Review of India’s Economy from Nehru to Modi — A Brief History: Good policy, bad policy

In managing the economy, India cannot afford to be a slave to the ideas of rich countries — it has to think for itself

Pulapre Balakrishnan has written a highly readable and insightful take on the story of India’s growth and development since independence from British colonial rule. Though this story has been told many times, in  India’s Economy from Nehru to Modi: A Brief History, Balakrishnan brings a coherence and a freshness to its telling. The book manages to convey relatively complex economic ideas in accessible language and brings in data to substantiate all the arguments.

He brings many years of experience in closely analysing macroeconomic trends to his version of India’s post-Independence economic history. The history is divided into four parts: the Nehruvian period, the period from the mid-1960s to the late 1980s (which he calls the “watershed years”), the early post-reforms period and the most recent period covering the Modi years. But the book is certainly not merely a chronicling of historical facts on India’s economy. A macroeconomic framework holds the account together and there are many theoretical insights.

A particularly refreshing aspect of the book is that it tries to stay away from well-worn ideological battles that have been waged between what the economist Joseph Schumpeter called “pre-analytic visions” — the ideological apparatus that shapes our thinking before we embark on any empirical or theoretical analysis. While it is impossible to break completely free of it, good scholarship lies in being self-reflexive about one’s own pre-analytic vision. The author of the present volume complains about the lack of this quality among Indian economists, observing caustically that “an ideology-based predilection for how the economy works has been a constant among India’s economists, lowering their efficacy in finding solutions”.

The challenge for policy-makers in India is how to be creative about our own problems given our strengths, and to not be, in Balakrishnan’s words, “derivative” or a slave to fashions coming from the rich countries (such as the infamous fiscal deficit target of 3% of GDP). This requires not only a grounding in Indian economic reality, but also the courage to think independently. The present volume is a great example of the latter, where both supply-side and demand-side arguments are brought in as necessary, and where care is taken not to demonise either the private sector or the public sector, but instead to think about the role of each.

For example, when discussing the role of the Green Revolution in getting India out of the crisis of the mid-1960s, Balakrishnan alludes to the importance of taking a demand-side perspective. He notes that the growth of agriculture underpinned the growth of the entire economy. Though prices of agricultural goods did not decline relative to those of non-agricultural goods, there was still a growth-boosting effect that operated through a demand channel by raising farmers’ incomes, enabling them to increase their consumption and investment spending.

Balakrishnan’s emphasis on the demand-side also leads him to bring our attention to an important connection between the distribution of income and jobless growth. Drawing on work on inequality in India by Thomas Piketty and colleagues, he notes that the rich are more likely to spend on high-end services than basic manufactured goods, while it is the latter whose production creates jobs in higher quantities. Thus an increase in inequality can reduce the demand for manufactured goods thereby reducing job creation.

For those who are interested in the performance of the economy in the Modi years, the penultimate chapter (‘Momentum Lost’) provides an account of why the economy has faltered and what the connections are to policies of the UPA years.