India & Socialism - Nehruvian Folly?

Nehru’s Policy Determinants

There is much that Nehru has to answer for and much that he can be faulted for. In hindsight. Today’s India, boosted by 10 years of economic growth, now finds fault with Nehru, but misses the historical context.

3 events to my mind shaped Nehru’s policies significantly. The answer to Nehru’s socialist policy choice lies is in these 3 events - which has not been pointed out, much less understood.

Lees-Mody Pact

October 28th 1933.

Much of India’s (in Raj Krishna’s memorable words) ‘Hindu growth rate’ can be traced back to this date. On that day, the Bombay Mill Owners Association signed the Lees-Mody Pact. This earned all Indian industrialists Nehru’s distrust. The British had succeeded once again in divide-and-rule.

While the whole country was on a boycott of British goods (specially Lancashire), 21 businessmen led by Homi Mody (father of Russi Mody, Piloo Mody) agreed to a system of ‘imperial preferences’ - which furthered India’s impoverishment. Earlier, Homi Mody had warned Gandhiji against the renewing the swaraj movement. Homi Mody had his own political ambitions. After Independence, Nehru did try and make up with Homi Mody. Homi Mody was also included in to India’s Constituent Assembly - even though he had served the British well.

Cut back to 1931. Japan had become the largest buyer of Indian cotton - in spite of imperial preferences. Japanese textiles were increasing market shares in India dramatically. Lancashire was hurting. Duty on Japanese textiles was raised from 31.5% to 75%. Japan stopped buying Indian cotton in retaliation. Indian mills and the Indian farmer paid the price. Cotton prices crashed.

Montagu Norman was already wreaking havoc with his economic policies in India. Demand had collapsed. USA and Europe were being ravaged by the Great Depression. The “money famine” had collapsed demand in India.

Britain agreed to “help”. Customs duty was lowered for British goods only to 20%. Britain agreed to buy Indian stock piled cotton at lower prices. GD Birla said “They have lost their nerve …”. Churchill made life difficult in Britain as this pact did not deliver as much as Churchill wanted and expected. The Indian population was still breathing - though just about.

Ike & Nehru

On March 5, 1953, the Soviet media announced Stalin’s death. The Soviet juggernaut seemed unstoppable. Communism was scoring victories everywhere. China had become communist. Mao emerged truimphant - and Chiang Kai Shaik retreated to Formosa.

In 1954, Eisenhower laid out his infamous ‘domino theory’. It was during Ike’s his presidency that both America and India were on the same side regarding the Anglo-French-Israeli Suez invasion and the Hungarian crackdown by the Soviets. Nehru regarded Eisenhower highly. His overtures to Stalin were met with hesitation.

Tibet went into the Chinese maws. Wars in Vietnam, the Cambodia, insurgency in Burma, the Iron curtain in Eastern Europe, made Eisenhower sound like a prophet. Communism seemed real - and a clear danger. While Nehru was not averse to democratic socialism, authoritarian Communism was anathema.

1956 Elections - Socialist Gains

Eisenhower’s Domino story seemed to resonate in Nehru’s mind after the 1956 election. What shocked and stampeded Nehru was 19.33% of the combined vote won by Leftist parties (CPI and the Praja Socialist Party - a party formed in 1952, whose founder members were Jayaprakash Narayan, Ram Manohar Lohia, JB Kripalani) - versus Nehru’s Congress which got 47.78% of popular vote. This challenge to Nehru within 10 years of Independence from a non-Congress platform made these socialist leaders legends in their own lifetime.

The Communists went ahead and formed the world’s first elected Communist government (the State Government in Kerala). Suddenly, communism looked a lot closer.

Socialist US and Europe

These 2 events and the pre-Independence Lees-Mody pact gave Nehru little choice but to be a Socialist. Possibly, India with its post-colonial grinding poverty of the 1950-70, under a cloud of propaganda, needed state directed freedom.

Between the two world wars, Europe and USA were socialist in all, but name. The Welfare State took care of everything - food stamps, health insurance, unemployment benefits, subsidized housing, old age benefits and pension plans. Everything that a socialist state was supposed to deliver.

Industrial licensing, State directed investments, Research and Development subsidies - to make the national economy deliver ‘better’.

With such a huge international bias towards state intervention, for Nehru to go down the socialistic path was a natural corollary.

The Social Contract

To those who complain about the ’speed’ with which India moves, need to understand that abrupt change would have also broken the ’social contract’ that the Indian Government has built up over the decades. There cannot be a change in the terms of contract before re-negotiation of this social contract. After all India created the value of the spoken word - ‘raghu kul reet sada chali ayee, pran jaye par vachan na jaye’

China & The Asian Tigers

Nehru’s major supposed fault was the leftist (socialist) path that India took in the 1950’s - while the Asian Tigers went down the rightist path. The apparent success of the Asian Tigers made the average (especially the NRI and Westernized types) Indian look at these countries and wonder where India had gone wrong. The 1997 Asian currency crisis brought out the fault lines in the open - and the resilience of the Indian economy became obvious.

The Chinese success is similar story. Much like USSR’s break-up, the Chinese monolith is more fragile than apparent. The Tibetan’s are held together by force - and no one imagines that this holding them together by force can be in perpetuity. The Muslim provinces of Xinjiang which is another one -third of China is which is papered over. But possible the biggest issue is the share of revenues of the Chinese central governments. Apart from the usual suspects of democracy, economic disparities, social upheavals, etc, there are 3 factors, which to my mind are most Chinese analysts miss.

The Chinese Paper Dragon

The Chinese Central Government commands less than 25% of the total tax revenues - and the 75% goes to provinces. This, possibly is why the Chinese Government cannot reduce cigarette usage in China. Most expenditures on health, education, pension, unemployment, housing etc. are borne by the local government - and hence there is patchwork of systems which run across China. Most of executions and imprisonments of bureaucrats (including the Mao’s Cultural Revolution) is to demonstrate central authority. The PLA is the only factor that keeps China together. A Chinese Lech Walesa or a Nelson Mandela could unwind China very quickly.

Significantly, the Chinese diaspora and Western MNCs are biggest investors in China - and also the main beneficiaries. This currently keeps resentments of the local Chinese under control - as the neighbour is not getting much richer. But at one stage the domestic Chinese will want to greater say and control over the Chinese economy. He may not be happy with just a well paying job and abundant, low quality goods.

India vs China

On these three counts India scores significantly better than China. India’s problems with Kashmir are an external creation - as is the North East problem, to a degree. India’s significant issue (probably temporary) is the Naxalite problem. India’s central Government has greater control and share over total revenues - than the Chinese. India’s recent economic and political successes are entireley home bred - with the exception of remittances from the expat workers in the Middle East.