Arvind Panagariya at Idea Exchange: ‘A big mistake in the Nehru model was emphasis on heavy industry. You can’t be labour abundant and capital scarce’

While a lot has been written retrospectively on the political developments of the time, there’s almost nothing on the economy. The book explores how Nehru himself came to this mixed-economy model. The period between the second Five-Year Plan and 1964 is crucial. What got built into the system, the economic structure and even in the minds of politicians, bureaucrats, intellectuals and business men, continues to influence us till today. After Nehru, India got placed on a “deterministic path.” Any deviation from that system was destined to fail. I have given examples of the struggle between more socialist and less socialist forces — more socialist forces always win.

Harikishan Sharma: How did Nehru’s policies influence Indian agriculture and what were his views ?

Nehru’s attitude towards agriculture was one of benign neglect. I think his concern mainly was about having enough foodgrain. The first Five-Year Plan, by default, did end up spending a lot more on agriculture than industry. But once he got to the second Five-Year Plan, it was industry all the way.

Harikishan Sharma: A comparison of Nehru’s development model with those of other post-colonial leaders in Asia and Africa is largely absent in your book. Why so?

It is an interesting question to ask why we ended up in this kind of heavy industry model, whereas South Korea, Taiwan and Singapore took a very different approach. Africa, too. Effectively, the countries that were colonised by Great Britain ended up with a very heavy socialist legacy because the leaders and intellectuals of all those countries were educated in Great Britain of the 1930s and 1940s. Both the civil service as well as the political class and the Indian elite were heavily influenced by the kind of socialism that flourished in the UK. Whereas if you look at South Korea and Taiwan, they were colonised by Japan. There was no socialism in Japan, so they took a very different route. In Nehru’s case, specifically, he was influenced by the Soviet Union experience.

P Vaidyanathan Iyer: Nehru’s period also saw India being very insulated from the rest of the world with its state-led enterprises and the Licence Raj regime. And then post-1990, we saw reforms and opened up gradually. But now that we are in a completely different situation, how do you look at protectionism?

First of all, Nehru himself was not a protectionist in today’s sense of the word. In his mind, international trade was an instrument of imperialism. He didn’t interfere with trade policy as long as foreign exchange was plentiful. We drew upon that till 1957. The trade regime of India remained quite liberal actually. If you have grandparents at home, they will tell you that a lot of the consumer goods, cosmetics and even fancy chocolates were all imported those days. But then once we began to run out of foreign exchange, the regime tightened and morphed. We would stop importing products and produce them here instead. Eventually, it became pretty much protection on demand.

Today, the world is different. Through the 1990s, even under the UPA (United Progressive Alliance) years till about 2007-08, the tariffs kept coming down with some exceptions like textiles, clothing and automobiles. Nevertheless, the level of protection, even if you go back to 2007, remained higher than our Asian peers. Then we had some rollback of protection. In 2017-18, tariffs were raised. On the whole, we remain an open economy and trade to GDP ratio remains reasonably high — total exports are about 20-21 per cent of the GDP and imports are around 25 per cent. It’s still about 45-46 per cent trade to GDP ratio. We are still an open economy but we can be more open.

Harikishan Sharma: How do you see Nehru’s emphasis on self-sufficiency and the call for Aatmanirbhar Bharat by Prime Minister Modi?

These are two very different concepts. Nehru wanted to eliminate trade. Our heavy industry was designed with that objective. Today’s self-reliance is more connected to nationalism — let’s stand on our feet. It’s like a household that can be self-reliant without being self-sufficient.

P Vaidyanathan Iyer: Aatmanirbhar Bharat is dovetailed with the government’s policy of Make In India, where certain industries are being incentivised. Whenever we have done better in exports, we have grown well. How do you look at this scenario?

Reform, especially in a democratic system, is a long-drawn process. I would say 1991 was a good beginning but subsequent reforms were a lot more difficult. You can understand why it took us so long to draw up the bankruptcy or the Goods and Services (GST) tax. Labour laws are still awaited. Land issues, particularly in urban areas, still remain to be sorted. China can do this much faster because of the authoritarian system. In democracy, you have to take people with you and occasionally even have to reverse decisions as we had to do with the farm laws.

On liberalisation | It is a mystery how everybody in Narasimha Rao’s generation was a socialist. He himself felt that he was operating within the Nehruvian parameters, that Nehru would approve of it

So, what is a good way to industrialise? Your target should be that whichever industry you are trying to support, should become, within a reasonable time period, an export industry. It should be able to compete in the global market place. If I look back at the 1970-1980 decade, protection was available on demand. We have still not been able to shake it off. The lasting impact is not just in thinking, it is also in the structure of the economy that we have inherited. Today’s successful industries still remain machinery, petroleum refining, IT and pharmaceuticals. These are either heavily capital intensive or skilled-labour intensive industries. As a result, you have a large part of the workforce in agriculture and another large part in micro and small enterprises.

The corporate level employment of 200 workers is less than seven or eight per cent. In 1991, the investment licensing ended but the small-scale industries reservation remained. It morphed into our preoccupation with micro and small enterprises. This Ministry of Micro, Small and Medium Enterprises (MSME) is supposed to be micro, small and medium, but where is the medium? The medium is where we need the incentivisation.

Anil Sasi: In the book, you mention how post-war, the developed countries opened up for trade, allowing developing ones to maintain some restrictions or be protectionist. Now, there seems to be a complete reversal. How do you see this developed world-led protectionist movement?

Global protectionism can be very easily overstated. During US President Donald Trump’s first term, recall the tariff war between China and the US. There were also steel and aluminum tariffs. Then we had these embargoes and trade sanctions on Russia. We had Covid. The pre-COVID peak of total exports was about $19 trillion in merchandise and about $6 trillion in services, totalling $25 trillion. The post-COVID peak has already been $25 trillion for merchandise and $7 trillion for services – that’s altogether from $25 trillion to $32 trillion. For any country wishing to operate in the global economy, you’ve got plenty of scope. This is where I had double disagreements with many. One is that somehow now, because the world is turning protectionist, the export-oriented model really has less room to work in. We have a lot more room today than China did in the 2000s. This is one disagreement. The other is about how the services exports market is much more open and, therefore, that’s where you can succeed more easily. Actually, services are subject to a lot more protectionism.

Often, these are covered by domestic regulation because services are not regulated through these tariffs. These are inside the border measures. Can lawyers from India work in the US or Europe and accountants in India work in the US and Europe? No. Those markets have not even begun to open up. So, it gets overstated.

Unni Rajen Shanker: How would you place 1991 in the history of Indian economics?

The year1991 was absolutely critical because that’s the time change happened. I devoted a long chapter on then Prime Minister Narasimha Rao in the book. It is a mystery how everybody in Rao’s generation was a socialist. So, it is quite remarkable that he actually saw through what he needed to do and, unlike his predecessor Rajiv Gandhi, had the political servitude to navigate the whole system. He felt that he was operating within the Nehruvian parameters, that Nehru would have approved of it. He did not stop at the 1991 reforms, but he continued. Private entry was given to civil aviation, to telecommunication, financial liberalisation happened, capital market liberalisation happened, so quite a bit of that was done.

On the legacy OF socialism | If I look back, protection was available on demand. We have still not been able to shake it off. The lasting impact is not just in thinking but also in the structure of the economy we have inherited

Ritika Chopra: What is that one aspect of the Nehru model that you found particularly impressive, one that holds lessons for future governments?

You can say that once the model had been chosen, it was implemented very impressively. But if you were to ask me, what is that one big mistake in that model, I would say the emphasis on heavy industry. You cannot be such a labour-abundant and a capital-scarce economy. The savings rate on that very low level of GDP was about seven per cent. With that capital, how can you be thinking of putting up the most capital-intensive industries of the time — steel mills, machinery industry, fertilisers, chemicals? That had a detrimental effect because you had to put all the non-agricultural labour into cottage and small-household industries. When labour has no capital to work with, it doesn’t acquire any skill. That remained the state of affairs for several decades.

No matter what we try to do through skilling, the training ultimately happens on the job. But what on-the-job training would you get when there is no capital? One absolutely telling factoid — the development expenditure on primary education during the second Five-Year Plan was only half of what we had invested in one steel mill. For heavy industry, you needed engineers and managers. So you started the IITs and IIMs. But your resources were so limited that primary education automatically got neglected.

Harikishan Sharma: While you fault the Nehru model for neglecting primary education, at the same time, you criticise the Manmohan Singh government for enactment of the Right To Education (RTE) Act.

Because it’s right to education only in name. In the end, it does not do things that we should do to provide quality education. In a way, the education campaign was already a success by 2010 with the Sarva Shiksha Abhiyan started by Prime Minister Atal Bihari Vajpayee continuing during the UPA period. Enrolments were already at 95 per cent for children from age six to 14. But the legislation itself was retrograde. If you look at the norms for the school recognition — the school building, having a sports field, a library — all of it is fine but you cannot leave out student achievements. What if I am running a school which doesn’t have as good a building or doesn’t have any air conditioning in the classrooms but I have good teachers? The legislation protected the rights of the teachers without giving them any duties.

Some sensible people defended the feature for the reservation in private schools for the children of parents below poverty line. Even that feature in the end was not the right way to go about it. If you want to really do it, give vouchers to parents. Let the parents decide and if the public schools are good, then the voucher will come back to the government.

Raj Kamal Jha: Whenever there has been a flurry of reforms, we have seen safety nets being stitched — like the food-for-work scheme in the ’80s to NREGA (National Rural Employment Guarantee Act) in 2005. Today, when such schemes are so common, where are they headed? Is this the rise of the UBI (Universal Basic Income)?

UBI is about universal, meaning nobody is to be excluded. None of what we have done is completely universal. In a democracy, when incomes rise, there will be pressure to redistribute. You cannot have a part of the economy grow rapidly, become rich, create, accumulate wealth and not share it with a very large chunk of the population, which is not doing as well. So, that is a natural byproduct of a democratic system. In the Indian ethos, it is even more unavoidable. We can live with it, provided we do not lose sight of the fact that the economy is not a Kamadhenu but a regular cow. You can milk it only if you nurture it.

Sukalp Sharma: Do you feel that we are paranoid about the rupee’s exchange rate instead of letting it find its value in the marketplace? How has the political narrative about the rupee’s value changed since the ’90s?

In 1991, devaluation was incredibly hard but the liberalisation would have failed had that not been done. So, 11 out of 10 points to Manmohan Singh for actually having pushed that successfully. That opened the door to further depreciation of the rupee and paved the way for the benefits of liberalisation to fructify. In the decade that followed, exports of merchandise alone rose six-fold. Luckily, I think at the policy level, we are much wiser.

Now, about becoming completely hands-off, I still think it was right to gradually not lean against the exchange rate movement in the longer run. But in the short run, we try to smooth things out. Only period during which we went off that policy was from 2009 to 2013. That’s when we became hands-off and the taper tantrum episode happened because of that.

Udit Misra: For the longest time, poverty alleviation has been our priority. Has inequality become a bigger policy variable to tackle?

I personally think that you can do something about inequality by addressing the poverty of the bottom 30-40 per cent. In the sense of the Gini-coefficient (a statistical measure of inequality in a population), if the India-wide Gini rises, but in my own village, the Gini actually falls, what do I care? I will care about my immediate context and as long as inequality within my social milieu has fallen, I am happy with that. How does it matter if the India-wide inequality went up? If I’m trying to combat generalised inequality, I know of no country which has successfully done that.