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Nehru’s real big mistake: Heavy industry wrongly got priority in 1950s. So even at 75, India isn’t rich

Author: Arvind Panagariya
Publication: The Times of India
Date: August 19, 2021
URL:       https://timesofindia.indiatimes.com/blogs/toi-edit-page/nehrus-real-big-mistake-heavy-industry-wrongly-got-priority-in-1950s-so-even-at-75-india-isnt-rich/

As India enters its 75th year of independence, we must set the goal of bringing genuine prosperity to all by the 100th year. But the occasion is also an opportunity to introspect why India has not achieved this goal already. After all, 75 years is a long time and some countries have become prosperous in less than this time.

It is commonplace to trace our economic failure during the first several decades to Nehruvian socialism. But this begs the question: Precisely which features of it? Superficially, one may point the finger at Nehru’s push for a progressively larger share of the public sector in the ownership of the means of production so that profits will translate into public revenues rather than private wealth.

While this intrusion of the public sector was surely a factor, it was not the real key to the failure. Instead, it was Nehru’s decision to frontload his development model with highly capital-intensive, heavy industry at a time when investable capital was highly scarce.

Nehru’s socialism is often likened to Fabian socialism, which rejects the revolutionary doctrines of Marxism and takes a more moderate approach to it. What is less well-known is that till at least 1936, Nehru had subscribed to a far more radical form of socialism, bordering communism. In this phase, he had come to the view that imperialism inevitably resulted from capitalism since capitalist nations needed colonies as the sources of raw materials and markets for finished products.

It followed that socialism worldwide was the only way to defeat imperialism and that international trade inevitably gave rise to imperialist tendencies. “We wanted neither to be victims of an imperialist power nor to develop such tendencies ourselves,” he wrote when explaining the rationale for economic self-sufficiency as an objective for a post-Independence India in The Discovery of India.

The conventional approach to seeking self-sufficiency while industrialising the nation would have been to follow the import-substitution industrialisation (ISI) model. This would have entailed protection to assembly activities in the first stage, components production in the second stage, machines necessary to produce components and assembly activities in the third stage and machines to produce machines in the fourth stage.

But Nehru never saw protection as the means to industrialisation or self-sufficiency. In his thinking, the twin objectives had to be achieved by adjusting the production basket to consumption needs of people. But a decision still had to be made regarding the sequence in which to phase out the production of final products, components and machines over time. Here Nehru went for exactly the opposite of the sequence that the ISI model recommended. He placed heavy industry consisting of products such as steel and machines at the beginning of the process.

In a speech delivered in 1956, as India embarked upon the path-setting second five-year plan, Nehru outlined his approach thus, “Previously people’s idea of industrialisation was one of increasing the output of consumer goods, with consequent employment. The idea now is … we must start from the heavy, basic, mother industries. … We must start with the production of iron and steel on a large scale. We must start with the production of the machine which makes the machine.”

Nehru saw heavy industry as essential for self-sufficiency as well. In a speech in 1953, he had argued, “One thing is clear to me that if we do not develop heavy industry here then we either eliminate all modern things such as railways, airplanes and guns, … or else import them. But to import them from abroad is to be slaves of foreign countries.” He expressed these views in numerous speeches throughout his tenure as prime minister.

The strategy brought with it many unintended consequences. All available capital was reserved for heavy industry. Given the meagre amount of capital, the scale of production in each product line within heavy industry still remained suboptimal. In parallel, light manufactures were relegated to household and small enterprises where they too remained subject to production at suboptimal scale. With higher inflation at home than abroad and a fixed exchange rate, most products soon became uncompetitive against their foreign counterparts and had to be protected through strict import licensing.

Heavy industry created few jobs for the unskilled. Simultaneously, the demand for light-industry products and services remained constrained by domestic incomes, which grew at a snail’s pace. The result was a painfully slow transition of workers from below-subsistence agriculture into industry and services. The proportion of workforce in agriculture, which stood at 69.7% in 1951, remained stuck at 69.5% in 1961 and 69.7% in 1971. No reduction in poverty was achieved.

Though India began dismantling the Nehru model in 1991, journey away from it has been slow due to the intellectual legacy and inherited industry structure. Socialist-era patronage produced intellectuals who, as educators, have continued to hardwire the future generations of bureaucrats and politicians in the old ideas.

Entrepreneurs, likewise, invest where they have tasted success and few of them have done so in large-scale manufacturing of light manufactures, where the potential for well-paid jobs for the masses lies. That has meant a continued slow pace of transformation.


-The writer is Professor of Economics at Columbia University.

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