Nehruvian Socialism and License Raj

Seminar Paper

2017-18

Paras Agarwal

SYA 022

Advisor: Kiran Limaye

Sarla Anil Modi School of Economics, NMIMS

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Index

1) Introduction
2) Literature Review
A- Post-Independence Nehruvian Socialism
B- Multiplying by Zero and Licensing Blues
3) Research Gap
4) References

2
Introduction

India gained independence from the ‘British Raj’ on 15th August 1947. The economy during
this period grew at 1.2% (Tomlinson, 1996). The people who suffered blamed it on
governance methods and policies used by the British. The ideology which leaders had during
this period, especially Jawaharlal Nehru, was very anti-capitalistic in nature, but it was
difficult to label it. The term socialism cannot be easily used here as it means social
ownership and control of means of production but in this case, the means of production were
controlled by the state. This idea can be defined better as dirigisme, which means state
ownership and control of economic and social matters. However, it is better known as
Nehruvian socialism and was primarily based on the idea of becoming a self-sufficient
industrialised economy by relying on planning led by the state.

The path of becoming an inward nation with self-dependency was evident in the second five
year plan where the objectives were mainly to develop state owned heavy industrial plants
and use labour intensive techniques in them so as to improve employment levels (Rao, 1955).
Many large industries were nationalised and the private players needed licenses to develop
industries which were very difficult to acquire. Thus, India had adopted the path of
‘socialism’ which was going to lead it to glory and growth. Nehru sincerely believed that
rapid industrialization of India was essential to essential to relieve the pressure land, to
combat poverty and raise standards of living, for defence, and a variety of other purposes
(Nayar, 1997). There were many other problems faced by Nehru during this time. Many
criticized him saying that the congress party, which once worked for the poor farmers, had
turned its focus to other things, and used it to compete against Nehru. However, Nehru was
unfazed and continued building on his idea of the ‘planned economy’ and with Second five
year plan, started setting up many big industrial plants whose primary objective was not to
earn profits, but to improve employment opportunities (Das, 2000). The businessmen from
this era also surprisingly never wanted free competition. They were ready to seek protection
from foreign imports and capital. In a society with a history of feudal controls, and
generations of stagnation of the economy, government controls were a natural phenomenon
(Virmani, 2013).

The five year plans had precise indicative planning for public and private industries. There
were quantity controls and capacity management policies in these plans which slowly phased
out private players from many industries and the public industries which came in the place of

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these were not efficient in any means as they had controls over all facets of operations and
had detailed day to day administrative directions (Majumdar, 1996). These industries were
the example of the worst of socialism and capitalism together – the controls of socialism with
the monopolies and lobbies of capitalism.

Nehru died in 1964 with the economy in shackles. There was terrible scarcity of food and
agriculture was stagnant with almost no growth in production levels. Foreign exchange
reserves were very low at this point as well and India was vastly dependent on US aid, which
was $600 million, at the time, the largest aid program in the world. Lal Bahadur Shastri
inherited these problems from Nehru and quickly got to action. He knew that the agricultural
sector was neglected and thus started working on the sector. HYV seeds, with high yields
were spread in the Indian markets with fertilizers and India, from being a basket case and the
recipient of largest aid program, to being a self-sufficient country (Felicia Wu, 2004). Shastri
was considered far more pragmatic and less ideological than Nehru and as it became clear
that Dirigisme and Fabian Socialism was not delivering growth or equality, Shastri was the
person to change the course of the economy with many reforms on his mind, but as Shastri
died just after 19 months of becoming prime minister, his ideas of reforms died with him and
Indira Gandhi came to power for the first time.

Indira Gandhi decided to follow her father’s policies and thus, India again embarked upon the
Dirigisme economic model (Desai, 2006). However, Mrs Gandhi’s government became even
more rigid, introduced more controls and became more bureaucratic and authoritarian. After
1967, India withdrew even further from world trade and raised tariffs to absurdly high rates.
The nationalisation of bands, which was a very popular move during the time, with the
infamous MRTP act of 1969 added to the woes of businessmen (Das, 2000). Many people
believed that the policies implemented by Indira Gandhi were aimed towards the plight of
poor, as popularised by the slogan ‘Garibi Hatao’. However, the boldness with which Indira
Gandhi ruled the nation for more than a decade was certainly admired by everyone. This was
the period though, the lost decade, where India was crippled by restrictive policies and
‘license raj’. The policies during this period could also be attributed to the leftist policy
makers working for Indira Gandhi. This period saw the industrial growth slowing down, the
imports rise and exports stagnant at 5% of the GDP (Das, 2000). India’s position declined in
the world and it eventually led to the economic reforms or the NEP in 1991, which redeemed
India from the shackles of many years of bureaucratic controls and ‘License raj’.

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Thus, this paper is an account of Indian economy and history before liberalisation. It talks
about the development of a nation after 100 years of colonial rule and the subsequent reaction
to it after independence, the idealistic Nehruvian socialism, which tried to combine the best
of both capitalism and socialism and how it panned out, the brief tenure of Shastri and his
pragmatic ideas, and finally about the governance of Indira Gandhi and the modern Indian
tragedy of not changing course from the wrong economic model and escalating it with stricter
rules, increased bureaucracy and bottlenecked infrastructural and economic growth and thus
our transition from ‘British Raj’ to ‘License Raj’.

Literature Review

Post-Independence Nehruvian socialism

The period after independence saw the development of socialistic dirigisme ideology in India.
Pandit Jawaharlal Nehru, the first Prime Minister of Independent India and leader of the
congress party believed in the model with state ownership of resources and industrialisation
as the path to growth with state planning. The paper (Krishna, 1988) talks about the
similarities between the ideology of Nehruvian socialism and Fabianism, which was
developed by the British in the early 1890s using six major fundamental issues, and how the
socialistic model developed by Nehru was similar to that of the British Fabian thoughts. The
state and the public sector were supposed to grow at all periods in both ideologies.
Democracy was synonymous with the growth of socialism. Both ideologies also believed in
ending of private property, except in a restricted sense as state controls the means of
production. Equality was based on the idea of ending all of the inequalities of wealth and
status. The private sector should be allowed to exist but it should work under the confines
laid down by the state and the bureaucracy was an essential for state ownership and Nehru
believed that bureaucracy cannot be eliminated but improved.

The chapter on Indian planning and development Economics from the book (White, 2012)
also compares the ideologies of Nehru with that of the Fabian socialism. The idea is defined
as practical socialism or ‘democratic commonwealth’ with the key means of production
owned by the state, but some industries in private hands as well. The ideas of Nehru were
inspired a lot from the Fabian turned Marxist professor Harold Laski, whose ideas were very
similar to those of Nehru (Guha, 2003). But many believed this idea of an inward looking
state with planning and dirigisme were fed into Nehru by his advisors. The Mahalanobis

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growth model, which was derived by the Professor P.C. Mahalanobis, was used by Nehru
during the formulation of the second five year plan. Mahalanobis was an advisor to Nehru
and one of the few persons majorly responsible for the economic model used for India (Raj,
1961). The Mahalanobis model emphasised on major investments to building basic heavy
industries to achieve rapid long term growth rate. This model of growth, coupled with
Nehru’s belief in a state controlled planned state led to the development of Nehruvian
Socialism as it exists today.

The inward looking industrialization character of Mahalanobis model was adopted in part
from the soviet model and in part from the Harrod-Domar model of growth. This second five
year plan also introduced the concept of licensing in the private sector. Now, output quotas
for every industry were planned and all the private businesses needed special permits for
things ranging from importing equipment to increasing production levels. Thus, no private
producer could produce any quantity more than permitted by the government. Licensing
restrictions gave monopoly to the firms which managed to acquire them, saving them from
domestic and foreign competition as they were protected from imports. The process of
gaining and selling licenses however, were infected with corruption and bureaucracy very
fast. These markets were filled with corruption and inefficiency. This system ended up in
slowly dismantling competition from the market, without gaining anything it planned to
achieve. These failures however, were much more evident during the Indira Gandhi
governance, during which time; ‘the license raj’ was in complete control. Foreign investment
was subject to stifling restrictions.

The paper (Nayar, 1997) talks about state hegemony and the influence of nationalism the
decision. The Mahalanobis model is talked about a lot in this paper as well as it was the main
model used by the Indian planners from the period of second to fifth five year plans. The
main objective for this plan was to achieve annual growth rates of more than 5% in national
income and to employ 11 million additional people every year during this period. In making
the case for small-scale and household industries, Mahalanobis did not mean to plan for a
technologically dualistic economic structure. His larger objective of achieving a universally
modern economy was clear, with the small industry sector meant only for a transitional
phase. However, there were many problems which were found with the Mahalanobis model
and the relationship between economic development and planning. The extreme shortages of
material capital and the necessity of industrialisation as the rural agriculture were completely
ignored in this model. Also, another assumption made by Mahalanobis was the assumption

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that there were no opportunities for rapid export expansion. Competition was considered
wasteful, and this led to lack of productivity and innovation. What thus underlay the
economic strategy of the Second Plan was not the power of economic theory, for Nehru could
not have had access to it before it had been formulated for the underdeveloped countries, but
a theory of power, to which he gave the fullest expression. Further the economic nationalism
embodied in the strategy was not simply negatively aimed at preventing domination by
foreign powers, which India had experienced for some hundreds of years, but also more
positively for assuring India a role in the future in the international community, because of
the territorial and population size it had (Mohanty, 2016).

The vision of Nehru was to create a public sector industrialisation movement as he strongly
believed that private industries could gain a lot of power from this and he found it highly
objectionable that economic power should be in hands of a small group of persons, however
able or good they might be. Nehru envisioned an ever-expanding public sector, both
absolutely and relative to the private sector, in possession of the commanding heights,
fundamentally as a route to a socialist society. Nehru had come to understanding of the role
of an expanding public sector, as a mode of transition socialism. However, this ideology
bought Nehru against some of his own party leaders as they were not convinced with the idea
of either industrialisation rather than agriculture or they were not convinced with the model
of his socialism with state dirigisme. However, not many people had any other
comprehensive ideologies dedicated to achieving growth and improving the state of the
economy. The reason he could push through his programme in respect of the heavy industry
strategy and the public sector is that, apart from a fairly generalized nationalism, the state was
in the control not of the capitalist class but of the intermediate group consisting of the new
middle class and the lower class.

The chapter from the book Essays by Eminent Persons on the Rapidly Transforming Indian
Economy (Desai, 2006) talks about the Indian economy during the time periods of Nehruvian
socialism to the liberalisation of the economy. During the periods before liberalisation, Indian
policy was driven with the motive of national self-efficiency and was built around Import
Substitution Industrialisation strategy (ISI). Investments were made in capital intensive
industries by the public sector with the primary motive to create employment, which was
very different from the model Gandhi proposed; of self-fulfilled villages and decentralised
economy with agriculture as the main focus. The Nehru model however, ignored agriculture
and believed investments in the capital intensive heavy manufacturing industries was the path

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to growth. The period after independence was also very fragile as it was difficult to believe
that such a large demographic of varied culture and religion could come together and form a
democratic nation, but the belief of people in Nehru and the congress party ensured that the
country would not be split up on the basis of any cultural differences. This belief in Nehru
also led the nation to believe in the economic model he presented for the nation. Many
believed during this period that capitalism was on its way out and free market ideology was
on retreat. Thus, Nehruvian socialism was the policy majority deemed as the best and it was a
policy very well crafted for its time (Rudra, 1992). However, there was rampant export
pessimism and no emphasis on innovation and development of new products. The strategy
failed to take advantage of India’s early start in modern industry and reinvented many of the
things which were there tarred with foreign brush.

Thus India created a dependent entrepreneurial class in place of one that had survived foreign
rule, depressed modern consumer goods industries and fostered small scale ones which were
capital wasting and inefficient, built at an enormous expense a basic goods sector with a long
lead time before it could bring better consumer goods to the people and failed to generate
industrial employment. The public sector, mainly in services, became the biggest provider of
employment in the modern sector. Jointly the private and public organised industrial sector
became a stagnant and highly privileged pool of a limited number of employees. Together the
public services and the organized industrial sector employed 15 per cent of the labour force.
This was called socialism, and it did not improve till Shastri came into power and focused on
the food and hunger problems instead of industries, though India went back to the same
model with Indira Gandhi, with even more regulations and controls and thus, a lost
generation of growth opportunities.

Multiplying by Zero and Licensing Blues

The book (Das, 2000) talks about the licensing system and the damage it caused to the
economy, during the Nehru and Indira Gandhi era. The purpose of introducing licensing was
a) to create a planned pattern for investments, b) to counteract monopoly and concentration of
wealth, c) to maintain regional balance in locating industries, d) to protect the interests of
small-scale producers and encourage the entry of new entrepreneurs, and e) to encourage
optimum scale of plants and technology (Nayak, 2015). These were all good intentions, but
the way that bureaucracy went about administrating the licensing system created a nightmare
for the entrepreneur.

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An untrained army of underpaid, third-rate engineers with inadequate and ill-organized
information and without any clear-cut criteria, vetted thousands of applications on an ad-hoc
basis. The low-level functionaries took months in the futile micro-review of an application
and finally sent it for approval to the administrative ministry. The ministry again lost months
reviewing the same data before it sent the application to an inter-ministerial licensing
committee of senior bureaucrats, who were equally ignorant of entrepreneurial realities and
who also, operated on ad hoc criteria in the absence of well-ordered priorities. After the
minister’s approval, the investor had to seek approval for the import of machinery from the
capital goods licensing committee. If finance was needed from a state finance institution, the
same scrutiny had to be repeated afresh. The result was enormous delays, sometimes lasting
years, with staggering opportunities for corruption. Large business houses set up parallel
bureaucracies in Delhi to follow up on their files, organize bribes, and win licenses.
Tragically, the system ended in thwarting competition, entrepreneurship, and growth, without
achieving any of its social objectives. It fostered monopolies and encouraged uneconomic-
scale plants employing second-rate technology. Thus, licensing was an unmitigated disaster.
It raised costs, brought delays, arbitrariness, and corruption, and achieved nothing. The whole
process of licensing led to abject delays and killed off any entrepreneurial opportunities and
thus growth, especially when many of the public sector enterprises became a loss making hub
with large sums of money flushed down the drain because of the extremely pampered
organised labour with low productivity and no autonomy given to these public sector
enterprises to perform, thus killing off the private competition from the market was the worst
thing for the economy, as was the discouragement of foreign capital in the nation.

The biggest problem however wasn’t the model Nehru chose to follow; instead, it was the
backing of the same model by Indira Gandhi which was the modern India tragedy of not
reversing our economic structure and model in the late 60s, when all the other East Asian
countries were adopting the open economy model with great success. The Chinese economy
also started opening up and using the international markets to its advantage with setting up
huge export oriented plants with great levels of productivity and using technology from
across the world to achieve that. India after 1965 withdrew further from the world trade,
raising tariffs and taxes even higher, and becoming one of the worst performing nations in the
1970s (Das, 2000).

Indira Gandhi increased the licensing system’s complexity and restrictiveness. She
nationalized the fourteen largest banks in 1969. The government-owned banks now directed

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their loans to the industries favoured by the plan – or to cronies of politicians with pull.
Neither government lenders nor their borrowers faced market discipline when borrowers
could not repay because they had poorly invested the funds or because they never intended to
repay. Economic decisions became ever more highly politicized and bureaucratized. India
was left with hobbled and underdeveloped state capitalism, overlaid with a veneer of
planning. In practice, India was not a planned economy; it was an economy for which a plan
had been made (Desai, 1992). Licensing restrictions gave monopoly profits to the protected
firms fortunate enough to hold licenses. Not surprisingly, the process of seeking and granting
licenses quickly became marked by bribery and corruption.

After bank nationalization, the next big bill passed by Indira Gandhi was the one which
crippled the private industry for a generation and was one of the biggest contributor to the
infamous ‘License Raj’, the Monopolies and Restrictive Trade Practices (MRTP) Act in
1969. This act turned out to one of the most damaging in modern Indian history. Any group
with combined assets above Rs 20 crore was declared a monopoly and was effectively
debarred from expanding its business after 1969 (Kumar, 1987). The industrial growth
plunged from 7.7% a year between 1951 and 1965 to 4% between 1966 and 1980 (Das,
2000). By 1990, India’s planning process had created a large rentier class of state employees
in the public enterprises and the bureaucracies of the central, state and local governments.
They exerted great power, mediated every significant decision and directed society’s
resources. By the second time Indira Gandhi came to power after the emergency period and
the brief rule of Janata Government, the common man as well as intelligentsia seemed to be
tired of the dirigisme regime which seemed to supress the best instincts of Individual
enterprise in the country (Nayak, 2015). For instance, during the period when the MRTP act
was active, Tata made over a hundred proposals for new business projects or to expand
existing projects ones, all of them were rejected. The act was finally scraped by the Narsimha
Rao government in September 1991 (Das, 2000).

In 1960, India’s real per capita income (gross domestic product or GDP) was approximately
$891, slightly more than three-fifths of South Korea’s $1,458. After three decades of slow
growth under the Permit Raj, India’s income had only slightly more than doubled, while
income in South Korea’s rapidly growing export-oriented economy had risen to 6.5 times its
starting level. As a result India’s 1990 real income of $1,898 was slightly less than one-fifth
of South Korea’s $9,593.47 (White, 2012). From 1950 to 1980 India’s annual growth rate in
real GDP averaged about 3.5%, ruefully called the “Hindu rate of growth.” That rate was

10
much below the rates in other Asian countries and meant only about 1.2% growth in real per
capita income. This was primarily due to the lost opportunities by adopting an inward
looking, import substituting path, especially after the late 60s to the early 80s.

The industrial growth rate averaged as high as 7.4% in the 1950s. But it slowed down to 6.3%
in the 1960s and to only 4.2% in the 1970s (Krishna, 1988). This was mainly due to the
MRTP Act and the excess bureaucracy during Indira Gandhi’s government. The poverty rates
during this time were also very high. The number of people below poverty line for the period
1960-61 to 1977-78 did not see much improvement. The higher series reveal the average
poverty ratio over this period to be 56% and the lower to be 46%. For 1977-78 the higher
figure shows 370 million and the lower figure 309 million people in absolute poverty. Thus,
even though Indira Gandhi had the slogan ‘Garibi Hatao’, which led to her victory, her
policies supressed economic growth and destroyed the chances for the poor. Unemployment
rates during the period 1970-78 also remained unchanged at about 8.2% of the labour force
(Krishna, 1988). Thus, the loss making PSU’s were not generating employment during this
period. In the matter of promoting equity, the outcome of an expanded government sector has
been the creation of an elite working class in the organised sector whose per capita earnings
have risen steadily while the earnings of landless agricultural labourers have stagnated.

The efficiency of Public Sector Industries during the 1950s was high compared to its
performance in the 1960s, 1970s and most of the 1980s. Between 1961-1962 and 1987-1988,
efficiency was grossly low compared to what Indian industry had been 1954-1955 and 1959-
1960 there were small dips scores for these years were always over 0.95. The largest drop in
efficiency was seen during 1961-73 with efficiency declining at a rate of 2% per annum
(Majumdar, 1996). This was the period when bureaucracy crept in the functioning of the
PSUs and the centrally planned economy started taking a turn for the worst. During this
period, the locus of decision making was taken away from the hands of Indian industry and
efficiency patterns suffered. As the regulation and control regimes turned authoritarian in the
late part of the 1960s and mid-1970s, there were occasional rises in the efficiency score but it
was largely decreasing during this period. The biggest reason for the decelerating growth was
the productivity of our investments. Infrastructure was the other reason for our poor
performance as there were many bottlenecks for development of the economy, thus creating
what one can define as ‘License Raj’.

Research Gap

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While writing the review, a key finding on this paper has been that the period after
Independence can be divided into two periods; the first right after Independence with the
Fabian socialistic ideologies of Nehru and the Mahalanobis model of economic growth, and
the second with Indira Gandhi’s governance where self-sufficiency as the growth model was
abandoned but the dirigisme model was retained with more controls and planning.
Productivity and new business opportunities declined during this time and foreign loans were
taken but the economy not restructured. The resultant was a stagnant economy for 15 years in
the clutches of ‘License Raj’.

This paper however does not take into consideration the time before the NEP when Janata
Party was in power during the governance of Lal Bahadur Shastri and Morarji Desai, the
policies implemented during those times and how those policies affected the course of the
Indian economy. This paper also does not look at the agricultural revolution and its impact on
the economy and how it changed the course for the economy because of the changed import
constitution.

The ideology of Pandit Nehru however, cannot be completely criticized as socialism was a
popular ideology in the 1950s and the best path for a nation with a large poor population was
that the state intervenes on behalf of the masses. The market based strategy was ahead of that
time and the leaders at that time could not have waited for the trickle down from that policy.
It was clear though that Nehru’s economic path as delivering neither equality nor growth. But
Indira Gandhi persisted with that path and became even more rigid, introduced more controls,
and became more bureaucratic and authoritarian.

There were five major problems in the model of socialism adopted by Nehru and enhanced
by Indira Gandhi. It was an import-substituting path rather than export promoting path. A
massive, inefficient and monopolistic public sector was developed which did not have any
monopoly of working. The private sector was extremely overregulated, and thus diminished
competition in the market. Foreign capital was discouraged and the organised labour was
pampered which led to extremely low-productivity. However, the socialism bought often
ignored benefits for the economy. It gave time to the entrepreneurs to get to the level of
foreign competitors which won’t have been the case if India was opened directly to forces of
market. Thus, the transition of socialism to capitalism will ensure that India develops slowly,
but steadily and does not lose complete power to the market forces and the growth is much
more stable.

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