Arvind Panagariya's book explores Jawaharlal Nehru's long economic shadow

The Nehru Development Model: History and its lasting impact

Author: Arvind Panagariya

Publisher: Penguin Viking, 2024

Pages: 345

Price: Rs 856

This magisterial review of modern India’s economic history by a celebrated international trade economist, earlier chair of the NITI Aayog and currently the chair of India’s 16th Finance Commission was written during the pensive days of Covid-19 and is dedicated to the author’s brother — an eminent Indian neurologist — who sadly passed on then. It is refreshingly free of dry technicalities. Instead, a lively, albeit heavily annotated, style, transports readers into the minds of politicians, business leaders and intellectuals, reading in their actions the reasons India remains export pessimistic, trapped in high capital investment projects and negligent towards trade and agriculture as growth drivers and employment generators.

India suffered economically from a widespread, persistent faith in the Indian variety of “socialism.” It ignored our comparative advantage in light manufacturing and agriculture based on cheap labour, land availability, existing business smarts and worker skills. The focus post-independence, on heavy industry was ruinous for GDP growth and employment, embedded inefficient, large public enterprises, killed the then flourishing private exports via export controls to benefit domestic consumers, while import controls and taxes on consumer products inflated domestic prices, generating exorbitant profits for producers. In tea exports we vacated space in the US and European markets to Sri Lankan and African exporters, in cotton textiles to Japan and in jute to Pakistan.

Second-guessing the market via a planned heavy industry-focused economy generated inefficiencies via bureaucratic procedures and low technical skills in the implementation of clunky industrial and trade policy and bred a private sector specialised in managing the Licence Raj but low on business innovation and thriving on the inefficient performance and high price benchmarks generated by the vast public sector.

Why does a fondness for “socialism” persist in India? The author suggests it is an easy sell for the political class because there are many more have-not voters than haves. Bureaucrats benefit from intrusive, albeit efficiency-retarding, government controls. Business interests use such controls to protect themselves from imported competition. Indian intellectuals are comfortable in a time warp of self- reinforcing beliefs, unmindful of modern economic practices.

The author traces these pathologies to the long economic shadow of Jawaharlal Nehru — India’s longest serving prime minister — who nurtured democratic institutions but failed India’s economy despite his pragmatism in rejecting redistribution of wealth (a tenet of socialism) because India had no wealth to redistribute and rejecting collectivised agriculture, Soviet style, though he cut landed aristocracy to size through ownership ceilings with the surplus land redistributed to the landless. He was even open to the import of private equity capital to build industry. Nor was he an advocate of wholesale nationalisation beyond the Imperial Bank of India and Indian aviation including Air India.

The “Nehruvian Model” was consequently a “mixed,” growth model with the public sector dominant because sufficient private capital with experience in infrastructure and basic industries did not exist and the public private partnership model was yet to be marketed by global finance. Nehru’s sensible twin objectives were freedom from “imperialism” and from “poverty” presciently defined multifunctionally. Sadly, the implementation strategy to get there was muddled by the success of Soviet central planning. Nehru stigmatised foreign trade as a ruse by which colonial powers grew rich and their colonies dependent on imported manufac­tured goods or defence equipment. Overlooked was how the foreign exchange needed for development would be earned sans buoyant exports, once the accumulated Sterling balances ran dry, as they did by 1958.

On why Nehru’s long economic shadow sustained till 1991 — nearly three decades after his passing — the author points to the near continuous, political domination of the Nehru family. Indira Gandhi (1966-77 and 1980-84) took socialism further via extensive nationalisation of private industry and large welfare outlays, cementing political, bureaucratic, business, and intellectual inertia into following socialist, economic fundamentals, even as the Soviet Union began imploding.

Rajiv Gandhi (1984-89) had no socialist baggage and led the change in economic narrative towards liberalisation, competition, and efficiency in fiscal, industrial and trade policy. But lack of administrative experience and inept political management led to an early exit followed by his tragic assassination. Prime Minister P V Narasi­mha Rao (1991-96), a seasoned state- and national-level politician, redefined economic policy towards markets, despite the entrenched political belief in mixed socialism. The foreign exchange crisis helped unify support behind him. He cannily masked drastic economic policy change (devaluation, trade, and industrial licensing liberalisation) as continuity in Gandhian and Nehruvian precepts, while strategically, Finance Minister Manmohan Singh, a widely respected technocrat, became the face of reforms. Also, reforms-driven explosive growth in Deng Xiaoping’s China became a hard to ignore exemplar.

Prime Minister A B Vajpayee (2000-2004) was reform-oriented and started a privatisation drive but was constrained by closet socialist political allies and BJP colleagues. Prime Minister Manmohan Singh (2004-14) continued trade and licensing liberalisations but remained constrained by left-of-centre colleagues and the debilitating impact of the global financial crisis. On the Modi BJP government, in power since 2014, the author opines “liberalization has been revived with contentious reforms like the bankruptcy and insolvency Code, GST and cut in tax on corporate profits, though “import substitution industrialization” remains alive in Atma Nirbhar Bharat.

India’s “stable and vibrant” democracy comes at the cost of a Nehruvian “socialist” polity and an underperforming economy. Institutional analysts will discover a treasure trove of evidence on how fuzzy objectives, poor design of regulatory systems and unskilled staffing can pervert the intent of economic policy. A highly recomme­nded, provocative but illuminating read for thought leaders.

The reviewer is consultant, economic governance & energy regulation