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Jaimini Bhagwati: 1947-64: An age of short-sightedness?

Jaimini Bhagwati  |  New Delhi 

It is surprising that some are so sure about the policies that could have been followed after 1947.
The commentary in the Indian print media about our relatively high rates of GDP growth in the last few years is occasionally accompanied by dismissive comments about the first Indian Prime Minister Jawaharlal Nehru's economic policies from 1947 to 1964, i.e. his tenure as Prime Minister. And, the gushing television coverage about Indians who have become dollar-billionaires or acquired foreign companies through leveraged buy-outs at times conveys a sense that policies during the Nehru years kept us back till recently.
The fruits of India's achievements are yet to reach a majority of the population and hence this euphoria and hubris appear to be misplaced. Further, the sniping against Nehru is disconcerting on several counts. In newly independent India, constituted as never before in history, the leadership at that time had the foresight to lay the foundations of India's parliamentary democracy, independent judiciary, the media, apolitical civil service and armed forces, commitment to secularism and social equality, and institutions of higher education in science and technology. Nehru passed away on May 27, 1964, almost 43 years ago. In the last four decades we have fallen short on implementing the ideals of our "tryst with destiny" and we are all partly to blame. This article aims at providing some background to the economic policies during the Nehru years so that over-simplistic statements about decisions taken during that time can be viewed in perspective.
First, a few facts. The British had imposed controls on foreign exchange, prices and production during the Second World War and these were reintroduced soon after independence. Later, the Industrial Policy Resolutions of 1948 & 1956, the Industry (Development and Regulation) Act of 1951 and Essential Commodities Act of 1955 provided the framework and legislative support for government to regulate investment, production and prices. Price ceilings were imposed when there were shortages and this invariably led to the mushrooming of black markets.
With the benefit of hindsight, the negative consequences of some post-independence economic policies are easy to identify. However, till at least the early 1960s many in academic and policy making circles were in favour of import substitution, rationing of foreign exchange and controls on factors of production. For instance, the Singer-Prebisch thesis (after the German and Argentinean economists Hans Singer and Raul Prebisch) distinguished between the classical theories of comparative advantage and the actual trade practices of countries. One of Prebisch's arguments, based on Latin American trade data from 1876 to 1947, was that the gains from international trade are not equitably distributed between developed and developing countries. Prebisch became Director of the Economic Commission for Latin America (CEPAL) in 1948, and, contrary to prevailing wisdom, suggested that industrialisation could be achieved faster by governments taking an active role. The rationale for imposing exchange controls was to direct scarce hard currency resources to import inputs needed for priority industries.
Specifically, foreign academic on Nehru's policies was divided. Milton Friedman visited India for two months in 1955 as an economic adviser to the Indian finance minister and again in 1963. Friedman expressed his scepticism about central planning in India and commented that controls on economic activity impeded innovation and growth. In contrast, IMD Little, who was in India for a year in the 1950s, on sabbatical from MIT's Centre for International Studies, endorsed India's approach to planning in a 1960 report.
Within his political peer group Nehru had sharp differences of both with those who argued for a lower government profile and those who advocated tighter controls. For example, in 1950 the then finance minister, John Mathai, opposed the creation of the Planning Commission. At the same time, Nehru was subjected to severe criticism from the left by Jayaprakash Narayan. It appears that Nehru decided to follow a left-leaning compromise among the several competing points of view. This has been corroborated by Arvind Panagariya in his article titled "Political Economy of Trade and Foreign Investment Policies in India 1950-2006" (NCAER Golden Jubilee Conference, December 2006), which concludes that "it can be justifiably argued that if the influence of Nehru had not been dominant and India had strictly followed the prevailing academic orthodoxy, the outcome would have been more, not less, protectionist ... on balance, Nehru's approach produced a more liberal outcome in the 1950s".
In a 2003 lecture, former US Treasury Secretary Lawrence Summers mentioned that the rate at which a country would grow depends substantially on its "ability to integrate with the global economy through trade and investment ... capacity to maintain sustainable government finances and sound money ... and ability to put in place an institutional environment in which contracts can be enforced and property rights can be established". In the 2004 Wider Annual Lecture titled "Rethinking Growth Strategies", Dani Rodrik, Professor of International Political Economy at Harvard University, observed that these are outcomes, not policies. Another outcome often cited in the context of the debate on globalisation is that only those developing countries that are in a position to manage their interaction with the rest of the world should open up in a phased, sector by sector manner. Additionally, Rodrik pointed out in his 2004 lecture that the examples of the Asian tigers and later China, India and Vietnam suggest that successful outcomes can be reached by very "divergent and heterodox institutional arrangements". Others have also commented that the policies required to achieve desired outcomes vary from country to country and with time. All aspects considered, experts continue to differ on various optimal time-specific country-appropriate policies that drive growth. Consequently, it is surprising that some in India seem to be so sure about the policies which could have been easily followed in the post-independence years to ensure sustained growth.
To sum up, looking back over the last 60 years, course corrections could perhaps have been made earlier as domestic and international circumstances changed. In the 1950s, though, it was not necessarily clear that controls were inappropriate at that stage of India's development. Further, any analysis of the drivers of growth is incomplete without due consideration of the associated political economy constraints. As evidenced by recent empirical work, sustainable high growth depends on the consistent support of local political and social structures. It follows that attempts to come up with universally applicable prescriptions for growth invariably result in anodyne formulations of outcomes as distinct from specific policies.

j.bhagwati@gmail.com

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First Published: Thu, March 08 2007. 00:00 IST
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