Wednesday, November 20, 2013

Nehru-Indira Socialist Economics Failed


    How can we judge the performance of the Nehru-Indira socialist, mixed economy that prevailed from 1950 to 1979? This approach is also characterized as the “License Quota Permit (LPQ) Raj.” First note that Shri Jawaharlal Nehru(JN) was PM from 1947 to his death in May 1964, while Mrs. Indira Gandhi (IG1) was PM from January 1966 to March 1977.  Thus father and daughter led the country for 25 out of the 30 years. Though there were other PMs in 1966-67 (Shastri) and 1977-9 (Morarji, Charan Singh) they didn’t have time to change the fundamental development approach.  The reason for using a cut-off date of 1979 is because the Indira Gandhi (IG2) that returned as PM for a second tenure in 1980, initiated a clear reversal of her own failed policies of the Socialist Era.

Methodology & Benchmark

     Next we need a performance measure and a comparator. Growth and Poverty reduction have often been used (including by the author) to compare performance across time periods.   But in this note we use a much more effective summary measure of Welfare, the per capita GDP at purchasing power parity, to show how the average Indian fared relative to the rest of the World. This helps us to 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 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 S. Korea and argue that we performed abysmally relative to them. Though this is true it is subject to criticism of selection bias - picking the best performing countries as comparators would obviously make India look bad! Such criticism cannot be leveled 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 inhabitant surely needs to be ostracized (not praised, as it still often is in India)!


   So how did the JN-IG1 socialist approach fare? In 1950 the welfare of the average Indian was 29% of that of the average World inhabitant.  By 1979 it had been reduced to 20% (1/5th) of that of the average world citizen.  This means that the rest of the World on average was progressing faster than India; Not just S. Korea, not just E & SE Asia, but Africa, Latin America and the developed countries (all) taken together!  During PM 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 per cent points ( or -11%).  It declined further during the 1965 war and was 23% in 1966 at the start of Indira Gandhi’s 1st spell as PM. During this first  tenure of PM Indira Gandhi (IG1) the welfare of the average Indian relative to that of the average World inhabitant declined by 2 per cent points (-8%) to 21% in 1976. It was 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 cent per annum compared to an average growth of per capita World GDP of 2.7 per cent per annum.  Thus the average Indian’s per capita income was falling behind the World by 1.6 per cent per year during this period.

Winds of Change

The Janata government formed in 1977 with Shri 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 analyze the LPQ Raj and suggest a new approach.  I still remember that my first foray into practical policy advise was to give a memorandum to the Dagli committee arguing that tax policy was more efficient than ‘controls’ in achieving desired objective and recommending industrial decontrol and to depose before P C Alexander on import decontrol. The Morarji government fell before the Dagli or Alexander committee recommendations could be implemented.  The Charan Singh government that replaced it barely had time to settle down before it fell in 1979.  It was only after the arrival of the second Indira Gandhi (IG2) government in 1980 that import decontrol started in earnest with surprisingly positive results.


The Nehru-Indira version of socialism was a failure compared to other market based models being used in other parts of the World after World War II.  The main negative elements of this approach were:
(1) Nationalization of large industry and financial institutions, their consequent monopolization & suppression of competition. (2) Suppression of private entrepreneurship (including non-profits)  through oppressive controls on every sphere of economic activity and their conversions into “rent seekers”.  (3) Obsession with heavy industry to the detriment of both labor intensive light industry (rendered uncompetitive through rigid labor laws) and of agriculture. (4) Gross neglect of basic education and literacy(3 R s). (5) Creation of a large, unspecialized, overextended and oppressive bureaucracy that behaved like the inheritor of the colonial/princely rulers.   
It was only with the gradual abandonment of this model by one of its architects (IG2) that Indian growth accelerated and the Welfare gap between Indians and the rest of the World started closing.
A version of this article appeared on the Editorial page of the Times of India on November 21, 2013, under the title, “The God That Failed: Nehru-Gandhi socialist Model placed India in precipitous decline relative to the World.”

No comments: