Virtual Discussion: 'The Nehru Development Model: History and Its Lasting Impact' by Arvind Panagariya

SHRUTI RAJAGOPALAN: Good morning, and good evening to those who are joining from India. I’m Shruti Rajagopalan. I’m a senior research fellow at the Mercatus Center at George Mason University where I also lead the Indian economy program. You can learn more about us at mercatus.org, and you can also check out our broader economic history and history of thought project called the the1991project.com since that’s the theme of the conversation today.

I’m joined by a really fantastic panel to discuss Arvind Panagariya’s latest book. Arvind Panagariya is the chair of the Finance Commission in India and also the Jagdish Bhagwati Professor of Indian Political Economy at Columbia University. I’ve spent a lot of time learning from Arvind about trade theory and policy and India’s economic history. In fact, we’ve covered that over eight or nine conversations of about 90 minutes each in a series called Talking Trade. You can find that on the Mercatus website and on the 1991 Project and so on.

Today we are here to talk about his latest book. The Indian edition is called, “The Nehru Development Model: History and its Lasting Impact.” In the U.S., you can find it titled, “The Nehru-Era Economic History and Thought and Their Lasting Impact.” It’s published here by Oxford University Press. On the panel, I’m joined by Douglas Irwin, who is a John French Professor of Economics at Dartmouth College and also an expert on all things related to trade theory, trade policy, and history of economic thought.

I’m also joined by Lawrence H. White, who’s a professor of economics at George Mason University. Again, an expert in monetary economics and macroeconomics but also has written a lot about economic history and the history of economic thought. I’m really excited to be here. I’ve learned a lot from you, and I look forward to hearing your remarks. The format today that we’re going to follow is that Arvind will start us off briefly talking about the broad themes in the book for about 10 minutes, and then in alphabetical order, Doug, I, and Larry will follow with our remarks of about 10 minutes each.

Then, Arvind, you can respond to our remarks, any or all, or talk about something completely different for another 10 minutes before we open it up to questions from the live audience that’s listening to us right now. Thank you so much. Arvind, I really enjoyed this book. I’ll hand this over to you.

ARVIND PANAGARIYA: Thank you, Shruti. I’m really grateful to you for organizing this and also very grateful to both Doug and Larry for joining the panel. It really is a true privilege to have the book discussed by these two leading economic historians and experts of history of economic thought. It’s a very thick book. What I would do is touch on various aspects of it so that I introduce the main themes and then we can take it from there.

The book is divided into three parts. The first part is about the history of economic thought of [the] Nehru period, [the] second part is the economic history, and the third part is about the lasting impact.

Main themes—the way I would like to describe [them] is as follows: Nehru had two projects at independence, a political project and an economic project. The political project was to establish India as a democracy, and the economic project was to lay down the foundation of economic growth and development. Nehru’s political project was a resounding success, but his economic project turned out to be an equal failure.

This book is about the economic project. In part, it’s motivated by the fact that, whereas a whole lot of books have come out on Nehru’s political philosophy theory and the general manner in which he handled his political project, there’s almost nothing contemporaneously today on Nehru’s economic project. This is a very thorough piece of work. It took me two to three years to complete it, and a lot of research has gone into it.

Nehru very much, for a variety of reasons into which I will not go right now, felt that one of the key things he wanted to achieve on the economic front was self-sufficiency. For him, self-sufficiency meant very much what the word says, that he did not want to depend on international trade. He wanted that India should rejig its production basket to match what its consumption basket is. That was the first key objective that drove his economic thinking.

The second aspect of it, of course, was that in terms of the objective, he was very clear that he wanted industrialization and growth as instruments of poverty elimination. He very well recognized, quite rightly, that poverty could not be overcome without substantial growth. For that growth, he needed to industrialize India. Now, once you combine these things—that you want to industrialize and you also want to achieve self-sufficiency—that automatically then translates into going for heavy industry.

In the prevailing circumstances, the view, almost universal at that time, was very much driven by what economists call the Harrod–Domar model, that growth is very much a function of investment. To achieve growth, to industrialize, you needed to invest. Then if you wanted to be self-sufficient, you needed the machinery industry because ultimately, the investment has to be done in the machines. If you don’t produce machines, then how are you going to invest? That being the case, the focus of his model became the heavy industry.

That, in a way, turned out to be the Achilles heel of that model because the country was very much a labor-abundant country, and it went into capital-intensive industry first, capital being the most scarce factor. That was one issue with the very design of the model, but then it also actually got India necessarily into a kind of policy and institutional regime which was fated to be very, very inefficient.

What do I mean by that? Well, given that capital was incredibly scarce, left to themselves, the entrepreneurs would invest that capital into relatively more light industry. If you wanted a heavy industry, then of course the government has to direct the investment. This is where the planning came. The planners had to then decide what are going to be the particular products and sectors that the government will prioritize.

The planning commission was put in place, which set all the targets for production of various heavy industry products, and then you needed a huge machinery to translate those targets into enterprise-level investments. Also, Nehru was keen to establish India as a socialist society, which translated from an economic standpoint into having a very heavy hand on the public sector. Heavy industry was developed in the public sector partly, but to the extent that Nehru also accommodated the private sector, it required investment licensing.

Any investment that was more than, let’s say, about ₹1 million at that time, a very small amount even at that early prevailing exchange rate of ₹4 to $1, that would mean about $250,000 worth of investment required a license. The investment licensing regime came into play.

Also, now if the enterprise’s investment required importing capital machinery or it required importing intermediate inputs, raw materials, then you also had to effectively have some sort of import licensing because you couldn’t leave the limited foreign exchange.

There was fixed exchange rate. India was not a major exporter at the time, and it never gave priority because Nehru was wanting self-sufficiencies. Exports were never a priority, so foreign exchange was very limited, and therefore that also quickly led to the adoption of import licensing and also foreign exchange control. You ended up with this massive administrative machinery whose job was to guide the investment, guide the imports, guide the use of the foreign exchange. A lot of that required setting up all sorts of bureaucracies within the government.

For the entrepreneurs, it became quite a nightmare because you effectively ran from pillar to post to get your licenses both for imports as well as for investment. All sorts of inefficiencies also crept in as a result, which I will set aside right now because we don’t have the time. On the economic thought, besides the economic thought of Nehru, which I have described, Nehru being very consultative, also invited a number of economists, India’s leading economists from leading institutions in the entire country, and appointed a panel.

It was panel of 21 economists who looked at the strategy that Nehru was going to pursue in the Second Five-Year Plan, which was the foundational Five-Year Plan. It so turned out that the entire economic lot was very sympathetic to Nehru’s view. Actually, if anything, these economists wanted more control, not less. There were a couple of dissenting voices. You had B. R. Shenoy. Then there was the Bombay School, which is Vakil and Brahmananda. An isolated foreign economist, Milton Friedman who really gave a trenchant critique of what Nehru was trying to do.

Of course, retrospectively, eventually, Friedman turned out to be right on almost everything. He pointed out that, “Look, at one extreme, you are putting capital into these heavy industry sectors with hardly any labor, and at the other extreme, you have all the labor sitting in these cottage industries, household industries, village industries, where they have no capital whatsoever. You’ve got two extremes, but efficiency requires you to be in the middle.” Of course, Friedman got more salience in the Indian thinking at the time. Indeed, his note, which was only 4,000 words, actually later got discovered in the 1980s, and I saw it for the first time myself in about 2000 and wrote a column about it.

In any case, businessmen were also very much with Nehru on this. They had also written in about 1944, ‘45, just before independence, something called the Bombay Plan. That Bombay Plan was very much in the same spirit and almost the same even in the content, actually, as the Second Five-Year Plan. Therefore, the businessmen also came on board, and generally [those of the] political class were with Nehru as well on this.

Nehru also was such a formidable, dominant figure that if he said something, his word was taken as something of the truth that you could not deny. That also led to the political class being supportive. Later on, some dissenting voices came from [the] Southern Party and all, but [the] Southern Party was still not formed when the foundational Second Five-Year Plan was discussed.

I want to take two or three more minutes just to summarize quickly what is in the book, the rest of it. The running theme of the book is that the Nehru era placed India on what I call the deterministic path, that the socialism got so deeply entrenched in the Indian psyche and thought that moving away from the Nehru model became a challenge. Anybody in this following 30 years or so after Nehru died in 1964, who tried to move away basically failed.

The first struggle happened between Mrs. Indira Gandhi, Nehru’s daughter, who wanted to go in an even ultra-socialist path, and not so socialist opponents of hers in the organizational wing of the Congress Party. This struggle happened in 1969, and, socialism being so popular with the large part of the Indian population, in the end, Indira Gandhi won out. She really then moved into much harder socialism than was Nehru socialism.

In fact, compared to Indira Gandhi’s socialism, Nehru’s begins to look relatively soft. She nationalized wholesale—the banks got nationalized, insurance got nationalized, coal mines got nationalized, oil industry got nationalized. Even in terms of the factor markets, land markets came to be very heavily regulated and the state interventions being very, very deep in the land markets. Labor markets got very much controlled and regulated as well in favor of labor and very much against the interests of businesses. All in all, that’s the path that happened.

Then, [the] second opportunity came when Indira Gandhi, after emergency, lost the election, and Morarji Desai became Prime Minister. Morarji actually was from the so-called conservative wing of the Congress Party, who had been in the struggle in 1969 being with the organizational wing of the Congress Party. There was the opportunity then for Morarji Desai to actually take a somewhat different turn, but again, the socialism’s hand turned out to be so heavy and so dominant that he could not. No movement away from what existed happened.

Then, 1984, Indira Gandhi was assassinated, and, at the end of October ‘84, her son Rajiv Gandhi came in who was very much a modern man. He wanted to take India into the 21st century. He explicitly in his speeches in the first year, said so, that he wanted to move away from the socialist regime and all, but again the senior Congress leadership turned out to be so dominant and so completely beholden to Nehru’s socialism that ultimately Rajiv Gandhi was not allowed to take the direction that he wanted to take. He simply was overpowered by this senior leadership, and later on, of course, in the last three years of his five-year term, he himself lost the plot. He just was not cut out to be a savvy politician.

It was only finally in 1991 that a number of things changed which paved the way for the economic reforms and for Shruti’s project called 1991. Here, a number of things happened. The failures of the Indian model, or the Nehru model, had become very apparent to everybody. Growth had been very, very sluggish. No big progress happened in poverty removal with all that. That’s one part of it.

The other was China, which was a more populous country than even India, started opening up in the late 1970s through 1980s. It grew almost 19%. That also had an impact. Above all, [the] Soviet Union, which had greatly influenced Nehru’s own thinking, collapsed in 1990. Those three major factors also played a considerable role in weakening the hands of the socialists within India.

Then ultimately, you still, nevertheless, needed an economic crisis, which happened. There was a balance-of-payments crisis in 1991 and that paved the way for pro-market reforms to happen. A new prime minister just came in because during the election campaign of 1991, Rajiv Gandhi himself was assassinated. Congress then invited P. V. Narasimha Rao to lead Congress—who led Congress to victory.

Lo and behold, he turned out to be a very different kind of prime minister. It is a challenge to explain because Rao was contemporary of Indira Gandhi. Only four years younger than Indira Gandhi. There is a puzzle to explain there how come he turned out to be a reformist. There’s a long chapter, which tries to answer that question. The other thing was that Rao was also politically very savvy. Once he decided that this is the course he wanted to take, unlike Rajiv Gandhi, he was actually able to navigate the Indian political system and launch some of the fundamental reforms that were needed.

Just one last word is that, although the reforms did start then, they could not be ended there because, simply, so much was still left to be done. Rao still could not carry it too far. Even then, things like labor law reform could not happen. The small-scale industries, the reservation for tiny enterprises to produce all kinds of labor-intensive products, that could not be removed. A number of other things, actually, that needed to be done could not be done in one go.

India’s reforms have proceeded very unlike China, which could move much faster because of its authoritarian system. India has moved much more slowly. Then a lot of reforms happened both under Rao and his eventual successor, which is Atal Bihari Vajpayee, from 1998 to 2004. Then the Congress-led United Progressive Alliance came back in 2004, which ruled another 10 years.

During that period, particularly the second term of the UPA, we went back to the socialist policies—there was the Land Acquisition Act. There was the Right to Education Act, there wasthe  Retrospective Taxation Act. There were all sorts of very, very heavy handed environmental regulation, which effectively blocked most of the infrastructure projects from progressing.

This has been a bit of a stop–go process precisely because the political class, the bureaucracy, even the businessmen and all the intellectuals, especially the economists, still remain very socialist in their thought. If one were to look for economists within India, who are essentially homegrown and are firm advocates of markets and openness, you’ll find practically none. I pushed the envelope on that. I could come up with only one Rao arguably who is homegrown. Without argument, he is very much an advocate of markets. Beyond that, it’s very hard actually to find some.

This impact, this strangleboard of the socialist thought, it still remains an obstacle. A lot of progress has been made. There is no doubt. Growth is very much appreciated today. There is a lot of support also for reforms. Even if, as I said, economists by and large are not so pro-market, but there is still some pro-market forces at work now. Things are a little better in terms of future reforms.

I’ll stop there. Thank you, Shruti. Sorry, I took a little longer.

RAJAGOPALAN: No, that was excellent. Thank you for that, Arvind. Now, I will hand this over to Professor Douglas Irwin. Doug, please take it away.

DOUGLAS IRWIN: Thank you very much. It’s a great pleasure to be here. Thank you, Shruti, for the invitation and for organizing this, and thank you, Arvind, for writing such a wonderful book. You mentioned in the introduction to the book or the preface that this is a COVID project of yours. I think it just shows that good can come from bad. That was a very difficult period for so many, but you put your energies to good use and produced something of lasting value that I think generations will turn back to when they’re looking back at this period.

One reason I think this book is very important, and I commend it to everyone viewing and everyone who hears this, is what I think is the importance of historical memory. We have to remember where policies of the past came from and their economic impacts if we have any hope of learning for now and the future. That’s one of the reasons why I’m a great supporter of the 1991 Project, which you, Shruti, are leading at the Mercatus Center at George Mason.

It’s a tremendous repository of documents, ideas, essays to just remind young people about what happened more than 30 years ago. This book, Arvind, too, also stands as a reminder to the younger generation about where policies came from, where the mindset came from, what were people thinking at the time, how has India been able to shed some of it, but as you pointed out in your remarks, not shed everything.

This is just very important. Larry, Arvind, and I are roughly of the same generation, I think. Throughout our careers, we learn things and we come to certain conclusions, and then we assume it’s obvious for everyone else, but every generation has to go through that learning process. Every generation questions. This is a way of passing on to younger people in particular, since we’re educators first and foremost, the economic impacts of these policies.

I should also mention another one of Arvind’s books, which is “Free Trade and Prosperity,” because this book is mainly, as you note, a work of history. Where did the ideas of Nehru come from? How did they translate themselves into policy? What were some of the impacts? His other book, Free Trade and Prosperity, talks more about the outcomes and the impacts on society.

So many aspects I could raise here, so I’m just going to jump around a little bit from idea to idea. Arvind did a great job in the book and in his remarks on explaining where these ideas came from. I think one interesting question is, why did they last so long when it was evident that they weren’t really working so well?

One adjective I’d use to describe the book, and this is a word of praise, is clarity. There’s a lot of complicated legal legislation—how things operated, the small-scale reservation, the import licensing system, the planning commission. It all can get very complicated, and one could get bogged down very quickly, but your book is written in such a light, accessible, easy-to-understand way. It almost makes the Indian bureaucracy penetrable when we know that it is really something that was just wound up in red tape. I really appreciate just trying to understand the import licensing regime in particular because I know that others have tried to describe it, and one quickly gets bogged down. There’s so many different avenues of established users versus actual users for licenses and things of that sort. We won’t go into it.

The main question is, why did this system last for so long? One interesting point that comes out of the book is that it actually came about, in part, because of an accident. Maybe accidental, maybe not. You note that in the late 1940s, early 1950s, India’s import regime was actually fairly liberal. It was the balance-of-payments crisis in the Second Five-Year Plan in 1956, ‘57 that really just exhausted the foreign exchange reserves quickly and led to this big clamp down on import licensing and foreign exchange allocation.

Now, in some sense, that would have perhaps been inevitable given Nehru’s views on socialism and planning and what have you, but he had been in power before then and didn’t do that. It really was a response to a crisis. Then you get the mindset, of course, behind it. The reason why it lasted so long, I think, is it became deeply embedded in the bureaucracy, deeply embedded in the thinking of leaders, and a huge consensus among policymakers, business leaders, academics that this is really the only way to go. There’s such a broad consensus because legality is so important and the legal system is so important, once these laws get written, it’s very hard to underwrite laws.

Even when China began to liberalize in 1978, India couldn’t respond quickly because of the mindset. India lost several decades, I think, of potential growth, potential poverty reduction because it stuck with the system. Arvind, in his remarks, mentioned just the intellectual homogeneity in India behind this. I think that’s one of the interesting and important parts of the book as well, is just reminding us there are a few dissenters in any point in time. John Stuart Mill makes this case in “On Liberty” about how we always have to listen to the dissenters a little bit because they actually may be right. Even if 98% of the people agree that you’re doing the right thing, you should always be questioning the received wisdom.

There were a few dissenters, B. R. Shenoy, obviously, Jagdish Bhagwati. I think you also rightly highlight Milton Friedman. I know some people can be very polarized in their views on Friedman as being dogmatic and ideological, but he obviously won the Nobel Prize. He’s a respected economist. I think you can download for free his two memoranda on the Indian economy that’s been published by another think tank in India.

If you read them, first of all, Arvind has matched Friedman’s clarity and exposition. They’re absolutely clear what’s going on. It’s just a clear diagnosis and a road forward for India, one from the mid 1950s, another one from the early 1960s. How that didn’t have an impact—obviously, the circulation of those ideas didn’t get very widespread— but because of the clarity and the force of their exposition, I would have thought that they would have more of an impact.

The intellectual story in this book is really an interesting one about how ideas either gain traction or don’t and how they can change things. Of course, you do mention 1991 when things really began to change. Of course, we’re marking the passing of Manmohan Singh who really was a very important figure here, and his legacy in overturning some of this.

I also liked the part of the book and your remarks on the Rao puzzle. Prime Minister Rao, of course, allowed Manmohan Singh to go forward with this. This really is a puzzle. We can read his statements. There are a number of books about him. I’ve read most of them, I think, because I’m interested in this as well, but we can’t really get into his mind. How did someone who was a self-avowed socialist, who was of Indira Gandhi’s generation, who had grown up with Nehru supporting the Congress party and all the policies really help undo a lot of that?

He never really explained himself or wrote a memoir or was subject to interviews where we could get inside his mind. We know he did it, and we know the superficial policy justifications for it, but what was going on in his head really is an interesting puzzle.

Two things on that. Arvind used the term self-sufficiency because that was a very important term for Nehru in justifying a lot of the policies at the time. Self-sufficiency was rebranded, if you will, in the 1990s. I know Manmohan Singh did this quite a bit. It’s not meaning that you produce everything for yourself, it means you’re self-sufficient in the sense you can pay for all of your imports through your exports. You don’t depend on foreign aid, you don’t depend on capital inflows, you become self-sufficient—your ability to pay for yourself that way.

That means you could have a very large trade share as long as you can pay for it. It’s that rebranding that was important. I’m not sure it’s in your book, but there’s also this story about how when Rao confronted Congress opposition to the reforms of the period, he said, “Actually, this is all from Nehru.” They rewrote the introduction to, I believe, the domestic delicensing. They said, “Oh, okay”" Most of the party members went along with that. They just paid honor and tribute to Nehru rather than saying, “We’re overturning something,” they say, “This is in line with his thought.”

I’ll just wrap up there. There’s so many interesting and important aspects to this book. Just the history of policy, the history of ideas, looking at the impacts of these. It will be a lasting testament to your skill as an author and a researcher, an economist in doing this. I think it will be read for many years to come. Congratulations and thank you for writing it.

PANAGARIYA: Thank you, Doug. Thank you.

RAJAGOPALAN: Thank you so much for your remarks, Doug. Arvind, like Doug, I also really enjoyed the book. I told you it looks very large, for those who haven’t read it yet, but it’s incredibly accessible and full of the normally incomprehensible Indian detail made comprehensible, as Doug said.

I think what you’ve covered really well is how Nehru’s thinking on socialism evolved and how, as a consequence of that, the Indian socialist and planning state evolved and then its lasting impact. The area where I depart ways with you, Arvind, is when you describe Nehru’s political project as a resounding success and discuss the economic project as a failure.

I think the reason for that is while many people think that his democratic and constitutional project succeeded, and it’s really Indira Gandhi under whom we experienced some dictatorship, I will challenge this argument on two fronts. The first is that Nehru’s political project was not one without problems. I think not only were there many issues, these issues were a consequence directly of five-year plans and this socialist ideology, and it led to a number of constitutional amendments that we can discuss in detail in the Q&A, but I’ll mention briefly.

The second part that I think it relates to is, once we really dig into these constitutional questions and constitutional amendments, what I find is that Indira Gandhi’s socialism was actually a continuation. I know it was a departure from Nehru’s more soft Fabian version of socialism, but it’s a continuation in the sense that many of the tools that Indira Gandhi used to amass the dictatorial powers, especially during emergency, were actually Nehru’s original constitutional innovations. Those innovations came about in the first place because he was grappling with this question of central planning.

I’ll just give you a few examples of a couple of amendments, and we can discuss this more in the Q&A. The first is, as you rightly pointed out, Arvind, the Five-Year Plan, the first one is not really a plan in the sense that it doesn’t have the kind of input-output matrices and very detailed descriptions of how much steel will be produced and how many bicycles will be produced. All that came with the Second Plan.

The First Five-Year Plan does lay out not just the socialist ideals, but also some very, very specific plan objectives, and it gives marching orders, in a sense, both to parliament and also, more importantly, to state and provincial legislatures at that time. This is before we had linguistic reorganization, so this is still the old administrative provincial setup that we inherited from the colonial government.

The Five-Year Plans really described some of these goals, and then Nehru, through his fortnightly letters, would communicate with chief ministers and the state legislatures on what they needed to do to give voice to the goals of the Five-Year Plans. The first of these is quite famous. This is the land reforms, which was required both to increase agricultural productivity, but the second part of it was to break up these large feudal estates or the Zamindari system.

Now it’s pretty well known that it directly ran into trouble with the courts on two margins, one, because it ran afoul with some of the property right restrictions that were there under Article 31 in the Constitution, but the second part of it has very much to do with the directions of the Five-Year Plan. The Five-Year Plan very specifically requires that concentration and control over land is diminished and that there is greater equality.

One of the things that happens, especially in Bihar and Madhya Pradesh legislatures, is they pass a land reform law which says you can take land from these large estates, break them up, and give them to those who were landless and working on those very same estates, but the Constitution required that compensation must be provided upon taking of such property, so there’s a very classic takings provision.

Both the high courts and the Supreme Court [said] that this is not a problem for Zamindari reform. There is already an exception written into the Constitution through constitutional debates. The second part of it was that, in a socialist format, you can’t exactly give compensation when you take land from large feudal lords. It almost defeats the purpose. Nehru’s chief ministers brought in a new innovation, and they said, “We’ll do differential compensation.

Poor Zamindars will get more compensation than rich Zamindars. The rich Zamindars, in the case of Bihar, will get one-twentieth of the compensation.” Actually, these land reform laws at the state level ran afoul with the Constitution, not on property rights grounds, but because they violated equal protection under the law, which is an Article 14 provision.

This inconsistency keeps coming up over and over again. In later property amendments—the 4th, the 7th, the 17th—we see that, again, this question of should the state really pay out very large sums of compensation, including bank nationalization, when we are really using this not so much as a tool of eminent domain to create public goods, but as a tool to bring about socialist equality and to reduce concentration over capital and concentration over property.

You see that the amendments in the Constitution reflect that. They say, “Oh, we don’t have to really give just compensation.” You don’t have to give fair market value. You have to give some kind of an amount that will somewhat make people whole. The thing that pertains a little bit more to what you’re talking about in the book, Arvind, has to do with the Industrial Act of 1951.

One of the aspects here is the highly restrictive industrial licensing regime that starts from the [Industrial Resolution in 1948], but its full-blown legislation in ‘51. Under this Act, the kind of licensing regime that is envisaged is going to really run afoul with Article 19(1)(g), which is basically the right to all citizens to practice any profession or carry on any occupation, trade or business.

At the very first stage—this is right there in 1951— in 1950, you have this Act, you have the first plan come into place, and in 1951, the first amendment also brings in what we call the non-obstante clause that is read into Article 19(1)(g), which says that the state can make reasonable exceptions to carry out its goals, even if it’s in violation of this right that is guaranteed to trade occupation and business.

You see this again come up very quickly. These are very mundane cases: Can the government nationalize a bus route? Is extreme licensing, or the denial of licenses to a bus company or a bus monopoly equivalent to nationalization when you think about it from the point of view of the Takings Clause, or is this really a violation of the restrictions in Articles 301 to 305, which is about interstate trade and commerce? These sorts of questions keep coming up, and what do they do? In the case of licensing, first, they amend Article 19(1)(g).

The Third Amendment, when you talk about the price and quantity controls which are there as part of the first plan, and then the legislative plan, the Third Amendment is really created to give a voice to the Essential Commodities Act. The Essential Commodities Act runs afoul with the Constitution, and now to save this, we need to amend the Constitution and put that in another box, so that you can actually control prices and quantities through the Essential Commodities Act. This legal innovation is quite interesting, just like Kameshwar Singh.

The legal innovation in this case is something called the Ninth Schedule. I wrote part of my dissertation on this, so I can throw in links to those papers when we transcribe this conversation. The Ninth Schedule is really a saving provision. It’s to repair unconstitutionality of laws, which sounds very odd to an American audience, I’m sure. If something is unconstitutional, how could one possibly save it? Well, the Indians have an answer to that. You create an appendix at the back of the Constitution and call it the Ninth Schedule.

You throw in any law that runs afoul with the Constitution and say, “You know what, if it’s brought under this list, under Article 31B, even though it’s unconstitutional, we will let it pass.” Nehru actually kicks off the Ninth Schedule with seven laws which are really for Zamindari reform. This is in 1951. It starts with about 13 individual laws. By the Fourth Amendment, they’ve added a few more. They’ve added another seven. By the 17th amendment, which is really Nehru’s swan song, the Ninth Schedule has 64 laws. Now it includes everything and the kitchen sink.

One of those laws which are saved is actually the Essential Commodities Act. You see the same thing by the Fourth Amendment, you need to bring in the Industrial Disputes Act into the Ninth Schedule. Arvind, you talked about how there were all these problems between labor and capital, and the government had to legislate and wrestle with these problems, you’re absolutely right. And it was hard to wrestle with these problems, not just in the economic sense, but also in the democratic and constitutional sense.

The only way to do it was, when it was called unconstitutional, throw it in the Ninth Schedule. In the 7th Amendment, you have the same problem. By the way, I’m still on the First Five-Year Plan. You have something called the National Development Council, which is supposed to incorporate all these issues. The Seventh Amendment has this huge conflict between what is a state’s purview to legislate, and what is the union government’s purview to legislate. As we all know, central planning—there’s a reason we call it central, it requires a large degree of centralization.

This decentralized activity where every state legislates whatever it wants—not really going to fly well. What needs to be done? Now, we need to go back and amend the Seventh Schedule. You’re the Chair of the Finance Commission, Arvind, so you know the Seventh Schedule better than me. This is really a question of what comes under the purview of the state versus the union list. They say, “Oh, there are certain problems to avoid these multiple entries on acquisition of property or taxation. We’re really going to replace the entries. We’re going to omit the entries in the Union list and state list and then bring it under the concurrent list as a comprehensive entry.”

This keeps going on. In the interest of time, the way I think about this is that this incompatibility, the way it manifested itself, is first, the planning commission led by the Prime Minister, in this case, Nehru, would create these five-year plans. To attain the goals in the five-year plans, the union, Parliament and the state legislature would pass all this legislation. The legislation would get challenged in the courts subject to independent judicial review.

Judicial review would often strike down some of the socialist legislation carrying out the goals of the five-year plans for violating fundamental rights, or interstate trade and commerce, or the Seventh Schedule, or something like that. Then to give validity to what was actually unconstitutional or void, the Parliament would amend the Constitution.

This is basically a five-step process that played out over and over and over again. I think we forget how many times it played out under Nehru, because Indira Gandhi’s violations, using the same five-step process were just so egregious that Nehru’s are overshadowed.

I want to end with the Ninth Schedule innovation that Nehru really started is what helped Indra Gandhi save her own dictatorship during the emergency. She had to amend the [Constitution] Representation of People’s Act and the Election Act to remove the office of the Prime Minister from any judicial review. The reason for the emergency is that she refused to step down as Prime Minister when the courts held her election invalid basically because of a minor election offense of using official vehicles and so on.

The way she actually managed it constitutionally is not just by imposing emergency, it’s by throwing in these laws into the Ninth Schedule. That’s the way to save the problem. Same with newspaper censorship. All of the most egregious violations of the Ninth Schedule of the emergency were actually thrown into the Ninth Schedule. All the nationalizations that you talked about were amendments to the Constitution, very much in the same format as Nehru set up.

That would be my minor quibble with Arvind on this, that while I don’t disagree with the content, I would have gone a step further and said one of the other lasting impacts is also we have now about 105 amendments to the Constitution. This trajectory was something that really, Nehru and this problem, or this incompatibility between socialism and constitutionalism, as Hayek would call it, is what set this out. I’ll pause here.

Larry, do you want to kick off with your comments next?

LAWRENCE H. WHITE: Yes. Thanks, Shruti. What are my qualifications for being on this panel? I’m not an expert on the Indian economy. I think Shruti invited me because I did write a book on the history of economic policy thought entitled “The Clash of Economic Ideas,” which was published by Cambridge in 2012. In that book, I included a chapter on Indian planning and development economics. The Indian experience was a factual setting to give a broader perspective on development economics and its application.

The chapter on India followed a chapter on post-war Germany. The idea was the contrast between the Germans choosing a market-friendly set of policies, and India, the opposite. Shruti and I also coauthored with G. P. Manish and Dan Sutter, a history-of-ideas article on Liberalism in India. Those two publications are my qualifications. Accordingly, I’m going to focus on the chapters of Arvind’s book, which deal with the history of ideas, that’s particularly chapters 2, 3, and 14.

Of course, my interest in this is rather solipsistic, namely, how different is his account as an insider, you might say, from my account as very much an outsider, how badly did I mangle it. I’m reassured because our accounts are actually very similar. Our accounts of Nehruvian economic planning, that is, we cite many of the same sources.

Of course, the reader will learn in much more detail from Arvind’s book about how Nehru admired the Soviet Union as a model of industrialization-led growth and thought that was the model to follow.

Like Sidney and Beatrice Webb, who wrote the notorious book on the Soviet Union as a new civilization, Nehru used that term repeatedly that the USSR was a new civilization. It was a beacon of innovation that we can be inspired by. Nehru just thought, factually incorrectly, that the USSR was outgrowing the West, based on the cooked-up numbers that the USSR was putting out, but also based on the very real fact that the West was in a Great Depression, and the Soviets seem to have avoided that.

Now we know that that was a tragic error. That was not a model to follow. We learn in much more detail about how Nehru moved toward a more pragmatic socialism, you might say, within a mixed economy, unlike the USSR. Not everything was going to be owned by the state. Particularly, as Nehru wanted to rise in leadership in the Congress Party, he had to trim his views, because he knew that he was a little bit not going to capture the median voter with a completely socialist economy. We learn more about the Western advisors who supported the planning efforts.

As Arvind said earlier today, they were inspired by the Harrod-Domar model, whereas Nehru and his advisor, Mahalanobis, were inspired by an actual Soviet model by the economist Feldman. Of course, the result was that the five-year plans just squandered scarce capital. They squandered it by investing in making heavy machinery that would have been much more economical to buy, to import rather than to make yourself, and they created state monopolies in arbitrarily chosen so-called key industries. The real message here is not that the state should have gotten its plan better, but that the state is not the agency to make those decisions.

We need markets to tell us through profit and loss, which lines of investment are actually profitable and which ones are wasteful. These results of too much planning are compounded by the attempts at self-sufficiency or autarky, to use a less polite term. In the mixed economy context, trying to control the private sector so that it coincided with the plan meant the stifling of private investment and enterprise under the Permit Raj. Not incidentally, it meant a lot of corruption and rent seeking because it preserved the privileged position of those who had licenses against competition.

There’s a great deal about the development of Nehru’s thought that was new to me and about the contemporary supporters and opponents of Nehru’s ideas. There’s excellent archival work reported in the book. Let me give one example, a common view which Nehru himself fostered in his autobiography—he wrote a letter to George Bernard Shaw, who was a Fabian pamphleteer. It’s a view that [the] Manish, Rajagopalan, Sutter, and White article echoes, is that Nehru picked up Fabian ideas while he was studying in London. This is 1910 to 1912. He was in law school.

In the article, the four of us say that the ideas of the Webbs, George Bernard Shaw, and Harold Lasky all left their mark on Nehru. Arvind argues persuasively that that’s not the case. Nehru was not an early convert to Fabian socialism. He was really indifferent to political ideas while he was in England. It’s only after he left England and after he visited the Soviet Union in 1927 that he became a serious convert to socialism.

There’s a similar revelation later in the book when Arvind provides evidence that the common belief that Indira Gandhi, Nehru’s daughter, had no strong views on socialism when she took office and that all these policies came from her advisors. In fact, he shows us that the Congress party leaders, who were very much in Nehru’s sway, chose her because she had deservedly developed a reputation for being favorable to socialism. What we learn about the opponents is interesting because many accounts of Nehru’s era, including Shashi Tharoor’s and Ramachandra Guha’s accounts, give almost no attention to Nehru’s critics. We get a good account in Arvind’s book.

Among economists—there were really only three, who’ve already been mentioned, B. R. Shenoy, Milton Friedman, and Peter Bauer. Of course, Shenoy was the only Indian there, and so he’s very much isolated within the community of Indian economists. All three of them foresaw that the forced allocation of resources to heavy industry and the attempts at national self-sufficiency were very much going to undermine the desired growth in real per capita income. They were inconsistent with that.

One anecdote I hadn’t seen before, which is delicious, is a political leader in the Congress party, N. G. Ranga, as paraphrased by “The Times of India,” noted that, of course, Nehru had to come to terms with capitalism, with business leaders, because he had no mandate and didn’t have the votes to abolish capitalism. Ranga asked, “What would happen if the capitalists went on strike and refused to cooperate with the government?” A quote from the newspaper article.

We have to recall that Ayn Rand did not publish “Atlas Shrugged,” which is about a strike by the capitalists, until 1957. Ranga was anticipating that idea, that you need the cooperation of the producers if you want production. It was Ranga and Rajagopalachari who blocked some of Nehru’s more radical anti private property initiatives.

In summary, this is a very well-written and informative book, as has been mentioned. It’s very clear. It’s founded on solid historical research. It’s founded on a solid understanding of market economics. I recommend it to anybody who wants a better understanding of why the Nehru development model, the socialist model, failed and why India’s reform came so late. Why it didn’t reform in a pro-market direction until 1991. Arvind’s answer is that reform wasn’t possible until a generation arose that was not so steeped in socialist ideas. Thanks.

RAJAGOPALAN: Thank you, Larry. When I was reading Arvind’s portions from the book, I was thinking the same thing, that we didn’t make the William Morris connection in our paper and we didn’t connect all the dots. Arvind, that was incredibly useful archival work and illuminating for me. Arvind, do you want to take five, seven minutes to respond, maybe more or less if you need, to any or all of the comments that have been discussed so far?

PANAGARIYA: Thanks, Shruti. Yes. Thank you all. Fantastic commentary. This is the great thing about having great commentators. Since Doug will have to leave a little early, I particularly wanted to say something about the fundamental question he raised, why the change took so long, and why are we still having so much difficulty in taking forward the change?

Partly, there is this interaction with democracy happening throughout, which, unlike in China, for example, the authoritarianism allows if the top leadership decides it’s going to make certain changes. They also internally, perhaps, face some opposition, but still, it’s a bit easier to overcome that opposition. Therefore, this interaction with democracy certainly has meant that the change has been slow in India. It also connects to something you said, Doug, yourself, about the legislation. India was just too early to put in all very, very constraining legislation labor laws, for example, under Indira Gandhi, a host of those things, plus the Indian judiciary.

By nature, judiciary tends to be left of center, and the Indian judiciary for a long time, was very far left of center to the point that judges will tell you that if there is a case in which the workers are pissed against the capitalists, we would always—whatever the law may be—we will always rule in favor of the workers because corporates have deep pockets. They have got enough resources and all. It’s a worker who needs the protection.

This combination worked, but systematically speaking, there are three things I would say. Intellectual thought, that, of course, got very deeply entrenched. The socialist thought itself got very deeply entrenched. Policymakers, bureaucrats, business people, intellectuals, everybody was and remains married to that thought. That’s one part.

Second is the economic structure. The economic structure we created was very heavily capital-intensive industries and complete neglect of the labor-intensive industries. That remains entrenched till today. India’s successful sectors are automobile, machinery sector, petroleum refining sector, you’ve got IP sector, you name it. Anything that has to do with capital or skilled-labor intensity. Those are the sectors that remain successful. Labor-intensive sectors still struggle.

Third is the vested interests. These vested interests have to do with both. Every system creates its own vested interests. If you are in a bit more authoritarian system, you can overcome that more easily, but in democracy, it takes a while. It takes a while and persistence. These are the factors I feel that have held back the change or have made the change incredibly slow in India.

Shruti, I thought your discussion was absolutely fascinating. This is not my expertise on this, but as you were speaking, I thought all this is a book in itself to me because [of] your fascinating details of history and all.

Only thing I would say in my defense—having said that Nehru’s political project was a resounding success and to get back to defend that, I would say that, look, there was so much internal contradiction you pointed out and yet the system had enough flexibility that it survived. There is also an entrenchment, led by Nehru, of the democratic thought. Universal suffrage gets in there at the very beginning of the process, and that really brings in everybody into the political process, and there’s this entrenchment. In some ways, at least my read of that part of [the] emergency period, is that at the end of the day, at heart, Indira Gandhi was herself democratic.

When she saw what she had done and thought about it—perhaps she also, in her solitude, may have thought about how Nehru had started off and what Nehru’s dream was, her own father—that may have led her to think that that this is not the right path to go to. In the end, it is in this sense, I think, that despite all the contradictions that you pointed out, which are all very fascinating, at the end of the day, [the] political side still remains democratic. Just look at around us. What developing country since the Second World War, end of the Second World War, meaning the post-colonial era, has remained [a] democracy throughout?

Take out that maybe 18 months of emergency rule, but this is the only country which has held this kind of—maybe Costa Rica and maybe Jamaica there, one or two. Even Sri Lanka, which at one time could be cited as an example, can no longer be really cited as an example of a continuous democracy in a developing country. Not to mention the fact that it is such an incredibly large, such a diverse country. As the Chairman of the Finance Commission, I’ve been going to different states, and I’ve done 15 out 28. Boy, you see Europe is nothing in terms of diversity of language, of culture, of races, of tribes, you name it. It’s just unbelievable how diverse India is, and yet it holds together very nicely as a country. I think that is successful.

To Larry, thank you very much. I wish Shruti had warned me of your book, and I could have read it while I was writing this book. Thanks for your very, very encouraging comments. I really appreciated many of the quotes that you brought out also and some of the earlier background, which I missed. I think how Nehru describes [the] Soviet Union in such glowing terms, et cetera—I think that that should have been in the book. The books emphasize a little bit more the influences that he came under at that conference in Brussels of the leading communists from the Western world and the nationalists from Africa and Asia. I do talk about him having passed through Soviet Union when returning back to India on that trip, but obviously, there was a lot more of this fascination and this reading of [the] Soviet Union through the incorrect data and numbers, et cetera, being such a huge success and all. That I wish I had brought in a little more forcefully than I have in the book right now. Thank you.

RAJAGOPALAN: Thank you so much for that, Arvind. First of all, I want to thank our panelists. Douglas Irwin, I strongly encourage everyone to read one of his books “Against the Tide,” which is this fantastic intellectual history of free trade. Thank you so much to Professor Lawrence White. Larry’s book is “The Clash of Economic Ideas.” He has some fantastic chapters—oh yes, there it is, there’s the cover—has some fantastic chapters on India and the intellectual history.

Of course, all of Arvind’s books, I strongly recommend everyone reads them. In particular, this one, the Indian edition is called “The Nehru Development Model: History and its Lasting Impact,” and the US Edition is called “The Nehru-Era Economic History and Thought and Their Lasting Impact.” Thank you so much, Arvind, for doing this and for writing the book. It was a pleasure to have all of you here.

PANAGARIYA: Thank you, Shruti. Thanks very much.

WHITE: Thank you.