Introduction
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)!
Results
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.
Lessons
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.
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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.” http://timesofindia.indiatimes.com/home/opinion/edit-page/The-god-that-failed-Nehru-Indira-socialist-model-placed-India-in-precipitous-decline-relative-to-the-world/articleshow/26112532.cms
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