The Road Not Taken: Rajaji’s Blueprint vs. Nehru’s Socialism

Authored by Anurag Chauhan, one of the Co-founders

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The article aims to discuss how C. Rajagopalachari’s liberal blueprint for economic development suited more for the country than the socialist policies of Nehru and Indira Gandhi between 1950-1980. Both Nehru-Indira Gandhi led governments laid emphasis on state controlled economic model with major features like Central Planning, Bank Nationalisation, Industrial Control through pro-socialist laws and regulations. C Rajagopalachari and his party which he formed later on, Swatantra Party mandated free economy, liberal economic model with less or minimal government intervention. We had an economic growth of 3.5 percent from 1950-1980 by following the Nehru-Indira Economic Model. Had India followed the path of Swatantra Party/C Rajagopalachari, India would have emerged as a nation with faster economic growth, less poverty as well as a prominent economic power like other East Asian Countries. 

Nehru’s and Indira’s Socialist Model

Let’s first discuss about the Nehruvian Socialist Model. Post Independence, the economic policies of Nehru were heavily based on socialism which was inspired by Soviet type of economic planning. The First Five-Year Plan from 1951 to 1956 had prioritized agriculture, but the focus shifted to the heavy industries under the Mahalanobis model by Second Five-Year Plan from 1956 to 1961. The state dominated through public sector enterprises like coal, steel and power. The key industries for the public sector were reserved in the Industrial Policy Resolution of 1956 stifling private enterprise. The License Raj existed at that time which comprised of a web of bureaucratic permits which further affected entrepreneurship as it required businesses to have various approvals for their operation or expansion. Then Indira Gandhi was the Prime Minister from 1966 to 1977 and from 1980 to 1984 who further increased such economic policies. During her tenure, 14 major banks were nationalised in 1969 and in 1980 six more banks were nationalised. These banks were nationalised aimed at giving credit to and help sectors like agriculture and small industries. This further led to inefficiencies as the banks prioritised political directives over their profit. The Monopolies and Restrictive Trade Practices Act, 1969 further capped the growth of private firms, discouraging innovation. In those days, import substitution policies protected the domestic industries however it led to subpar goods and limited competitiveness on global scale. The GDP growth of India averaged merely 3.5% by 1980s which was termed as the “Hindu rate of Growth” which left millions of people into poverty despite the rhetoric of social welfare. 

Rajagopalachari’s Vision for Liberalisation: A Missed Opportunity for India

C. Rajagopalachari was a key figure in the independence movement of India. Also, he was the last Governor-General. He left Congress Party due to its Socialist policies. In 1959, he founded the Swatantra Party which advocated economic freedom as well as minimal state control. Rajaji had criticised the License Raj for affecting the entrepreneurship with red-tapism in bureaucracy. He advocated for the deregulation of private businesses, integration of India into global trade as well as modernisation of agriculture through incentives to market rather than forced land reforms. He proposed an economic model which prioritised industrial growth, global competitiveness and job creation thereby challenging the state-centric Nehruvian Socialist Model. 

The Swatantra Party wanted to dismantle the License Rajwhich Rajaji viewed as a barrier to the private  enterprise. He advocated for market based policies which would promote innovation and employment, taking inspiration from the successful global economies. In agricultural sector, he wanted to promote the incentives for boosting productivity voiding disruptive redistribution. However, the socialist narrative of Congress prioritised equity and hence dominated politics. The Swatantra Party could never secure more than 44 Lok Sabha Seats which reflects the populist leanings of that era. By the 1980s, India faced a balance-of-payments crisis and stagnant growth, proving Rajaji’s warnings correct as the 1991 reforms echoed his ideas.

The Socialist Policies from 1950 to 1990 yielded merely 3.5 % annual GDP. If India would have followed the liberal vision of Rajaji back in 1950s to 1980s, it could have driven an annual growth of 5-7% similar to the successful East Asian Nations. Deregulation would have boosted sectors like textile thereby crating millions of jobs. The openness to the foreign capital/investment would have brought technology as well as competition. Further, the agricultural reforms based on market requirements would have increased yields as well as rural incomes which in turn would have helped to tackle poverty faster. 

In the book How Asia Works, Joe Studwell mentions why economies like Malaysia failed which mirrors the missteps which India took between 1950-1980. The subsidies given by government without “Export Discipline” fostered inefficiency which is similar to India’s protected industries. Thus, the emphasis of Rajaji on export-led growth as well as on liberalised finance could have placed Indian firms as global players similar to what Taiwan achieved. Also, as mentioned by Studwell about redirecting savings to productive sectors which would have avoided rent-seeking traps as seen in Southeast Asia. Therefore, by prioritising growth, the policies of Rajaji could have matched post-1991 reforms, which would have lifted millions of people from poverty thereby aligning India with other East Asian countries which have been economic giants. However, post liberalisation reforms led by Narasimha Rao, then Atal Bihari Vajpayee’s infrastructure push as well as major reforms by current Prime Minister Narendra Modi through initiatives like Make in India, GST, digitalisation, etc. today India is on a right track for economic development.

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The post was originally published at Baiswada Research Centre.