Nehru’s real big mistake: Heavy industry wrongly got priority in 1950s. So even at 75, India isn’t rich

Synopsis: Nehruvian Socialism has been criticized for many of India’s present problems. This article explains the main cause behind that.

Introduction

Nehruvian Socialism has often been criticized for India’s economic failures in the initial decades. Nehru’s push for a progressively larger share of the public sector has been tagged as the main cause of failure. However, it is not correct. Instead, the push for highly capital-intensive heavy industry, at a time of capital scarcity, was the main reason.

What was the conventional approach to industrialisation?

The conventional approach to making the nation self-sufficient would have been to follow the import-substitution industrialisation (ISI) model. This model works in 4 stages, at every stage, a particular type of activity requires protection and promotion:

1. In the first stage, the assembly activities.
2. In the 2^nd stage, components production.
3. Further, in the 3^rd stage, machines, necessary to produce components and assembly activities.
4. Lastly, in the 4^th stage, machines, to produce machines.

What was the approach followed by Nehru?

However, Nehru never saw protection as the means to industrialization or self-sufficiency. Instead, he adopted exactly the opposite sequence that the ISI model recommended. He placed heavy industry consisting of products such as steel and machines at the beginning of the process. Nehru saw the heavy industry as essential for self-sufficiency.

Consequences of Nehru’s approach 

Low availability of capital: Despite reserving available capital for heavy industry, the scale of production in each product line within the heavy industry still remained suboptimal. It was because of the scarcity of capital compared to the requirements of heavy industries.

Light manufacturing activities: Whereas, light manufacturing activities were left for households and small enterprises. Due to low capacity, these activities also remained subject to production at a sub-optimal scale.

Higher Inflation: Furthermore, India faced higher inflation at home than abroad and a fixed exchange rate. This made majority of Indian products uncompetitive compared to foreign countries. Thus, strict import licensing was implemented.

Employment: The heavy industry created few jobs for the unskilled. Simultaneously, the demand for light-industry products and services could not increase at a fast pace due to low household incomes. Thus, the transition of workers from below-subsistence agriculture into industry and services was also very slow.

It led to a very ow reduction in poverty in that time period.

Why the transition has been very slow?

The transition from the socialist era of industrialisation, after 1991 liberalization, was also very slow. It was because the socialist era produced many intellectuals, who carried the legacy on and did not let the old models die off completely. These intellectuals further produced industrialists and politicians as their followers.