Note: This article is being republished on the occasion of Nehru’s 52nd death anniversary.
Sadly, in contemporary times, Jawaharlal Nehru, India’s first and tallest prime minister, is often misunderstood and misrepresented. Prime Minister Narendra Modi’s tirade against Nehru in Parliament recently shows this misunderstanding.
Often, Nehru is blamed for many ills in today’s India. Efforts are being made to damage his legacy. One area where Nehru’s legacy is often misunderstood is economic policy. He is often portrayed as a particularly dogmatic socialist leader who was against business and foreign investment.
The rich work of academics and economists like Michael Kidron, Nagesh Kumar, Arvind Panagariya among other scholars gives us a glimpse of Nehru’s approach towards foreign investment – an important part of economic policy.
Receptive attitude towards foreign investment
Contrary to popular perception, the Nehru government had a relatively liberal and open foreign investment regime. In early 1947, foreign companies were concerned about the fate of their investment in independent India as they feared nationalisation (i.e. the state forcefully taking ownership of foreign companies). Nehru was fully aware of these concerns. On December 15, 1947, Nehru told a chamber of commerce in Calcutta that his government would welcome foreign capital and technical assistance. Later, on April 6, 1949, Nehru himself articulated the foreign investment policy statement. In this statement, he noted that his government would encourage new foreign capital on mutually advantageous terms.
He promised ‘national treatment’ to foreign investors (i.e. no discrimination between domestic and foreign companies) and assured foreign investors of no restrictions on remittances of profits and dividends. Further, the statement noted that though majority ownership by Indians was preferred, foreign capital having control over a company for a limited period will not be objected if in national interest.
Nehru’s vision on foreign investment was re-articulated by his finance minister, John Mathai, who in his 1950-51 budget speech said that “foreign capital is necessary in this country, not merely for the purpose of supplementing our own resources, but for the purpose of instilling a spirit of confidence among our own investors”. Finance minister Mathai then went on to state that it is necessary for India to consider providing reasonable conditions of security and fair treatment to foreign investors who are willing to take the risk of investing their money in India. This not just showed a friendly attitude towards foreign investment but also underlined the importance of providing security and protection to foreign investment in India as a means to attract investors to India.
The credit for this relatively liberal stand on foreign investment goes entirely to Nehru because the 1948 Industrial Policy Resolution (IPR) had adopted a hostile tone to foreign investment. The resolution said that a law be enacted to scrutinise every single foreign investment project before giving approval and that, as a rule, the major interest in ownership and effective control should always be with Indians. This hostility towards foreign investment was shared by the Indian National Congress and also by the left-wing parties. In fact, even Indian private industry was not pro-foreign investment. As policy analyst Sanjaya Baru has observed, the ‘Bombay Plan’ prepared by leading Indian industrialists like JRD Tata and GD Birla, in 1945, asked the government to step in and fill the investment gap rather than allow foreign direct investment. The ‘Bombay plan’ wanted the Indian government to give preference to external loans and foreign aid instead of foreign investment.
But Nehru was pragmatic enough to understand that foreign investment was critical for India to plug the savings gap and to bring in valuable foreign exchange. Thus, while announcing the foreign investment policy statement on April 6, 1949, Nehru, guided by national interest and not any ideology or dogma, significantly diluted the 1948 IPR.
In the second five-year plan, in 1957, foreign investment was further liberalised by the government, giving a host of concessions and incentives to foreign investors. At the beginning of the third five-year plan in 1961, as Nagesh Kumar has written, the Indian government issued a list of industries where foreign investment was welcome. This included some industries that were reserved for the public sector like drugs, fertilisers, synthetic rubber and aluminium.
In 1961, according to Kidron’s estimates, at least two-fifths of the organised large-scale sector and one-fourth of the entire modern sector in India was under foreign investment.
Against nationalisations of foreign investments
An integral aspect of Nehru’s approach towards foreign investment was the absence of large-scale, ideology-driven nationalisation of foreign companies or foreign stock. On February 17, 1948, Nehru, in a speech to the Constituent Assembly, made a case against nationalisation by saying that “if we squander our resources in merely acquiring for the state existing industries….for the moment we may have no other resources left, and we would have spoiled the field for private enterprise too. So, it is far better for the state to concentrate on certain specific, vital, new industries, than go about nationalising many of the old ones”.
Nehru articulated the same view on nationalisation in his letter of March 3, 1953 to all the chief ministers. He also assured foreign investors that if their investments were nationalised, fair and equitable compensation would be given. Indeed, the Indian Constitution as adopted in 1950 recognised the right to property as a fundamental right.
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Padma Desai and Jagdish Bhagwati, in a paper written in 1975, argue that since Nehru’s approach towards socialism was Fabian-type gradualism, “nationalizations of existing capital stock were de facto ruled out”. Nehru’s stand on nationalisation was in complete contrast to what had happened in countries like Soviet Russia where foreign investment was expropriated by the state without compensation or restitution in violation of international law. This showed that while Nehru was inspired by the Soviet Union economic model, he was also fully aware of the excesses of communist regimes. He ensured that India didn’t make the same mistakes notwithstanding the popular sentiment against foreign investment prevalent at that time in a newly independent India. It’s remarkable that the prime minister of a country that had just got independence from 200 years of colonial plunder and loot by the British could show such intellectual and political courage.
Thus, barring some instances of nationalisation, guided by national interest, such as nationalisation of some foreign oil companies, in 1953-55; and nationalisation of the imperial bank that had 10% British ownership, foreign investment was not nationalised in Nehru’s India. Even where nationalisation took place, compensation was paid.
Nehru and investment agreements
Another less known fact about Nehru’s approach to foreign investment is that in 1957 and in 1964, as P S Rao – one of India’s leading international lawyers – reports, India entered into a limited investment protection agreement with the US and West Germany, respectively. Rao writes that India’s agreement with the US covered losses to American investors due to non-convertibility of currency, profits and capital-repatriation; and losses suffered due to expropriation or due to damage of physical assets caused by war, revolution or insurrection. Similarly, the agreement with West Germany also covered losses caused due to expropriation and non-convertibility of Indian rupees into West Germany currency. While these agreements were not full-fledged bilateral investment treaties (BITs), they did contain some elements of investment protection such as protection from unlawful expropriation and full protection and security, which are now widely recognised as an integral part of any foreign investment protection treaty.
None of this is to suggest that Nehru’s economic model was flawless. Indeed his five-year plans attracted criticism. T N Srinivasan, one of India’s leading economists based at Yale University, critiqued the excessive focus on capital and heavy industry. He argued that “had a greater share of investment been devoted to labour-intensive light manufacturing industries producing consumer goods to supply domestic and foreign markets, growth would have accelerated and reduced poverty much more than what was achieved during 1950-80.” Similarly, Milton Friedman, the great American economist who championed free-markets, critiqued the Indian investment strategy for focusing on two extremes i.e. capital and heavy industry, on one hand and handicrafts on the other hand at the cost of small and moderate size industry.
M R Masani and C Rajagopalachari (who founded the Swatantra Party –the only intellectually rigorous experiment in Centre-right politics in India, which failed) also critiqued Nehru’s economic policies for creating a ‘license-permit-quota raj’. Notwithstanding these weaknesses, the Indian economy grew at a healthy rate of 4.1% per annum from 1951 to 1965.
Why is Nehru’s legacy misunderstood?
For several reasons but, as historian Ramachandra Guha has consistently argued, a good part of this blame should be shared by Nehru’s heirs and his political descendants especially Nehru’s daughter, Indira Gandhi. It’s Indira Gandhi who gave Nehruvian socialism a bad name. From 1965 to 1980, India witnessed what Arvind Panagariya so appropriately describes as a phase where socialism struck with vengeance. Contrary to Nehru, Indira Gandhi, for political reasons, went on a nationalising spree. She nationalised banks in 1969, and from 1972-74, she nationalised a number of firms such as coal mines, copper, aluminium, general insurance and textiles. She imposed various layers of regulations on businesses by enacting draconian laws like the Monopolies and Restrictive Trade Practices (MRTP) Act in 1969 and the Foreign Exchange Regulation Act (FERA) in 1973. FERA, in particular, turned out to be disastrous for foreign companies leading to the exit of Coca-Colas and IBMs from India. In short, as senior journalist Inder Malhotra has argued, Indira Gandhi stretched the ‘license-permit-quota’ raj for too long, whereas after a stable and solid start from 1950-65, the time was ripe for India to move towards an outward-looking economic model based on export promotion as South East Asian countries had started doing. No wonder, the Indian economic growth rate fell to a miserable 2.9% per annum in 1966-80.
It finally took a massive balance-of-payments crisis in 1990-91, the collapse of communism in Soviet Russia and Eastern Europe, rise of China and spectacular success of South East Asian economies by using market-forces, for India to realise that it could no longer postpone its tryst with free markets. Finally, under the leadership of P V Narasimha Rao and Manmohan Singh, in 1991, India started its bold experimentation with free-markets. Since then, it has been a story of one step forward, two steps back.
In sum, to be fair to Nehru, he was a bold, visionary and a pragmatic leader guided by national interest and not merely by some dogma or ideology. The study of the foreign investment regime under his leadership shows this. True, he made mistakes like all leaders do. But he deserves to be judged fairly keeping in mind the context in which he operated. For this to happen, as Guha rightly says, Nehru needs to be rescued from his political descendants.
Prabhash Ranjan is an assistant professor of law at the South Asian University and a visiting scholar at Brookings India. Views are personal.