Authors: Patrick French
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.
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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.
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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.”
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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.
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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 input-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.
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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.”
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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.”
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Although most of India’s economy remained in the private sector, it was bound by a theology of red tape.
It is worth quoting some lines of what Mahalanobis said in his speech in Calcutta in 1954, for although his thinking did not match what was coming out of China at this time in its folly, the inhumanity of his approach and its disengagement from normal commercial experience were extraordinary. He began with a haze of numerical examples, designed to stress the uniquely scientific quality of the new project: “Different models of economic growth are being constructed and studied on the basis of different sets of relations (sometimes expressed in a mathematical form) between relevant varieties.” India, in its infinite variety, would become an input-output matrix: the Mahalanobis Model. Materials would be allocated to different industries from the centre: “When an approximate allocation of investments is ready, the anticipated consumer expenditure is known, and the requirements of final flows of consumer goods have been settled, it would be necessary to work out the total output of the different industries (inclusive of all intermediate products and consistent with the bill of final goods) … Work is already in progress in 12 sectors (that is, a 12 × 12 table); and arrangements are being made to prepare a 90 × 90 table.” What a thought, 90 × 90—or 8,100 table cells, in a time before computer spreadsheets! In Mahalanobis’s dream of the future, India would industrialize rapidly and full employment should be assured within ten years. To get there, he announced that both large and small industries across the nation would now be obliged to “increase productivity by all other means such as working 2 or 3 shifts,” and the resultant surplus of goods would be purchased by the state “on a large scale to build up inventories which would be used to meet the increase in demand later on.”
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It was fantasy, an imaginative piece of Bengali creativity and an implausible economic vision. An exceptionally damaging consequence of all this thinking and action was that as new nation after new nation tried to make
itself afresh following the European retreat from empire, postcolonial leaders and their economic advisers turned to India and to Mahalanobis. They went not to Chicago for guidance, but to Calcutta. As one such thinker, Hans Singer, said: “P. C. Mahalanobis became the prophet (or guru) of the development economists” in the postwar decades.
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Later in life Mahalanobis even proposed the creation of what he called a Labour Reserve Service, an idea that fortunately never turned into reality, in which a giant pool of surplus workers on half-pay (half-pay, for labourers on a few rupees a day) would be shifted around the country from project to project on the whim of government officers, like something out of pharaonic Egypt. He had it all worked out: “The Labour Reserve Service (LR) would then act as a buffer against unemployment and would serve as a (perhaps socially more useful and psychologically more preferable) form of or substitute for unemployment insurance limited, however, in the first instance, to persons who are already factory workers.”
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What did it mean for Indian business people, in practical terms, to have their day-to-day commercial decisions controlled by the theoretical strictures of successive Five Year Plans? Some of the larger conglomerates, such as those owned by the Tata and Birla families, were left to get on as they liked. The enthusiasm of the owners of capital for the aspects of socialism contained in the Bombay Plan soon dissipated. From 1966 to 1969, India had a “plan holiday,” largely because of a lack of finance, but it did nothing to unravel the stifling structure Nehru and Mahalanobis had created.
In the years immediately following independence, the new system had appeared to be working. Import substitution (making goods locally rather than importing them from abroad) and unmatched public investment had generated economic growth. During Nehru’s premiership, per capita GDP rose on average by just over 2 percent a year, which was a noticeable improvement on the preceding half-century. By the 1960s, serious structural problems were becoming apparent. The new Third Five Year Plan was dependent on foreign assistance in order to make it possible.
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The worst period came during the 1970s, when India’s annual per capita GDP grew at 0.76 percent.
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Under Indira Gandhi, the country was in the illogical position of getting American food aid while denouncing American capitalist hegemony, and looking over its shoulder at countries like Japan and South Korea admiringly even while disapproving of their methods. A developing cult of the larger national cause made it somehow unpatriotic
to question the economic system that had been created by the victors of the freedom movement—even if it was not really working. Indira Gandhi started to use economic policy as a form of political patronage, pacifying farmers who had grown richer under the Green Revolution with subsidized power and fertilizers one minute, and championing the poor the next with populist moves like taking money from the former maharajas or proposing to nationalize the wheat trade.
Shortly before the outbreak of the First World War, a lawyer named T. V. Sundaram Iyengar had started southern India’s first motor bus service, using the dense network of roads in the Tamil region. It was an innovative idea; he offered a promise of wayside meals in an effort to recruit passengers, knowing that many people would be frightened of using such a novel form of transportation. Over the years, he had diversified into road building, car parts manufacture and rubber retreading. The south of India had fewer merchant capitalists than the north. Prominent trading communities like the Chettiars had largely stayed away from industry (unlike the Marwaris, a prosperous mercantile community originally from Rajasthan) and done business abroad, giving a rare opportunity to people like T. V. Sundaram Iyengar.
The TVS group that was named for him had grown and grown, and today it has an annual turnover of about $1bn. His grandson, Gopal Srinivasan, remembered how in order to make anything happen during the Mahalanobis era, the company had no choice but to woo government bureaucrats.
“Nineteen fifty-six to 1984, when Rajiv Gandhi came in and started to make some changes, was a black period in our history. We were ruled by the DGTD, the Director General of Technology Development. If you wanted to import a $10 machine, he would make the decision. Before 1956—after the Brits went into decline in the 1930s—Indians were used to doing business largely as we liked. You had the textile businesses in Ahmedabad and Coimbatore, and my family were involved in truck and car distribution. By 1960 we had obtained the licence to make Dunlop wheels, Lucas electricals, Girling brakes—but we had nothing to distribute!”
So each effort that TVS made in the international market in the 1950s and 1960s was hamstrung by the planning regulators.
“We needed to import steel and copper, and had to make the payments to an English company. So that meant we had to: one, get an import licence; two, ask the Reserve Bank of India to release the foreign exchange; three, get the payment released; four, get permission to manufacture.
“For foreign collaboration, like we had between TVS and Lucas, we had
to prove it was justified: how much it would cost, how long it would last, whether expatriates were needed, then how much they would be paid, how many days’ travelling would be required. Each stage—each permission—took us six months to a year. We had to set up a large office in Delhi in order to apply to the ministries. Twice every month my father had to fly from Madras to Delhi.”
This was a journey of more than 1,000 miles, in a four-prop Viscount aeroplane, from India’s southern reaches to the nation’s capital. Because their brand was based on reliability and trust, Srinivasan said TVS had refused to pay bribes to the bureaucrats. Some of the important ministers and civil servants originated from south India, which made the process of winning their support easier.
“You needed to develop a social relationship. In the 1950s and ’60s, I would say there was still some sense of purpose connecting business and government—that we were all in it together, building the new India—but by 1969 it had become bureaucratic to the point where … it was really a lost era.”