Book Review: The Nehruvian Development Model
When Hamza Alavi brought up the idea of an “overdeveloped state”, he correctly depicted the idea of how political masters of third-world countries are going to frame the economic policies right after getting decolonised. The same idea is depicted through Arvind Panagariya’s book “The Nehruvian Development Model”, which discusses the economic trajectory taken by India in its initial years after attaining independence under the leadership of the first Prime Minister Jawahar Lal Nehru.
The book begins with a discussion of Fabian socialism, around which Nehru wanted to develop the idea of modern India. Initially, Nehru’s vision leaned towards radical socialism or communism, as observed by the author when Nehru visited Brussels for a conference organised by socialists of Europe, which witnessed a heavy presence of nationalists from Africa and Asia. However, it started getting re-shaped during the meetings of the National Planning Committee (under the presidency of Subhash Chandra Bose), where he interacted with different Indian industrialists, which helped him to lean towards a milder approach and bring the notion of a mixed economy.
Nehru was influenced by the Mahalanobis model of economic planning, which reflected Fabian principles by advocating for state control over key sectors while allowing some degree of private enterprise. This model aimed at achieving industrialisation and economic development through planned interventions. The emphasis on social welfare in Fabian socialism aligned with Nehru’s goals for post-independence India. He sought to eradicate poverty and improve living standards through government initiatives, paralleling the Fabians’ advocacy for a welfare state.
Considering the facets of such socialism, Panagariya believes that the idea of Fabian socialism somehow became Nehruvian socialism. Panagariya brings up points that highlight the model’s inability to accommodate human capital properly. Mahalanobis’ plan was to build capital with heavy industries, which, according to the author, had fewer employees. This is because a major chunk was present in rural areas and cottage industries that were small-scale, and the promotion of such industries would somewhere help in income generation that would develop demand for other sectors of the economy, something that was based on the idea of Gandhian economics. Though Nehru tried to incorporate some of the principles of Gandhian economics, it was not sufficient to ensure thorough development, which can be seen in the case of food inflation occurring during the late 1950s due to stagnation witnessed in agriculture. This is something opposite to the constitutional principles laid under Article 48 of the Indian Constitution that stressed the modernisation of agriculture. But what was the reason behind not stressing the cottage and small-scale industries to a great extent?
Arvind Panagariya lays out several reasons for this. Firstly, for Nehru, the economic oppression sensed during colonial rule needed to be eradicated as soon as possible. For that, he believed there was a need for capital goods. A large investment was required to develop capital goods, which would crowd out other sectors of the economy. Secondly, for Nehru, the stress on industries would help to build India as a mechanised hub. Unlike other countries that view this model as import substitution, for Nehru, industrial development was necessary for eradicating traces of imperialism and colonialism, aiming to make India self-sufficient and not reliant on other parts of the world. Thirdly, Nehru viewed industries as a better means of faster economic growth. In fact, according to Meghnad Desai’s book “Rethinking Development and Politics”, Nehru wanted to see double-digit growth annually, with the GDP doubling in every decade.
For this, Arvind Panagariya provides an account of the East Asian economy, especially when it comes to South Korea. The evolution of industries in South Korea during the 1950s, 1960s, and 1970s marked a significant transformation from an impoverished, predominantly agricultural economy to a highly industrialised society. Following the devastation of the Korean War (1950-1953), South Korea faced immense challenges, including a lack of infrastructure and resources. The government initiated recovery efforts, focusing on land redistribution and educational improvements to lay the groundwork for future industrialisation. The turning point came with the military coup in 1961 led by Park Chung-hee, whose administration prioritised economic development through a series of Five-Year Plans.
The First Five-Year Development Plan (1962-1966) aimed for a growth rate of 7.1%, which was exceeded by an average growth rate of 8.9%. This period saw a shift towards light industries, particularly textiles and footwear, which were labour-intensive and geared towards export. The government played an active role by providing low-interest loans to businesses and establishing protective measures for nascent industries, leading to dramatic increases in manufacturing output and exports. In the 1970s, the focus shifted from light to heavy and chemical industries (HCIs) as part of the Second Five-Year Plan (1967-1971), which aimed to develop sectors such as steel, petrochemicals, and machinery. A desire for economic self-reliance drove this transition to compete with North Korea’s industrial capabilities. The government invested heavily in infrastructure projects, such as the construction of integrated steelworks in Pohang and advancements in shipbuilding and electronics. By the end of the 1970s, South Korea had established itself as a major player in global markets, with manufacturing accounting for a significant portion of its GDP.
Why did countries like South Korea choose a different trajectory?
The author, Arvind Panagariya, explained the reason behind the kind of colonial masters who ruled India and East Asian economies. When it comes to East Asian economies, it was mainly Japan. The faster pace of economic growth that Japan witnessed in its Industrial Revolution period was also incorporated into these economies. So, unlike Indian supporters of Socialism who learned about it in Europe during British rule, where socialist ideas were popular in the early 20th century, people in East Asian economies never experienced socialist movements.
The Korean government actively facilitated exports and encouraged private sector growth through targeted investments and incentives. In contrast, Nehru’s model often led to inefficiencies due to bureaucratic controls and a lack of competition within protected markets. India’s focus on heavy industries did not yield similar levels of productivity or growth as seen in South Korea; instead, it resulted in stagnation in many sectors due to inadequate infrastructure and policy paralysis. According to Panagariya, the economic model ignored our comparative advantage in light manufacturing and agriculture based on cheap labour, land availability, existing business smarts and worker skills.
This also hampered human capital development. Although the Nehruvian model was about building Indian Institutes of Technology (IITs), it ignored the tenets of primary education. It focused more on higher education, which would help to build engineers and other personnel who the heavy industries would absorb. In addition to this, resource mobilisation was unjust even in the healthcare sector. Therefore, economists like Bellikoth Raghunath Shenoy criticised such policies to a great extent as they would have promoted deficit financing, which further facilitated and led to inflation. This further would restrict the private sector.
Therefore, Panagariya dives into the aspect of license raj, a system of strict government controls and regulations that governed industrial activity in India from the 1950s until the economic liberalisation in 1991. License raj was established under the Industries Development and Regulation Act (IDRA) of 1951. Panagariya argues that the Nehruvian state viewed industrial control as a necessary tool for achieving self-sufficiency and economic stability in a newly independent nation. The government believed that regulating industries could prevent monopolies, ensure equitable distribution of resources, and promote national interests. However, this approach led to a complex web of bureaucratic controls where businesses were required to obtain licenses from multiple agencies before they could operate or expand. Panagariya highlights that this system, which was consolidated by 1965, not only stifled entrepreneurship but also fostered a culture of corruption, as obtaining licenses often required navigating an intricate bureaucratic maze, leading to bribery and favouritism.
In one chapter, which focuses on the impact of these restrictive policies, Panagariya critiques how the License Raj ultimately hampered economic growth by limiting competition and innovation within the private sector. He notes that while Nehru’s intentions may have been to protect smaller enterprises and promote equitable growth as recommended by the DK Karwe Committee, the reality was that only well-connected individuals or established businesses could thrive under such a system. This resulted in a concentration of wealth among a few families and conglomerates who could navigate the regulatory landscape effectively. The chapter underscores that the emphasis on heavy industry at the expense of consumer goods and light industries further exacerbated inefficiencies within the economy, leading to shortages and limited choices for consumers.
However, even after Nehru’s demise in 1964, Nehruvian policies remained in essence until 1991. The author highlights the Nehru family’s ongoing political dominance in India. Indira Gandhi, who served as Prime Minister from 1966 to 1977 and again from 1980 to 1984, advanced socialism through extensive nationalisation of private industries and significant welfare spending. This approach solidified a culture of political, bureaucratic, business, and intellectual inertia that adhered to socialist economic principles even as the Soviet Union began to collapse.
In contrast, Rajiv Gandhi, Prime Minister from 1984 to 1989, did not carry the same socialist legacy and shifted the economic narrative towards liberalisation, competition, and efficiency in fiscal, industrial, and trade policies. This happened because, in the eyes of Panagariya, Rajiv Gandhi witnessed India as a citizen rather than a politician in his initial years, the product of which was the Union Budget laid in the early years of his prime ministership. Legal experts like Nani Palkhiwala also appreciated such policies. However, his lack of administrative experience and poor political management in terms of pressure of political affiliation led by Kamlapati Tripathi led to his early departure from office and his tragic assassination.
Prime Minister P.V. Narasimha Rao (1991-1996), an experienced politician at both state and national levels, transformed economic policy to embrace market-oriented reforms despite a prevailing belief in mixed socialism. The foreign exchange crisis during his tenure garnered support for his initiatives. He cleverly presented significant changes in economic policy—such as devaluation and liberalisation of trade and industrial licensing—as a continuation of Gandhian and Nehruvian ideals. Meanwhile, Finance Minister Manmohan Singh, a respected technocrat, became the public face of these reforms. The remarkable economic growth in Deng Xiaoping’s China also served as a compelling example that could not be ignored.
These economic liberalisation policies were continued during Prime Minister A.B. Vajpayee’s tenure. He was reform-minded and initiated a privatisation drive but faced limitations due to the influence of socialist-leaning political allies within his party. Following him, Prime Minister Manmohan Singh (2004-2014) continued the trend of trade and licensing liberalisation but was similarly constrained by left-of-centre colleagues and the adverse effects of the global financial crisis. This was further manifested during the current Narendra Modi regime.
Therefore, the book presents a critical picture of the Nehruvian economic policies for which the author states, “India’s ‘stable and vibrant’ democracy comes at the cost of a Nehruvian ‘socialist’ polity and an underperforming economy.” Even the author displayed that more than a colonial hangover, it is the Nehruvian socialism hangover that hinders policy-makers from coming out of the box called the Nehruvian economic model and making economic reforms.
