Among the key groups of supporters that carried Narendra Modi to victory in the general election, the most conspicuous was the group of free-market writers, intellectuals and journalists. In op-ed pieces and television outings, this influential section of intelligentsia saw in Modi a chance to redeem India from its failed experiment with socialism. The narrative went that Nehru’s tryst with socialistic planning chained the Indian economy to the 3% “Hindu rate of growth”. It was only when PV Narasimha Rao “opened up” the economy in early 1990s that India began to catch up with the more industrialised West.
Ever since Modi’s thumping win, this set of writers and intellectuals has wanted him to become “India’s Thatcher” and follow the neoliberal script – go for “supply-side” reforms, like labour and land law deregulation; stop “distorting the market” through subsidies for foodstuff, fuel and fertilisers; “liberalise trade and investment”; restore “macroeconomic fundamentals”, referring essentially to fiscal consolidation and inflation. Most such writers were disappointed with the first budget, which did not cull the welfarism of the United Progressive Alliance government, even as it sped up divestment and tax cuts.
One symbolic act that has been sought by this group is the abolition of the Planning Commission, which many of its writers view as the embodiment of the “failed” experiment with socialism and Nehruvian paternalism. Arvind Panagariya, one such neoliberal luminary advising the National Democratic Alliance government, writes that “India is a market economy and there is no place for planning in it”. Tavleen Singh, a self-described scorcher of “socialist residue” in India, has repeatedly impugned the institution and its officials for being “obsolete” and having little idea about how really the country lives.
Much to their glee, the prime minister finally announced the Commission’s denouement during his Independence Day speech. The new body set to replace the Commission is NITI (National Institute for Transforming India) Aayog with Panagariya likely to be its head. The Cabinet Resolution responsible for the formation of NITI Aayog is high on the same platitudes that underpinned the formation of the Planning Commission, but is unclear as to the body’s mode of operation. We don’t know whether the advice generated shall be in the form of quarterly, annual or triennial reports or whether its CEO will work in close integration with the finance or industry ministries. Nevertheless, the inclusion of Chief Ministers and Lieutenant Governors in the framework of national decision making is a giant step in the right direction.
The right direction
The Planning Commission, for much of post-Independence period, certainly overplayed its hand in the attempt to micromanage investment, trade, and consumption in India through complex (and frequently corrupt) mechanisms of licensing, subsidies and tariffs. But it is highly erroneous to conclude that planning, as part of political management of economy, is a faulty approach.
Most countries that have managed to industrialise successfully have substantially depended on the state’s abilities to harness new industries through protectionism, drastically increase productivity through planned technology transfer (and technology theft) to domestic firms, and occasional micromanagement of entire industries to make them internationally competitive.
The industrialisation of the East Asian Tigers and now China is the defining economic story of the late 20th century. Yet, this was largely a result of careful nurturing by the government of certain industries through protection, subsidies and technological support, with the aim of upgrading the economy’s productive capabilities.
South Korean example
The South Korean state invested in steel-making (much against the wishes of the global financial community, which felt that it was not Korea’s “comparative advantage”), which resulted in state-owned POSCO. POSCO was efficient long before it was privatised. Hyundai Motor was founded in the late 1970s, and was severely protected by the state till it began to make good cars in the early 1990s.
Similarly, the Japanese fiercely protected their automobile industry and facilitated important technological transfer through careful manipulation of foreign investment.
Much of China’s acumen in capital goods (it makes more steel than the rest of the world combined) and now increasingly in the new industries of solar panels lies in the strategic calibration of state subsidies to allow these industries to achieve scale and competitiveness.
More importantly, many of the above states organised their economic strategy through commissions similar to the one set up in India. Korea had its Economic Planning Board. Korea’s first five-year plan made it clear that it was an investment-poor nation and thus had to increase savings. This meant that South Korea would then focus on labour-intensive textile industries. Its second plan drove towards the building of heavy and chemicals industry to upgrade the nation’s productive base.
China’s latest five-year plan (now referred to as “guidelines”, the last of which was released in 2011) from its National Development and Reform Commission argues for a focus on balancing the economy through increasing consumption (as opposed to investment, which till recently made up for half its output) and called for the nurturing of new industries, particularly in renewable energy sector.
Moreover, planning is not necessarily opposed to the market. In countries where it has been successful, it has complimented private enterprise. Planning can decide the sectors that are to be target of preferential finance, support, protection or discipline. There is ample of space for institutions such as private enterprise, competition and the profit motive to flourish in such a framework. After all, Hyundai and Toyota have come up in countries where extensive state intervention and preferential industrial policy have been the norm.
A historical process
Development needs to be understood not as an application of one-size fit-all policies like trade liberalisation, deregulation or improving the business environment, but as a historical process that allows a nation to upgrade its industrial and productive base on stage-by-stage basis. A country that is largely agrarian and feudal (like Afghanistan) cannot suddenly begin to make semi-conductors. It needs to be able to specialise in less-sophisticated production like textiles before moving up. As is evident from the history of successful economic stories, the biggest benefit of planning lies in guiding the increasing sophistication of an economy’s productive capabilities.
New think-tank constituted for development
The Union Government announced on Thursday that the Planning Commission had been replaced by the new National Institution for Transforming India, or NITI, Aayog, with a governing structure that includes chief ministers of all states and lieutenant governors of union territories. The institution will function like a think-tank to provide strategic and technical advice to the government. Its predecessor, the Planning Commission, was dismantled in December as a "socialist-era institution".
The real mistake in India’s development strategy lay not in pursuing state intervention, but – as economists such as Deepak Nayyar note – getting state intervention wrong. Excessive reliance on licensing and the public sector, refusing to impose export discipline on private enterprise and borrow foreign technology restricted the productivity of investment in India. East Asians, on the other hand, worked with private players and provide them support and protection, but also forced them to adhere to government’s developmental and export targets.
With manufacturing constituting little over 15% of India’s output, some element of planning is essential to India’s economic development. Perhaps the new NITI Aayog will end up doing exactly that. However, if it continues with the laissez-faire economic thinking underpins the decision to get rid of a Planning Commission and aims to to curb the “developmental” aspect of the Indian state ‒ which may well be the case given Panagariya’s inclusion ‒ in favour of the regulatory aspect, then this may well be a mistake.
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