One Step Forward, Two Steps Back

Niranjan speaks about three things in his essay as regards the first two decades or so of India’s independent history:

  1. What did we seek to achieve? A more accurate framing of the question, arguably: what should we have sought to achieve, and how should we have gone about it?
  2. How did we do in terms of conventional macroeconomic metrics?
  3. What did the dissenters of the time have to say?

Let’s deal with each of these questions in turn.

  1. What did we seek to achieve?

The Indian economy had to create opportunities for people to move from farms to factories/offices, from villages to cities, from household enterprises to formal enterprises. Each shift would enable labour to move from low productivity to high productivity activities, thus boosting incomes.

The reason I said that a more accurate question would have been “what should we have sought to achieve” is because it is not clear to me if economists, politicians and policymakers of that time would have agreed with Niranjan’s goals in the excerpt above.

As Niranjan himself mentions in his essay, MK Gandhi wouldn’t have agreed with this vision, preferring a version of India in which each village was a republic unto itself, and as self-sufficient as possible. But Gandhi’s wasn’t the only dissenting voice – we simply didn’t know then what was the most appropriate path to development, and lots of different folks had lots of different ideas. By the way, a good way to begin your exploration of what ideas were being discussed around and before Independence is by reading Towards Development Economics, a collection of essays edited by J. Krishnamurthy. Another excellent, and more recent source is Planning Democracy, by Nikhil Menon. There is a ton of material on this issue, of course, so please treat these recommendations as random starting points, and read as much about this period of India’s history as possible.

We sought to raise incomes as rapidly as possible, it is true, but there were many different opinions about how this should be done. Some of the ideas that we adopted then have been discarded over time, and not just by India. Others were eventually jettisoned, but this didn’t happen rapidly enough, in my opinion.

What were these ideas?

The elements of the classic Nehruvian growth strategy are well known: A focus on public sector investment rather than private sector investment, on capital and intermediate goods rather than consumer goods, and on the domestic market rather than foreign trade. There was more than just economics in play. The focus on building capacity in steel, machine tools and mining was an attempt to maintain strategic autonomy in the Cold War era—similar to why countries, including India, are today trying to build domestic capacity in semiconductors, electric batteries and telecom equipment, for example.

Remember, economics at its heart isn’t as complicated as us economists make it out to be. “What are you optimizing for?”, for example, is a surprisingly powerful question, and reading the paragraph above reinforces my own answer to the question “what was India optimizing for back then?”.

India was optimizing for self-reliance in a socialist setting, and given these constraints, tried to raise incomes as rapidly as possible. India was not optimizing for growth, no matter the underlying ideology, and no matter the opportunity costs. India was prioritizing self-reliance and a socialist mindset, and so long as we didn’t deviate from this path, we tried to achieve as rapid a growth path as was possible.

We now know, given what took place in certain parts of Asia, that this was the wrong thing to optimize for. But that was the zeitgeist of those times, and this, unfortunately, was the path we adopted.

I have said it before, and I will say it again: “What are you optimizing for?” is an underrated question.

2. How did we do in terms of conventional macroeconomic metrics?

Economists have used statistical techniques to pinpoint 1950 as the first big structural break in India’s economic trajectory, with 1980 being the other. The economy accelerated after many decades of stagnant output. Economic growth averaged 4.2% a year between 1950 and 1965. Industrial output grew annually at 7.1%. The fact that industry grew faster than the rest of the economy meant that India began to reverse the deindustrialization that had begun in the last years of Mughal rule. Equally importantly, economist S Sivasubramonian showed in his monumental work on Indian economic growth in the 20th century that total factor productivity grew at 1.8% a year in the 15 years to 1965.

Economic growth of 4.2% a year would imply a doubling every eighteen years or so. And while that is certainly nothing to sneeze at, another of my favorite questions to ask in economics seems appropriate right now: “relative to what?”

That is, what is the benchmark for deciding whether 4.3% is good enough or otherwise? Niranjan give us a potential candidate when he speaks about India’s first structural break in the year 1950. 4.3%, we understand, was certainly higher than the period preceding 1950, otherwise there wouldn’t be a statistical break to speak of. But two other benchmarks are possible.

  1. How did we grow relative to some of the other Asian economies of that time?
  2. What would have been the maximal rate of sustainable growth that other macroeconomic models would have afforded us?

The answer to the first question isn’t encouraging. And what we, as students of economics should take away from this is the fact that while India did well in the first two decades after her independence, she could (and should) have done better.

The answer to the second question is pure macroeconomic modeling, and can occupy the minds of the best and brightest economists for their entire careers. But long story short, the answer to this question is very much a function of ideology, assumptions and type of model developed. And for this reason, I would prefer to benchmark India’s performance against what came before 1950, or against her peers (howsoever defined), rather than the output of a model.

Bottomline: we did well, but could have done much better.

3. What did the dissenters of the time have to say?

One of the joys of being a social scientist is that there isn’t one definitive answer that everybody can agree upon. The is a deep richness in terms of complexity to human society. There is an inherent subjectivity that we bring to how we see the world in terms of what it looks like and why. And this guarantees that there will be different opinions about how to go about achieving whatever the aim.

There were two other powerful critiques of the Nehruvian development strategy. The Mumbai economists CN Vakil and PR Brahmananda argued that India should invest more in agriculture and the production of consumer goods — or what they called wage goods.
The famous dissent of economist BR Shenoy provided four red flags. First, the heavy dependence on deficit financing to build industrial capacity would lead to balance of payments pressures. Second, the focus on capital goods rather than wage goods for mass consumption would be inflationary, as people employed in new industries would get money incomes but nothing to spend them on. Third, high taxation to finance the plans would weigh on citizens. Fourth, increasing government control of the economy would eventually harm Indian democracy.

Both arguments have turned out to be prescient. In fact, you could argue that the first of these arguments is really a subset of the second. But any student of the Indian economy should be familiar with the works of BR Shenoy, in my opinion one of India’ most underrated economists. If you can spare the time and have the inclination, read his dissenting note in full.

My point here is not just to explain how, in my opinion, we took some wrong decisions. We certainly did, but we would do well to remember that there were a lot of different opinions back then about how to help developing economies grow rapidly. It is easy, with the benefit of hindsight to look back and say this should have been done instead of that. But it is always easy to bet on the winning horse after the race is done!

My point instead is to make you, the reader, aware of some of the nuances of the excerpts that I have quoted here, and to leave you with a thought. How do we know what is best for India’s growth trajectory today? Whatever your own particular answer, how sure are you that it is indisputably the correct one? Might folks who disagree with you have an inconvenient iota of truth hiding in their arguments?

Argue more with folks who disagree with you, for these is no better way to learn!