues was explicitly addressed by Mahalanobis in the
drafting of the Second Five Year Plan.10
There was, however, a flaw in the logic of the Model that may have derived
from trying to replicate the Soviet experience of rapid industrialization without
the associated institutions. As more or less an accounting scheme, the
Mahalanobis Model was exclusively a supply-side model. There was inadequate
recognition of a likely demand constraint to capital accumulation subverting the
growth process. A model based on the purely physical relationship between
inputs and outputs may have made sense for the Soviet Union, the classical
‘command economy’ where investment can be decreed by planners and enforced
by commissars, but not so in India with a ubiquitous private sector that invests
only in response to growing profits or its anticipation. Here demand is a driving
force. In the command economy, the surplus could be constantly re-invested
irrespective of market signals, maintaining a more or less constant growth
dynamic at least for some time. Or, from within the discourse on growth
economics, the savings are invariably always invested, which since Keynes we
recognize as a fiction for a market economy, which India mostly was even by
then. The only constraint to a seemingly endless growth in a command economy
would be a declining investible surplus, which could also arise for entirely non-
economic reasons such as political disaffection. Something of this kind perhaps
describes the decline and fall of the Soviet economy after about five decades of
rapid growth. However, even as late as the 1960s, there was no inkling of any
impending collapse. As far as the Nehru-Mahalanobis Strategy is concerned,
however, we may reiterate that it is important to draw the distinction between the
Model and the plan, and the plan did explicitly recognize the role of demand, as
we will see shortly.
While the hubris that the state could direct investment indefinitely may
occasionally have carried away the planners in the 1950s, the criticism often
encountered that they failed to recognize the importance of agriculture is merely
ill-informed judgement. It is important to understand this not so much as to
rehabilitate the planners as to establish that they may not have succeeded to the
extent they would have liked to. In the process, we may succeed in throwing
some light on the situation in India today, when even into the twenty-first
century the agricultural base of the economy is emerging as an area of concern.
This indeed is the one of the main uses of history for the economist. But before I
turn to the role envisaged for agriculture within the Nehru–Mahalanobis
Strategy, I must consider what in the mind of some11 had constituted an
alternative vision for the development for India and, therefore, a challenge to the
Mahalanobis Plan. This was the plan presented by C.N. Vakil and P.R.
Brahmananda of the Bombay School. The centrepiece of the Vakil-
Brahmananda Plan was a ‘wage-goods sector’. We get an insight into what had
gone on in the minds of these two economists when we appreciate the reason for
their scepticism regarding the relevance of the Keynesian problematic12 for
India. As recaptured by Brahmananda more recently, Keynesian unemployment
assumes excess capacity including ‘stocks of wage goods and other circulating
capital’ while in India ‘unemployment of labour exists because supply of wage
goods to sustain labour as a cooperant factor with land and labour is inadequate’
(see interview in Balasubramanyan 2001: 29). Note the self-consciously
Classical terminology, for when Brahmananda is pressed to name the wage
goods, he chooses ‘corn and clothing’. He had gone on to list fourteen items, but
we may rest with ‘foodgrains and textiles’. Essentially for 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: ‘So you see, for these reasons, agricultural development
becomes fundamental. It has to be accorded priority independent of whatever
you posit for industry’ (Ibid.). And again, an observation quite relevant for India
fifty years later, ‘The service and industry sectors cannot absorb more than a
small proportion of the labour force. The service sector is important, but services
can be expanded only with growing wage goods surpluses’ (Ibid.).
So what is the proper appraisal of the Vakil-Brahmananda Plan? There can be
no doubt that in focusing on unemployment they had honed in on a key reality of
India in the 1950s.13 Also, the centrality accorded to agriculture could not have
been faulted. However, the authors of this plan appear to have underestimated
the importance of capital goods for raising agricultural production. There is
Brahmananda's suggestion (Balasubramanyan 2001) that these could have been
imported in return for the wage goods; but if wage goods were scarce enough to
limit the expansion of employment in the first place, it is not clear how easily a
sufficient export surplus could have been generated. This question precedes any
proclivity for ‘export pessimism’ among India's planners, the attitude that had
allegedly led them to underestimate the role of the world market as a potential
engine of Indian economic growth.
Next, for exports there is the question of competitiveness to be reckoned with.
A much vaunted sterling balance had, of course, been built up during the Second
World War when India had supplied the Allied effort in a virtual seller's world
market. However, these goods—being minor armaments, clothing, and
equipment—would no longer have been demanded to anything like the same
extent after the War. As for the agricultural sector, the primary source of wage
goods, it had been unable to supply even the domestic population adequately14
during the first fifty years of the twentieth century. Moreover, there is also the
question of the very availability of capital goods to be purchased from industrial
economies either recovering or booming following the War. The moment in
history is well captured by Chibber (2003: 147) when he states that:
In the years after the war, capital goods in the form of plant and machinery were extremely scarce; not only
did India not have any capital goods industry to speak of, but imports from the developed world were not on
the near horizon, as European powers embarked on the reconstruction of their own economies and because
the United States did not regard South Asia as a pivotal region. The problem with plant and machinery was
mirrored by the problems with raw materials and intermediate goods, especially since, after partition, much
of the Indian cotton and raw jute was now in Pakistan. In both these cases, businesses constantly called for
the assistance of the state in securing the requisite import of goods.

Far from being a tangential comment on the credibility of the Vakil-

Brahmananda Plan, recognition of Indian export and import possibilities in the
1950s is suggestive of the prospects for an Indian economic development
through trade based on comparative advantage. The notable absence in the wage-
goods model is the economist's deus ex machina, 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’ (see interview in Balasubramanyan 2001). This agreeable picture begs
the question of the source of demand for the expansion of the economy. With
hindsight, we can see that the Vakil-Brahmananda model was Classical more
than just in its chosen terminology, with employment determined in the labour
market. There is no autonomous investment function, which would have implied
that the demand for labour as a derived demand gets determined in the goods
market—independent of its price—and, in the context of their framework,
independent of whether there is an adequate supply of wage goods. Of course,
prices could still rise in the absence of wage goods and this would hold back the
multiplier mechanism. However, as the unemployed are surviving as it is, it is
possible to exaggerate15 the degree to which the expansion in output is curtailed
from the supply side following the expansion in aggregate demand.
It is possible to espy a strange ‘symmetry’ between the Mahalanobis and the
Vakil-Brahmananda models, with the former downplaying the importance of
consumer goods and the latter downplaying the importance of capital goods in
the growth process! In the Mahalanobis two-sector Model the absence of
consumer goods per se cannot constrain output growth, which the subsequent
history of the Indian economy makes suspect as an assumption. However, once
the overall Nehru-Mahalanobis Strategy is taken into account, we find that the
degree of its oversight of a crucial ingredient for growth of the Indian economy,
namely, consumer goods, is arguably less than that of the underestimation of the
importance of capital goods by Vakil and Brahmananda. At least, Mahalanobis
saw industrialization as an input into agricultural growth and industrialization
was to be promoted by public investment.16 No serious scheme for
transformation of the productive capability of the wage-goods sector appears in
the Vakil-Brahmananda Plan in comparison. But it is with respect to the crucial
role of demand in the sustained expansion of an economy that the Nehru-
Mahalanobis Strategy appears to have been set to win. In a talk delivered over
All India Radio on 11 September 1955, a date prior to the launching of the
Second Five Year Plan, Mahalanobis had explained the logic of planning in
India thus:
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.
(Mahalanobis 1961: 52)

Of course, we can see the heroic assumptions of physical planning at work

here—especially the implicit premise that it is possible to plan without full
control of prices in a private enterprise economy—but at least on the drawing
board Mahalanobis' plan had hung together a little better than anything else that
was on offer17 for India at that stage in its history. It had demonstrated an eye for
the big picture.
Finally, as an aside, one might observe that critics of Indian economic policy
in the 1950s who saw the Nehru-Mahalanobis Strategy as violative of economic
freedoms due to its reliance on controls18 could not have taken much comfort
from the Vakil-Brahmananda Plan, as its authors had placed it squarely in the
field of planning. Surely, once employment rather than output is targeted, it is
difficult to conceive of reallocation of labour without envisaging forced
migration, Brahmananda's vision of cottage industry notwithstanding. The use of
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 that attained by consent.19
Returning to the question of agriculture, not only was Mahalanobis acutely
aware of its role in the scheme of things but he had incorporated this awareness
into his strategy if not so fully into his model. He had instantly recognized that in
the 1950s Indian agricultural growth was severely constrained by the availability
of the most basic kind of industrial inputs. Thus, agricultural progress was itself
linked to industrialization, even though the extent could have been debated, that
is, while brick and mortar were clearly essential it is certainly not true that
aircraft and automobiles were. Nevertheless, the suggestion of a role for
industrialization in launching the transformation of Indian agriculture is not so
entirely far-fetched. At this juncture I quote from the late Raj Krishna, an
economist who having placed himself at a distance from the establishment that
had donned the Nehruvian mantle is unlikely to have been in thrall to it. Yet he
had stated:
To some extent, the kind of development which occurred in the Nehru and post-Nehru periods was
inevitable. In a subcontinental economy with a very large market, abundant natural resources of every kind,
and vast reserves of unskilled and skilled manpower, the building up of a strong and diversified capital-
goods base was a historical necessity. If today we can boast of a large measure of self-reliance, it is because
considerable capacity has been created in the metallurgical, mechanical, chemical, power and transport
sectors. These sectors are basic precisely because they are equally indispensable for defence, for large-scale
consumer goods production, for small-industry development and rural development. The technical linkages
between agriculture and industry are such that even a 4 percent rate of growth in agriculture is not possible
without a high rate of growth in industries which supply the input requirements of a growing agriculture in
the form of cement, bricks, pipes, pumps, electric power generation and transmission equipment,
agricultural implements, diesel oil, fertiliser, pesticides, roads, vehicles, etc. And a seven percent growth in
industry is not possible without a high rate of agricultural growth, because nearly half the modern industrial
sector either processes agricultural output or supplies agricultural inputs. (Krishna 1979: 59)

Notice that the links conceived of here between agriculture and industry in
India at that early stage of development were both rudimentary and fundamental
at the same time, and, for that very reason, recognition of it should have been
central to any serious growth strategy. It is not credible to argue that the Nehru-
Mahalanobis Strategy had ignored, by design or by default, these links. For
instance, note:
It was appreciated that, in India, surplus is the key to industrialization. It is not only essential to grow
enough food and fibres for our own requirements but it is also necessary to produce a surplus in the form of
either industrial or food crops. 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 fertilizers and pesticides and help in the promotion of scientific
research, which would lead to further advances in agriculture. (Mahalanobis 1961: 95–6)

While raising the level of income is widely recognized as having been the
main objective of planning in the Nehru era, Mahalanobis himself was
additionally engaged with another one, a feature that is not widely known. This
was to release India ‘permanently’ (Mahalanobis 1961: 74) from the foreign-
exchange constraint. Indeed, in his view, this was the very objective of planning
for industrialization. This feature is seldom recognized, but it needs to be. And
when it is, we are given an internal criterion by which to judge the economic
policy of the Nehru era. After all, autonomy was at the core of the Nehruvian
vision of economic development, not to mention of post-colonial India, and
nothing would epitomize this more than a strong balance of payments position.
Indeed, if independent development was the objective, then this would never be
achieved if India were strapped permanently to a balance of payments deficit.
Having flagged this, I return to the more recognizable objective of the economic
policy of the time, namely, the accelerated growth of income.
So a rapid increase in the level of income was the main objective of planning
and this was to be brought about via greater investment in heavy industry. We
have also seen that this was central to the plan for the transformation of Indian
agriculture, a process that would require increased industrial inputs. But how
was this to be financed? The planners were fully aware that the step-up in
investment envisaged in the Second Five Year Plan was very substantial indeed.
Indeed, in retrospect, they appear to have had a better sense of the role of public
finance in a credible economic plan than is found in the public discourse on
growth in India of the early twenty-first century when the ‘policy regime’ per se
has been elevated to far too important a role.
The importance that was accorded to resource mobilization is apparent from
two elements of the plan to raise the level of income. First, no major foreign
assistance was envisaged. This was in keeping with the idea of an independent
development, a project incompatible with excessive reliance on foreign aid or,
even, foreign direct investment (FDI). Taking the Second Five Year Plan as a
case, foreign assistance was put down to less than 5 per cent of total public
expenditure in the proposed ‘government budget’ for 1956–7 to 1960–1, even as
the investment rate was to be raised by over 50 per cent from 7 to 11 per cent of
GDP. Of course, the actual achievement with respect to foreign savings had
differed, as we shall soon have occasion to see. Second, as part of the same plan,
the envisaged contribution of the public enterprises was significant, revealing the
political leadership's expectation of their role in the economy, for instance, the
item ‘Additional Taxes and Loans & Profits from State Enterprises’ along with
the ‘Contribution from the Railways’ equalled ‘Loans from the Public’ and were
over twice what was to be taken as foreign assistance.20 I shall return to this
central premise of public policy in the 1950s that the public sector was expected
to contribute resources to the larger project of national development.
Thus far I have been concerned with trying to establish what the leadership of
the Nehru era had in mind as the ends and means. We have a reasonably good
picture already, but this gets crystallized when we turn to the speeches of
Jawaharlal Nehru himself. Recall that Nehru was the Chairman of the Planning
Commission and was closely involved with the planning process. These
speeches are of interest to us today not only in revealing the arduous process of
deliberation by which policy was formed but also in pointing out the surprisingly
remarkable grasp that, despite being an active career politician, Nehru had on
matters related to the economy.
The first of these, made in 1952, gives us two insights into the economic
calculation of the political leadership. It reveals that the idea of industrialization
as a goal to raise incomes was adopted even before the Mahalanobis Model,
which had undergirded the Second Plan, was written down. Further, it conveys
the full recognition prevalent among the planners of the importance of
agricultural growth to the industrialization project. The extract follows:
There is much talk of industrialisation. In the initial chapters of the Plan, certain figures pertaining to the
amounts allotted to industry, agriculture, social services, transport, etc., are given. In this respect, industry
does not seem to occupy as important a place as agriculture. If I remember correctly, a very large sum is to
be spent on irrigation. We certainly attach importance to industry, but in the present context we attach far
greater importance to agriculture and food and matters pertaining to agriculture. If our agricultural
foundation is not strong then the industry we seek to build will not have a strong basis either. Apart from
that, the situation in the country today is such that if our food front cracks up, everything else will crack up,
too. Therefore we dare not weaken our food front. If our agriculture becomes strongly entrenched, as we
hope it will, then it will be relatively easy for us to progress more rapidly on the industrial front, whereas if
we concentrate only on industrial development and leave agriculture in a weak condition we shall ultimately
be weakening industry. That is why primary attention has been given to agriculture and food and that, I
think, is essential in a country like India at the present moment. (Nehru 1952)

This speech was made at a relatively early stage of the economic transformation
that was being attempted.
Next I quote from two sets of speeches made almost at the end of Nehru's
tenure as prime minister, indeed close to the end of his life. The first of these is
really a politician's justification of the policies pursued by his government and
reads as such, but it does convey a remarkably 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 civilizational sense but in the sense of the challenges it faces given its
economic backwardness and its democratic polity. The extracts follow:
Planning has of course been done in other countries; but not through democratic processes. Other countries
which are democratic have not accepted planning. But the combination of these two concepts is rather
unique. … The first thing we realised was that it was no good copying America or Russia or any other
country. The problems of India are her own. We can learn from America or Russia, as certainly we should.
But the economic problems of India are different. We learn from them, of course, as they have acquired
great experience. We always realised that the fundamental factor was growth in agricultural production.
Agriculture is basic to us because however much importance we attach to industry unless we have surplus
from agriculture, we cannot progress in our economy. We cannot live on doles from other countries. We
have always to choose between benefits accruing today, or tomorrow, or the day after. From the country's
point of view, if we spend the money we now have for some petty immediate benefits, there will not be any
permanent benefit. One has to find a healthy balance between the immediate benefits of today and the long-
range benefits of tomorrow. All the money we have put in heavy industries is for tomorrow's benefit,
though it brings in some benefit today also. It will take some years before this investment yields fruits. …
So, our strategy of economic development is essentially modernisation of agriculture and training of our
rural masses in the use of new tools and new methods. At the same time, it seeks to lay the foundations of
an industrial structure by building the basic or heavy industries, above all by producing electric power.
Middle and small scale industries will inevitably come in their train. (Nehru 1963a)

A clearer articulation of the central issue in investment planning, namely, the

choice of the long-run output-maximizing allocation of investment across
activities would perhaps be hard to find.
The second set of speeches that I had referred to shows us a Nehru somewhat
despondent regarding the extent of progress made on the agricultural front. He
even suggests that agriculture has been neglected relative to its importance. The
first extract is from a speech made to the chief ministers at the annual meeting of
the National Development Council in 1963. It is as follows:
Emergency was declared in the wake of Chinese invasion. … Emergency does not merely mean raising
soldiers or getting aircraft. It means production, production for defence specially. All other types of
production, more particularly on the agricultural front, is equally necessary. … We have done many things
which are creditable to us. But the overall picture is not one of fast progress, specially in the agricultural
domain. This is rather distressing because agriculture is the basis of all our development work. If we fail in
agriculture, it does not matter what else we achieve—how many plants we put up—our economic
development will not be complete. … Agriculture is more important than industry for the simple reason that
industry depends on agriculture. Industry, which is, no doubt, very important, will not progress unless
agriculture is sound and stable and progressive. I find there is a passion in many areas of India for industrial
plants. Well, all good luck to those who want them. Let them have it. People seem to think that an industrial
plant solves all the problems of poverty, which it does not. It has a long-term effect on the economy, no
doubt. And I have no doubt in my mind that the problem of poverty will not be solved in India except
through industrial progress, industrial progress of the latest type. That is the truth. However, at the present
moment, whichever way you start in India, you come back to agriculture. We dare not be slack about it, as
we have been, I’m afraid, in many places. (Nehru 1963b)21

The final extract is from a speech delivered less than six months before
Nehru's death:
Though we all know that agriculture is essential and basic, it has been rather neglected. I say neglected in
the sense that people hoped that crops will grow by themselves and not by much effort on our part. Now,
greater attention is being paid to it and I hope this will bear results. There are all manner of things that go
into agriculture. We have large irrigation schemes, but it takes a long time for us to take advantage of them
fully. We first spent a lot of money and energy in building them. Between the two there has been a long
gap. We should plan for their full utilisation in advance. (Nehru 1964)

As is often the case, political leaders can be a little too close in time to
historical events to be able to evaluate them dispassionately. In retrospect, Nehru
was proved to be unduly pessimistic. A growth transition in agriculture was to
come within a year of the last of the speeches. An acceleration in agricultural
growth rate took place in the mid-1960s, plausibly22 even in 1964–5, the year of
his death. Though he did not live to see its beneficial effects spread cross the
Indian economy by stimulating other sectors, arguably, as set out in Chapter 3,
this transition has at least partly to do with the policies implemented by his
government.
I now turn to the record of economic growth in the India of the Nehru era.

THE GROWTH RECORD OF THE NEHRU ERA

We may use two sets of comparators to evaluate the growth performance of an
economy. One is the record of preceding growth in the economy itself. The other
is the contemporaneous growth of other economies similarly placed and the
growth of leading economies over the long haul of their histories. We start
therefore with a comparison of growth in the Nehru era with growth in the first
half of the twentieth century, more precisely the period 1900–47, which marks
the second half of the British Raj in India.
In Table 2.1 are arrayed growth rates over time of the three main sectors of the
Indian economy. The layout of the Table enables us to see the economic
performance of the Nehru era in century-wide perspective. In the first column
are the data for the years 1900–47. In the second are the data on the same
indicators for the rest of the twentieth century including the seventeen years of
Jawaharlal Nehru's prime ministership. Finally, in the third column are presented
the data for the period 1950–1 to 1964–5, the year of Nehru's death. Read
together, the data convey two important points. First, not only does growth in the
Nehru era amply exceed what was attained in the final half-century of colonial
rule, but the quickening of the economy observed over the second half of the
twentieth century may be seen to have been already achieved23 in the Nehru era.
Table 2.1 Growth of GDP in the Twentieth Century

Source: Sivasubramonian (2000).

Notes: Growth is the average annual compound growth rate of GDP in 1948–9 prices; pre-1947 data are for
‘undivided India’ which includes the Indian states and Pakistan but excludes Burma.

Second, 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 a
pathology. In a poor economy with a low level of consumption of even the most
basic goods, a faster growth of the commodity-producing sectors would be
considered desirable. The broad-based expansion of the economy during the
Nehru era amounts to a transformation of the economy that is, perhaps, more
likely to be readily recognized as such by economic historians.
To bring perspective to my argument, I refer24 to a debate among economic
historians on the significance of the Industrial Revolution, agreed to have taken
place in Europe in the middle of the eighteenth century. In this context, Joel
Mokyr (2005), a historian of technology, has observed that growth after the
Industrial Revolution was not just higher but qualitatively different in at least
three respects from what had gone before Mokyr. First, according to Mokyr,
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 localized 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. While it may
not be entirely appropriate to transfer this description to the transformation of
India during the Nehru era, as a certain amount of modern industry was already
in place by 1947, the parallels are there to see. Though not all three of Mokyr's
observations are evident from the data I have presented in Table 2.1, it would be
agreed upon that the Nehru years witnessed growth spread across the economy, a
technological advance was fostered, and, as we can now see, the rise in income
has not only been sustained for over fifty years but the growth rate itself has
actually been accelerating since.25
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 had 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 percent and one in
which it grows at 0.2 percent’ (Mokyr 2005: 286). While the parallel between
the growth records for the period Mokyr speaks of and for the India of our
period is—as is evident from Table 2.1—close indeed, it is his comment on the
overall significance of the Industrial Revolution that is of greater import to us
here. 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 taproot of modern economic growth’ (Mokyr 2005: 286). To seek
parallels between the growth following the Industrial Revolution in Britain and
the growth of India during the Nehru era may well prove to be a promising line
of inquiry for a historian of the Indian economy.
However, I shall put to use Mokyr's characterization of the Industrial
Revolution not to draw such a parallel but to highlight a difference between the
two phases of the twentieth century in India 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 Indian economy of this period is not in industry at
all. While the categories for which growth is recorded in Table 2.1 are somewhat
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 unrecognized, 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 entirely worth recording
Sivasubramonian's apposite assessment of the economic achievement of this
period. He speaks of the economic recovery of the Nehru era as having been
‘swift, smooth and remarkable’ (Sivasubramonian 2000: 563).26
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 use,
the choice of the base year for prices is crucial. I have used Sivasubramonian's
estimates of GDP as they provide data at constant, that is, 1948–9, prices for the
entire twentieth 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 estimates27 of GDP growth, in 1938–9 prices, for
this period show the average annual growth rate of per capita output virtually
stagnating at 0.04 per cent per annum. This estimate would suggest a far more
significant turnaround following the end of the colonial era in India.
I now turn to the second of the two standard comparators of the growth
performance of an economy already alluded to, namely, the performance of
other economies. Two sets of economies have been chosen here for comparison
with India during the Nehru era. The first is a set of Asian economies. These
were more or less at par with India in terms of per capita income in 1950. The
second is a set of the world's best-performing economies of all time. In Table 2.2
are presented growth rates attained by these two groups of countries. Of the two
sets of economies for which data are presented, a comparison of India's
performance with that of the Asian economies is of greater interest for two
reasons. First, the data are for the same period; second, as stated, in terms of per
capita income, Korea and China had economies that were more or less at par
with India in 1950. A noteworthy finding emerges. From the work of DeLong
(2003) we know that while India has grown faster than most of Africa during the
last five decades, it has performed worse than East Asia. If Korea is taken as
synonymous with East Asia, then this feature holds also for the period 1950–64.
Korea's growth rate is 50 per cent higher than India's for this period. However,
we find that India's growth rate is 25 per cent higher than that of China. This
may be little known, but it is not entirely surprising. Actually, China was to pull
ahead of India only a decade and a half after the Nehru era, in the late 1970s,
following the reforms launched by Deng Xiao Ping. Possessed of this
information we would be inclined to believe that admiration for Mao Zedong's
China in certain circles in India during his lifetime must have been based more
on his revolutionary potential than on the early economic achievements of
China.28 This is clear, for the revelations of the disastrous consequences of the
Great Leap Forward—including an estimated 30 million deaths allegedly due to
famine in the late 1950s—were received uncritically here. While this may well
be expected of those ideologically committed to the Chinese path, one thing is
clear from our comparison. In a comparison with China it now appears that, at
least in terms of growth, Nehru had not left the Indian economy too far behind.
The subsequent tearing away of China, reflected in the falling behind of India in
the world's growth league tables, must therefore owe itself to causes other than
his leadership.
Table 2.2 Economic Growth in India Compared

1950–64 1820–1992
India 4.1 –
China 2.9 –
Korea 6.1 –
United States – 3.6
United Kingdom – 1.9
Japan – 2.8
Source: Maddison (1995).
Note: Data are average annual growth rates.

No less revealing is a comparison of the growth in India during 1950–64 with

long-term growth in the leading OECD (Organisation for Economic Co-
operation and Development) economies. We find from Table 2.2 that the former
had exceeded the latter, often substantially. It is now possible to place in
perspective Raj Krishna's lament (see Krishna 1980: 28) that independent India's
record of growth, over 1960 to 1977, placed it lower than ninety countries
worldwide. Krishna had used per capita GDP as his measure. This succeeds in
masking the degree of progress made in the Nehru era. An altogether unexpected
consequence of the transformation of the economy had been a very significant
rise (see Table 2.1) in the rate of growth of population. Now the measured rate
of growth of per capita GDP is lowered.
Two observations are in order here. From Table 2.1 we can see that were the
rate of growth of population to remain at the colonial rate, the rate of growth of
per capita income during 1950–64 would have exceeded 3 per cent. This is more
than twice29 the rate of growth of per capita income of US and UK during 1820–
1992, and exceeds that attained by Japan during the same period. Before I move
on to my second observation I might remark that, actually, the counterfactual
considered is quite absurd as the growth of population is very likely endogenous
with respect to the growth of income. This leads me to the observation itself. The
rise in the rate of growth of population per se serves as an indicator far more
vivid of the extent and nature of the economic transformation achieved than any
estimated rise in the rate of growth. Life expectancy at birth rose from 32 years
in the 1940s to 37 years in the 1950s and to 43 years in the 1960s (Bhat 2001).
Demographers (Ibid.) have put down the rise in the rate of growth of population
in the period that we are studying to the increase in the fertility rate, itself due to
the decline in the incidence of malaria and widowhood, presumably due to
improving public health outreach. The fertility rate itself may be seen as an
index of a population's perception of the future of an economy. Instances in
world history that encourage such an interpretation range from the decline in
fertility observed during the uncertain transition to a market economy in Russia
in the 1990s to its rise in post-war United States, a time of high optimism of
America's future as a society. The 1950s in India had witnessed the highest
increase in the fertility rate among all decades since 1947.30
A methodological point needs to be made here, one that will serve as more
than a mere justification for the method that I have pursued. Note that in Table
2.2 I have compared growth in India during the Nehru years with very long-term
growth of the advanced OECD economies. Far from loading the outcome of the
comparison in favour of the former, as may be assumed, this actually tilts the
balance in the direction of the latter economies. For we know that long-term
growth rate of the industrialized economies has accelerated31 over the last couple
of centuries. Therefore, the longer the time period we consider, the greater the
likelihood of observing a higher growth rate for these economies when
compared with a shorter series commencing from a time when their per capita
income was the same as that of India's in, say, 1950. This observation has, in
addition, the virtue of placing in perspective the achievement of the Nehru era.
In the presence of increasing returns to scale, the observed growth cannot be
dismissed as merely the arithmetic outcome of measuring a given increase
against a ‘low base’.32 At best a statistical commentary, such an assessment
misses the implication that from an economic standpoint a low base is actually a
serious impediment to initiating growth in the presence of increasing returns to
scale.33 At the level of the firm, increasing returns to scale can arise from a
variety of sources, the simplest to comprehend being large fixed costs due to the
lumpiness of investment. This retards entry. As for increasing returns at the level
of the economy, we have already encountered Allyn Young's conceptualization
of the phenomenon in Chapter 1. Thus, the early initiation of sustained growth in
the India of the 1950s after half a century of stagnation is non-trivial. Indeed, it
was a substantial achievement. Interestingly, at the time, Nehru himself had
demonstrated a clear idea of the magnitudes involved in the task of raising the
rate of growth: ‘We have aimed at 5 percent in this Plan, and five percent is
going to be a hard job. We shall have to work very hard, because we have started
at such low levels, with such low surpluses. India is almost at the lowest rung of
the income ladder. Even China, I believe, is a little higher. So was Russia at the
time of the Revolution’ (Nehru 1956). The challenge that India was faced with
as it aimed at faster growth in the 1950s had been sharply appraised by its
leadership.

WHAT QUICKENED A MORIBUND ECONOMY

There remains no question about the fact of a dramatic quickening of the Indian
economy since the initiation of planned economic development in the second
half of the twentieth century. To quote a prominent economist of the time
writing in 1965, ‘The rate of economic growth that has been achieved in India
since 1950–51 is 2 to 3 times as high as the rate recorded earlier under British
administration. As a result the percentage increase in national income in the last
thirteen years has been higher than the percentage increase realised in India over
the entire preceding half century’ (Raj 1965: 2). However, it remains to be
established what brought about this transformation. Accounting for this
transformation would also serve a constituency larger than those with a
particular interest in the recent history of India. It would constitute one answer to
the larger question, flagged in the ‘Introduction’ as generally of interest to
economists, namely, ‘How do economies grow?’34
To get a handle on the task that confronts us, we may start by eliminating the
factors that clearly cannot be credited with the turnaround. Going by the
conventional wisdom of today, trade would be a prime candidate for
consideration as potentially crucial. For a sample of the view that openness is
central to faster growth, consider this: ‘Low or declining barriers to trade
constitute a necessary condition for sustained rapid growth’ (Panagariya 2005:
7). Trade clearly is a non-starter when it comes to explaining the growth
acceleration of the 1950s, for the fifteen years from 1950 had witnessed a
progressive closing of the trade regime. Of course, export promotion is not
necessarily at odds with a regime of imports controls, especially in the 1950s
when international surveillance was not of the order that we find today. So it
would not be entirely absurd to imagine export-led growth even in a relatively
protectionist regime. But this is clearly not a reasonable description of the Nehru
era when the economy had faced severe balance of payments stress, a feature
inconsistent with export-led growth. In fact, though Mahalanobis had been
inspired by the vision of an India permanently freed from the balance of
payments constraint, this was certainly not achieved even ten years after the
launching of the Second Five Year Plan. Yet, from a methodological point of
view, we would want to remind ourselves that a balance of payments surplus is
not a recipe for faster growth. It is instructive in this context to note that India
had ended its colonial period with positive sterling balances. Nevertheless, the
period 1900–47 was one of the most stagnant phases in India's recorded history.
To take a more contemporary example, in the second half of the twentieth
century, Africa has remained one of the more open economic areas of the world
(Castells 2000). However, this has not prevented it from remaining the most
depressed.
Let us now consider another possibility among factors responsible for faster
growth in India. That is the end of colonialism. Much of India had been a de
facto colony for about two centuries prior to 1947. This meant that its economy
had been subjugated to Britain's imperial interests, an arrangement likely to have
stifled its potential. Though some economists today tend to overlook this,35 it
was recognized by Indian entrepreneurs of the time. In particular, the visionary
engineer M. Visvesvaraya (1936) has written extensively of the obstructions by
the colonial Government of India that Indian industrialists had faced in their
plans to invest in new projects and points to this as the reason for the failure of
industrialization36 in the Indian subcontinent. Visvesvaraya had listed four
‘failings’ of the colonial government. These were the refusal to publish the
statistics that would reveal the dismal condition of India, the neglect of banking,
the denial of tariff protection to Indian industry, and ‘the grave deficiency which
affects economic advance [which] is neglect of mass education’. Overall,
Visvesvaraya paints a picture of the malign neglect of India's industrialization by
the colonial state in comparison with the role of government in the West,
particularly England itself. It is markedly at odds with the characterization by
Morris (1992: 199) that ‘there can be no doubt that in India during the century
and a half of British rule the market was given its head. India was one of the
great social experiments in letting self-interest and markets do virtually
everything’. If Morris' characterization of British policy were true, the data in
Table 2.1 would constitute a particularly damaging verdict on the capacity of
markets on their own to promote economic development.
An apparently straightforward test of the Visvesvaraya hypothesis would be
whether the tide turned after the end of colonialism with India's entrepreneurs,
set free from the colonial yoke, leading the turnaround of the economy.
However, this is a proposition not easy to test, as ‘everything else’ did not
‘remain the same’, violating ceteris paribus, the staple of economists.
Principally, the post-colonial state had adopted a role which would have
profound implications for private sector behaviour. On the one hand, it
intervened in the economy by raising public investment, which is likely to have
extended the market for the private sector's product. On the other hand, it also
intervened by restraining private sector activity. Indeed, in the minds of some,
this stifled the private sector at least as much as it had been stifled by the
colonial Government of India. Be that as it may, granting that there was a change
in the overall policy regime after 1947 makes it difficult to test the proposition of
interest here. For instance, it would be difficult to deny that Indian
entrepreneurship was stifled under the Raj even if the private sector is seen not
to have led the revival after 1947. But we are not without clues whatsoever. We
have seen that the revival of the Indian economy was broad based (see Table
2.1) while the sector that had allegedly been suppressed most, in order to further
British industrial interests, during the colonial era was the manufacturing sector.
So the end of the colonial suppression of India entrepreneurship cannot be
credited as the sole factor responsible for the revival of the Indian economy,
even though the end of colonialism was sine qua non for actualizing the political
project of quickening India. The factors responsible for this must be traced to
some more active agency. How then was the dramatic turnaround of India
achieved? There can be no doubt that it was state-directed.37 However, it yet
remains for us to provide an account of the mechanism.
It can be argued that the quickening of the Indian economy followed from a
coordinated public effort to spring the economy from the low-level equilibrium
trap that had held it down for close to half a century.38 To see how low levels of
national income can result from coordination failure we need to first apprehend
the idea of a complementarity between the economic actions of individual
agents. This is best understood in the context of a firm considering making an
investment. A central element in this decision problem is the firm's forecast of its
future revenues. Now this productivity depends upon the future path of average
capital accumulation by all firms in the economy. If our firm believes that this
path will swiftly rise, it would predict a correspondingly high rate of growth of
its own productivity because of the ‘externality’ involved. Where firms hold
identical expectations, each firm will be more willing to invest, raising the rate
of growth of its capital, and thus income in the economy. We see here that the
decision to accumulate capital by one firm provides an incentive for others to
undertake the same action. This is the externality referred to. Here it takes the
specific form of a complementarity in that capital accumulation by one firm
encourages capital accumulation by others.
It was Rosenstein-Rodan (1943), reflecting upon the question of the
reconstruction of a war-torn Europe, who had identified the role of
complementarities in precipitating a low-level equilibrium trap. He had proposed
that a low level of income is the outcome of an economy-wide coordination
failure, in which some investments do not occur simply because other
complementary investments are not made and the latter are not forthcoming only
because the former are missing. It is possible to comprehend this outcome from
the decision problem of the firm that we had considered. At a very general plane,
one firm's investment is the source of another firm's profits, making this second
firm viable and providing it with the incentive to invest.
Coordination failure results as follows. Where no entrepreneur is large enough
to invest in more than one line of activity, each entrepreneur would invest only if
he/she were to believe that others would invest as well. Now we have two
possible equilibria, one in which the region is devoid of any investment at all
and another in which there is investment by all, expectations being uniform
across firms. Either way, the outcome is a ‘coordinated equilibrium’ in that each
firm's decision is based on its expectation of the behaviour of others, resulting in
an outcome coordinated in this sense. In this account, a low-level equilibrium is
a market failure. The implication of this type of reasoning is that a better
outcome—with income high—is possible, but is not necessarily attained in an
economy of free agents maximizing profits. Notice that whether or not such an
outcome arises depends upon each agent's expectations of the actions of others.
To the extent that the formation of expectations is driven by past history, a
stagnant society could remain so whereas an already active one would remain
active, even though there may be nothing intrinsically different between the two
regions.
The idea of a coordination failure—whereby an economy is trapped in a ‘bad’
equilibrium when a more desirable one exists—is particularly compelling when
it comes to a diverse economy with industries developed to a different degree, if
only for the reason that now coordination across these many diverse industries
would be required. Such diversity is likely to be appropriately descriptive of the
Indian economy at Independence. If ‘coordination failure’ describes well the
stagnant state of the Indian economy at that point in time, it is also easy to
imagine the complexity of the task of achieving a coordinated expansion to a
higher level of income in a large and diversified economy.
The early literature on development economics had proposed two solutions to
the coordination problem. To understand them we need to take on board the
concept of linkages. This concept springs from the view that the economy is an
interlinked entity. Hirschman (1958) had conceived of backward and forward
linkages. Forward linkages ease the supply conditions of a sector. Thus, the steel
industry facilitates the development of the railways by making available a
crucial input at a lower price. On the other hand, a backward linkage raises the
demand for the product of a sector, as when the development of the steel
industry historically raised the demand for coal. Forward linkages push the
economy while backward linkages pull it, so to speak. This feature, that an
economy is interlinked, provides the means to shift the economy out of a
coordination failure that leaves it stranded at a low level of income. In 1943
Rosenstein-Rodan had proposed a programme of coordinated investment in
several sectors meant to shock an economy out of its lethargy, so to speak. Such
a policy has two requirements. The first is economic in that a very large
investment outlay is needed to make a difference. In subsequent writing
Rosenstein-Rodan (1963) was to refer to this critical minimum effort as a ‘Big
Push’. The second requirement is informational. The ‘coordinator’—reasonably
assumed to be the state alone—must have an idea of the proportions in which
consumers spend their income on the different commodities, or we could end up
having too much coal and too little soap, for instance. However, the existence of
linkages between the sectors of an economy makes it possible to overcome both
these potential handicaps. This takes us to the solution proposed by Hirschman.
Hirschman had implied that Rosenstein-Rodan's proposal of investing in the
major sectors simultaneously was akin to promoting balanced growth in the
economy. Instead we could envisage unbalanced growth, a situation where the
initial investment is targeted on some specific sector(s). Indeed, the idea is to
deliberately foster unbalanced growth by investing in certain leading sectors.
With this, both forward and backward linkages are activated and the production
response gets the whole economy moving. Exactly as does the Big Push, this
strategy too shifts the economy onto the desirable equilibrium. However, it
differs in that it makes use of the market, exploiting potential linkages, with the
government presumably investing only in the leading sector. Note that this
strategy is less vulnerable to the two requirements of the Big Push, for here both
the scale of the public investment entailed and the informational requirement are
likely to be less.
But where the government's investible resources are limited and not all sectors
are equally endowed with linkages, the question of which sector to choose is not
a trivial one. It is obvious that the sector(s) chosen must possess both numerous
and strong links with the rest of the economy. However, it is a less obvious
criterion that emerges as of interest, that of the intrinsic profitability of a sector.
In the context, this is a treacherous concept as we had earlier introduced the idea
of a complementarity by arguing that the profitability of an investment depends
upon investments elsewhere in the economy. But let us overlook the circularity
that this implies and persist with the idea of intrinsic profitability best captured
by the American expression ‘bang for the buck’. Once we have arrayed activities
according to their intrinsic profitability, the investment priority of government
would turn out to be the exact reverse of that of the private sector. That is, in the
context, the government's priority would be to first invest in the least profitable
sector because this is unlikely to be taken up by the private sector. Exactly as a
chain is only as strong as its weakest link, ‘the government maximises the
chances of overcoming coordination failure by investing in the least profitable
activity, provided of course that such activities have linkages as well’ (Ray 1998:
141; emphasis original). Now, adopting the least profitable sector for public
investment is the strategic choice to be made.
This extended foray into the debates in early development economics was
meant to provide a window on what was attempted in India in the Nehru era. We
of course know that in a bid to quicken the economy, a programme of massive
public investment was initiated with the onset of planning in 1951. However, it
is of interest yet to understand how precisely this may have worked to bring
about the dramatic rise in the rate of growth. Ray (1998: 142–3) has
imaginatively suggested that the Mahalanobis Model was essentially a scheme
for promoting unbalanced growth, with heavy industry as the leading sector. It is
certainly true that heavy industry has substantial linkages with the rest of the
economy—forward into agriculture and backward into consumer goods and
services. Ray's view appears to be borne out by the data on the proposed sectoral
allocation of investment in the Second Five Year Plan presented in Table 2.3.
From there, we find that, in line with popular perception, ‘industry’ does get the
largest share of the outlay. However, this is not overwhelmingly so. First, there
are other sectors of the economy that come close to having been allocated a
similar share. Second, and in any case, industry's share does not exceed even a
third of the total outlay. Therefore, even as the share received by industry may
count for its being singled out as the ‘leading’ sector, the suggestion of an
‘unbalanced growth’ having been pursued in India would appear inappropriate as
a characterization of the Nehru-Mahalanobis Strategy.
Table 2.3 The Allocation of Public Investment in the Second Five Year Plan

Sector Outlay Share

(Rs crore) (%)
Electricity 450 13.2
Industry 1000 29.4
Transport and communication 850 25.0
Agriculture and irrigation 750 22.1
Construction 250 7.4
Stocks 100 2.9
Source: Adapted from Mahalanobis (1955b).

Of course, in relative terms, industry was allocated much more than

agriculture than is conveyed by the figures per se, for industry accounted for a
much smaller share of GDP than agriculture in 1956. But what strikes one most
after a gap of half a century is how balanced the proposed allocation of
investment appears, given India's needs at that stage of its development. Also,
the large allocation to industry must be seen in perspective. I repeat a point made
by me earlier and one that I shall return to. This is that the planners had
envisioned industrialization contributing directly to raising agricultural
productivity and thus agricultural growth. Interestingly, from the point of view
of the history of ideas, this would be case of recognizing forward linkages even
before the appearance of Hirschman's article on the unbalanced growth.
Nevertheless, though the Nehru–Mahalanobis Strategy, which had undergirded
the industrialization drive of the Indian state, did have as its central element the
heavy goods sector—thus bearing similarity with a strategy of unbalanced
growth—I find it more plausible to see the quickening of the Indian economy as
due to a Big Push driven by expanding public investment.39 Not only was there a
wide spreading of this investment across the economy, as seen in Table 2.3, but
the economy had already quickened40 before the launching of the Second Five
Year Plan and all its sectors were to accelerate again, though at differing points,
over the next three decades.
However, the most important reason for rejecting an unbalanced-growth type
explanation for the acceleration of growth in India during the Nehru era is that
the acceleration was very likely led by agriculture. This may be surmised by
taking the information in Table 2.1 along with the additional information that
agriculture constituted by far the largest share of the economy in the 1950s.
Recall that a sector's contribution to the growth of the economy is its share-
weighted growth rate. The full contribution to Indian economic development of
the state-directed heavy-industry-drive was to come much later, and some
suggest it continues to this day.41 Be that as it may, the industrial sector did
expand substantially (see Table 2.1) in the Nehru era. Its accelerated growth
during this period along with that of the agricultural and services sectors reflects
the movement along a broad front that is the hallmark of the Big Push strategy.
The argument that the expansion of the Indian economy in the post-colonial
era may be seen as due to a state-directed drive such as a Big Push is properly
verified by reference to the data on public investment. Data on saving and
investment by the public and private sectors, respectively, are provided in Table
2.4.
Table 2.4 Saving and Investment (per cent of GDP)

Source: National Accounts Statistics, New Delhi: Central Statistical Organisation (CSO).

All of it points to the plausibility of the explanation provided here. Several

points may be noted. First and foremost, there is a very substantial expansion of
public investment as a share of GDP. Note that such an expansion, exceeding
two-and-a-half times the original figure by the end of the Nehru era, has not
been matched in India for the next quarter century. Though not apparent from
the highly aggregative data presented here, it is not only the magnitude of the
expansion of public investment that is significant but also its direction. As in the
Big Push, according to the Nehru–Mahalanobis Strategy, investment was to have
flowed in all directions (see Table 2.3) simultaneously. Contrast this with the
limited public spending outside of administration and the railways by the
colonial government. Interestingly, there is an almost identical expansion of the
private corporate sector during this period. This too is unmatched for the next
twenty-five years.
Some comments would be appropriate here. The first concerns causality. Even
though the expansion is contemporaneous, going by economic theory we would
on balance imagine the public sector contributing to the expansion of private
investment by expanding the market for its goods and at the same time supplying
the capital goods necessary at a lower price. Forces making for greater public
investment following from private investment are more difficult to imagine,
reflected in the assumption of autonomous public spending in macroeconomic
theory. Second, the degree of expansion of the private sector in the Nehru era is
perhaps little known today and seldom recognized as a feature of the period.
However, this record makes it a little difficult to sustain the argument that the
policy regime was relentlessly hostile to it. Added to this is the fact that the
expansion of the private sector was also very likely financed by the other sectors
within the economy. Note that the saving-investment gap for the private
corporate sector widened very substantially during this period. This implies that
corporate investment was financed by the household sector, the external sector,
and even by the public sector42 itself. Therefore, it is not as if, even in the era of
so-called ‘high planning’, the private sector had had to pull itself up by its
bootstraps. Of course, this could not have neutralized any heavy-handedness of
the bureaucracy in the implementation that may have stifled the growth of some
firms and retarded private sector development to an extent.43 However, judging
by the expansion in investment, it would not be inappropriate to surmise that the
private corporate sector as a whole appears not to have done too badly in the
Nehru era.44
The role of the government in quickening the economy in the second half of
the twentieth century is unmistakable. It was of course in keeping with the plan
of the Indian state. However, the government's calculations had gone awry in the
process on one count. This pertains to the role of external assistance in financing
plan outlay in the public sector. As I have already pointed out, the proposed
budget for the Second Five Year Plan had anticipated for foreign assistance a
share of only 5 per cent. The outcome was to turn out to be far different. The
shares of different sources in the financing of public sector outlay during the
Nehru era (and slightly beyond, as we have included the entire Third Plan
period) are to be found in Table 2.5. Note that the figure recorded for the Second
Plan had exceeded by far the figure of 5 per cent intended. More significantly,
the share of foreign assistance had risen steadily after the commencement of
planning.
Table 2.5 Financing of the Public Sector Plan (in per cent)

Source: Bagchi and Nayak (1994).

The role of foreign assistance in financing the public expenditure, which in

turn had stepped up the rate of growth in India, cannot be overlooked. Indeed, by
the end of the Third Plan, it was a significant source at close to 30 per cent. This
is mostly glossed over. However, three observations may be made relating to
foreign assistance to India during the Nehru era. First, except for the Soviet
Union, it is difficult to think of many other countries that have transformed their
economies as rapidly without significant external financing. The United States
had received British capital and Britain in its time had had its trade surplus with
India, arguably some of it disguised plunder45. China had received aid from the
USSR46 and South Korea from the United States. So foreign assistance per se
does not take away from India's achievement in transforming her economy quite
rapidly and against significant odds. Second, by comparison with other
developing countries attempting a similar transformation at that time, the
amounts received by India were not large in relation to its size. For instance, at
US$ 1.8—being the average for the years 1962 and 1963—the aid per capita
received by India was a fifth of that received by South Korea and less that thirty
times that received by Israel. In 1964–5, total aid—loans and grants—stood at
3.5 per cent of national income.47 Finally, it is significant that, at least during the
Nehru era, aid did not compromise India's objective of self-reliant
industrialization. As Bhagwati and Desai (1970: 187) have observed: ‘By and
large the aid has gone towards “Industrial Development”. This is in keeping
with, and sharply underlines, the general Indian strategy of development as also
the economic philosophies of the time which under-emphasised the productive
significance of expenditure on education and other social services as also the
role of agriculture.’ Indeed, India's position appears to have been stronger than it
is today when in somewhat frantically seeking FDI by showcasing its economic
architecture it appears to have lost a sense of its priorities, the haste to usher in
full capital account convertibility before the global financial crisis succeeded in
erasing its charm being the most noticeable case in point.
Of course, more than any particular strength of India's, the availability of
external funding for her economic plan in the 1950s had to do with the
international politics of the time. The Nehru era had coincided with much of the
Cold War and as a non-aligned country India had been sought after by the
protagonists on both sides. While Soviet aid had come early and without strings,
aid from the West and the multilateral loans under the aegis of this grouping
predominated over loans from the Eastern Block, though these came at a higher
rate of interest (Bhagwati and Desai 1970: Tables 10.1, 10.2, and 10.5). There is
altogether little reason to believe that Indian economic policy had been
influenced by excessive dependence on borrowing from any particular quarter.
On the contrary, Kalecki (1976: 35) must surely have had India in mind when he
compared the developing countries with intermediate regimes to ‘the proverbial
clever calves that suck two cows’.

CARICATURE OF A VISION: THROUGH A GLASS, DARKLY

In a final section of this chapter I address some lingering perceptions regarding
the Nehru-Mahalanobis Strategy and the outcome of the policies that had been
adopted as part of its implementation. Though these are often propagated by
simplistic or, worse still, sentimental readings, I consider it important to do so as
the allegation that we continue to pay for a misguided road map adopted in the
1950s is a serious one.

‘The Neglect of Agriculture’

‘The Neglect of Agriculture’
There are two ways in which a sector can be neglected. First, it could be ignored
in the policy discourse itself, with insufficient attention devoted to its problems.
Negligence could also take the form of insufficient resources being devoted to
the desired expansion of a sector. I have already suggested in the course of the
discussion so far that agriculture had received direct attention and considerable
resources during the Nehru era. To widen the window, I first present the view on
the matter of two economists of the time, and then return to provide a
perspective of my own. V.K.R.V. Rao, a doyen of Indian economists, had had a
ringside view of the Indian economy for about five decades starting in the 1940s.
He has had the following to say:
It has been alleged that the priorities assigned … in India's planned development have been based on a
mistaken imitation of Soviet planning and that higher priority should have been given to agriculture and
consumer industries instead of to capital goods industries. … The emphasis placed on capital goods
industries was the result of an understandable desire to furnish the country with domestic supplies of the
crucial inputs of economic growth so that the rate of growth could be much faster than if the country had to
rely essentially on foreign aid for its requirements of capital and intermediate goods. Apart from this it is
not correct to suggest that planning under Nehru did not give sufficient priority to agriculture. In fact, of the
total investment undertaken during the first three Five-Year Plans … agriculture, including irrigation,
accounted for Rs. 3, 446 crores, or 22.7 percent, while economic infra-structure, like transport and
communications, and power, accounted for Rs. 5, 737 crores or 37.7 percent and social services for Rs. 2,
760 crores or 18.1 percent. Industry accounted for only Rs. 2, 651 crores or 17.2 percent of investment in
the public sector during the fifteen years covered by the three Plans. (Rao 1971: 72)48

Raj Krishna was an economist in a very different mould from V.K.R.V. Rao.
Chicago-trained and, given the political climate of the time, cast as somewhat of
a right winger, his writings show him to be a more acute observer of Indian
economy history than many of his peers. Overall, Raj Krishna suggests that there
may have been a mistake only in the proportions in which investment had
flowed into different channels rather than ‘in the choice of the plural strategy
which had always characterized Indian planning’. On the specific issue that we
are considering, he has stated:
Nehru, as indeed all planners, attached prime importance to agriculture. Nearly a fifth of the public sector
Plan outlay has been consistently allocated to agricultural development. In addition, heavy investments
were made in industries producing agricultural inputs and processing agricultural outputs. There was a
massive increase in the flow of credit to the agricultural sector from Rs. 70 crores in 1950–51 to Rs. 2, 000
crores in 1975–6. Almost all agricultural inputs are subsidized; agricultural income is lightly taxed, and
during the last thirteen years minimum prices, covering the full cost of production have been guaranteed for
all major crops. This set of policies can hardly be described as embodying the neglect of agriculture. But the
fact still remains that the allocations for agriculture (particularly irrigation, extension and fertilizer
production) and for rural infrastructure and social services could and should have been higher. (Krishna
1979: 60)
 The facts of the case, at least with respect to the allocation of resources, as
presented by Rao and Krishna, must persuade all but the wilful disbeliever. Of
course, it would be the case that in per capita terms the direct allocation to
agriculture was certainly lower than that to industry as the rural population
dwarfed every other cohort in the economy. But to rest with this awareness
would be to adopt a myopic approach. To state somewhat differently a point
already made, planned industrialization is not a rival to agricultural expansion,
and Mahalanobis had realized the same, as we have observed. On the contrary,
faster agricultural growth, it was diagnosed, needed more industrial inputs,
whether fertilizer for nutrient replenishment, iron and steel for implements, or
cement for irrigation conduits. Moreover, agricultural production was relatively
free from controls in the Nehru era while private industry was subject to
stringent policy controls, above all in the form of licensing.
There is of course a different approach to assessing the belief that agriculture
was neglected. This is to account for intent by outcome rather than
pronouncement. Now, only the performance would count. We have already
looked at the growth of agriculture in the Nehru era, though the information had
been nested within the larger category of ‘primary sector’. The data presented in
Table 2.1 show unambiguously that the agricultural sector grew very
impressively in this period, recording the highest growth acceleration among all
sectors in making a dramatic recovery from the colonial era. This can hardly be
seen to result from neglect, either benign or malign.49 Indeed, the scale of this
achievement and the role of political agency in the form of a determined and
capable leadership are fully comprehended only when we study in some detail
the state of Indian agriculture in 1947.
Though it is the de-industrialization of India under colonial rule that has
received most attention from historians, it is the decimation of the countryside
that is perhaps the leitmotif of the British Raj in India. For a century and a half,
ending with the Bengal Famine of 1943, there had been some devastating
famines, with one particular famine in Bengal under the administration of the
East India Company in the eighteenth century believed to have wiped out a third
of the population. These famines were directly related to the policies of
extortionate taxation and forced commercialization of agriculture pursued by the
Company. As historians have provided outstanding accounts and analyses of
these events, I go directly to summarize the findings of George Blyn on the trend
in output in the first half of the twentieth century. Blyn had divided the period
1891–1947 into ten overlapping ten-year slices which he termed ‘reference
decades’. He then estimated both the average annual rate of growth and the
change in the rate of growth across these reference decades, for foodgrains and
non-foodgrains separately. To help focus a little better on his findings, I have
collected in Table 2.6 the estimates for foodgrains. This data presents us with an
unedifying picture of Indian agriculture under the Raj.
First, the rate of growth of foodgrains as a whole is far lower than the rate of
growth of population, implying declining availability per capita. The output of
rice, the grain consumed by the largest number in India then (and even now),
actually declined. His findings were summarized by Blyn as follows: ‘In the
most general measure of the change in rates over time, the trend in reference
decade rates, all eight foodgrains showed retardation’ (1966: 96). The record of
non-foodgrains is better, with a far greater average growth rate in the aggregate.
However, this reflects accurately the raison d’etre of the colonial project in
India, which was the exploitation of natural resources and commandeering of the
market of the colony for the benefit of metropolitan industry. Indeed, the glacial
progress of foodgrains production is directly related to this strategy,
implemented partly through price incentives and partly by brute50 force. It
cannot come as a surprise that food supply for the native population experienced
collateral damage.
Table 2.6 Agricultural Growth in British India

Crop Average annual growth over Change in the reference

ten reference decades decade rates of growth
Aggregate 0.11 −0.17
Rice −0.09 −0.03
Wheat 0.84 −0.09
Jowar 0.05 −0.12
Gram 0.26 −0.34
Bajra 0.72 −0.11
Barley 0.02 −0.55
Maize 0.51 −0.17
Ragi −0.37 −0.23
Population 0.67 0.11
Source: Blyn (1966: 96).

The performance of the economy in the Nehru era must also be evaluated in
light of the agricultural legacy of colonialism. To have contributed to two
accelerations in the rate of growth of agriculture51 within two decades of the end
of colonial rule comes close to being spectacular and places in perspective the
grievance that agriculture was ignored in comparison with the attention paid to
industry within the Nehru-Mahalanobis Strategy. Indeed we need to recognize
the reversal of the decay of agriculture in the first half of the twentieth century as
one of the great achievements of independent India, and this was largely
achieved in the Nehru era.52 I submit this radically revised reading of the period.

‘The Black Hole of Public Enterprise’

The second among perceptions of the policies of the Nehru era that I would like
to flag pertains to the idea of a public sector. In India today there is an
unmistakable frustration with the public sector. It is associated with a poor
performance record, marked for its lack of innovation, disdained for its shirking
of social responsibility, and perceived as parasitic on the public finances. On the
last, an additional consideration from further left, beyond the political parties
intermittently in power in some states, would be that it is financed
disproportionately by the poor who are not even among its principal
beneficiaries. Much of this is not off the mark as a description of the state of
affairs. However, the belief among many that this outcome is intrinsic to the
Nehruvian conception of the public sector is far from correct. In this section I
undertake two tasks. I first establish the rationale for the setting up of the public
sector in India. I then consider one indicator of its performance during the Nehru
era.
I choose to retrieve the original idea of the public sector and its performance
record during the Nehru period within the overall project of resource
mobilization. This would not be considered unusual, I presume, for the hallmark
of any successful developmental effort is the mobilization of resources. It is not
necessary that the resources mobilized must be contained within the public
sector. After all, private investment is an equally legitimate component of
aggregate investment in an economy. However, in the context of Indian
industrialization, launched in the 1950s, a large part of this mobilization would
necessarily have had to be in the public sector as it was intended that the state
would play the leading role here. For planning to be effective, there is required,
if not a concentration of resources in its hands, a substantial financial capacity
with the state.53 Where an economy is at a low income level, this requirement is
likely to be large, in turn requiring the productive surplus to come progressively
into the public sector, thus enabling it to maintain a command over resources.54
In this section, I first present views on resource mobilization and the role of the
public sector enterprises within that overall objective of both the government
and of independent economists then active. Subsequently, I study the evidence
on both resource mobilization and the contribution of the public sector to it.
As the Second Five Year Plan constituted the single largest instance of
resource mobilization during the Nehru era, the official documentation related to
it is the best source of the government's view on the question of interest to us
here. There, in the section on financing in the recommendations for the Plan we
find:
Large financial resources would be required for the Second Plan. A small portion would come from sterling
balances or foreign loans and aid; and the bulk of the resources must be found from within the economy.
The tax system would be directed to collect an increasing part of the growing national income in order to
permit greater capital formation in the public sector and to finance an expansion of social services. The
public sector would be extended to industrial and commercial activities where necessary for raising
resources for public purposes. (Mahalanobis 1955b: 73)

This is echoed in the Industrial Policy Resolution of 1956 which states that the
public sector was expected to ‘augment the revenues of the state and provide
resources for further development in fresh fields’ (cited in Krishna 1988: 9). We
find that the original idea of the public sector was not welfarist. In particular, the
objective of having a public sector at all was to raise resources for the public
purpose. Of course, this is not inconsistent with a strong welfare orientation. The
issue here, however, is the role envisaged for the public sector when planning for
economic development was launched in India.
The need for a very significant resource mobilization and the role of the public
sector in relation to that task was also recognized by the independent economists
of the day. Emphasizing that ‘the effort involved in this increase is considerable,
and will strain the economy a very great deal’, the economists empanelled by the
Planning Commission to scrutinize the proposals for the Second Plan had spoken
of
the great difficulty of increasing tax proceeds unless a fundamental revision in current concepts that
underlie the tax system is accepted. One of these concepts relates to the exemption of essentials from the
scope of an important part of commodity taxation. When so large a measure of effort is necessary to
increase the proportion of tax revenues to national income, which has remained so obstinately static, one
cannot escape the logic of the fact that the mass of consumption is by the mass of the people. Unless this
bears a somewhat higher burden of taxation, no perceptible change in the stubborn ratio of public revenues
to national income can be achieved. We wish to endorse in particular, the Recommendation of the Taxation
Enquiry Commission to the effect that Article 286(3) of the Constitution may be amended to remove the
present exemption of articles ‘essential to the life of the community’ from the scope of state sales taxation.
Simultaneously, measures to secure a practical ceiling on incomes through a steepening of taxes on income
and wealth, including estate duties, becomes an imperative necessity. A revision of the price policy of
important public enterprises with a view to obtaining a larger surplus as a contribution to the resources for
economic development is similarly required. Besides the general increase in rates of direct and indirect
taxation that will be involved in the considerable stepping up of tax effort will be part of the challenge to
administrative efficiency that the big development effort for putting through the next Plan entails. (Planning
Commission 1955: 115; emphasis mine)

Apart from the replication of the views of the government on the role of the
public sector, quoted earlier, two points may be noted. First, the independent
economists had recognized the serious resource mobilization effort entailed in
the project of industrialization. Second, note the complete absence of populism
in the recommendation that in the short-run even the convention of excluding
essentials from taxation may have to be put in abeyance. The unstated
expectation from the public sector is also reflected in the proposed government
budget for the Second Five Year Plan. There, as I have pointed out already, the
profits from state enterprises along with ‘additional taxes and loans’ exceed the
amount of foreign assistance allowed for, and when combined with the
contribution from the railways, amounts to close to one-eighth of the total
outlay.55 Finally, it is illuminating in the context to read Mahalanobis:
In the highly developed countries of the West, taxes on commodities are usually looked upon as
‘regressive’, as being a burden on the poor. Public enterprises are also expected to be run on a no-loss-no-
profit basis. Fortunately, our outlook is changing and it is being realised that in an underdeveloped country
like India excise and customs duties, purchase tax on commodities or a levy on services would be
convenient and adaptable methods to raise resources. It is also agreed in principle that public enterprises
should earn and contribute increasing returns for purposes of national development. (Mahalanobis 1961:
96–7)

One thing is clear from these records of the time. Unlike today, fiscal populism
was not considered a credible option by the architects of economic policy in
early independent India.
While we may by now have an idea of the original conception of the role of
the public sector in India, we are yet to have a picture of its performance. First, it
may be repeated that a surge in public investment had been achieved in the
Nehru era, a fifteen-year record of expansion that has not been surpassed.
Second, the share of public savings in total savings had risen56 by the end of the
period. Though the extent of this increase is not much greater than that of the
private corporate sector, it is still noteworthy that the expansion of investment
was accompanied by an expansion of public saving, as was intended. We have in
this an index of the role of the public sector in resource mobilization. Of course,
this is not an argument regarding the sufficiency of that mobilization. While still
on the topic, I present evidence on the behaviour of public sector savings during
the period that we are looking at here. In Table 2.7 are presented data on savings
of the public and private sectors. The public sector has been classified further
into the ‘public authorities’ (comprising government administration and
departmental commercial enterprises) and the ‘non-departmental enterprises’
(comprising government companies and statutory corporations).
Table 2.7 Public and Corporate Sector Savings (in current Rs crore)

Source: Adapted from National Accounts Statistics 1950–51 to 1987–88, New Delhi: CSO.

Note from the table that while the expansion of savings in the public sector as
a whole is as it is faster than the expansion in savings of the private corporate
sector, within the former the non-departmental enterprises turn in a vastly
superior performance compared to all groups. Though the savings of the non-
departmental enterprises have continued to improve steadily for the next twenty
years or so, during no other phase is the quite spectacular growth in their savings
during 1950–64 matched.57
 Three caveats to our assessment need be introduced, however. First, the rise in
aggregate profits of the public sector is not incompatible with instances of
chronic loss-making by individual units. Second, the data cannot serve as a
measure of profitability, for which purpose we would need to factor in the
volume of capital invested. And finally, this is not to be taken as a mark of the
efficiency of the public sector, as we are very likely dealing also with
monopolies here.
Emerging from this discussion is a view of the public sector held by the
leadership in the Nehru era that is entirely at odds with what is perceived by
latter day academic commentators. Equally, among the next generation of India's
political class it has not been sufficiently well recognized that the public sector
was originally conceived of as an active agent of resource mobilization for
development. This led to its reincarnation as a flaccid employment-granting
welfarist agency after the exit of Nehru from the political scene. For that very
reason while we might today view with shock and awe the extraordinary record
of public sector savings highlighted in Table 2.7, it was very likely seen as
comme il faut by Nehru himself! For instance, consider the following extract
from a speech made on the occasion of the inauguration of the second Hindustan
Machine Tools Factory at Bangalore in 1961:
There is a certain uniqueness about this function and the factory. The uniqueness lies in the fact that this
factory has been made out of the profits or the surplus of the older Hindustan Machine Tools factory and,
rightly, therefore, it is called a gift to the nation by those who have been working in the old factory. This
should be a matter of great satisfaction to all those who are concerned with the HMT factory. (Nehru
1961)58

However, though the record of the public enterprises during the time may have
been seen as entirely appropriate, the data presented in Table 2.7 must challenge
the accounts of some economists of today. Thus, referring to ‘the losses made by
public enterprises’, Bhagwati (1998: 6–7) has stated: ‘Capital-intensive white
elephants in the public sector were supported on the basis of models that
deduced that this choice of techniques would yield a higher savings rate and
hence higher growth: a conclusion that would now sound laughable, had its
consequences not been so tragic.’ Presumably Professor Bhagwati had had in
mind the performance of the public sector well beyond the end of the Nehru era.
Nevertheless, in the face of so strident a commentary, it is worth repeating that
during the Nehru era at least the savings of the public enterprises actually grew
faster than that of the private corporate sector.
Neither the official approach to them nor the actual record of the public
enterprises during these years suggest that the public sector was one of the
wasteful legacies of the Nehru era. Their drift in that direction owes more to the
political culture of a subsequent era when the public sector was turned into a vast
machine for dispensing patronage and buying out the vested interests of the day.
The evidence presented here also allows us to evaluate the assertion that
dirigisme is recipe for a fiscal crisis of the state.59 The growth of the central
government's tax revenues, as share of GDP, in the fifteen years since 1950 had
not been exceeded60 since even by the year 2000. However, my aim here has
been to argue that in its original avatar the public sector was a strategic
intervention in the cause of growth, and that during the Nehru era it had
delivered to an extent far greater than usually acknowledged.

‘A Model that Could Never Have’

There exists a strong body of opinion that directly links the comparatively
slower growth recorded in India over the long haul to the flawed Nehru-
Mahalanobis Strategy. Though it has already been established here that the
record of growth in the Nehru era is hardly disappointing, and we know that
some of the narrative is meant as caricature,61 this view needs to be addressed as
it is often encountered. I shall consider criticisms from two angles, each
representative of a view of what constituted the core of public policy in the
Nehru era.
The first of the lines of criticism draws not so much on mainstream economics
as on socio-political philosophy, and perhaps precisely for that reason is more
widely held. This identifies state intervention as having stifled private enterprise.
Add to this the construction of ‘a loss-making public sector’ and we have a
strategy that far from mobilizing resources needed for development actually
squandered them. The view is neatly summarized by Chibber (2003: 6) thus:
‘India's mistake was its very turn toward development planning in the first place,
an economic strategy that relied so centrally on state intervention in markets.’62
Of course, in some spaces of the economy the loss of economic freedom due
to state intervention in the Nehru era was indeed real. But it is important to have
a measure of its extent. Prominent among the controls and emblematic of the
restriction of freedom of enterprise was industrial licensing. Instituted with a
view to channelling resources according to plan priorities, industrial licensing
did seriously limit the freedom to invest, including in capacity expansion, of the
private sector. Moreover, even apart from defence and atomic energy—in which
areas it is likely to have had little interest in investing—private investment was
mostly excluded from the utilities and much of infrastructure. However, the area
over which licensing had had an impact must be seen in perspective. It was
confined almost entirely to manufacturing, leaving out of its purview about 80
per cent of the economy in the 1950s. Agriculture was a notable area of
exclusion as it was the largest part of the economy. In addition to licensing there
was reservation, with certain sectors—chosen mainly on grounds of their being
‘traditional’—reserved for industrial units with capital investment less than a
prescribed limit. In the language of a strand of development economics, such
intervention was ‘distortionary’ in that it contributes to a deviation from the
market outcome. However, in a perverse sense the same intervention may be
read as expanding (or ‘protecting’, as one's perception may dictate) the economic
freedom of the beneficiaries of the reservation who in its absence may have been
competed out altogether. Nevertheless, the reservation policy had limited the
freedoms of the private corporate sector. The policy of reserving certain
segments of the manufacturing sector for small units would have had the obvious
impact of not allowing for any potential economies of scale to be reaped in these
sectors. Among its consequences, it has been alleged, has been the destruction of
India's more automated cotton textile industry which now had to face
competition from a handloom sector protected from competition by the
reservation policy.
The perception of loss of economic freedom during the Nehru era is closely
linked to the presence of controls in the India of the time. Further, whether by
design or default, much of these controls gradually came to be referred to as
‘socialism’. What is, however, interesting is that a large part of this structure had
been instituted during the Second World War. Put in place by a colonial
government guided not solely by the objective of protecting India but largely of
ensuring that finance and resources flow in a direction compatible with
maintaining the Allied war effort globally, these controls encompassed economic
activity from foreign trade, to capital issue, prices, and even the internal
movement of goods, notably grain. The origins and development of much of the
controls in post-Independence India have been traced to the first half of the
1940s by Mohan and Aggarwal (1990). Even the urban bias of the public
distribution system, an intervention associated with left-wing politics today, can
be traced to the colonial government's desire to maintain the internal peace
needed to continue the outward-oriented war effort.
Two instances clarify the precise relationship of these controls to the Nehru-
Mahalanobis Strategy. First, the debate at the time of the launching of the
Second Five Year Plan model was about the maintenance of the war-time
controls and not the institution of a new set. Thus, it was that B.R. Shenoy's note
of dissent63 had actually argued for its rescinding. It is not known widely enough
that there had been no proposal for a significant increase in controls as part of
the Plan, perhaps because the powers with the government since the War left it
with sufficient clout to control economic activity anyway. Import controls came
to evolve in an ad hoc manner after a balance of payments crisis in 1957, itself
precipitated by liberalization, interestingly of consumer goods imports64.
Investment licensing, however, did figure prominently in the Industrial Policy
Resolution of 1956, providing the legislative muscle for the actualization of
planning for growth.
I conclude this discussion of the place and role of controls in the Nehru era
with two observations. First, despite the allegedly debilitating impact of controls,
the economy did recover from almost half a century of stagnation. Moreover, it
was the manufacturing sector—the area of the economy most subject to controls
—that had recorded the fastest growth, though not the highest degree of
acceleration. Second, and this anticipates a theme in my overall conclusion on
the nature and role of public policy in the Nehru era, there is a need to
distinguish the economic policy of this period from what was yet to emerge.
What we now recognize as the major distinguishing features of the policy regime
of India since Independence were to come later. I have in mind the Monopolies
and Restrictive Trade Practices (MRTP) Act and the restrictively amended
Foreign Exchange Regulation Act (FERA), an astronomical marginal rate of
taxation of income, the nationalization of banks, and the legislation65 that
tightened the ‘labour laws’. These together provided a happy hunting ground,
being a rich source of rent, for an increasingly unregulated bureaucracy. Most of
this has been draconian in its impact and served little the cause of upliftment of
India's poor, but it is worth recalling that all of these had come after the death of
Nehru. Indeed, that it had followed that event so closely is itself indicative of the
importance that was assigned to these forms of intervention in the Nehru-
Mahalanobis Strategy.
Some handle is got on the question of the role of left-wing ideology per se in
accounting for the presence of controls during the Nehru era by considering ‘The
Bombay Plan’. This plan for an overall development of the country proposed in
1944 by the leading industrialists of India bore an uncanny resemblance to what
finally got adopted as official policy, including the emphasis on capital goods
and the focus on the domestic economy. If anything, the Bombay Plan was far
more tilted towards heavy industry than was the Mahalanobis Plan, but it is the
approach to controls in the former that is unexpected given its origin among
private entrepreneurs. It was stated: ‘During this period, in order to prevent the
inequitable distribution of the burden between different classes which this
method of financing will involve, practically every aspect of economic life will
have to be so vigorously controlled by government that individual liberty and
freedom of enterprise will suffer a temporary eclipse’ (All-India Manufacturer's
Organisation 1944: 48).66
The second angle from which the Nehru-Mahalanobis Strategy is criticized
focuses on what we would more readily recognize as an economic model by
itself, rather than merely the loss of economic freedom contingent upon the
adoption of a particular strategy of development. This critique is a little more
fleshed out than the first and claims for itself an empirical validity, though I shall
point out that a purely empirical approach can lead the argument to unexpected
conclusions, including the validation of the choice of the very model in the first
place. It proceeds by arguing that the model of import-substituting
industrialization (ISI) that India had followed was unlikely to have done any
better that it actually did in the long run, and that India's mistake was to have
chosen this model over one of greater outward orientation, with a central role for
trade. Even though the critique of ISI was that protection induced high-cost
production, this by itself was not enough to disqualify such a model from the
perspective of growth, for there is no particular reason to insist that growth will
be necessarily slower within such a regime irrespective of the context. So
reference was now made to historical experience, and this had gone as follows.
By the late 1970s the larger and more prominent developing economies that
had adopted ISI had begun to appear stuck in a groove of slow growth. On the
other hand, the economies of East Asia, namely Korea, Taiwan, Hong Kong,
Singapore, had all arrived on the global stage as leading exporters and were also
at the same time the fastest growing economies of the world. From this was born
the idea of an export-led growth, and the ISI model was written off completely
as a non-starter. Proceeding from the poor record of exports of some large
countries, India included, that had promoted ISI, it was concluded that
interventionism was responsible for the disappointing outcome. As I shall
demonstrate, this conclusion was somewhat premature. Answers to two issues
need to be sorted out first. These pertain to competitiveness and causality. While
it is no more than a matter of accounting that fast-growing exports, treated as
exogenous, will raise the rate of growth of an economy, it has been recognized
that the causality between growth and exports is not always of the kind usually
presumed by arguments for an export-led growth. For instance, where dynamic
economies of scale are to be reaped, a faster economy-wide growth leads to
faster productivity growth in all sectors and this enhances the international
competitiveness of an economy's exports. Now the causality is directly from
growth to exports and not from exports to growth. However, not all cases of
international competitiveness can be attained thus, and for many of the far-
eastern economies the domestic market was much too small to depend upon for
faster growth to bring about a greater international competitiveness. Here
competitiveness was developed, and the question remains how.
While protection is fundamental, the rationale being no more than the century-
old ‘infant industry’ argument of Friedrich List, it is clear that it is far from
sufficient to explain the attainment of this competitiveness. The work of Alice
Amsden (2001) has helped us understand the specific interventions by the state
that were entailed to achieve this in these other economies of the Far East which,
unlike Japan in the inter-war years or China today, actually entered markets for
fairly sophisticated manufactures, especially electronics. Combined with the
work of Wade (1990), this has led to a ‘significant re-thinking in development
studies’ (Chibber 2003) of the strategy of growth to be pursued by the
underdeveloped economies of the world. Their work has conclusively
established the role of ISI in general and intervention in particular as having laid
the base of the East Asian success. No longer are we satisfied with hoary
accounts of free trade, export-led growth, and merely ‘market-friendly’
governments that always conducted themselves at arm's length from private
agents.
Bruce Scott (1997) has investigated the historical basis for the claim that the
successful economies of the world had abjured intervention, or state
directedness, and adhered to free trade. Scott has studied two historical episodes,
one less often encountered in development economics today. The first episode is
that of the East Asian experience and his comment is as follows:
Taiwan and South Korea … now have relatively free economies. In earlier decades, these countries did
have some economic freedoms, notably in product markets. But both were authoritarian regimes with non-
transparent controls aimed at simultaneously promoting exports and restricting foreign entry into their
economies. The state-owned banking system in South Korea allowed the chaebol conglomerates to develop
rapidly with little retained equity, much like the Japanese keiretsu in the early 1950s. South Korea's leaders
chose to develop the economy by concentrating their efforts on a small number of large companies, which
they protected by eliminating the market for corporate control. They also instituted a regime governing
labour that all but eliminated workers' ability to bargain collectively, thereby ensuring that companies
would have the lion's share of income with which to promote growth. Taiwan used purchasing policies of
state-owned enterprises for similar purposes. Only in recent years, as their economies achieved a high
degree of success, have Taiwan's and South Korea's governments begun to relax their grip. (Scott 1997:
159)

Though other accounts of the East Asian experience, including of the associated
role of government, abound,67 I have dwelt on this one in particular for its clarity
of expression.
But Scott's contribution to the debate on ‘economic freedom’ was yet to come,
by taking on the argument in the context of the historical experience of the first
industrial country, referred to in the context as Great Britain. Addressing the
view that it had gained economic supremacy in the nineteenth century when it
moved to a free-trade regime, he has argued:
But its rise took place mainly in the previous century, when in competition with France and the
Netherlands, it relied on a protectionist policy of trade promotion and on forced mobilisation of resources.
Great Britain dismantled its trade regime after it became the undisputed economic, financial, and industrial
leader of the world, not before. Under its new, freer policies it began its relative economic decline and was
slow to take advantage of the newer industries based on electrical and chemical engineering. For all its
freedoms, it had performed below average for industrial countries for more than a century—and especially
since World War II—as its incomes have fallen below those in most of the rest of Western Europe.
It is true that Great Britain began its initial rise to supremacy by freeing up its internal market, a step it
took while other sizeable countries were divided into regions with their own trade barriers. The Great
Britain of the 18th century had the largest domestic market in Europe even though its population was less
than half of France's, and that market encouraged a great deal of economic innovation and resourcefulness.
The United States followed the same pattern during its ascendance: it combined a free domestic market with
sizeable tariff barriers until after World War II. Indeed all the leading industrial powers developed as
protectionist regimes in the 19th century, whereas countries such as India and Portugal, following free trade
regimes, found themselves stripped of industry. (Scott 1997: 159)68

However, it is Scott's observation on contemporary China that serves most to

query the privileging of economic freedom as a driver of economic growth, and
that has the greatest potential of sorting out ideological predilection from plain
economics. Scott observes: ‘With almost twenty consecutive years of growth
exceeding 5 percent per capita per year, China already seems to be
demonstrating that the lives of 1.2 billion people can be radically improved in an
environment that sharply limits freedom’ (Scott 1997: 159). In the context of the
debate on the optimal model or ‘ideal architecture’ for growth, this example has
an interesting implication. It shows that selecting the model that ought to have
been chosen in the past using current growth rates as the criterion can be
treacherous for those committed to a narrow vision of the growth process. For,
if, on the basis of that country's current performance, China's economic model is
to be adjudged as the right choice for development, it must follow that India's
mistake was not in having adopted the Nehru-Mahalanobis Strategy but in not
taking it far enough by investing more heavily in heavy industry and sealing
itself off from the rest of the world in the early days.
Indeed, in some remarkably prescient writing done over three decades ago, at
a time when China's rise to economic power status was yet to be imagined,
Byres and Nolan (1976) had concluded that ‘China has progressed towards
industrialisation at a faster rate than India and appears to be poised for an even
faster pace of industrial advance than India in the future’. The basis for their
prognosis is:
[T]he greater emphasis given by China to the development of ‘key’ industries places her in a better position
for future economic development, since it has freed her to a greater extent than India from the foreign
exchange constraint over the rate of investment and growth. China now appears to have a significantly
greater capability than India to produce domestically the ‘producer’ goods that are the physical wherewithal
of investment.69

Interestingly, in the context of the general distrust of planning as an unnecessary

interference in the market mechanism, Byres and Nolan state that China's
superior performance is due to the ‘quality and effectiveness of planning’ in that
country compared with that attempted in India. It is possible to recognize their
forecast as an instance of extraordinary economic intuition even as one may
disagree outright with their assertion that China had attained what it had ‘without
the terrible cost in human suffering’ that has characterized the Indian experience.
Though weighing-up deprivations one against the other would be akin to
comparing apples and oranges, one might yet argue that it is not credible to
assert that the costs of political repression, and the alleged death by starvation
following economic adventurism in China amount to less than that of the
widespread hunger in India. Silence over apparent political repression cannot be
excused even if it was at a time when the Chinese leadership had yet to start
implementing the ‘one child per couple’ policy through third-trimester abortions,
for accounts of the excesses of the Cultural Revolution had begun to filter
through by the early 1970s.
What emerges from our discussion can be concisely summarized thus: while it
can hardly be denied that markets are fundamental to sustained growth, it would
be naïve to dismiss governments as dispensable to the outcome. Indeed, that
would be a misreading of a by now richly documented history of economic
growth in diverse historical settings and across centuries. Even without insisting
that government is the driver of growth, experiences of economic growth and
development show us that government is an economic driver in the sense that its
actions can have directly productive consequences.
With so much historical evidence of success in countries pursuing ISI, it is
difficult to walk away from it insisting that the choice of model per se explains
India's relatively slow growth for about two decades from the mid-1960s. The
answer must be sought in the domestic political economy, the balance of
economic and political forces that determine economic outcomes, and the nature
of the Indian state.70 Following the work of Wade (1990) on Korea, we are able
to see that what went wrong with ISI in India is that the government singularly
failed to ‘govern the market’. As for the ‘heavy investment strategy’, Jha (1980:
79) has persuasively argued that the reasons for its disappointing results over the
long haul must be sought in political economy—‘because the government chose
to make it fail, and adopted policies which ensure that this would happen’—
rather than economic model. In fact, this is the principal message that we get
from a study of the Nehru era when, as I have shown here, economic
performance was far from what it has been portrayed by critics of the Nehru-
Mahalanobis Strategy.

CRITIQUE OF A STRATEGY: THE MISSING COUNTERFACTUAL

While the discussion so far in this section may have served to dispel the
perception that public policy in the Nehru era had neglected the crucial role of
agriculture or the savings potential of the public sector enterprises and that it was
based on an economic model that stood no chance of success, there is one area
that appears to have been neglected quite severely then. And that was primary
education. Rare were interventions in the 1950s by Indian economists on the
relevance of primary education, but there was a particularly insightful one by
B.V. Krishnamurti,71 an economist then with the Bombay School. In 1955,
within months of the publication of the ‘Recommendation for the Second Five-
Year Plan’ by the Planning Commission, Krishnamurti had written ‘how
absurdly low are the sums allotted for education in the Mahalanobis Plan’,
speaking of it as being lopsided, with little importance given to education and
other social services, and calling for a reallocation to expenditure on this account
from the outlay on heavy industries. More important are Krishnamurti's
argument for greater expenditure on education and his explanation for why it
was so low in the Plan. ‘A concerted effort to educate the mass of the
population, specially in the rural areas, would undoubtedly have far-reaching
benefits of a cumulative expansionist character. This would greatly lighten the
task of the government in bringing about rapid economic development.’ Pointing
to the government's lack of even-handedness in dealing with education in
comparison with ‘heavy industries or river valley projects’ for which it was
willing to adopt deficit financing, he speculates whether this has to do with the
fact that ‘being brought up in the traditions of mid-Victorian finance’ it
continues to ‘apply the calculus of the private grocery merchant to a matter like
education’.72
Interestingly, in all the counterfactual scenarios that are sketched for India, it
is openness to trade that tends to get emphasized, the implicit suggestion being
that the possibilities of trade were neglected. There may well be a point to this
observation, at least surely for the period starting in the mid-1960s. However,
the absence of primary education from these exercises of counterfactual analysis
is striking. One cannot overlook the likelihood that the very face of India, not to
mention the rate of growth of output via human-capital accumulation, may have
been vastly different had more attention been paid to primary education at the
very outset. As this study is also an evaluation of the contribution of Nehru to
the growth and transformation of India, I am reminded of the comment made to
me by a civil servant in Bangalore (now Bengaluru) that the man whose birthday
is celebrated as Children's Day in India had actually managed to do very little for
the very young. Cruel as it may sound, and appearing odd given Nehru's
publicized73 empathy with children, the verdict is certainly close for it is indeed
correct that primary education ended up being severely neglected in the Nehru
era.74 It is of course technically true that, given the constitutional distribution of
powers in India, education—being a ‘State Subject’—was then at least partially
a responsibility of the states, but this does not absolve the policymaker of the
Nehru era of a grave error of judgement regarding the factors that drive growth,
leave alone development. Of course, both policymakers and economists
continued to neglect the continuing neglect of primary education in India till into
the twenty-first century when suddenly India's disparity with the rest of the
world on this count could no longer be ignored. We return to this topic in
Chapter 4.
In our effort to try and understand where the Indian economic strategy may
have foot-faulted, it is instructive to read Korean economists on country's
progress. Thus, we have Kim (1995: 286):
[W]hat distinguishes Korea from other developing countries is the way it has invested in human resources
even before launching a drive to develop its economy. Had it not been for the formation of trained human
resources in advance, Korea's economic development in the 1960s and 1970s would have been much
retarded… What this implies is that investment in human resource development should precede
industrialisation, as human resources cannot be trained overnight when needed. 75

Contrast Korea's educational preparedness with India's at the beginning of its

industrialization programme. Public expenditure on education, by the Centre and
states combined, decomposed by level, is presented in Table 2.8. Note that while
an awareness of the relevance of technical education for industrialization is
reflected in the rising share allotted to this segment, the share of elementary
education declines very sharply. So much so, the relative expenditure on
schooling declines by the end of the Nehru era, despite a rising share of total
expenditure going to secondary education. At the same time, the share of higher
education almost doubled, this after technical education has been accounted for
separately. Note also the negligible expenditure on adult education programmes
given the stock of illiterates in the country in 1947. Altogether, it is difficult to
avoid the conclusion that during the Nehru era higher and technical education
were privileged over mass literacy and primary schooling. While a shift of
expenditure towards higher and technical education may have been necessary for
an industrializing economy, arguably in India the shift was implemented
somewhat hastily. As a result, it has remained the country where public
expenditure per student as a percentage of GDP per capita is most skewed in
favour of higher education (see Table 4.18).
At the level of a history of ideas, it is difficult to square the neglect of the role
of education among India's economists at a time when it was emerging as a part
of the mainstream of the discipline. The idea that industrialization would require
training the peasantry, and that the private sector is unlikely to be sufficiently
interested in this task, was already in the work of Rosenstein-Rodan (1943),
Schultz's essay on investment in man—which had in it the idea of
‘capabilities’—had appeared in 1961, and by the mid-1960s academic
collections of country experiences with education had begun to appear.76 This
seems not to have made much of an impact on the cohort of India's economists
otherwise much attuned to the progress of Anglo-American economics. We may
compare this with the state of interest in education within the economics
profession in late nineteenth century Russia, as recorded by Kahan (1965: 5):
Table 2.8 The Distribution of Public Expenditure on Education, 1951–66 (in per cent)
Source: India 2009: A Reference Annual, Publications Division, Ministry of Information and Broadcasting,
New Delhi, 2009.
Note: Includes expenditure by the states and union territories.

Finance Minister Vyshnegradskii's concern with the level of skill and education of the Russian industrial
labor force in the 1880s both expressed and stimulated a concern for education as an economic investment
of the society. His pronouncement was reflected in a large number of studies, both empirical and normative,
or policy oriented. An early and probably representative example of the latter is an interesting collection of
essays published in 1896 under the general title of Economic Evaluation of Popular Education. It contains
contributions of I.I. Yanzhul’, A.I. Chuprov and I.N. Yanzhul’. That by I.I. Yanzhul’ (which is still of
considerable historical interest) is based upon the assumption that various ‘external’ stimuli of economic
growth (tariffs, subsidies, government regulations) are less effective than education and training. He
invokes the authority of J.S. Mill, Thomas Brassey, and Alfred Marshall, and provides empirical data from
American experience to argue that the level of productivity of labour in various countries is positively
correlated with per capita expenditures on education and with rates of literacy. The general conclusion of
the essays is summarised by the authors as follows: ‘There are, of course, many factors impeding the
development of the Russian economy, but the foremost among them is the general illiteracy which
distinguishes our country from all other civilized countries … an increase of labor productivity is the only
means to erase poverty in Russia and the best policy to achieve it is through the spread of education and
knowledge’.

Note the reference to the importance, when it comes to growth, of education

relative to ‘tariffs, subsidies and government regulations’, the stuff of so much of
the debate over growth in India over the past three decades! On the other hand,
no comparable discourse on the role of education in economic development had
taken place in India during the era of high planning, or since for that matter.
Much of the energy of professional economists, it seems, got dissipated in
skirmishes about the mathematical properties of the plan models.77 In the midst
of all this argument, however, a salvo for education appears to have been fired
by Amartya Sen, who had queried the increased target for agricultural growth in
the Fourth Plan on grounds of an inadequate spread of elementary education in
rural India. A response from C.H. Hanumantha Rao had followed.78 The
immediate success of the Green Revolution that was to follow may suggest that
Sen had been proved wrong, but this would be a hasty conclusion to draw if we
were to take a longer and broader view of India's economic growth.

CONCLUSION: THE RECOVERY OF INDIA

There is an influential narrative on growth in India that goes like this: ‘India's
post-World War II economic history begins with a disastrous wrong turn by
India's first prime minister, Jawaharlal Nehru, towards Fabian socialism, central
planning, and an unbelievable quantity of bureaucratic red tape. This “licence
raj” strangled the private sector … As a result, India stagnated until bold neo-
liberal economic reforms triggered by the currency crisis of 1991’ (DeLong
2003: 184).79 Surely, the account of growth in early independent India presented
in this chapter restores perspective to the recent economic history of this
country. We have shown that, contrary to the above, actually, the very origins of
growth in twentieth-century India can be traced to the early 1950s. The Nehru
era witnessed the revival of a moribund economy and the igniting of a growth
process that has remained undimmed for over five decades during which the rate
of growth of the economy has hastened slowly. The repeated acceleration of the
growth rate implies that the penchant for drawing a likeness between the policies
of the Nehru era and the Soviet Union is misplaced, as growth in India has been
sustained in a way that it was not in the former Soviet Union. Actually, India's
growth rate has accelerated repeatedly, and this feature is not incompatible with
the Nehru-Mahalanobis Strategy.80
Within the recovery engineered, I have flagged two specific achievements of
the Nehru era that had a bearing on growth, namely, the quite spectacular
transformation of agriculture as reflected in the acceleration of growth and the
unprecedented mobilization of resources by the Indian state which enabled a
hike in public investment. There may have been errors of commission, such as
the spawning of an increasingly unregulated economic bureaucracy, and of
omission, such as the gross neglect of schooling. But there have been four
decades at least in which to correct these. To hold that this is due to a ‘lock-in’
(Chibber 2003) effect of the Nehruvian strategy and suggest that nothing could
have been done to alter the situation is only to confirm that we have not
understood the lessons of even our recent past.
Though I have not focused on the particular role of Jawaharlal Nehru in the
formulation and implementation of the economic policy of his time, I have
provided a window to his views on the economy including, to an extent, of their
evolution. Arguably, no Indian leader at the helm of this country since has been
as central to the navigation of its economy. The economic record of this time
therefore serves as one indicator of the effectiveness of his role as independent
India's first prime minister, a topic of perennial interest to so argumentative a
people as us Indians.81 Under Nehru, the Indian economy had been transformed
from a colonial enclave to one with at least some of the prerequisites for
sustained long-term growth, while at the same time maintaining an autonomy
from the superpowers vying for influence on a newly independent subcontinent.
The acceleration of the rate of growth of the economy achieved in the Nehru era
may be considered as a marker of this transformation. I have provided both
historical and comparative perspective on this variable and argued that the
achievement was indeed quite remarkable in the context.
Further, the framework within which it had been achieved has a bearing on
today's thinking on the ideal economic architecture for growth. Central to the
latter is the construct of economic freedom defined as absence of restraint.
Considered ‘economics’ since the implosion of the Soviet Union, this view is
contradicted by the recent history of China where freedom, economic or
political, is not a prominent feature of the landscape of a heaving economy.82
While the situation in the Nehru era was a far cry from today's China, both in
terms of economic and political freedoms, India's growth performance of that
period, largely engineered by the state, is a serious challenge to the thinking on
growth encapsulated in the Washington Consensus, a recipe for prosperity
influential in the 1990s but no longer so.83
The historic role of the economic policies of the Nehru era needs to be better
understood. For sheer prescience it would be difficult to best the contemporary
evaluation by Nehru's alter ego in the charting of a uniquely Indian economic
journey. For a statistician, likely to have been ever tempted by the calculus of
probability, Mahalanobis's forecast, made in the late 1950s, is markedly free of
confidence intervals! He had averred: ‘One thing can be said with complete
certainty. Jawaharlal Nehru has carried India into a new epoch. Whether there is
a smooth transition or whether India has to pass through storms on her way to
progress, it will be impossible to go back to a stagnant economy’ (Mahalanobis
1961: 563). This prediction has acquitted itself. It must encourage us to view the
recovery achieved by the policies pursued in the 1950s as a bridgehead to the
higher growth rates that have followed. The shibboleth ‘Hindu rate of growth’
(see Panagariya 2005: 18) serves more to obscure than to illuminate the nature
and significance of economic change in the Nehru era of India's history.

NOTES
1. See Mahalanobis (1955a). Mahalanobis's non-technical papers on planning and economic
development have been collected in Mahalanobis (1961). These taken together convey the evolution of his
thinking, particularly on the topic of a growth model for India.
2. For authoritative and contrasting accounts, as they approach the Nehru-Mahalanobis Strategy from
different angles, see Chakravarty (1988) and Srinivasan (1996).
3. See Mahalanobis (1955a).
4. It may be mentioned that while Mahalanobis may not have been entirely clear in his exposition
always, this must surely count as a forerunner of the models of endogenous growth that came to fascinate
the profession from the 1980s on. This is also pointed out by Srinivasan (1996).
5. The premise of a foreign exchange constraint has been severely criticized as amounting to no more
than ‘export pessimism’. We will have occasion to review this position shortly.
6. See ‘Technical Note’, Appendix to Section 4 of Mahalanobis (1955a).
7. For example, see Price (1967), and the interchange between Vasudevan (1968) and Price (1968) that
had followed.
8. See Chakravarty (1988: 13). Interestingly, Mahalanobis had also stated (1955a: 24) that while the
earliest version of his model of growth is similar to those by Harrod and Domar, he was not aware of them
when he had formulated his own. We find that the Anglo-American lineage of the Mahalanobis Model
tends to get overlooked in favour of the Soviet, presumably because recognizing it would take the sheen out
of the criticism of its foreign origins. More recently it has been suggested by Ray (1998: 55) that Soviet
planning was ‘deeply influenced’ by the Harrod-Domar model. With this we come full circle!
9. At that time, admiration for the Soviets was present in some unexpected circles globally. Thus, we
find the following reference to its achievements in The World Economic Survey, 1931–32 of the League of
Nations at Geneva, quoted approvingly by M. Visvesvaraya (1936: 71): ‘Russia is one of the chief prodigies
of the time. From extreme backwardness it has advanced at a stride to the forefront of mechanical
development.’
10. See Mahalanobis (1955b). It is significant that Mahalanobis had also addressed health and education,
though, arguably only in passing. We return to this issue at the end of this chapter.
11. See Desai (1998).
12. This had already been raised by Rao (1952). In any case, it is not clear that the Nehru-Mahalanobis
Strategy should be equated with the Keynesian problematic to the extent that the latter was addressed to the
short run in an economy with unemployed capital. On the other hand, the objective of the former was to
build up the capital goods base in a country that was seen to be lacking in it.
13. But then the Nehru-Mahalanobis Strategy was actually motivated by the objective of eradicating it.
14. Evidence of this follows.
15. See the response to Rao (1952) by Raj (1954), and a conceptualization of how macroeconomic
equilibrium is restored when aggregate demand expands in an India-type economy by the then remarkably
young Bhagwati (1956).
16. Whatever may have been the structure of the Model, when it came to the strategy, Mahalanobis
(1955a: 23) had recognized the ‘paucity’ of consumer goods as a ‘limiting factor’ on growth.
17. To be sure, there was also the Gandhian model of the self-sufficient village economy, but it had been
explicitly rejected by Nehru himself even before Independence. And, in any case, it stood little chance of
being adopted by the largely urban political leadership of post-colonial India.
18. See Shenoy (1955).
19. ‘[T]he price paid for rapid industrialisation has been terrific in some socialistic countries. I am
certain that no country with any kind of parliamentary democracy can possibly pay it’ (Nehru 1954).
20. See Mahalanobis (1955b: Table 8).
21. The speech is of interest also for the vehemence with which the problem is identified: ‘agriculture is
more important by itself than any chief minister’!
22. See Chapter 3 for an estimate of the date of the growth transition. While the Green Revolution is
conventionally treated as having originated in the second half of the 1960s, it may be noted here that the
rate of growth registered in 1964–5, the year of Nehru's death, was at nearly 12 per cent, the highest annual
production increase in crop agriculture in a decade and a half (see Ministry of Agriculture 2003). However,
this was to be followed by two years of drought.
23. Of course, as evident from the graph in the ‘Introduction’, finer partitions of the data points over the
period 1950–2000 would yield a higher rate of growth of the economy from the late 1970s on. However,
from the same graph we can see that the acceleration during the Nehru years outweighs by far the ones that
were to follow.
24. I thank M. Suresh Babu for having drawn my attention to this literature.
25. This can be seen in the figure in the ‘Introduction’. More formal evidence appears in Chapter 3.
26. This assessment is noticeably at odds with the customary assessment of the economic record of the
Nehru era by economists. Historians, it appears, bring a greater objectivity to the study of the economy than
economists, perhaps because they privilege economic theory less.
27. Reported by Sivasubramonian (2000: Table 6.3).
28. See Dhar (2003) and Guha (2007) for accounts of the reception of Mao in India during the Nehru
era.
29. See Maddison (1995).
30. See Dyson (2008).
31. See Romer (1986).
32. An instance of this tendency may also be found in the reported comments on economic growth in
India by Alan Greenspan. Having first castigated Nehru's ‘Fabian socialism’, Greenspan acknowledges the
higher growth in recent years but plays down this acceleration as having been from ‘off a low base’. See
‘Give up Socialism: Greenspan’, The Times of India, New Delhi, 24 September, 2007. Apart from its
oracular nature, the observation displays an empirical oversight in that India had already grown at over 5
per cent per annum in the 1980s, which was the highest rate of growth outside of East Asia by then.
33. For a broader, historian's, account of the burden of the colonial legacy in India, see Chandra (1992).
34. See Scott (1997).
35. See, for instance, Lal (1999).
36. See also Bagchi (1972) for an economist's perspective on the period.
37. Indeed, this must be the obvious conclusion of those who claim that an excessively interventionist
state pursuing the Nehru-Mahalanobis Strategy best characterizes the economic environment of early
independent India.
38. In making my case I shall draw upon the exposition of this view of underdevelopment by Ray
(1998).
39. For a suggestion along these lines, see Rao (2004).
40. See the figure in the ‘Introduction’.
41. See Reddy (2006).
 42. ‘[I]nvestment in industry in the private sector [was] largely assisted by financing institutions in the
public sector, and by fiscal concessions and tax incentives provided by Government’ (Rao 1971: 72).
43. It is equally significant but inadequately recognized that the bureaucratic approach is likely also to
have lowered the productivity of public investment.
44. For a qualitative assessment of the gains to the private sector during the Nehru era, see Zachariah
(2004).
45. See Habib (1973).
46. Somewhat uniquely in the form of trade credit for ‘complete plant installations for machine-building
industries’ (see Raj 1967: 24).
47. Figures on aid reported here are from Bhagwati and Desai (1970: 181 and Table 10.3).
48. Note also from this account the substantial difference in the planned allocation of investment to
industry for the Second Five Year Plan set out in Table 2.3 and the actual share of investment of this sector
over the Nehru era. The latter, as recorded by Rao, turns out to be barely above half of Mahalanobis'
preferred value of 0.3.
49. For a rejection as ‘simplistic’ of the claim of a neglect of agriculture under planning, see Srinivasan
(1996).
50. ‘Not a chest of indigo reached England without being stained with human blood’ (British colonial
civil servant quoted by Winchester and Winchester 2004: 56).
51. As raised already, even if the second acceleration is established to have occurred immediately after
the death of Nehru, the Green Revolution ought not to be seen as episodic but the result of some years of
preparation of the seed bed, so to speak, in terms of the spread of irrigation, the diffusion of best practices
via an extension service, and preparatory measures such as field trials under the auspices of the public
agricultural research system, Indian Council of Agricultural Research (ICAR), some of them commencing
as early as the First Five Year Plan itself. The comment by ‘AM’ (1964: 1195), popularly believed to be
Ashok Mitra, in a special issue of The Economic Weekly in July 1964 devoted to an assessment of the
Nehru era—‘[d]espite all the gains of the last seventeen years, in many respects we have to make up for the
lost time of these very years, during which all of us have grown a little less romantic and during which our
per capita availability of food has not gone up by a single grain’—is appropriately hortatory but wrong in its
claim regarding the progress made in agriculture. The per capita net availability of grain had grown slowly
but steadily over the Nehru era, despite the significant rise in the population growth rate. Of course, that the
performance could have been better is unexceptionable, but two caveats are in order here. First, subsequent
growth in availability of foodgrains in India has barely matched the record of this period. See Economic
Survey 2006–2007, Table 1.17. Second, in the Nehru era, the relative price of agriculture having first
declined remained depressed for most of the time—for which see Appendix Table 4.4 in Misra (2004)—
while agricultural growth quickened. Apart from the fact that this would be considered the pre-eminent
marker of a successful development strategy, it is the best imaginable evidence that the Nehru-Mahalanobis
Strategy had, in practice at least, encompassed the Vakil-Brahmananda Plan which had predicated a wage-
goods constraint binding Indian economic growth.
52. The agricultural turnaround achieved in the Nehru era, even when acknowledged in India, mostly
receives the back-handed compliment that it was merely ‘extensive growth’, achieved via extension of the
cultivable land frontier. This view is mistaken. Recent research on the Indian subcontinent originating in
Japan shows that the 1950s in India witnessed the reversal of a trend decline in land yields, the latter being
known to us since Blyn (1966). Further, among the decades of the twentieth century, the average annual
growth of yield achieved in the 1950s is exceeded only in the 1980s. ‘It is important to note that the reversal
of land productivity occurred before the breakthrough of the “Green Revolution”’ (see Kurosaki 2007: 18;
emphasis original). Clearly, the author had had in mind the ‘growth’ of ‘land productivity’.
53. Even when this is not acknowledged as such by professional economists, it is widely recognized
within civil society. See the report on a debate in Kerala today in the Malayalam daily Mathrubhoomi
(2007).
54. A strong public sector revenue base is required also in high-income economies with substantial
welfare interventions, for instance, the economies of Western Europe.
55. See Mahalanobis (1955b: Table 8).
56. See Rao and Sen (1995).
57. See Table 3 in Rao and Sen (1995).
58. Interestingly, Nehru was not at all squeamish about acknowledging assistance from the West when
he felt it appropriate to do so. For, the speech had continued: ‘May I also refer to those who originally set
up the plant here, the well-known Swiss firm of Oerlikons who laid the foundations? They built the first
HMT plant and helped in training our people in the early stages, and their work has yielded this fine result.’
59. See ‘Introduction’ in Lal (1999).
60. See Ministry of Finance (2005).
61. See, for instance, the description ‘model for going backwards’ in Bhagwati (1998).
62. However, the author himself does not subscribe to this view.
63. See Shenoy (1955).
64. See Chibber (2003).
65. Of course the original legislation governing work and employment in the factories dates from the
colonial era.
66. The context was that, having advocated deficit financing—‘finance [is] only a camp follower’—to
move the economy, the authors of the Plan anticipated a temporary inflation.
67. See in particular Chang (2003).
68. In the context, the following conclusion of Crafts (1996: 200) may also be noted: ‘The British
Industrial Revolution was accompanied by growing protectionism in product markets but continuing
receptiveness to foreign ideas.’ It pretty much stands on its head the conventional wisdom on UK in the
eighteenth century that it was highly open to trade in goods and self-sufficient in technology when it was
not passing it on to the rest of the world.
69. See Byres and Nolan (1976: 86) for this and all following references to their work.
70. Such explanations have been provided by Chibber (2003) and Kohli (2004), respectively.
71. See the entry under ‘Krishnamurti’ in Balasubramanyan (2001). I am indebted to Ramachandra
Guha for bringing this little known critique to my attention. It is of some value to the economics profession
in India, not only due to its perspicacity but also as some kind of record, that not all our members had pulled
their punches during the great debates of their times!
72. All quotations are from ‘Krishnamurti’ in Balasubramanyan (2001).
73. See Crocker (2008). Nehru's defenders, however, are quick to point out that he had little to do with
the institutionalization of his birthday as Children's Day, not to mention ‘the phoney appellation’ Chacha!
(see Sharada Prasad 1979: 8).
74. A historian's account of how this came to be despite Nehru's own intentions is to be found in Spear
(1967). Spear proposes that it was the very body that was given the responsibility of implementing the plan,
namely, the functionaries in government, who sabotaged it, as they were hostile to the project of social
upliftment. Interestingly, a twenty-first century parallel has been suggested with regard to the
implementation of the National Rural Employment Guarantee Scheme by Dreze (2009). For a perspective
on the state of educational provision in India beyond the Nehru era, we may turn to Romila Thapar (2009):
‘[M]any of us feel that the foundation of primary and secondary schools has still to be established and
nurtured. I suspect that nothing is done about the foundation because political parties fear an educated
electorate that can ask questions. It would then not be swayed by mass meetings and would make vote-
banks irrelevant. The moment people ask questions and relate the present to the past and have a project for
the future, it becomes a different electorate. I don't think it is just an oversight that governments and
politicians pay so little attention to education.’ Clearly, even Nehru's influence on matters that could not be
settled in Delhi was limited. This was the age of the satraps, who called the shots in the states.
75. For an econometric investigation that confirms the role of education in the long-run development of
Japan, see Self and Grabowski (2003).
76. See, in particular, Anderson and Bowman (1965).
77. An instance of this is Komiya's observation that the Mahalanobis solution was ‘inefficient’, cited in
support of their critique by Bhagwati and Desai (1970: 237). The East Asians, on the other hand, were very
likely blessed by the fact that they did not base their growth strategy on any explicitly advertised model, as
a result of which they spent less time quarrelling over it! It is of interest to note Mahalanobis' own view of
the purpose of his modelling efforts: ‘I do not think that the models have any permanent value of their own.
I have used them as scaffolding to be dismantled as soon as their purpose has been served’ (1955a: 6).
78. The references are in Rao (1964). I am indebted to Professor Rao for bringing this exchange to my
attention.
79. However, the author does not himself subscribe to this view.
80. Recall from the discussion in the section ‘Imagining Economic Growth: The Nehru-Mahalanobis
Strategy and Its Critics’ that Mahalanobis' model did predict income rising steeply in the long run.
81. Interestingly though, most assessments tend to underplay Nehru's pre-occupation with the economy,
privileging instead his role in fostering a parliamentary democracy within the country and shaping a just
order globally. This is so even of the sympathetic accounts to be found in Gopal (1975, 1979, 1984) and,
more recently, Malhotra (2007).
82. See Huang (2008).
83. See Rodrik (2006).

* Parts of this chapter were originally published as ‘The Recovery of India: Economic Growth in the
Nehru Era’, Economic and Political Weekly, 10–17 November, 2007. A revised version of the same
appeared as ‘Visible Hand: Public Policy and Economic Growth in the Nehru Era’, Indian Economic
Journal, April–June, 2008.