India’s economy from Nehru to Modi – a conversation with Pulapre Balakrishnan

Pulapre Balakrishnan is renowned expert on inflation, productivity, and economic growth. Apart from his academic assignments with Oxford University, Indian Statistical Institute, and IIM Kozhikode, he has also worked with the World Bank, ILO, RBI and UNDP. Currently, he is Professor of Economics at Ashoka University. He had a freewheeling conversation on his latest book India’s Economy from Nehru to Modi: A brief history with Dr Charan Singh, CEO, EGROW Foundation. Edited excerpts:

In the introductory chapter, you lay the context of your book by introducing the philosophers of our times to explain what should be the objectives of the reforms and what is the purpose of economic policy. Your focus is on the quality of life. Please tell us about your views on how our prime ministers have performed on this front?

The introductory chapter is not so much about the reforms or the various stages of India’s economy and the policies. It is a generic description of how we should view development. I start with Nehru’s view and what was promised in 1947 which, I believe, is important for our assessment of where we are in 2022. I believe that Nehru’s views at that time reasonably captured the collective aspirations of the vast majority of Indians.

The chapter is not a prelude to the reforms in India’s economy, but it emphasises that we should assess India @75 in terms of what was promised in 1947. What Nehru wanted was a fulfilling life for every Indian. Nehru’s vision is close to what is called human development.

On August 15, 1947, he said independence was a step to end poverty, ignorance and disease, and inequality of opportunity. The book measures and evaluates the achievements on various parameters such as poverty and education. You also talk about Thomas Piketty and inequality. The Nehruvian era involved industrialisation and you spoke about PC Mahalanobis who was given this task of developing a model for the country. Somewhere in your book, I was getting a feeling that Mahalanobis was too mathematical, and while doing quantification, the emphasis on quality of life was lost. What are your thoughts about the Nehruvian era?

Mahalanobis model of course was a very intuitive mathematical model. It divided goods into two types — consumption goods and capital goods. Capital goods go into the production of both types of goods, and if you initially invest more in capital goods, you will have a higher level of output. It is correct that the second Five-Year Plan brought that into reality in some ways with increased investment in the heavy goods sector. But at the same time, Mahalanobis did not put excessive emphasis on the model as a state.

He believed that planning was much more than that and he did have a certain idea of planning. This is close to what economists refer to as a Nehru-Mahalanobis strategy which was basically a strategy of trying to revive the economy by investing in various sectors. Heavy industry was only part of it. Please remember that some of the investments was in irrigation and electricity generation. It would be wrong to think of the planning as excessively focused on industrialisation. Industrialization was part of the strategy, but it also focused on reviving Indian agriculture which fared particularly badly under the Raj.

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The final point is about the model being mathematical and, therefore, having missed out on other things. Yes, I would say that in some ways the model seems to have under-emphasised schooling and that is a point that I come back to repeatedly in the book. The East Asian nations followed a model not very different from what we followed. It can be called import substituting industrialisation. But along with that, they invested heavily in schooling. School education made the difference and we missed out in terms of an opportunity. Maybe over time, we focused on higher education while neglecting schooling. We are paying the price for it.

The book says Nehru was quite knowledgeable about agriculture. You’ve written that the crop yields during his time were better than elsewhere in the world. We always thought that Nehru was too focused on industrialisation. The table on page 31 compares the country’s economic performance during the Nehruvian era with the 1900-46 period. The GDP per capita growth rate was 0.1% in the 1900-46 period, and 1.9% in the next 15 years…

I made that comment about Nehru’s knowledge of agriculture based on the speeches of Jawaharlal Nehru published by the ministry of information and broadcasting. He speaks often about agriculture and made comparisons of yields in India vis-a-vis yields in the rest of the world. He was as concerned as he was knowledgeable is evident from this famous comment, “Anything can wait, but agriculture.” There’s no doubt that he was conscious of the fact that India must be self-sufficient in food production and the year in which he died (1963-64), there was a tremendous increase in food production. However, it was followed by two years of consecutive drought.

I want to acknowledge that the table 1.1 you mentioned was collated by the best-known national income historian of India, S Sivasubramonian, for his PhD thesis in the Delhi School of economics in the mid-1960s. Yes, it does show a tremendous improvement in agricultural production and per capita income. The per capta income growth would have been much higher but for the spurt in population growth during the period. I just want to make a small point that the rate of growth of population was an indirect reflection of the improvement in living conditions in a country.

Sivasubramonian estimates that per capita income growth in India’s economy in the last half century of the Raj was 0.1%, but British national income statistician Angus Madison says the growth was negative during the period. The point is that there was a tremendous increase in per capita income during the Nehru era, compared with the last 50 years of the Raj.

The book talks about the momentous neglect of education. Historian Romila Thapar has written that the political class is not keen on an educated population as they tend to ask inconvenient questions. Further on, you mentioned that India invested in machines, but failed to do so sufficiently. Bur the IITs, IIMs and AIIMS came up during this period. When you write that Nehru neglected education, what precisely did you have in mind?

Two things. One is that going by global standards, the public expenditure on education is one of the lowest as shown in the table 5.1 of the final chapter. We spend less than even the sub-Saharan Africa. World Bank data shows that India is the only major country that spends less on education than sub-Saharan Africa. There is no major difference even after 2014 and expenditure on education remains lower than the global average.

The other thing is, it is true that the IITs represent a very high class of education by global standards. Our education expenditure is probably biased a little towards higher education. There is evidence towards this throughout the book, especially in chapter three where I quote two World Bank economists that India’s literacy level in 2005 was similar to China’s in 1970. We haven’t paid enough attention to schooling and IITs are no substitute for that.

I do discuss a little bit about the extent to which you can blame Nehru for the neglect in the 1950s. I would think it’s a momentous neglect because we ended up with low school education levels compared with countries that really made progress, whether it is the democratic East Asian countries or Communist China.

Moving on to Mrs Indira Gandhi’s time as the Prime Minister, you discuss the deficits in food production and foreign exchange. The book says, seeds of the Green Revolution was there even before, and she just plucked it and brought it in. I would like to have your views on the Green Revolution. Your comment on chanting socialism, but planting capitalism is interesting. I think that’s the turning point because she did away with the privy purses and raised the slogan Garibi Hatao. The book is discussing in detail why was India not in the same tent as the western powers, though it was not hostile to them. The reason of course was that both Nehru and Indira Gandhi were suspicious of capitalism or at least of the dominance of private capital. Could you tell us a little more about this?

I just want to say the subheading ‘chanting socialism planting capitalism’ is not meant to be sarcastic. It is just a statement referring to the fact that the Green Revolution was really focused on farmers who are private entrepreneurs. There’s no question about that. Indira Gandhi was a pragmatic politician. She was authoritarian without doubt, but it would be incorrect to say that she didn’t have the interests of India in her mind.

This thing about her visit to the US and President Johnson’s comment on sending food to India by the ship loads must have stung her. This played a very important role in Green Revolution. But it should be important to say that Prime Minister Lal Bahadur Shastri’s slogan ‘Jai Jawan Jai Kisan’ shows that apart from Nehru, all top politicians were exhorting people to grow more food. But Indira Gandhi certainly gave it a thrust and went for it wholeheartedly. Within a matter of years, we were self-sufficient in food and that changed the terms at which India faced the rest of the world.

We no longer had to beg for food. We were independent in a way that we hadn’t been for a long time. Among the photographs of an era, there is one in which Indira Gandhi is speaking to the farmers just outside Delhi about their role in the green Revolution. That was a tremendous political initiative and I just want to conclude by saying that, of course, today we realized that there was an ecological underside to the whole policy package. Draining of the underground water supply and the procurement policy were mistakes that need to be addressed. But the Green Revolution was a major event and was probably a turning point in India’s history.

On poverty, let me just say that there are two things. There was no major reduction in poverty in the Nehru era that a lot of people believe that poverty increased during the period. The most authoritative work on that is by Montek Singh Ahluwalia which I’ve quoted in the book. A world Bank study in 1978 says that there is no distinct trend in poverty in 1950s. In the Nehruvian era, poverty in India’s economy fluctuated along with food prices. Poverty is measured in terms of the calories that income can buy. Poverty began to decline in late 1960s. I’ve deliberately used external sources to shed light on this. I’ve referred to a paper in the American Journal of Agricultural Economics which shows that the first major dent in poverty happened in the late 60s. So, Mrs Gandhi was not just sloganeering when she was saying poverty was beginning to decline and it declined throughout the 1970s. But the decline was too slow.

I would also like to move on and then talk about the short period that Rajiv Gandhi came in. Rajiv Gandhi himself was a technocrat who understood the benefits of technology. The telecommunication revolution that took place was a seed that was sown in. The financial inclusion that came through Jan Dhan accounts was possible because of the telecom revolution. Rajiv Gandhi’s telecommunication revolution and the technological disruption which you mentioned brought in the bullishness and the animal spirits. Your thoughts…

India is now giving back to the rest of the world in terms of agriculture. I don’t just mean the food exports, but one of the important plant breeders globally is a person of Indian origin. Kush is a scientist from Punjab who spent the last 50 years outside India. India is now participating in the global food revolution.

We should really feel proud about that Rajiv Gandhi era. Everything you mentioned is correct, and I just want to make a small addition to what you said. It was a marvel for us in the 1980s that we could go into a kiosk and make a call to anywhere in the world. I would say that in terms of practical consequences — the average Indian migrant could call his family from any city. The impact it had on the individuals’ well-being, and also on businesses has always been underestimated.

You may not have noticed that the central element of the software services supply model that India is now known for was laid by Rajiv Gandhi in 1985. That allowed companies such as Texas Instruments to be based in Bangalore and communicate seamlessly with their headquarters in the US. This gave birth to the business model of being located in India but supplying services globally. It happened in the first six months of the Rajiv Gandhi government. It is such an important moment in India’s history.

All of us are familiar with the work of Dani Rodrik and Arvind Subramanian. Their famous paper explained why the economy grew faster since the late 1970s after Mrs Gandhi returned to power. Corporate investments started booming from the year Rajiv Gandhi came into power and remained high till the end of his tenure. His last year in power saw GDP growth in India almost reaching 9%. Had we not had the balance of payments crisis of 1991 and had Rajiv Gandhi returned to power, we don’t know what the Indian economy would have looked like.

We all remember the era from 1991. I must tell you that your book has captured many of such things. I especially liked the chapter in which you explained the unwinding of the industrial policy…

Whatever disappointments we may have about the reforms, India did not face a balance of payments crisis since 1991. That is a tremendous achievement. It’s partly due to the reforms and partly because of better foreign exchange management. I haven’t studied that in depth. By and large, we all would agree that the reforms were focused, or were trade and industrial policy reforms. I don’t want to discuss it. Unfortunately, labour reform that should have happened didn’t happen. All the reforms were focused on trade and Industry, but share of manufacturing in the economy didn’t grow. The reforms of 1991 were largely influenced by the experience of East Asia, not necessarily China. If there is something that really stands out in the case of East Asia is the manufacturing success brought about by the reformers.

India did not witness a manufacturing revolution, but the quality of products improved dramatically. The reforms have enabled this improvement in quality. The Narendra Modi government certainly wants a higher share of manufacturing in the economy. The national manufacturing competitiveness Council actually specifies a share of 25% of the GDP for manufacturing. The share is about 17% now, depending on whether you measure it in nominal terms or real price terms. That is disappointing and we need to look at the reasons for that.

Moving on, we come to the Narendra Modi government that we have from 2014. You have devoted quite a bit of your book to this period. I would say you have been very transparent. You have discussed issues like demonetisation in detail which is interesting. According to you, the Modi government is pursuing the macroeconomic framework of fiscal consolidation and inflation count. The Covid-19 pandemic has upset the effort. The aggressive reversal of the cycle led by the US Fed is an effort to correct their own follies. You also speak about the unconvinced investor. Finance Minister Nirmala Sitharaman says she has done everything to make the economy conducive to investment. Would you like to tell us something more about it and why is the private investment not rising?

The Modi government’s economic policy has its focus on macroeconomic stability of India’s economy reflected in low inflation and a low budget deficit. It stuck to these targets in the first term, but in the second, Covid-19 upset its calculations. However valuable macro-economic stability is, that by itself cannot guarantee private investment unlike what some of the champions of macroeconomic stability says. Stanley Fisher championed this cause. I don’t really take that view too seriously. However important low inflation and low budget deficit maybe, they cannot guarantee private investment and growth.

The revival of private investment is more or less stuck at the 2013 level of 31-32% of the GDP. Private investment is about 75% of the total investment. Unless private investment revives, you’re not going to have sustained growth now. The government is also holding back public investment to some extent. This means that the market is not expanding fast enough. The government seems to have recognized this in the last budget which increased capital investment to 25% of the total expenditure.

There’s so much of research happening on gender parity and female labour force participation in India. There have also been discussions on the caste system. Your book deals with these issues…

Healthy women with some autonomy in private and public spheres are essential for the functioning of a democracy. You need a social transformation — where the old elites are forced to accommodate the demands of the larger part of the population. Human development and social indicators in the South and the West are better than in the North and the East, except possibly in the Northeast. The South and the West show higher income, but before discussing higher per capita income, we should discuss the superior socio-economic indicators. They show superior socioeconomic indicators because those societies underwent social transformation. That accounts for the regional disparities and explains the backwardness of Bihar and Madhya Pradesh which are richer in terms of natural resources than Kerala or Tamil Nadu.