India (22 page)

A year after this saga unravelled, Europe went to war. Many of Keynes’s generation died; five of the students at his college were killed before the end of 1914. After the Versailles treaty, he wrote a furious denunciation of the level of reparations Germany would be obliged to pay, believing it would cripple the German economy and breed resentment. Unfortunately, he was right: hyperinflation and the rise of Hitler came next.
The General Theory of Employment, Interest and Money
was written out of the depression that followed the Wall Street Crash of 1929. Towards the close of the Second World War, Keynes’s earlier proposals for a new monetary system came to fruition in the snows of Bretton Woods. With Britain almost bankrupt and the United States ascendant, Keynes’s proposal of an international currency unit was adjusted so that the U.S. dollar became the new global reserve currency. It was not until 2009, in a very different world economy, that his idea was revived by Zhou Xiaochuan, the governor of China’s central bank, who suggested the dollar should be dislodged in favour of a new IMF-backed currency. (China disliked having to hold its massive foreign exchange reserves in U.S. dollars.) Creating a fresh global monetary system needed “extraordinary political vision and courage,” said Zhou, and he acknowledged his debt to John Maynard Keynes.
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After Bretton Woods, Keynes prepared a document for Britain’s war cabinet saying that the UK had debts of £3bn which were principally the result of cash expenditure in Africa, the Middle East and India. Unless spending in these colonies was brought “under drastic control at an early date … our ability to pursue an independent financial policy in the early post-war years will be fatally impaired.”
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Keynes was in poor health now, having passed from the Edwardian era to two world wars. He was nursed by his wife, Lydia, on a diet of sour oranges, coffee and raw cabbage.
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His note to the war cabinet was not taken up, and by the time of Indian independence, two years later, he was dead.

When the British East India Company had started out in 1600, it had £35,602 in bullion and goods, stuffed into just four ships which were setting out for the unknown limits of the Indian Ocean.
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Now, at the close of business nearly 350 years later, Britain was indebted in sterling to India to the tune of £1.3bn, through circumstances nobody had anticipated. In 1939 the
debt had been running in the opposite direction, as the Indian government paid for the machinery of empire controlled in London. When war broke out, Britain found itself having to pay troops and convey them across Asia, as well as to build airfields, railways and military installations, ratcheting up debts to the administration in New Delhi in the process.
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When supplies of small arms or clothing were sent from India to Singapore, or Indian troops were sent to fight in Egypt, London incurred a liability to the Indian government. By the end of the war, this debt had developed a life of its own, and the money was a substantial potential asset for the newly independent nation.

In 1947, London and New Delhi discussed what to do about these sterling balances. When the prime minister, Clement Attlee, suggested they might be forgiven, Sardar Vallabhbhai Patel quickly put him right: repayment of the debt to India was “Britain’s sacred obligation.”
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The difficulty was that the British empire had total gold and dollar reserves of £500m, and Britain’s external liabilities were nearly eleven times that amount.
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So even if India wanted all its money, the money was not there to get. With remarkable goodwill in the circumstances (the British delegation was led by Jeremy Raisman, who had been India’s wartime finance minister and was well regarded on both sides) agreement was reached. Amounts would be released gradually by Britain to fund Indian imports, and money was put aside to buy out British assets in India and pay pension annuities to retired civil servants. The debt would also be shrunk through the devaluation of sterling. The British government agreed to pay India a tapering sum each year, culminating in a theoretical final transfer of £72 in the 2007–8 tax year.
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Although it was not the full shilling, this gave India a useful advantage in the years immediately following independence and partition, an asset which would need to be carefully husbanded. By 1958, when Jawaharlal Nehru’s government implemented its second Five Year Plan to create an industrial economy, the money had all been used up. Without this surplus, the gap had from now on to be filled by deficit financing and foreign aid.
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In the words of the governor of the Reserve Bank of India, C. D. Deshmukh, the new government had run through the sterling balances “as if there was no tomorrow.”
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Why did the Indian economy go wrong in the decades after independence? Whose idea was it? Arriving at Cambridge in 1907, Nehru imbibed the liberal atmosphere in the lull before the First World War. He studied natural
sciences, and attended lectures given by Keynes, Bertrand Russell and other figures of the day. He read H. G. Wells and G. B. Shaw, and considered Fabian socialist theories, as well as self-consciously modern ideas about human psychology and sexuality. He travelled in different parts of Europe and observed the rise of Irish republicanism. Much of his energy was devoted to behaving like any other well-off student: reading, thinking, meeting people from different countries, visiting the pantomime at Drury Lane, going for walks, going to parties, behaving in a mildly dissolute way, drinking champagne and getting into debt repeatedly, to the anger of his father Motilal. He was restless, and it was not until the 1920s back in India that Jawaharlal Nehru found real direction, realizing the battle for his country’s freedom would occupy his life. It was not a unique trajectory: after the First World War, both Chou Enlai and Ho Chi Minh studied in Europe and honed a more extreme form of revolutionary thinking.

Nehru’s economic ideas, such as they were, chimed with the progressive thinking of the time, particularly after the economic slump of the 1930s. Although he was not a communist, a visit to Soviet Russia in 1927 had left him impressed. He did not believe in Mohandas Gandhi’s idea of village industry and a spinning wheel in every hut; he wanted new, fast, scientific progress. In retrospect, it is extraordinary how optimistic he was about the prospects for immediate advance in
The Discovery of India
, as if putting words on paper would make them possible. He described the discussions of the National Planning Committee, set up by Congress in 1938. Its aim was:

These were big numbers, and a long way from what transpired. It was a case, again, of ambitious people formulating plans for other people that were not based on the reality of how humans work. Nehru’s thinking was outsourced in part to Subhas Chandra Bose, who as Congress president at this time helped to push through proposals for planning and industrialization against opposition from Gandhi.
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Underlying Nehru’s philosophy was a widely accepted belief that the economy could be made to grow by applying remote, organized, rational precepts. There was an assumption, based on the experiences of other countries, that India would need subsidies and state assistance during the early stages of industrialization. Even after the reverses of the late 1950s, Nehru did not change his economic ideas in any substantial way. He was an example of the dictum laid down by Keynes at the end of the
General Theory
:

His economic thinking was a hardened version of the social democratic outlook of Clement Attlee’s postwar Labour government, a Keynsian idea of a mixed economy taken to extremes that Keynes would have found fiscally impossible. Even as the American economy boomed in the postwar years, Nehru’s relationship with the United States would be scratchy. India’s wartime links to the Allied economy, which had been important to military success in the Middle East and Burma, were largely severed.

The fashion for socialism and central planning had an intellectual logic which attracted many of India’s brightest minds in the middle of the twentieth century. The theory was that since the nation was rich in land, resources and people but lacking in capital, it would not be possible to invest in the roads, power and steel needed for industrial development unless the government put up the money. It would be dangerous to risk being exploited or swallowed up by predatory foreign companies, in some new form of imperialism. The Indian economy during the last half-century of colonial rule had been in a stagnant condition, with annual per capita GDP flatlining at 0.1 percent.
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Nehru was impressed by a fresh orthodoxy which appeared to be endorsed by some of the world’s finest economic planners. The concept developed into the quasi-science of development economics, which was highly suspicious of the role of the market. Native entrepreneurs in newly
decolonized countries were not thought likely to provide a serious engine for growth. Nehru was by no means the first world leader to have trouble with the financials—his British contemporary Alec Douglas Home had to use matchsticks to understand economic problems—and his idealistic outlook was linked to the rejection of the benefits of a financially secure background. It also came from the potent Gandhian ethic of abandoning possessions, which was contrary to the Indian tradition of saving (not forgetting Sarojini Naidu’s quip about the Mahatma: “If only that old man knew how much it costs us to keep him in poverty”).
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As a young radical, Nehru told his father to throw himself into India’s freedom movement and give away his capital, but his father responded in a letter in 1921: “You cannot have it both ways—insist on my having no money and yet expect me to pay you money.”
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It was this approach, wanting to spend money but not to make it, that was to cause the new nation many problems.

Nehru, though, was not alone. With the exception of the Tamil politician C. Rajagopalachari, the first Indian governor general of India, who vigorously opposed what he called the “permit/licence raj,” and the late Sardar Patel, who thought the idea of central planning unproven and unrealistic, his views followed the consensus. He did not want a communist system, nor did he wish to replicate the social injustices of nineteenth-century industrial capitalism. Few people by this time were taking Gandhi’s idea of village republics seriously; indeed, Dr. Ambedkar thought this economic philosophy “with its call of back to nature, means back to nakedness, back to squalor, back to poverty and back to ignorance for the vast mass of the people.”
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Pushed from the left during his premiership, Nehru may even have felt he was taking a middle path.

If a single document catches this heady, ambitious vision of how the subcontinent could be made a better place, it is
A Plan of Economic Development for India
, published in Bombay in 1944. Its authors were not firebrands or revolutionaries: rather, they were staid and successful businessmen like J. R. D. Tata, Sir Shri Ram, G. D. Birla and Sir Purshotamdas Thakurdas, as well as the respected economist John Matthai, who became finance minister after independence. Although most were mill owners or industrialists who had made outstanding amounts of money by the usual capitalist methods, they thought the new India would need to be constructed along different lines. From a distance, their plan seems breathtaking in its idealism and detachment, the work of people who were philanthropic but unrealistic. Its origins were more prosaic. India’s business leaders realized that
when a Congress-led government took power, some form of disciplinary economic planning was inevitable. The “Bombay Plan” was in part a tactical move to outflank the hard left. “The inevitability of a change in the direction of a socialist economy must now be recognized,” Matthai wrote in an internal minute to his fellow “planners,” when much of the country was destabilized by the Quit India movement, “and leaders of industry would well be advised to take this into account and be prepared to make such adjustments as may meet all reasonable demands before the socialist movement assumes the form of a full-fledged revolution.” His hope was that industrialists could take up and endorse the “sound and feasible” elements of socialist thinking.
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The Bombay Plan was a short pamphlet, clearly written. The authors aimed to double per capita income over fifteen years, increase agricultural output and raise industrial output by five times. It was an ambitious idea, but not impossible given the underdeveloped state of Indian industry. Like Nehru, they hoped not to have to rely on foreign countries for plant and machinery. Moving on to social ambitions, the proposal started to become outlandish. Since people in Germany and Denmark used around thirty yards of cotton each year, Indians must do the same. Then there was new scientific research showing that everybody needed 3,000 cubic feet of fresh air per hour. This worked out at around 100 square feet of floor space per person, meaning the size of the average house would need to expand to 500 square feet. As residents of Bombay had around 28 square feet each (today the average figure is around 31 square feet—and bear in mind that some houses on Malabar Hill are very large indeed), this would involve extensive residential rebuilding.
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Their apparent dream grew. The quantum of personnel required for “large scale economic planning” could be gleaned from the Soviet Union: the Russians in 1939 had needed 582,000 “managers of state and collective farms” and 450,000 “heads of administration.” The process could only go forward with public agreement and goodwill. “In the execution of a comprehensive plan of economic development, it is essential that we should be able to count on the willing cooperation of the people. This will be possible only if the masses are able to read and write and are in a position to understand for themselves the broad implications of the developments embodied in the plan.”