Mixed Economy: Nehru’s blunder?


Of all the forms of wisdom, hindsight is by general consent the least merciful, the most unforgiving — JOHN FLETCHER, intro, Jean-Claude Favez’s Holocaust

At a book club meeting today, someone mentioned that he considered Jawaharlal Nehru to be a big idiot because he failed to embrace a capitalist economic model and rather opted for a socialist-leaning mixed style economy when India gained her independence. He further delved into some wistful thinking about “where India could have been now” if only Nehru had taken the “right” decision. This is an opinion shared by many people who have grown up and have been conditioned in the era of economic liberalization, post 1991. They have seen the wonderful benefits of a capitalist economy and wonder what the hell the nation’s founders were smoking, that they couldn’t realize the benefits of capitalism when they set out to write the rules of the game.

I too believe that a capitalist economic model is the best possible course to follow for any democratic nation. A capitalist model gives true economic freedom to the people along with the various other freedoms they enjoy in a democracy. A communist model, though noble in its ideals, usually ends up being lethargic , bureaucratic, inefficient and corrupt. But more on that in another post.

However, having said that, I will try to explain why Nehru probably took the decision that he did and why it was the right decision at that time. We have to understand the circumstances which influenced the decisions of the nation’s founders when a country of 300 million people came under their responsibility.

1) At the time of Independence, there was abject poverty, no middle class, frequent famines and widespread malnutrition. Nehru clearly felt that only the government, with a series of planned measures (5 year plans),  could carefully bring development to the people. He felt that, only the government at that time had the resources at its disposal to bring about such development. His govt then launched programmes to build irrigation canals, dams, land redistribution, modernize agriculture, set up IITs, IIMs, AIIMs etc. This was his core idea of having govt control for bringing development to people. And noone can argue that any of the above have not helped us.

2) With the widespread poverty in 1947 and severe lack of funds, Nehru felt that wasteful expenditure should be curbed. Having identified the important industries which were needed to serve people’s needs, he felt that these industries should be in the hands of the govt which had the necessary resources. And having decided so, the govt then discouraged private businesses from entering these areas as they felt that the pvt industries could utilize their money in some other area of development instead of needlessly squandering it in competing with the existing govt industries. I think thats a reasonable expectation anyone will have when funds are low. Idealistic, but reasonable.

3) The U.S.S.R had just established itself as a major world power alongside the U.S at the end of World War II . The whole world was transfixed by the USSR’s economic model. Communism became popular everywhere, from the U.S to East Asia. In fact even the south-east asian countries adopted a socialist economic model around this time. But, to his credit Nehru did not opt for a fully socialistic model and rather went in for a mixed economy with severe restrictions on business. The real problem was that around the mid 1970’s, other countries like South Korea and China,  realized the limitations of socialist economic models and changed course to capitalist models. We did not. When the country’s economy continued performing badly in the 70’s it should have served as a wake up call to the govt to change course, but they dint. That was the real blunder.

4) Having suffered, for 200 years ,the results of an unjust trade and industrial system imposed on us by the British, the founders were naturally skeptic about continuing the same course. They had seen the results of British economic policies which completely destroyed the local Indian industries and caused widespread de-industrialization and famines multiple times. This made the founders feel that Indian goods and industries needed to be protected from outside competition and hence the economy remained closed to global trade.

5) The Caste System. We often forget what a big role the caste system played in influencing ideas and opinions at that time. India has had a caste system which for 2000 years has given high esteem to people of  learning i.e the priests/ brahmins and has held in much lower regard the merchant/trading class. “Money-making” for profit was always, and still is, considered a bit ignoble. We are just not an entrepreneurial society. For too long, Indian society and caste system disregarded those who belonged to the merchant communities and hence created an atmosphere where business for profit was never considered to be a good cause. This same influence hung over Nehru, who was suspicious of businesses and their motives. He too did not have much respect for businesses run for profit. This was another factor why he shied away from giving businesses a free hand in India and led to the introduction of the infamous License Raj.

These were some of the factors which might have influenced Nehru. I’m sure there were other leaders who wanted a capitalist state. But at the end of the day it was a consensus decision for which the whole govt was responsible. Nehru wasn’t running a dictatorship, ramming his plans down others’ throats. His ideas and policies were that of the govt.

Nehru had a vision. The only mistake was that, when that vision did not fructify, even after 30 years, we did not realize our mistakes and take corrective action.

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