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Whenever the Indian economy is in trouble, discussion somehow leads to a mention (bashing) of the infamous Licence Raj of Socialist India. It is almost like Godwin’s Law for discussion on Indian economy. The Sen v/s Bhagwati debate has also brought it up recently.

I try and look at how fair the criticism is.

Licence Raj – one of the most pejorative terms that I have heard in relation to Centralised Development Planning. Most of the criticism, imo, is based on hindsight. In order to be able to truly criticize it is necessary to look at the data that Nehru had and the situation at that time.

Let us look at the context in which India adopted centralised planning.

  • India was a new country racked by the pains of partition.
  • We were a huge country with millions and millions of poor.
  • India had been a source for raw materials for Great Britain with no industries of note.
  • Most people depended on rain-fed agriculture for their livelihoods.
  • Infrastructure was poor and there was no money in the treasury to build more.
  • Revenue generation had been extractive more than developmental and a sea change in attitude was required.
  • Few Indians had any input in decisions that were made affecting them.

Planning to the new Indian State was not merely about economics. Nehru saw planning as “partnership of the people in a mighty enterprise & of being fellow travellers towards the next goal. The plan was expected to be. a dynamic, living organism. Nehru also looked at centralised planning as “……… ultimately a way to deal with separatism, provincialism and sectarianism…….”.  The banning of private engagement in steel, mining, aircraft, coal etc was mainly because it was deemed to be too important to be left to the profit motive. 

Some of the positives in India that are owed to centralised planning include

  1. development of infrastructure in terms of roads, railways, banking services and power without necessarily focusing on whether money was being made; even as we glorify liberalisation let us not forget that even today there are large swathes of remote India which are served only by the public sector  – think banks, or airlines.
  2. dams and irrigation which tried to break the tyranny of rain over agriculture. I know that this is also related to infrastructure but deliberately mentioned this separately because of the importance of this to over 80% of Indians at that time.
  3. Indians got involved in the planning process and foreigners were in a position where they had to bid for Indian contracts – look at how much pride this must have instilled in a new country. The superpowers were bidding and wooing India to help her build its infrastructure.  The British building a steel plant in West Bengal. The Germans in Rourkela. The Russians in Bhilai. I think the fact that the Americans lost out here impacted our relations for ever. 🙂
  4. Due to the protection, Indian industries got the breathing space to build up their strengths. Let us not forget that industrialists were hugely in favour of centralised development planning. I liken this protectionism to affirmative action. There is nothing wrong with this. MITI did it in post war Japan. Americans and the French still subsidize their own producers and lay high tariffs on imports to continue this protection to this day.
  5. Development of the IITs and regional engineering colleges comes from this thinking. Nehru was convinced that ‘science is the spirit of age and the dominating factor of the modern world’. He was convinced that we needed a scientific temper in everything we did with scientists working to improve productivity and alleviating poverty. His views on importance of science were unequivocal. He also knew that we cannot, in the true spirit of self reliance, depend so much on other countries and hence we needed to make the investment. He did face opposition from the agriculture lobby which proposed more investment on agricultural universities but Nehru also saw industrialisation as critical and invested in science and technology institutions.

These are some issues that come to mind immediately. Will add more if and when they occur to me.  Cannot resist a few last words.

Abuse has been heaped on centralised planning over the last 2 decades. Every thing that is wrong with India today has been laid at the doors of centralised planning. I am not saying that the criticism is misplaced. Of course not. It is necessary to be fair though.

  1. Let us not forget that at the time we adopted this USSR was becoming a super-power and they used centralised planning.
  2. Let us also not conveniently forget that most of the private sector growth in the developed countries is based on a great deal of  government intervention, protection and patronage.