India’s Economic Road

An Indian intellectual asks whether U.S. aid can ever be effective in a planned economy.

Oxford, England—United States opinion about India results almost entirely from actions by the plan­ners and collectivists who direct that country’s series of economic five year plans.

As a consequence, some influen­tial members of Congress and publicists have committed them­selves to the proposition that Uncle Sam should countersign any blank check for foreign aid which Prime Minister Nehru may pre­sent.

Insofar as there is opposition to this “back up India at any cost” psychology, it has been mainly rooted in two considerations: dis­taste for India’s strident neutral­ism, to which a sometime repre­sentative in the United Nations, Mr. Krishna Menon, has often given a strong anti-Western twist; and consideration for the heavily burdened American tax­payer. What may be the more im­portant question, whether India is on the right economic road, whether there can be reasonable confidence that American and other foreign aid will be effec­tively used, has seldom, if ever, been raised.

But it was raised very emphat­ically, and by an Indian of proved competence as an economist and financial expert, Professor B. R. Shenoy, at the meeting of the Mont Pelerin Society in Oxford.

The Mont Pelerin Society is a group of economists and political scientists, committed to the belief that economic freedom is an inte­gral part of political and personal freedom and that economic free­dom means maintenance of the free market, rejection of state in­tervention in economic matters, and reliance on individual initia­tive as the principal moving force in economic life. Its membership is overwhelmingly West European and North American, with a small fringe of Latin American members.

A Revelation

But by general agreement Pro­fessor Shenoy’s speech was the highlight of the Oxford meeting, if only because it was a revela­tion, even to an audience consider­ably above average in familiarity with world political and economic conditions. Professor Shenoy has served as an Indian representative with the World Bank and the Monetary Fund, is director of the school of social sciences in Gujerat University at Ahmedabad, and is a member, an increasingly dissent­ing member, of the panel of econo­mists attached to the Planning Commission of the government of India.

So Professor Shenoy’s analysis of the results of India‘s planned economy was an inside job of a man with thorough knowledge of the subject and it was devastating in its impact. India is now in the fourth year of its second Five Year Plan. The main counts in Shenoy’s indictment may be sum­marized as follows.

Agriculture, basic source of livelihood for the overwhelming majority of the people, has been ruthlessly sacrificed to the build­ing of costly industrial white ele­phants, including several steel plants, the need for which cannot be proved. Investment in these “white elephants” has been pushed at a rate quite out of proportion to the real savings of the country. The result has been an inflation­ary rise in the price level, allevi­ated but not cured by foreign aid and by reducing the gold and for­eign exchange backing of the cur­rency to a dangerously low level, with a prospect of complete ex­haustion if the present course is followed for another year.

News reports of firing on hun­gry mobs in Calcutta lent topical significance to Professor Shenoy’s criticism of a series of state inter­ventionist measures in agricul­ture, interference with interest rates, land transfers, prices and marketing of food grains, pres­sure for collective farming. The effect of these interventions, how­ever well meant, has been to affect adversely the amount of credit available in agriculture, to deter larger landowners from improv­ing their land, and to cause with­holding of food grains from the market.

Gold Smuggling

A rigorous system of exchange and import controls has led to equally disastrous consequences, slowing down industrial output, leading to a widening gap between the internal and external prices of import goods and gold, promoting gold smuggling. The state enter­prises which are heavily favored against private firms in new investment generally run at a loss or at rates of profit considerably lower than private firms.

Professor Shenoy sees two al­ternatives for India‘s economy: all-out planning along communist lines or the adoption of policies consistent with a free market economy. He received a hearty round of applause when he de­clared: “What we need from the West is not dollar aid. It is the philosophy of the Mont Pelerin Society.”

Even more surprising, perhaps, than Professor Shenoy’s exposure of the consequences of high pow­ered planning (which could be paralleled in the experience of Turkey and other underdeveloped countries which have tried to do too much too fast) is the fact that they are so little known in the West. Perhaps we have a better idea of the Soviet than of the In­dian economy.

Professor Shenoy is considering the publication of a book in Amer­ica. Certainly his views should be made widely available in the United States—not least to the members of those congressional committees which deal with for­eign aid appropriations.

His speech, with its hard-hit­ting facts and figures, conveyed the impression that government to-government foreign aid creates for the givers the awkward dilemma of underwriting the shopping list of foreign bureau­crats who may or may not know what they are doing, or of being denounced as imperialist Shylocks if there is any attempt to criticize or to prune the extravagantly planned economy ventures.

From The Wall Street Journal, September 18, 1959.

***

Productive Investment

To double the standard of living in a quarter-century, with all that that means in the final abolition of want and squalor, is not a fantasy. It is a practical possibility—but only with the aid of a massive, unobstructed, and enterprising investment of capital, not in the places where it will “do most social good,” but in the places where it will be most productive.

The Economist (London), October 16, 1964