Arvind Panagariya’s The Nehru Development Model deserves to be read by those who still hang on to the Nehruvian vision and equally by those who want to profit from a cautionary tale of how difficult it can be to undo past mistakes. A scholarly account of the economic history of independent India outlining the various forces underpinning the dominant view of the time; it is a narration of the imperative to build a planned control economy with emphasis on heavy industry.
Meticulously researched, this book builds the landscape of the economic regime in the Nehru years even as it systematically deconstructs how “Nehruvian socialism” became state policy. Panagariya reveals the emaciating effects Nehru’s economic doctrine had on India’s growth prospects, leaving the country with the infamous “licence-permit raj”, an inefficient public sector, a bloated bureaucracy, a neglected agricultural sector, and misguided trade policies.
Nehru’s own brand of socialism for much of his early political career was far more radical, encompassing several areas of communist thinking. As economic planning for independent India began in the late 1930s and 1940s, Nehru chose to tone down his views on matters such as land ownership and property rights, nationalisation of assets, and collective farming. His radical Left views found little to no resonance among his Congress colleagues, particularly the redoubtable Sardar Patel.
Caught in the anti-imperialist impulse of the time, Nehru saw capitalism-infused global trade in terms of imperialism. The objectives of eradicating poverty and self-sufficiency saw Nehru choose a strategy based on heavy industry and development of modern technology. Recognising that heavy industry would not generate significant employment, he regarded small industry (consumer goods and light goods) and agriculture as integral to his strategy. The author states there was a hint of political optics behind this pitch for a “balanced production”.
The bulk of the available capital was, however, used in setting up heavy industries while agriculture, and cottage industries were ignored. Various policy and regulatory instruments were deployed, including the Five-Year Plans (special attention is paid to the second Five-Year Plan which truly cemented the Nehruvian vision); expansion of the public sector; licencing of private sector; import licencing and tariffs; price and distribution controls; and institutes of technical education (rather than prioritising primary education). To quote the author, “this strategy represented the inversion of all developmental models, including import substitution which does not recommend heavy industry as the starting point.”
The Panel of Economists constituted by the Planning Commission to review the draft of the plan endorsed the Nehru-Mahalanobis approach. Even prominent industrialists saw merit in major facets of the plan in the immediate years after independence, developing serious differences only after the hasty nationalisation of certain industries in the early 1950s and the first balance of payment crisis in 1957. The only dissenter on the panel, B R Shenoy, made a farsighted observation when he stated that to “force a pace of development in excess of the capacity of the available real resources must necessarily involve uncontrolled inflation… [it] may prove to be explosive in a democratic community where people live close to the margin of subsistence.”
Milton Friedman was even harsher in his assessment of India’s approach, encapsulated in one prescient snippet: “… the structure of exchange controls and their associated system of import and export licenses…seem a major obstacle to the growth and progress of the Indian economy. They introduce delay, uncertainty, and arbitrariness into domestic business activities. They impose on officials a task that is bound to be discharged imperfectly…exchange controls necessarily involve the indiscriminate distribution of implicit subsidies and lend themselves to abuse as a means of granting protection from foreign competition.”
As someone involved in India’s economic diplomacy, I enjoyed the author’s exposition of India’s import and export policies. As a renowned trade economist, Panagariya brings considerable expertise as he sifts through tedious historical material to present an engaging narrative. He castigates Nehru’s import regime, criticising the lack of criteria for the allocation of foreign exchange; too many small-value licences; price and distribution controls; and sector-wide inefficiencies. The highly controlled investment and import regime became progressively worse as productivity declined. Even the export policy comes in for a strong rebuke. India’s loss of share in the global apparel market or in goods such as tea and jute where it had a near monopoly was a direct result of inexplicable restrictions and prevailing attitudes towards taxation on exports. Even Manmohan Singh criticised this export policy in a 1962 paper!
The author’s assertion that vying for Aatmanirbharta amounts to inward-looking decision-making merits reflection but also some nuancing. While seeking independence in strategic sectors — especially in light of geopolitical uncertainties that have disrupted global supply chains — should not be classified as export pessimism, it is imperative to take a pragmatic view of how we shape our trade policy. India’s external sector contributes nearly 50 per cent to its GDP. We need our exports to flourish. Catering to domestic consumers is a different argument. Possessing an abundant domestic market does not mean that we develop an aversion to trade.
The nature of strategic engagement has changed; economic interests are now central to international relations. As global value chains transform, countries are prioritising trade policy, investment promotion, and technology flows. After the world deals with its current preoccupations, I believe it will seek to refashion the multilateral trading system to pursue a development-based trade agenda. India’s future economic diplomacy will have to be anchored in a new geopolitical dimension that is more assertive, with a broadening of the trade paradigm over the next decade to account for challenges such as climate change, food insecurity, critical mineral tussles, and the advent of AI.
One wonders what India’s development trajectory would have been had scarce capital in Nehru’s time not been held ransom to the demands of meeting capacity utilisation of PSUs. In an illuminating chapter on the growth outcomes of Nehru’s development strategy, Panagariya writes that per-capita GDP rose only 2 per cent between 1951-52 and 1963-64. The shifts in the workforce across sectors were far smaller than in output. Cotton textiles grew a measly 4 per cent in comparison to heavy industry’s 100+ per cent growth. Food production failed to keep up with demand, forcing Nehru’s successor to initiate steps towards the Green Revolution. India’s share in world exports declined from 2.5 per cent in 1947 to 0.9 per cent in 1966. Consumer good imports fell to insignificant levels.
The key takeaway is that while Nehru succeeded in establishing an imaginative political system, his economic vision robbed India of tremendous growth potential. So entrenched was socialism in political thought in the decades that followed Nehru’s death that the country suffered from the innate tendency of bureaucracy, government machinery, and political actors to hesitate on market-oriented reforms for decades after.
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Speculating on counterfactuals may not serve any material purpose, but it is interesting that the author wonders what would have happened if Patel was the younger man and Nehru the older. A younger Patel would have been a stauncher defender of the private sector and would not have prioritised heavy industry, not at the cost of agriculture. The only similarity would have been their shared views on import substitution. But, would Patel’s domestic production agenda have led to stronger export performance and lesser reliance on deficit financing?
India floundered when other Asian economies took off between the 1950s and 1991. Yet, the true cost of Nehru’s misguided economic policies had never been fully studied. Arvind Panagariya fills that gap in the literature by providing valuable insight into the Nehruvian vision and its outcomes. The reader will note that the author’s own views on Nehru were much kinder until he undertook the research for the book.
The writer is Minister of Petroleum and Natural Gas in the Government of India
