This article of Arvind Virmani says more than history.
Arvind Virmani | Nov 21, 2013, 12.06 AM IST
How can we judge the performance of the Nehru-Indira socialist, mixed economy that prevailed from 1950 to 1979? This approach is also characterised as the “license quota permit (LPQ) raj.” Jawaharlal Nehru was PM from 1947 till his death in May 1964, while Indira Gandhi was PM from January 1966 to March 1977. Thus father and daughter led the country for 25 of the 30 years.
Though there were other PMs in 1966-67 (Shastri) and 1977-79 (Morarji Desai, Charan Singh) they didn’t have time to change the fundamental development approach. The reason for taking 1979 as the cut-off date is that when Indira returned as PM for a second tenure in 1980, she initiated a clear reversal of her own failed policies of the socialist era.
Next we need a performance measure and a comparator. Growth and poverty reduction have often been used to compare performance across time periods. But here we use a more effective summary measure of welfare, per capita GDP at purchasing power parity, to show how the average Indian fared relative to the rest of the world. This helps us compare the effectiveness of the Nehru-Indira socialist development strategy relative to the effectiveness of development strategies prevailing in the rest of the world during the same period.
Many writers argue that socialist policies were fine as growth was faster than under colonial rule. The problem with that argument is that the whole world did better after 1950, so the fact that India also did better tells nothing about the effectiveness of our policies compared to alternatives that were not only available but were actually adopted in other countries.
Other writers take specific countries such as South Korea and argue that we performed abysmally relative to them. Though this is true it is subject to selection bias – picking the best performing countries as comparators would obviously make India look bad. Such criticism cannot be levelled when the comparator is the whole world. A development model that leaves the relative welfare of the average Indian worse off than that of the average world citizen surely needs to be ostracised and not praised, as it still often is in India!
So how did the socialist approach fare? In 1950 the welfare of the average Indian was 29% of that of the average world citizen. By 1979 it had reduced to 20%, or one-fifth, of that of the average world citizen. This means that the world on average was progressing faster than India – not just South Korea, not just east and southeast Asia, but Africa, Latin America and developed countries (all) taken together!
During Nehru’s tenure, India’s per capita GDP at PPP as a proportion of average world per capita GDP at PPP was reduced by 3 percentage points (or by 11% of its previous level). It declined further during the 1965 war and was 23% in 1966, when Indira first came to power. By 1976 welfare of the average Indian slipped further to 21% of world levels (thus declining by another 2 percentage points or by 8% of its previous level). It remained at the same relative level in 1980.
Per capita income growth data from a different source confirms that Indian economic growth was slower than that of the rest of the world. Between 1960 and 1979 India’s per capita GDP grew at an average rate of 1.1% per annum compared to an average growth of per capita world GDP of 2.7% per annum. Thus the average Indian’s per capita income was falling behind the world by 1.6% per year during this period.
The Janata government formed in 1977, with Morarji Desai as PM, did try to change the direction of economic policy. It appointed a “committee on controls and subsidies (Dagli),” and the “Alexander Committee on Import-Export Policy”, to analyse the LPQ raj and suggest a new approach. I remember that my first foray into practical policy advice was to give a memorandum to the Dagli committee, arguing that tax policy was more efficient than controls in achieving desired economic objectives and recommending industrial and import decontrol.
The Morarji government fell before Dagli or Alexander committee recommendations could be implemented. It was only after the arrival of the second Indira government in 1980 that import decontrol started in earnest, with surprisingly positive results.
The Nehru-Indira version of socialism was a failure compared to market-based models being used in other parts of the world after World War II. Nationalisation of large industry and financial institutions led to their monopolisation and the suppression of competition. Secondly, private entrepreneurship (including the non-profit sector) was suppressed through oppressive controls on every sphere of economic activity, converting businessmen into rent seekers.
Thirdly, obsession with heavy industry led to the neglect of both labour-intensive light industry – rendered uncompetitive through rigid labour laws – and agriculture. The fourth negative consequence was a gross neglect of basic education and literacy. Fifthly, a large, unspecialised, overextended and oppressive bureaucracy was created that behaved like colonial or princely rulers.
It was only with the gradual abandonment of this model that Indian growth accelerated and the welfare gap between Indians and the rest of the world started closing.
The writer is former chief economic advisor, ministry of finance. He currently heads Chintanlive.com