The Murder Of Growth- Part 1

This is an intensely economic blog and represents my personal views based on some amateur reading out of academic interest. It’s not a ‘copy-paste’ at all, but it is ‘find-note-arrange-rearrange’ at places. It goes against Jawaharlal Nehru mostly and is based on analytical facts, not on perceptional hindsight. Basically it's about Nehruvian Socialism that failed to uplift the most diverse democracy as the way it was purported to do. My expressions could be fundamentalist, but thoughts aren't so necessarily.

With the recent backdrop of tumbling Rupee against American and European currencies, most of the economic portals paid remembrance to FY 1991 when India was on the verge of default on the BoP commitments and foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports.  Yet, the stark difference in both situations is that Rupee was pegged to the value of a basket of currencies in 1991 and wasn’t freely tradable, whereas in 2013 this isn’t the case and our economy is now much more liberal to allow externalities have their due impact on currency pricing. While reading about 1991 crisis, one will come across the term ‘end of license raj’ often, which seduced the inquisitive reader inside me to delve more into it. As I went on reading, I had some fascinating manifestation of the gross blunders made by Mr. Jawaharlal Nehru (JN) during the first two decades of our independence, that have mostly resulted into all the subsequent mess this country has gone through. This blog is just an attempt to highlight some of the key facts and may interest only those who felt it interesting reading so far. Others may please go back to Facebook!

Not many of us know much about the name Ms. Annie Besant (AB). She was once a president of Indian National Congress during its initial years and chief mentor of JN. Both AB and JN were members of the club ‘Fabian Socialism’, which openly sponsored communist manifesto. AB writes in one of her memoires- “A democratic Socialism, controlled by majority votes, guided by numbers, can never succeed. A truly aristocratic Socialism, controlled by duty, guided by wisdom, is the next step upwards in civilization.”  She highly influenced JN’s thoughts towards adoption of socialism. Mr. Clement Attlee, British PM 1945-1951 who declared Indian independence from British rule, was JN’s friend and active supporter of Fabian socialism too, from whom JN was further inclined towards these theories. Labor Party came to power in Britain after WW-II defeating the war hero Winston Churchill and Attlee’s Pro-socialism policies made deep impact on JN’s mind, who had just started enjoying premiership of a nascent country.

At the doorstep of freedom, JN had two prominently established economic models to embrace for growth-1. The linear-stages-of-growth model- It posits that there are a series of five consecutive stages of development which all countries must go through during the process of development. These stages are "the traditional society, the pre-conditions for take-off, the take-off, the drive to maturity, and the age of high mass-consumption". 2. Structural-change theory- It deals with policies focused on changing the economic structures of developing countries from being composed primarily of subsistence agricultural practices to being a "more modern, more urbanized, and more industrially diverse manufacturing and service economy."

JN embraced the first one, perhaps because it sounded so nice! JN was a man of dreams, yet his dreams often lacked rationale and concrete planning. He was a fairy-tale visionary. The anti-agricultural stance of structural change (SC) theory disheartened his hardcore socialist soul and he chose to sacrifice the necessity of urban and industrial development for building of a nation. Of course there were certain shortcomings in SC theory too such as incorrect assumption of surplus labor throughout the year that can be shifted from villages to cities for other deployments, whereas surplus is only a seasonal phenomenon in India. Yet, it was still constructive in fundamentals than the 1946 Harrod–Domar model that JN embraced for The First Five Year Plan (1951-1956). It argued that production required capital and that capital can be accumulated through investment; the faster one accumulates, the higher the growth rate will be. It was a quantitative model, not a qualitative. So basically, it was like growth = saving! It failed to consider the basic reality in less developed countries that labor is in plentiful supply in these countries but physical capital is not. To fill this gap, it argued that poor countries should borrow to finance investment in capital to trigger economic growth; neglecting the overdue leverage that was imminent. The basic socialist requirements of this model such as land rehabilitation, development of agriculture and community might have attracted JN’s all the attention while adopting this theory.

This deficiency of H-D model was later corrected by Solow model, which brought in an important parameter to measure growth- the rate of technical advancement. It explained long run economic growth as a derivative of not only capital / saving but also of productivity, capital accumulation, population growth, and technological progress. In Solow's model, new capital is more valuable than old (vintage) capital because—since capital is produced based on known technology, and technology improves with time—new capital will be more productive than old capital. Unfortunately Solow model came in 1956 when First Five Year Plan had already succumbed to H-D fantasies.

It’s interesting to note that both H-D and Solow are ‘Exogenous’ growth theories purporting that externalities stimulate growth prospects. Later developed ‘Endogenous’ growth theory holds that economic growth is primarily the result of endogenous factors such as investment in human capital, innovation, and knowledge. Here, households are supposed to maximize consumption (part-1) and industries are supposed to maximize profits (part-2), while crucial importance is also given to new technologies and human capital. It’s indeed leading towards a balanced and sustained growth in long run. China has followed its part-2 so far by promoting the exports, but they haven’t taken care of part-1. That’s why economists want China to increase its domestic consumption to maintain its growth, which after a long march in double digits has now slipped into single digit.

Well, coming back to JN, of course his gamble failed in First Five Year Plan. So, JN turned to a budding new socialist economist- Mr. P. C. Mahalanobis. He had developed a new growth model called Feldman–Mahalanobis model together with Soviet economist G. A. Feldman. The essence of this model was a shift in the pattern of industrial investment towards building up a domestic consumption goods sector. It suggests that in order to reach a high standard in consumption, investment in building a capacity of production of capital goods is firstly needed. A high enough capacity in the capital goods sector in the long-run expands the capacity in the production of consumer goods. This model had some very fundamentally wrong assumptions- most important being considering India as a “closed economy” where it’s assumed to be self-sufficient without any import-export. Also, investment was considered to be determined by supply of capital goods only. Other sources of capital such as tax, public saving etc. were not considered at all. Yet JN loved it, as it still didn’t ask for private industries! Second Five Year Plan (1956-1961) was built on this model and Result? State owned, operated and controlled means of production in key heavy industrial sectors, discouragement to Private activity and entrepreneurship through regulated permits, nationalization of economic activity and high taxes.

There was one lone warrior in Congress who vehemently opposed to JN’s anti-national and pro-communist policies. His name was C. Rajagopalachari (CR). When JN perceived Hindu Mahasabha to be the greatest threat to the nascent republic, CR openly held that the Communists posed the greatest danger. He parted away from Congress eventually and founded a new ‘Swatantra Party’ in 1959. CR is the person who coined the term ‘license raj’! His party opposed the Nehruvian socialist outlook of the Congress Party by advocating free enterprise and free trade and opposing the license Raj. Referring to CR, Sarojini Naidu, who was never on good terms with him, had once remarked- “the Madras fox was a dry logical Adi Shankaracharya while Nehru was the noble, compassionate Buddha”. However, as the fate would have it, Congress reined the power nevertheless and India craved for growth endless.

Third Five Year Plan (1961-1966) was an utter failure owing to two main reasons- first being fundamentally weak base for economy due to failures of earlier two plans and second being two back-to-back wars with China in 1962 and with Pakistan in 1965. The target growth rate was 5.6%, but the actual growth rate was 2.4%. Due to miserable failure of third plan, the government was forced to declare "plan holidays" (1966–67 and 1968–69) and customized three annual plans during this intervening period, thanks to the bold decision of Mr. L. B. Shastri (then PM), who had courage not to blindly embrace JN’s posthumous fanciful ideas. In these annual plans, equal priorities were given to agriculture as well as industries and the first constructive step towards private industrialization was taken during this period. It seemed to collect the scattered pieces of economy gradually, but again fate didn’t allow it. LBS died in 1966 and the power came back to one more socialist leader- Indira Gandhi !!

Well, Indira was per se a historic and larger than life personality. She wasn’t fanciful like her father, rather she was too solid for a woman. She was like an immovable object, which will deflect an unstoppable force but won’t move an inch! But in her heart, she was purely socialist and believed in ‘stalinization’ of nation rather than ‘liberalization’. I will try to give an account on further nosedive of Indian economy till the time of being on the brink of bankruptcy in 1991 in the next part of this blog. I just have started writing it and I am doubly excited to write about Indira, whom I really respect as a leader of substance despite many differences of opinions. It takes guts to control this country single handedly for 15 years. Before Rajiv tried to consolidate the economy in 1985, it had taken many blows already under the dictatorship of her mother. Let’s review the same in short while!

Till then, my hands rest and arms open for comments.