Independent India’s first economic crisis was a challenge for Nehru (and strangely familiar today)

The efforts to rapidly industrialise India in the Second Five-Year Plan did not come without a price. The proportion of total amount allocated to agriculture and irrigation in the Plan had to be reduced from 26.3 to 14 per cent in the Second Plan. Even in absolute terms, the outlay for agriculture witnessed only a marginal increase while that for irrigation fell!

This was despite the fact that the planners had estimated that India’s food grain requirement would double over a ten-year period. However, given the extent of outlays on agricultural production programmes, the Planning Commission itself estimated that total production could only expand by 15 per cent during the Five-Year Plan period. Such a discrepancy arose due to different ideas of the pace of agrarian reform between the planners and the state leadership.

The Planning Commission was of the view that agricultural production could be substantially improved, given the investment outlays, merely through an efficient use of resources.

In fact, VT Krishnamachari, the deputy chairman of the Planning Commission, even circulated a note in a meeting of the National Development Council claiming that, given the allocation in the Second Plan, agricultural production could be increased by 40 per cent. AP Jain, the Union Food and Agriculture Minister at the time, expressed strong disagreement with Krishnamachari’s figures, claiming that, given the Plan allocation, the maximum possible increase could only be a little over 15 per cent.

The Commission’s stance was strengthened by reports from China that showed that, as a result of agrarian reorganisation and mobilisation of idle manpower, the country would be able to boost agricultural output by 35 to 40 per cent over five years. Nehru picked up on the contrast between the planned outcomes of India and China: “Our original estimate was for a 15 per cent increase in agricultural production during the Second Plan. This manifestly is too little. The Chinese estimate is between 35 and 40 per cent in five years, and they start with a higher yield per acre. There is absolutely no reason why, if we are serious enough and work hard, we cannot equal the Chinese rate of progress in this matter.”

To study China’s methods, both the Planning Commission and the food ministry sent delegations to the country in July 1956.

Both delegations did come to similar conclusions that the mere establishment of cooperatives across China had led to vast improvements in agricultural output through utilization of surplus labour power.

By December 1956, the National Development Council gave way and voted to adopt higher targets of foodgrain production without any increase in investment outlays, though not as high as the planners would have wanted. Later, the NDC also voted to establish 2,000 cooperative farms during the Plan period. However, reality proved to be a difficult taskmaster for the Planning Commission.

The summer of 1957 proved to be a particularly difficult year for the Indian agricultural sector. The monsoons failed to make an impact, affecting production and escalating prices. The government had already imported 2 million tonnes of foodgrains in 1956-57, which was one-third of the total amount allowed for the five-year period. In the following year, it had to import another 4 million.

These food imports also included the first PL480 agreement2 with the US to import rice, wheat and cotton over a three-year period. The agreement with India was not reached easily as critics in the US vociferously attacked the government’s efforts to assist non-aligned nations. President Eisenhower, however, argued that a neutral stance by a nation does not necessarily imply “a position between right and wrong”. Instead, in most cases, it simply signifies an aversion to military alliances.

However, despite the import of foodgrains by the Indian government, the food minister, AP Jain, admitted in the Lok Sabha that, “we could not make up the total deficit [and] prices did go up to a level which was quite unprecedented”. Hoarding activities by traders worsened the situation. The Planning Commission was convinced that the country should undertake “progressive and planned socialization of the wholesale trade in foodgrains”.

AP Jain was simply not convinced with the idea of price controls and state trading as he felt that it would be akin to what Stalin and Mao had done by force in Russia and China. Nehru, however, told the chief ministers, in August 1957, that he saw no other solution to the problem of food shortages other than government purchase of foodgrains at controlled prices.

As foreign exchange was getting depleted, the option of continued commercial imports was also slipping away.

So, the food ministry ultimately agreed to begin its own procurement and distribution operations along with the implementation of price controls. This marked the beginning of the public distribution system (PDS), through which foodgrains were distributed cheaply through a network of “fair-price shops”. Also, no effort was made to replace the private trader with a state trading organisation.

However, the food crisis continued as prices rose and shortages remained chronic. By September 1958, the government had signed another PL480 agreement with the US, further deteriorating India’s foreign exchange position.

The economic cost of these efforts had a drastic impact on the Second Plan. The inflationary pressures also pushed up the costs of planned industrial projects. As higher financial outlays were not feasible, the Planning Commission had to lower the physical targets. However, the “core projects” were protected through a reallocation of funds. As Shenoy had predicted, the Plan was too ambitious, keeping India’s resource constraints in perspective.

To make matters worse, serious budgetary shortfalls were realised two years into the Plan, which depressed the Plan outlay far lower than originally expected. The sterling balances, which had proved to be an effective cushion against any balance of payment problems, had already been spent by 1956. Taxation proved to be the only dependable source of revenue. In fact, mobilisation of resources from taxation exceeded the planned targets. But that was not pleasing to the masses for obvious reasons. A culmination of these factors led to the emergence of the first signs of political discontent across India.

In the general elections of 1957, even though the Congress won both at the Centre and the states, there was a marked difference to the victory from the ones in the previous elections. A shift in voter sentiment towards the left was quite prominent. The Communist Party of India (CPI) emerged as the largest opposition party in the Lok Sabha.

In fact, the party also left a mark in the state assemblies. In Kerala, Congress had to witness the formation of the first communist ministry in India. In Madras, C Rajagopalachari broke away from Congress after being disillusioned with the party’s socialist leanings and formed a new party, which emerged as the second-largest party in the state. Nehru warned that “if the forces released by democracy and adult franchise were not mastered, they would march on, leaving the Congress aside”.

The major issues raised by most political parties at the time revolved around the economic discontent of the masses, including increased taxation, rising unemployment levels and rampant poverty.

Clearly, Indian voters were beginning to develop a sense of disappointment with the economic mismanagement by the national leadership. A noteworthy takeaway from the voting pattern is that Indians were not sceptical of the idea of socialism but were growing dissatisfied with the failures of its implementation.

Later in the year, the Nehru government was also rocked by the first corruption scam of free India, which eventually led to the resignation of the finance minister, TT Krishnamachari. It emerged that in June 1957, the public sector company Life Insurance Cooperation (LIC) had made the largest investment yet of Rs 1.24 crore in six companies owned by Haridas Mundhra, a Calcutta-based businessman. The Investment Committee had not even been consulted on the investment, against regular protocol.

The order seemed to have emerged from the highest offices of the government and the investment was made despite the fact that Mundhra’s companies were bleeding money and he was siphoning off huge chunks of money. Nehru’s son-in-law, Feroze Gandhi, demanded an explanation for LIC’s puzzling decisions.

In early 1958, Nehru set up a one-man enquiry commission under former chief justice MC Chagla, who submitted a report within a month. The hearings were held in public where crowds used to gather in such huge numbers that loudspeakers had to be set up outside the courtroom. When Chagla finally filed his report, and it emerged that Mundhra’s companies were obnoxiously rotten, Krishnamachari had to resign while the businessman was arrested and sentenced to twenty-two years in prison. Nothing seemed to be going right for Nehru.

Excerpted with permission from The Age Of Awakening: The Story Of The Indian Economy Since Independence, Amit Kapoor with Chirag Yadav, Penguin Books India.