Panagariya on Nehru's economic model: A legacy of heavy industry, limited growth

Finance Commission Chairman and Columbia University Professor, Dr Arvind Panagariya, has critiqued the economic policies of India's first Prime Minister, Jawaharlal Nehru, in his book The Nehru Development Model: History and Its Lasting Impact.

Speaking with The Federal's Editor-in-Chief S Srinivasan, Panagariya dissected the Nehruvian model of heavy industry, import substitution, and public sector dominance, arguing that these strategies contributed to India’s isolation from global markets, stifled innovation, and hindered job creation.

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The Nehruvian economic vision

Dr Panagariya credited Nehru with a successful political legacy, including universal suffrage and a democratic constitution. However, he described Nehru’s economic framework as a “massive failure.” The emphasis on heavy industries such as steel and machinery and the drive for self-sufficiency were underpinned by an aversion to international trade, which Nehru associated with imperialism. This inward-looking approach, Panagariya argued, left India economically stagnant and unprepared for global competition.

“At the time, capital was scarce, and the decision to direct it almost exclusively towards heavy industry was a mistake,” Panagariya said. “This model excluded labour, which was India's most abundant resource, leaving many unemployed or underemployed in traditional industries.”

Criticism of import substitution

Import substitution industrialisation — a hallmark of Nehru’s policies — failed to deliver the desired results, according to Panagariya. Despite the push for self-reliance, India remained dependent on imports for several key commodities, including steel.

“The idea of self-sufficiency might have been noble, but it was neither achievable nor practical in the context of India's economic and resource constraints,” he noted.

Panagariya emphasised that the exclusion of agriculture and labour-intensive industries from the economic model further exacerbated poverty. “Agriculture was largely neglected, and it was only after Lal Bahadur Shastri's tenure that efforts to revive the sector gained momentum,” he remarked.

The Soviet influence and socialist policies

Nehru's admiration for the Soviet model significantly shaped his economic policies. Panagariya highlighted how the Planning Commission, inspired by Soviet-style central planning, became the nerve centre of economic decision-making.

Also read: Nehru’s vision of modern India was needed to keep country united: Sharad Pawar

He traced Nehru's shift from radical socialism in the 1930s to a more pragmatic approach post-Independence. While Nehru allowed limited space for private sector growth, institutions like the IDBI and UTI were established under government control to mobilise resources for industrial expansion.

“These institutions were public sector entities, not private,” Panagariya clarified. “Nehru recognised the importance of industrialists but used them to support his broader socialist agenda.”

The legacy of bureaucracy and red tape

Panagariya reserved sharp criticism for India's bureaucracy, which he argued perpetuated inefficiency and slowed reforms. “Even today, multiple regulatory layers make privatisation or other structural reforms cumbersome,” he said.

Citing his own experience in government, Panagariya noted that even a strong Prime Minister like Narendra Modi faces challenges in ensuring bureaucratic alignment with policy goals.

Modern reflections and comparisons

When asked about the contemporary relevance of Nehru's economic model, Panagariya argued that its long shadow continues to influence India's policy landscape. “The licencing and control regime of the Nehru era took decades to dismantle. Even after the 1991 reforms, labour-intensive industries like apparel and footwear struggled to take off due to the remnants of socialist policies,” he explained.

He contrasted India's experience with that of countries like China and South Korea, which prioritised skill-building and labour-intensive industries before transitioning to heavy industry. “China destroyed its higher education institutions during the Cultural Revolution but rebuilt them to surpass India in all fields, including social sciences and technology,” Panagariya said.

Also read: Set for third term as prime minister, Modi failed to equal this Nehru record

Hope for the future

Despite his critiques, Panagariya expressed optimism about India's economic prospects. He highlighted significant reforms in the last three decades and projected that India’s economy could grow to $20 trillion in current dollars by 2047. “Growth has been consistent, and with further reforms — such as implementing labour law changes and accelerating privatisation — we can ensure mass employment and a higher standard of living for all,” he said.

The discussion underscored the enduring debate over Nehru’s economic choices and their impact on India's development trajectory. While Panagariya acknowledged Nehru’s intent to alleviate poverty and industrialise India, he concluded that the heavy industry-first approach came at a steep cost: decades of economic inefficiency and missed opportunities for inclusive growth.

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