Don’t blame Nehru’s Socialism for Air India fate. Read the 1944 Bombay Plan first

Vibhav Mariwala in The Print


Air India’s privatisation is finally underway, albeit, belatedly. Consequently, this has led to conversations around the planned economy, and in turn blamed the Socialist economy for India’s woes. These debates presume that India was forced into planning; this assumption undermines the country’s economic history, and disregards the role that Indian businesses played in shaping economic policy leading up to Independence.

In 1944, during the height of the Bengal famine, and with the seeming inevitability of Independence, J.R.D. Tata and seven other industrialists and executives — G.D. Birla, Purushottam Das Thakurdas, Ardeshir Shroff, Kasturbhai Lalbhai, Ardeshir Dalal, John Matthai, and Lal Shri Ram — came together to write a manifesto on the future of the Indian economy post-Independence. This was known as the Bombay Plan, or more formally called A Plan of Economic Development for India. The authors of the plan helped set up the Reserve Bank of India (RBI), Federation of Indian Chambers of Commerce and Industry (FICCI), supported the Indian National Congress (INC) during the Freedom struggle and even sat on the viceroy’s executive council during WWII.

View on economy

The Bombay Plan aimed to express the authors’ views on the post-Independence economy. It had the following components: a transition from agricultural domination to industrialisation; the allocation of resources through centralised planning, and the division of industries into ‘basic industries’, dominated by the State, and ‘consumer industries’, left to the private sector. From its outset, the plan acknowledged the primacy of the State in organising the economy and providing basic necessities to citizens. Historians such as Medha Kudaisya call the plan “a revolutionary idea” in State planning since it adopted a middle way for the private sector to coexist in a planned economy. On the other hand, Vivek Chibber in Locked in Place, argues that the plan was a way for businesses to entrench their own vested interests. (Vivek Chibber, Locked in Place: State-Building and Late Industrialization in India (Princeton, N.J. ; Princeton University Press, 2006), 86.)

The principle objective of the plan was “to bring about a doubling of the present per capita income within a period of fifteen years from the time the plan comes into operation,” and increase production of power and capital goods. It then went on to define a reasonable living standard, cost of housing, clothing and food to individuals, housing requirements, and the provision of essential infrastructure like sewage treatment, water and electricity. It planned to achieve these aims in three ‘leaps’ spread over five years, analogous to the Five-Year Plans. The table below reflects these priorities.
Graphic by Ramandeep Kaur | ThePrint

The planners argued for a ‘mixed-economy’ model, where the government would take control of ‘basic industries,’ and the private sector would take charge of ‘consumer industries’. Basic industries included transportation, chemicals, power generation, and steel production. More significantly, they argued that nationalisation of basic industries could reduce income disparities and that the government had to prioritise basic industries over consumption to reduce poverty. The planners conclude this section by saying, “for the success of our economic plan that the basic industries, on which ultimately the whole economic development of the country depends, should be developed as rapidly as possible,” emphasising that the government needed to take a leading role in the economy to ensure their provision. This shows that the the business community conceded the centrality of the State in building India’s economy.

The plan was well received, with endorsements from FICCI, RBI Governor C.D. Deshmukh, and the viceroy, who in response to the plan document had established a Department of Planning and Development in 1944 (Tryst with Prosperity). Newspaper editorials in India and abroad supported the plan. The Glasgow Herald commended the planners for thinking about issues such as “public health, population control and education” that “Indian political leaders [could not] be induced to think about, however urgent.” The New York Times reported that “the main political factions in India do not seem to be coming forward with any such practical approaches,” reiterating the view that India’s political elite had not considered policy solutions to India’s problems. However, the plan document was criticised as well for being inaccurate and a vehicle for the elite to entrench their interests over the interests of the poor by K.T. Shah, general secretary of the 1937-38 NPC and Gulzarilal Nanda, future Planning Minister (1951-63)and other economists. Its calculations relied on statistics from 1932, making its assumptions highly outdated and it underestimated the costs of implementing its aims.
 
Influence on economic planning

The document was significant since it reframed debates on State planning — from arguing if the State should dominate the economy, to analysing the extent to which the State should be involved in the economy. Its influence on Indian economic planning is clearly seen in the immediate aftermath of WWII, and in the First and Second Five-Year Plans that prioritised agricultural development and industrial growth, respectively. It also paved the way for India to adopt a third way in structuring its political economy by providing an opportunity to the country to combine aspects of Western capitalism, Soviet planning, and Western Socialism, allowing India to chart its own independent course. To many, the plan was a way for businesses to signal to the INC leadership that it was willing to accept the supremacy of the State in the economy, while acknowledging the role of the private sector in supporting consumption activity.

Insisting that Nehruvian Socialism was the cause for India’s economic ills without acknowledging the political and economic contexts of post-Independence India reflects an incomplete understanding of India’s formative years after independence. The Bombay Plan is an essential document to understanding the events that led to the creation of India’s planned economy, and reiterates the view that planning was not imposed on the country, but was widely debated across the private and public sphere in the years leading up to Independence.

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End to China’s estate market boom could spell trouble for the economy

Housing activity accounts for 29% of GDP, but Evergrande’s debt crisis is sign that things could soon change writes George Magnus in The Guardian

The Kangbashi district of Ordos in Inner Mongolia, famed for being a ‘ghost city’, has since filled up a bit. Photograph: Qilai Shen/Corbis/Getty 




In China today, the buzz is all about how the government there too has stumbled into an energy crisis with widespread power cuts. Yet this and other supply shocks will eventually pass, while the $300bn (£218bn) of debt enveloping China’s second biggest property developer, Evergrande, is of greater significance. It suggests China’s long housing boom is over, and bodes badly for the increasingly troubled economy, with implications for the rest of the world too.

China’s real estate market has been called the most important sector in the world economy. Valued at about $55tn, it is now twice the size of its US equivalent, and four times larger than China’s GDP. Taking into account construction and other property-related goods and services, annual housing activity accounts for about 29% of China’s GDP, far above the 10%-20% typical of most developed nations.

Real estate busts can be as painful as the preceding booms were exuberant. China, however, has only known growth as its previous housing welfare system was transformed from the 1990s onwards. A protracted housing downturn is now poised to add to the Chinese economy’s other mounting headwinds, with significant and unpredictable implications.

The signs were there 10 years ago, when the spotlight fell on China’s “ghost cities”. One of the most publicised was the Kangbashi district of the city of Ordos in Inner Mongolia, famed for its gleaming but empty office blocks and apartment towers, barren boulevards, deserted highways, and vacant shops and plazas. However, ghost cities turned out to be more bad investment than overinvestment. Ordos and similar cities remained eyesores for a while but have since filled up a bit.

Aside from ghost cities, the property sector prospered in the 2000s and 2010s because Beijing not only appeared to want a maturing real-estate market, but promoted it hard to underpin growth and the formation of a propertied, urban middle class. Developers had no qualms about borrowing heavily, because credit was freely available and they felt the government would always support the market if needed.

By the time the pandemic struck in 2020, it had certainly become a case of overinvestment. About a fifth of China’s housing units now lie vacant, often because they are too expensive for the population, 40% of whom earn barely 1,000 yuan (£115) a month. For second and third homes, the vacancy rates are higher still.

Meanwhile, since 2017, Beijing’s attitude towards rampant credit creation and the financialisation of housing – treating it as a commodity rather than as somewhere to live – has undergone a sea change. Xi Jinping told that year’s Communist party congress that “houses are built to be inhabited, not for speculation”, and that action would be taken to curb demand, overbuilding and rising home prices. Tighter mortgage terms and restrictions on multiple-home ownership followed.

Last year, regulators tightened regulations on developers designed to curb debt, preserve cash, and limit overbuilding. The government is sensitive to high housing costs, which are deemed to be excessive and a disincentive to larger family size. The crackdown chimes with its recent “common prosperity” drive, ostensibly designed to address rampant inequality, which has also seen a regulatory clampdown on big tech firms such as Alibaba, Didi and Tencent.

Those changes have exposed the financial fragility of developers and moved the precarious housing bubble centre stage. Even if, as seems likely, the Chinese authorities can keep the fallout from Evergrande from becoming a Lehman-type shock, a downturn in the property and construction sector could well aggravate China’s looming economic slowdown. Some expect China’s growth rate to slide to 1%-2%, for a while at least.

Banks and property companies are likely to restrict building activity and financing as they restructure broken balance sheets and Chinese households will be wary about taking on new mortgages. Household debt has risen from about $2tn in 2010 to more than $10tn last year, with the ratio of debt to disposable income surging to about 130%, significantly higher than in the US. With incomes rising only slowly, especially in the gig or informal economy, which now accounts for about three-fifths of employment, households are likely to remain on the back foot.

Demographics, especially the low 1.3 fertility rate, are also working against the economy. China’s working age and main home buying age groups are declining. The number of prime-age, first-time homebuyers – those in the 25-39 bracket – is set to fall by 25% in the next 20 years from 327 million to 247 million. The urbanisation rate, moreover, which doubled to 64% between 1996 and 2020, is bound to slow. There will be fewer marriages, fewer children and lower household formation.

In the last 10 to 15 years, local and provincial governments could always be relied upon to boost real estate and infrastructure spending to get the economy out of a hole if needed. They are already heavily in debt, however, and under pressure to find resources to support Xi’s “common prosperity” programme.

It is harder to predict what will happen to home prices in China. If they do, for the first time, decline far or over any length of time, expect to see much bigger problems emerge for banks and for consumers as negative wealth effects spread among the urban population.

We do not know how well China will manage to wean itself off real estate construction and services, but it will not be easy or painless. There will be important consequences for China’s economy, possibly its leadership, and the way China projects its influence abroad. Stay tuned.

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