India
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After Bretton Woods, Keynes prepared a document for Britain’s war cabinet saying that the UK had debts of £3bn which were principally the result of cash expenditure in Africa, the Middle East and India. Unless spending in these colonies was brought “under drastic control at an early date … our ability to pursue an independent financial policy in the early post-war years will be fatally impaired.”17 Keynes was in poor health now, having passed from the Edwardian era to two world wars. He was nursed by his wife, Lydia, on a diet of sour oranges, coffee and raw cabbage.18 His note to the war cabinet was not taken up, and by the time of Indian independence, two years later, he was dead.
When the British East India Company had started out in 1600, it had £35,602 in bullion and goods, stuffed into just four ships which were setting out for the unknown limits of the Indian Ocean.19 Now, at the close of business nearly 350 years later, Britain was indebted in sterling to India to the tune of £1.3bn, through circumstances nobody had anticipated. In 1939 the debt had been running in the opposite direction, as the Indian government paid for the machinery of empire controlled in London. When war broke out, Britain found itself having to pay troops and convey them across Asia, as well as to build airfields, railways and military installations, ratcheting up debts to the administration in New Delhi in the process.20 When supplies of small arms or clothing were sent from India to Singapore, or Indian troops were sent to fight in Egypt, London incurred a liability to the Indian government. By the end of the war, this debt had developed a life of its own, and the money was a substantial potential asset for the newly independent nation.
In 1947, London and New Delhi discussed what to do about these sterling balances. When the prime minister, Clement Attlee, suggested they might be forgiven, Sardar Vallabhbhai Patel quickly put him right: repayment of the debt to India was “Britain’s sacred obligation.”21 The difficulty was that the British empire had total gold and dollar reserves of £500m, and Britain’s external liabilities were nearly eleven times that amount.22 So even if India wanted all its money, the money was not there to get. With remarkable goodwill in the circumstances (the British delegation was led by Jeremy Raisman, who had been India’s wartime finance minister and was well regarded on both sides) agreement was reached. Amounts would be released gradually by Britain to fund Indian imports, and money was put aside to buy out British assets in India and pay pension annuities to retired civil servants. The debt would also be shrunk through the devaluation of sterling. The British government agreed to pay India a tapering sum each year, culminating in a theoretical final transfer of £72 in the 2007–8 tax year.23 Although it was not the full shilling, this gave India a useful advantage in the years immediately following independence and partition, an asset which would need to be carefully husbanded. By 1958, when Jawaharlal Nehru’s government implemented its second Five Year Plan to create an industrial economy, the money had all been used up. Without this surplus, the gap had from now on to be filled by deficit financing and foreign aid.24
In the words of the governor of the Reserve Bank of India, C. D. Deshmukh, the new government had run through the sterling balances “as if there was no tomorrow.”25
Why did the Indian economy go wrong in the decades after independence? Whose idea was it? Arriving at Cambridge in 1907, Nehru imbibed the liberal atmosphere in the lull before the First World War. He studied natural sciences, and attended lectures given by Keynes, Bertrand Russell and other figures of the day. He read H. G. Wells and G. B. Shaw, and considered Fabian socialist theories, as well as self-consciously modern ideas about human psychology and sexuality. He travelled in different parts of Europe and observed the rise of Irish republicanism. Much of his energy was devoted to behaving like any other well-off student: reading, thinking, meeting people from different countries, visiting the pantomime at Drury Lane, going for walks, going to parties, behaving in a mildly dissolute way, drinking champagne and getting into debt repeatedly, to the anger of his father Motilal. He was restless, and it was not until the 1920s back in India that Jawaharlal Nehru found real direction, realizing the battle for his country’s freedom would occupy his life. It was not a unique trajectory: after the First World War, both Chou Enlai and Ho Chi Minh studied in Europe and honed a more extreme form of revolutionary thinking.
Nehru’s economic ideas, such as they were, chimed with the progressive thinking of the time, particularly after the economic slump of the 1930s. Although he was not a communist, a visit to Soviet Russia in 1927 had left him impressed. He did not believe in Mohandas Gandhi’s idea of village industry and a spinning wheel in every hut; he wanted new, fast, scientific progress. In retrospect, it is extraordinary how optimistic he was about the prospects for immediate advance in The Discovery of India, as if putting words on paper would make them possible. He described the discussions of the National Planning Committee, set up by Congress in 1938. Its aim was:
to ensure an adequate standard of living for the masses, in other words, to get rid of the appalling poverty of the people. The irreducible minimum, in terms of money, had been estimated by economists at figures varying from Rs15 to Rs25 per capita per month … We calculated that a really progressive standard of living would necessitate the increase of the national wealth by 500 or 600 percent. That was, however, too big a jump for us, and we aimed at a 200 to 300 percent increase within ten years.26
These were big numbers, and a long way from what transpired. It was a case, again, of ambitious people formulating plans for other people that were not based on the reality of how humans work. Nehru’s thinking was outsourced in part to Subhas Chandra Bose, who as Congress president at this time helped to push through proposals for planning and industrialization against opposition from Gandhi.27
Underlying Nehru’s philosophy was a widely accepted belief that the economy could be made to grow by applying remote, organized, rational precepts. There was an assumption, based on the experiences of other countries, that India would need subsidies and state assistance during the early stages of industrialization. Even after the reverses of the late 1950s, Nehru did not change his economic ideas in any substantial way. He was an example of the dictum laid down by Keynes at the end of the General Theory:
Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist … for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest.28
His economic thinking was a hardened version of the social democratic outlook of Clement Attlee’s postwar Labour government, a Keynsian idea of a mixed economy taken to extremes that Keynes would have found fiscally impossible. Even as the American economy boomed in the postwar years, Nehru’s relationship with the United States would be scratchy. India’s wartime links to the Allied economy, which had been important to military success in the Middle East and Burma, were largely severed.
The fashion for socialism and central planning had an intellectual logic which attracted many of India’s brightest minds in the middle of the twentieth century. The theory was that since the nation was rich in land, resources and people but lacking in capital, it would not be possible to invest in the roads, power and steel needed for industrial development unless the government put up the money. It would be dangerous to risk being exploited or swallowed up by predatory foreign companies, in some new form of imperialism. The Indian economy during the last half-century of colonial rule had been in a stagnant condition, with annual per capita GDP flatlining at 0.1 percent.29
Nehru was impressed by a fresh orthodoxy which appeared to be endorsed by some of the world’s finest economic planners. The concept developed into the quasi-science of development economics, which was highly suspicious of the role of the market. Native entrepreneurs in newly decolonized countries were not thought likely t
o provide a serious engine for growth. Nehru was by no means the first world leader to have trouble with the financials—his British contemporary Alec Douglas Home had to use matchsticks to understand economic problems—and his idealistic outlook was linked to the rejection of the benefits of a financially secure background. It also came from the potent Gandhian ethic of abandoning possessions, which was contrary to the Indian tradition of saving (not forgetting Sarojini Naidu’s quip about the Mahatma: “If only that old man knew how much it costs us to keep him in poverty”).30 As a young radical, Nehru told his father to throw himself into India’s freedom movement and give away his capital, but his father responded in a letter in 1921: “You cannot have it both ways—insist on my having no money and yet expect me to pay you money.”31 It was this approach, wanting to spend money but not to make it, that was to cause the new nation many problems.
Nehru, though, was not alone. With the exception of the Tamil politician C. Rajagopalachari, the first Indian governor general of India, who vigorously opposed what he called the “permit/licence raj,” and the late Sardar Patel, who thought the idea of central planning unproven and unrealistic, his views followed the consensus. He did not want a communist system, nor did he wish to replicate the social injustices of nineteenth-century industrial capitalism. Few people by this time were taking Gandhi’s idea of village republics seriously; indeed, Dr. Ambedkar thought this economic philosophy “with its call of back to nature, means back to nakedness, back to squalor, back to poverty and back to ignorance for the vast mass of the people.”32 Pushed from the left during his premiership, Nehru may even have felt he was taking a middle path.
If a single document catches this heady, ambitious vision of how the subcontinent could be made a better place, it is A Plan of Economic Development for India, published in Bombay in 1944. Its authors were not firebrands or revolutionaries: rather, they were staid and successful businessmen like J. R. D. Tata, Sir Shri Ram, G. D. Birla and Sir Purshotamdas Thakurdas, as well as the respected economist John Matthai, who became finance minister after independence. Although most were mill owners or industrialists who had made outstanding amounts of money by the usual capitalist methods, they thought the new India would need to be constructed along different lines. From a distance, their plan seems breathtaking in its idealism and detachment, the work of people who were philanthropic but unrealistic. Its origins were more prosaic. India’s business leaders realized that when a Congress-led government took power, some form of disciplinary economic planning was inevitable. The “Bombay Plan” was in part a tactical move to outflank the hard left. “The inevitability of a change in the direction of a socialist economy must now be recognized,” Matthai wrote in an internal minute to his fellow “planners,” when much of the country was destabilized by the Quit India movement, “and leaders of industry would well be advised to take this into account and be prepared to make such adjustments as may meet all reasonable demands before the socialist movement assumes the form of a full-fledged revolution.” His hope was that industrialists could take up and endorse the “sound and feasible” elements of socialist thinking.33
The Bombay Plan was a short pamphlet, clearly written. The authors aimed to double per capita income over fifteen years, increase agricultural output and raise industrial output by five times. It was an ambitious idea, but not impossible given the underdeveloped state of Indian industry. Like Nehru, they hoped not to have to rely on foreign countries for plant and machinery. Moving on to social ambitions, the proposal started to become outlandish. Since people in Germany and Denmark used around thirty yards of cotton each year, Indians must do the same. Then there was new scientific research showing that everybody needed 3,000 cubic feet of fresh air per hour. This worked out at around 100 square feet of floor space per person, meaning the size of the average house would need to expand to 500 square feet. As residents of Bombay had around 28 square feet each (today the average figure is around 31 square feet—and bear in mind that some houses on Malabar Hill are very large indeed), this would involve extensive residential rebuilding.34 Their apparent dream grew. The quantum of personnel required for “large scale economic planning” could be gleaned from the Soviet Union: the Russians in 1939 had needed 582,000 “managers of state and collective farms” and 450,000 “heads of administration.” The process could only go forward with public agreement and goodwill. “In the execution of a comprehensive plan of economic development, it is essential that we should be able to count on the willing cooperation of the people. This will be possible only if the masses are able to read and write and are in a position to understand for themselves the broad implications of the developments embodied in the plan.”
How was India to pay for all this? Through a favourable balance of trade, money created by issuing government bonds, sterling securities held in the UK, “the hoarded wealth of the country, mainly gold” (they had been reading their Keynes), and foreign borrowing. Once “a national government comes into power in whom people have full faith,” the hoards of gold would quickly come out from their hiding places.35 A Plan of Economic Development for India reads like a spoof, but it was the reality.
The early years of central planning might best be seen through the person of Prasanta Chandra Mahalanobis, the epitome of organization. Privately austere, he never carried cash and had assistants to do such things for him, although his private and office money and assorted grants were all mixed up together.36 He was a product of the Bengal renaissance, the social and religious reform movement, a man for whom intellectual activity was a virtue in itself. Tall, crafty, thin-lipped and difficult to work with, Mahalanobis impressed Nehru with his knowledge of mathematics and his bursting self-confidence. He was a skilled statistician, an expert in large-scale sample surveys and the inventor of the “Mahalanobis Distance”—a measure used in statistics to assess group divergence and detect outliers. A friend and promoter of the poet Rabindranath Tagore, he had taken a first in physics at Cambridge (from Keynes’s college) a couple of years after Nehru. Notably, he was the founder of the Indian Statistical Institute in Calcutta, a body with a high and continuing international reputation. The prime minister liked the idea of putting the economy in the hands of this clever technician, a Bengali Brahmin who dabbled in poetry and impenetrable philosophy and dreamed of a noble future for India.
Mahalanobis came to economics only in his forties, and had spent the 1920s pursuing subjects such as the pseudo-science of eugenics (he wished to discover the racial origins of Bengalis). He had written a paper, “Analysis of Race-Mixture in Bengal,” in which he recounted how by using “anthropological measurements such as stature, head-length, head-breadth, nasal length, etc. of 300 Anglo-Indians in Calcutta,” he had discovered that Anglo-Indians were taller than Bengalis and had variable head-lengths. He invented a mathematical formula of “caste-distance” to determine the eugenic gap between Anglo-Indians and specific caste groups by contemplating variables, measurements and pooled variance. His conclusion was that Europeans had bred with Bengalis rather than with people from other regions, and that the resultant half-breeds were “singularly free from contact with the Chotanagpur tribes, but appear to have intermixed to some extent with the Lepchas of Darjeeling.”37 There was more. In 1949, by which time such ideas were falling out of fashion, he took part in an anthropometric survey of several thousand Indians, busily measuring their brows, noses, elbows and shinbones.
Extending himself from skull measurement and statistics to the ideal future for the nation, he invented a theory of economic development—the “Mahalanobis Model,” inevitably. It had much in common with a mathematical model used in the Soviet Union, although Mahalanobis arrived at his conclusions independently.38 Standing over an early computer at his institute and examining punch cards, he worked out the details. His notion was that since the economy was composed of various sectors, and they all fed into each other, it should be possible to devise a mathematical table to regulate the flow between the sectors. It was an i
nput-output model, drawing on the prevailing economic theory that one industry’s output could be considered another industry’s input and they could be correlated in a matrix (economists still argue that an input-output model can function in wartime). So when the table expanded, rows and columns could be added to show an array of different businesses, all happily feeding in and out of one another. Investment would be directed towards heavy industries, engineering, petrochemicals, fertilizers and refineries, rather than towards agriculture, rural employment, healthcare or education. A mine would produce coal to make steel for railways to transport coal from mines—and the process would all be orchestrated centrally. The glitch was that for this model to work, some harsh theoretical conditions had to be met: factories must work at full capacity, entrepreneurship must be brought under government auspices, prices must be fixed and the economy should be closed, with international trade restricted.
In November 1954, Mahalanobis made a speech in Calcutta in which he outlined the skeleton of India’s Second Five Year Plan. The occasion was attended by Nehru and other dignitaries, to emphasize how important it was to the nation’s future. Finding that indigenous economists were doubtful about the practicalities of his expansive dream—John Matthai had resigned as finance minister in 1950 because his power was being given away to the new planning commission—Mahalanobis travelled the globe, meeting supporters in Europe and North America.39 He hoped well-wishers from abroad would chivy the likes of Matthai: these “trained and experienced economists can help us a great deal in speaking their own language to Indian economists (which we are unable to do); and in carrying conviction to administrators and political leaders.”40 There might as well have been group discount rates for foreign economists, such did they flock to India. Most of them endorsed what was going on, finding it new and exciting. Milton Friedman was a dry exception: he went to India in 1955 and judged the Mahalanobis Model excessively mathematical. Friedman suggested the mixture of village handicraft units and monumental heavy industry was a potential disaster: “This policy threatens an inefficient use of capital by combining it with too little labour at one extreme and an inefficient use of labour by combining it with too little capital at the other extreme.” It encouraged inefficiency and discouraged entrepreneurs. Foreign exchange controls brought “delay, uncertainty, and arbitrariness into domestic business activities.”41 Although most of India’s economy remained in the private sector, it was bound by a theology of red tape.