[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.]
CONVERSATIONS WITH ECONOMISTS
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.
