The great ‘Invisible Hand’




It is often imagined albeit with some haste and generalisation that Jawaharlal Nehru’s idea of India’s economic development was to impose the top heavy public sector upon the Indian economy so as to guard the interests of the public sector through the use of industrial licenses.

This prevented the free entry of private capital and protected the monopoly of the state’s investments. This view is usually taken by the neo-capitalists of liberalised India who wanted to convey that the presence of public investments has crowded out the private investments. Far from this being the case, in India, it is the presence of the public sector that has helped the private capital to grow. The slew of econometric studies prove that the private capital has played a complementary role to public capital.

Embedded into Nehru’s vision was far less a consciousness of economy as a system of investments and profits, and much more a means of ensuring that the ideals of democracy and equality have a corresponding support from the outcomes of the economy so that the ideals of the country are wholly backed up by material means.

This is the reason why Nehru wanted the state in India to subsidise the private capital by leading investments in those sectors in which stakes are high initially making these ventures unviable for the private investors.

The public sector would engage typically in those activities which would not be profitable enough to attract private capital, the latter of who is solely driven by the profit motive. In a manner, the state sector subsidised private industries by laying down a strong foundation of heavy, core and basic industries in the country.

The public sector by compromising on its own profits helped the private sector enjoy benefits of essential raw materials and heavy machinery without having to invest in these.

Susmita Dasgupta | Joint Chief Economist, Joint Plant Committee, Ministry of Steel
Susmita Dasgupta | Joint Chief Economist, Joint Plant Committee, Ministry of Steel

While Nehru never compromised on the need of the private capital to add volume to the Indian industrial scenario, he was aware that given the state of the economy at the time of independence, market forces were not as well developed as they should be in order for investments and production levels to adjust to supplies.

In the absence of Adam Smith’s “invisible hand”(a term used to describe unintended social benefits through individual action) to guide the adjustments of production and consumption and given the scarcity and high cost of capital in the country, it was important that industrial licences did the job of making the demand and supply adjustments in lieu of market signals.

The system of industrial licensing were to step in as an understudy of free markets till such a time the market forces would develop adequately to optimise investments, production and capacities.