Saturday, October 18, 2014


[I wrote this in Business Standard  of 4 September 2001. The interviewee of Balasubramanyam who "bummed around in companies, universities, research organizations, government and journalism" was myself. Reading his book awakened memories of my youth as an economist: I was briefly Brahmananda's colleague in the Bombay department of economics; and I spent much time with the economists in the Planning Commission and Delhi School of Economics after I came to Delhi in 1966.]


The orthodox opinion, to which I too have contributed, is that the bad old days of Nehruvian socialism ended in 1991, and that a new era dawned with the reforms Manmohan Singh ushered in. This is a myth; what actually happened was more nuanced, more full of accidents and surprises. Although I have been around, experiencing that history since the mid-1960s more or less, I had forgotten. A new book by V N Balasubrahmanyam (Conversations with Indian Economists, Palgrave) reminded me of those halcyon days, in the 1950s and 1960s, when economics seemed full of certainties and India full of hope.
Subrahmanyam and his wife Ahalya took off in 1998 with a cassette recorder and recorded talks with ten economists. One learnt his economics in the 1940s, seven in the 1950s, and two in the 1960s. All except Bimal Jalan began their careers in academia; four – P R Brahmananda, Jagdish Bhagwati, K L Krishna and T N Srinivasan – were more or less lifelong professors. Three – I G Patel, Manmohan Singh and Bimal Jalan – were more or less lifelong civil servants. Two – A M Khusro, C Rangarajan – moved between the two worlds. One bummed around in companies, universities, research organizations, government and journalism. The Subrahmanyams asked sharp questions, but generally let the economists have their say. The result is a fascinating picture of the ten men and the world they were moulded in.
The economic circumstances of the 1950s and 1960s were more turbulent and difficult than anything we have recently seen. But in economics, Keynesian theory, which was perceived as having received its ultimate proof in World War II – the way unemployment evaporated as government spending picked up – was sovereign. The best brains in economics were taking Keynes’s two-sector model consisting of consumption and investment as the base, and experimenting with growth models based on it. The most important model for India was the Feldman-Mahalanobis model; it formed the basis of the Second Five-year Plan (1956-61).
In these models, investment was reduced to machinery making, and within the machine-making industry, two parts were distinguished – one that made machinery to make consumption goods, and one that made machines. The machine-making sector could make machines to make consumption goods as well as machines to make machines. Consumption goods could be made virtually without machinery – with such simple tools as ploughs, handlooms and bamboo sticks – but people using such primitive tools would produce little. They could produce much more if they worked with machinery. But the more machinery the machine-making sector produced to make consumer goods, the less it would produce of machines to make machines; and the less it produced of the latter, the more slowly would the machine-making sector grow.
The idea was to mechanize consumer goods production at the earliest date; with mechanization, workers would produce more, and their standards of living would reach the highest achievable level. The question was, how to get from a stage when people spun their own cloth and lived in thatched huts to one where they drove tractors, wore mill cloth and lived in skyscrapers. Mahalanobis’s answer was, first let all consumer goods be made without any machinery, build up as big a machine-making industry as possible, and make it make only machines to make machines. That would maximize the speed of expansion of the machine-making industry. A point would come when it employed so many people that if it expanded any more, there would be a shortage of consumer goods. At that point, part of it should start producing machines to make consumer goods, and they should be used to mechanize the consumer goods sector. That will release workers who were producing consumer goods; they should be sent to the machine-making industry to sustain its expansion. That was the quickest way to mechanize the making of consumer goods and raise people’s standard of living.
The Mahalanobis model was a beautiful one; it is a pity that the Subrahmanyams are too young to have fallen under its lure, and did not interview any of its adherents. Almost all them – Mahalanobis, Pitambar Pant, Gautam Mathur – are gone. But the Balasubrahmanyams could have found some of their once-young chelas like Hasheem and Saluja in the woodwork of Planning Commission, NCAER etc.
But they did find Brahmananda, who in the 1950s was an eccentric, whimsical reader in Bombay. He was too young to get called to the halls of power in Delhi, but C N Vakil, his guru, did have a seat amongst the priests, and Brahmananda used to feed him notes throwing doubt on the Mahalanobis strategy.
Brahmananda adopted the model of Piero Sraffa. Sraffa was a formidably brilliant economist who inspired and corrected many Cambridge economists including Keynes; but he would not put his pen to paper. Finally, after thirty years of cogitation, he wrote a slim book called Production of Commodities by Means of Commodities, in 1958. There he used matrix algebra, and so could distinguish any number of industries instead of two or three. But the point he wanted to make was simple. It was that at low levels of consumption, the productivity of workers depended on how much they consumed: if people were undernourished, feeding them more would increase the work they could do. But this was not true of all consumer goods; so he distinguished between wage goods, whose consumption increased workers’ productivity, and non-wage goods whose consumption did not.
If you make this distinction, the policy prescription changes. Workers’ productivity depends not only on whether they use machines or not, but also on how much they eat. So the first thing to do is to mechanize agriculture and raise food output per head; then, when feeding workers more no longer increases their productivity, one should go over to the Mahalanobis strategy.
Anyway, Brahmananda’s objections to the Mahalanobis model, couched as they were in Sraffa’s terminology, failed to sway the powers that be. The heavy industrialization strategy was launched – and collapsed in the crisis of 1965-66. By then there was a severe shortage of food; thousands starved to death in Bihar. Without understanding the Brahmananda strategy, the government adopted it; it diverted investment and scientific effort to agriculture, and engineered the green revolution.
The first input-output table of the Indian economy was made in the 1950s to implement the Mahalanobis model. What has happened from year to year has not borne the slightest resemblance to what the input-output models told it would; and all the tables have been roughly five years out of date. But such is the inertia in the Indian government that this meaningless exercise has continued for over four decades. In 2101, some bleary-eyed economist in the Planning Commission will be poring over the input-output table for 2084.
The really intriguing question is the following. The Indian government in the 1950s and 1960s employed extremely bright economists. I G Patel was in the finance ministry, first as J J Anjaria’s junior and later as seniormost economist in the government. T N Srinivasan and Jagdish Bhagwati sat on the top floor of Yojana Bhavan and helped make the five-year plans. There were other bright young men in that company – Bagich Minhas, Mrinal Datta Chaudhuri, Suresh Tendulkar, Pranab Bardhan, a number of American economists. In terms of intellectual fire power, those economists who helped frame the import-substituting industrialization strategy were far superior to those who later helped in the reforms of the 1990s. Why did those giants not spot the mistakes of the heavy industry strategy? Why was it not reversed earlier?
The Balasubrahmanyams put these questions to I G Patel, and he referred them to the Lakdawala Memorial Lecture he gave in 1996 (reprinted in his Economic Reform and Global Change, Macmillan). He is uncomfortable with the subject because, as he put it, “What one says from the safety of retirement is understandably suspect.” But in his view, “The limitations and dangers of the Mahalanobis model were clearly appreciated by economists then as now. Its overwhelming appeal, fortified by the personal charm, intellectual vigour and high connections of Prof. Mahalanobis, lay in its essentially patriotic and nationalistic flavour, which underlay much of economic thinking in India ever since the Bombay Plan. For economists, including myself, who grew up during the days of the nationalist struggle, all notions of catching up fast with the West and developing a diversified industrial structure had an almost primordial appeal, and we swallowed easily notions like the Big Push and “anything you can do, I can do better”…Wishful thinking obscured our economic reason.”
He puts it too mildly. In 1947 there had been no East Asian miracle; there was a deep cleavage between developed and developing countries. The former were far richer; and we ex-colonials firmly believed that our colonial status had kept us poor. Industrial productivity was much higher than productivity in agriculture, not just between industrial and undeveloped countries but amongst the latter themselves (it is so even now). The 1930s had seen a terrible slump in world demand for agricultural commodities. So it was natural to think that the way to get rich was to industrialize. There was considerable consensus amongst economists on the need for industrialization and diversification of economic structure – western economists like Nurkse, Lewis and Rosenstein-Rodan were the intellectual patrons of this idea. And, looking back, every developing country that has got rich has industrialized; China is doing it spectacularly, right before our eyes. As a country gets richer, its demand for industrial goods (and services) grows faster; even if it does not limit imports, its production structure will diversify. What is not true is that every developing country that has industrialized has got rich; there is a difference between efficient and inefficient diversification.
I G Patel called the idea that economists were influenced by export pessimism too charitable; it was more export amnesia. About import restrictions, he said they became unavoidable with the payments crisis of 1956: “It was not theory or philosophy but necessity that was the mother of the invention of extensive import restrictions. Theoretical justifications came later, almost as an afterthought. Once the bureaucrats got their hands on it, they developed import control into a fine art which became more bizarre by the day, and soon, import controls developed their own vested interests and momentum for continuance in an arbitrary fashion. The blame for this rather disastrous aberration in economic policy cannot be entirely or even largely be laid at the door of economists – although it is fair to say that, once introduced, many economists were slow to realise the full long-term ramifications of rampant protection.”
Actually, by the late 1960s a number of us were bringing out the terrible effects of controlled industrialization. The most comprehensive study was that of Jagdish Bhagwati and Padma Desai, India: Planning for Industrialization (1970), followed by Bhagwati and Srinivasan’s Foreign Trade Regimes: India (1975). I published a series of studies on the effects of controls on steel, imports and technology imports.
But then, as I G Patel put it, “The committed controllers and socialists came into prominence after 1969 when the split within the Congress party changed the entire rules of the game in Indian polity as in Indian economic policy – and indeed in the conduct of all national debate.” New economists took the helm in the government – Manmohan Singh, Sukhamoy Chakravarty, Bimal Jalan, Montek Singh Ahluwalia, Deepak Nayyar. What would they say? Balasubrahmanyams did not ask them.