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India's Great Free-Market Economist

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07/05/2011Chandrasekaran Balakrishnan

Soon after India's political independence, a broad public debate revolved around the type of economic system that should be adopted and followed. Three proposals emerged: the Gandhian model, based on village economy and trusteeship; the Bombay Plan, which posited that the economy could not grow without government intervention and regulation, especially in capital-goods production; and the Nehruvian model, which was premised on a socialistic pattern of society and shunned every possible avenue for the private enterprise.

Ultimately, what prevailed for the next 40 years was the Nehruvian model. During this period, India tried to develop a mixed economy. Nonetheless, in the process of practicing this system, the government controlled the entry and expansion of private enterprises, often without understanding the consequences of these policies.

The "Licence Raj" thrived very quickly: government permission was needed for everything from starting a new enterprise to expanding an existing firm to determining the quantity of goods to be produced and exported. The economy was akin to the proverbial frog in a deep well that jumps three steps up only to slip two steps down! Instead of helping the economy to grow, the government virtually stamped out choices and competition in the name of licenses, import substitutions, restricted exports, prohibition of commodities, quantitative ceilings for bulk exports, reservations for small-scale industries, etc., etc.

This controlled regime of 40 years caused an accumulation of systemic crises, which forced the country to open up the economy and integrate with the global market. All these events were foreseen by one great economist and professor, B.R. Shenoy, who wrote many books and published famous articles in national and international newspapers and scholarly journals. His contemporaries made the country pay a heavy price by rejecting his practical policy solutions. But now his ideas rule a liberalized India.

After a decade of economic reforms, Indian economist S.B. Mehta wrote in 2001,

The 1991 economic crisis led us to beg finance from IMF which levied almost similar conditions which Prof. Shenoy was suggesting since 1957. But the then Finance Minister (during 1991) was criticized by many that we were mortgaging our sovereignty to IMF. This author wrote to him that he should declare that we were following the policy that Shenoy hinted for twenty long years and not following the conditions of IMF. No politician or economist, however, uttered the name of Shenoy or quoted from his voluminous writings in support of the free market system. Thus, it seems, we neglected the sound advice of Shenoy during his life-time, as also from 1991 … when our policies leaned more towards free market.1

India's economic-reform era is actually an era of a revolution of choices created by markets. In fact, many now believe that choice and competition are the ultimate antidote to many economic problems in the country. The process of liberalization and globalization has virtually ended government-created artificial scarcities for even basic goods like telephones, motorcycles and scooters, cooking-gas connections, etc.

Foreseeing all this, Shenoy advocated that private enterprises should be allowed to compete both at home and abroad in most of the sectors except defense, roads, and railways. It is sad that nobody remembers him even now, even after two decades of opening up the economy to trade goods and services globally. This is particularly true of the present ruling government, which is said to have initiated the economic reforms and is now likely to proceed further with second-generation reforms. A journalist said, "the person who saw the writing on the wall a good three decades before the rest of his contemporaries is now a forgotten man."

Bellikoth Ragunath Shenoy was born in the village of Bellikoth, near Mangalore, in the southern Indian state of Karnataka, on June 3, 1905. Shenoy had a brilliant academic record. He secured a first-class master's degree in economics from Benares Hindu University (in central India) in 1929. Then he enrolled for an MSc and PhD in economics at the London School of Economics (1929–32), where he studied under Professor Friedrich A. Hayek. Shenoy was highly influenced by Hayek's writings, especially on the price system, knowledge problems, and the irrelevance of centralized planning. Eventually, Shenoy wrote his thesis, "Some Aspects of a Central Bank for India," at LSE.

During his study at LSE, Shenoy published two theoretical scholarly papers in the Quarterly Journal of Economics: "An Equation for the Price Level of New Investment Goods"2 and "Interdependence of Price Levels."3 These two papers essentially criticized John Maynard Keynes's fundamental equations as presented in the book Treatise on Money (1930). In fact, when Keynes realized that these equations were defective on many grounds, he stopped the publication of the second edition of his book! Further, these two articles established Shenoy as an up-and-coming economist with competence in monetary and financial matters.

Shenoy then returned to India and taught economics courses in various colleges and universities. At the same time, he was associated with many policy-making institutions and bodies. Shenoy's colleague Mahesh Bhatt once said,

Professor Shenoy was anything but a "committee man." He was an economist who preferred to be right in a minority of one. Every important contribution he made to the subject sparked off long-drawn controversies and memorable debates among the Indian economists.

Shenoy joined Gujarat University (in western India) in 1954 as professor of economics and first director of the School of Social Sciences. Milton Friedman once said,

there is only one prominent professional economist, Professor B.R. Shenoy of Gujarat University, who is openly and publicly and at all effectively opposed to present policies and in favour of greater reliance on a free market. He is a remarkable and courageous man.4

He worked also as a visiting professor of his alma mater LSE in 1966, and he become a member of the prestigious international liberal forum founded by Professor F.A. Hayek, the Mont Pelerin Society. In 1968, Shenoy resigned from Gujarat University and founded the Economic Research Centre in Delhi with an undying dedication to work on his unfinished projects.

Shenoy was a prolific writer, and he authored many books and articles in popular journals and newspapers. In his book Post-War Depression and Way-Out (1944), he pointed out the dangers of financing the Bombay Plan of government intervention and regulation through newly created money and bank credit. Other important works by Shenoy include Problems of Indian Economic Development (1958), Indian Planning and Economic Development (1963), Fifteen Years of Indian Planning (1966), Indian Economic Policy (1968), Indian Economic Crisis: A Program for Reform (1968), PL480 Aid and India's Food Problem (1974), Food Crisis in India: Causes and Cure (1974), and Economic Growth and Social Justice (1977), Ceylon Currency and Banking (1941), and The Sterling Assets of the Reserve Bank of India (1953).

In July 2011, India will celebrate the completion of 20 years of the economic reforms initiated in the 1990s. In the early decades of independent India's command-and-control economy, Shenoy vehemently questioned the ideology of India's centralized planning and argued for fundamental changes in economic policy on the premise of deregulation and a market-determined price system. According to Niranjan,

B.R. Shenoy, independent India's first major economic dissenter … died … in February 1978. The thrust of economic policy since then has moved from the worship of central planning to the appreciation of the market. Most economists now agree that our long tryst with Nehruvian socialism was an economic disaster.5

Shenoy advocated sound economic policies based on a free-market system decades before the economic crisis of 1991. Alas, his voice was ignored. His contemporaries had blind faith in centralized planning of private enterprises. These policies were responsible for creating crises in India's foreign exchanges in the 1990s.

Indeed, Shenoy and Professor Peter Bauer "are the only economists who opposed the 'deficit financing' carried out to fund Nehru's ambitious Second Five Year Plan."6 Shenoy's warnings were prophetic: only a year later, "India faced a serious balance of payments problem in 1957, just as Shenoy had predicted." The government of India invited Shenoy as a member of the Panel of Economists for advising the Nehru government in 1956. When other panel members proposed deficient finance, Shenoy wrote his famous "Dissent Note" on the Second Five Year Plan (1956–1961). He said, "I am unable to subscribe wholly to the views of my colleagues on … deficit financing as a means of raising real resources for the Plan."7 Unsustainably high levels of deficit financing continued for many years, eventually creating the catastrophe in 1991, thus forcing the government to take the free-market measures advocated by Shenoy.

Shenoy wrote voluminous articles and books defending free-market economics and integration with the world economy. Indeed, India's current initiatives of economic reform are nothing but what Shenoy had recommended for decades! Milton Friedman said

Prof. B.R. Shenoy was a great man who had the economic understanding to recognise the defects of current planning in India, and what was even rarer, the courage to state his views openly and without equivocation. Rarely does such a man bless our society.8

Friedman further went on to say,

If one reads Shenoy's report now, it sounds like a retrospective description of what happened rather than a forecast. But needless to say, though most economists display a deep respect for Shenoy's courage and personal qualities, he remains a prophet without honour in his own country.9

According to Professor Peter Bauer,

In his Note of Dissent, Shenoy rejected the general spirit of the Majority Report as endangering personal freedom and democratic political system. He also disagreed with several major proposals, including the scale of money creation, the maintenance and extension of state economic controls, and the scope of nationalization. He argued specifically that money creation on the scale envisaged by the Majority Report and under the Second Five Year Plan would result in inflation or a balance of payments crisis or both — a prediction that was fulfilled barely a year after the inception of the plan. … Shenoy's Note of Dissent represented conspicuous moral courage. … Thus, Shenoy's Note of Dissent went counter to the opinions and wishes of Nehru. … and also of the position of the Indian Planning Commission. It also went counter to the then current orthodoxy in the West. Many prominent representatives of that orthodoxy regularly visited India in the 1950s and 60s. The visitors included Gunnar Myrdal, Joan Robinson, Nicholas Kaldor, Thomas Balogh, Ian Little, Oscar Lange, Paul Streeten, and others. Most of these representatives of the prevailing orthodoxy endorsed the Second Five Year Plan in public pronouncements in India and in prestigious and influential publications in the West, such as the Economic Journal or the Review of the British National Institute for Economic Research.10

Shenoy quite convincingly reasoned that

nationalization should be ordinarily limited to public utility concerns and to concerns involving national security. Otherwise state intervention should be concerned with the prevention of monopolies or quasi-monopolies. Effective management of business and Industrial concerns in a competitive market economy is a highly specialized function and demands qualities which a civil servant is not required to and in the ordinary course of training may not acquire. This function best left to private entrepreneurs, in the prevailing socio-economic order, which is dominated by the market economy and the pricing system.

Further he went on to say,

I do not feel convinced of the economic importance … of controls. Decontrols have proved a note worthy success. Controls and physical allocations are not a necessary adjunct to planning. The distribution of productive resources, including the rations in which they are used are subject to variation and depend upon diverse technological, economic, and price considerations. It is quite impossible to take into account these complex and changing considerations and arrange anything like a satisfactory allocation of resources. There are great advantages in allowing freedom to the economy, and to the price system in the use and distribution of the needs of production. I am unable to agree with my colleagues that a case exists for continuing what controls now remain. Steps should be taken to remove controls as early as may be possible. Controls and allocations are essential characteristics of communist planning. They do not very well fit in under planning in free enterprise market economy."11

Moreover, what persisted during the socialist pattern of command economy in India before 1991 was best explained in Shenoy's own words:

Freedom-loving people, in the name of preserving and spreading freedom, are unwittingly financing and otherwise sustaining socialist policies which thus far — sensational projects and schemes apart — have yielded little else than social injustice, unemployment, poverty, and conflict. Though the Indian planners and their overseas supporters are full of promises and hope, these policies can hold out prospects of nothing better for the future. … Statist policies in India might have been abandoned long ago, but for the intervention of foreign aid, which kept the coffers of the prodigal replenished as they became depleted, the moral support lent to statist policies by visiting "experts" from overseas, and the colossal gains in money and power which these policies yield to the politician and civil servant."12

It is evident that Shenoy's writings have great relevance even today. What today's economists and the government of India are trying to do in the name of second round of economic reforms is exactly what B.R. Shenoy suggested decades ago! The time has come to claim B.R. Shenoy's rightful due.

As Professor Peter Bauer said, "May the succession of Shenoy and of his life never fail East or West."

India's liberalization process, initiated in the 1990s, has immensely helped, not only to lift millions of people out of abject poverty, but also to raise their standard of living higher and higher. For decades, Shenoy's lone voice was ignored for no valid reason, but his ideas are immortal.


[A collection of Shenoy's essays was published in 1996 as Planned Progress or Planned Chaos? by M.P. Bhatt and S.B. Mehta.13 Dr. Parth. J Shah — who founded a free-market think tank, the Centre for Civil Society (New Delhi), in 1997 — worked together with R.K. Amin in 2004 to edit two volumes of selected works of Shenoy (Economic Prophecies and Theoretical Vision) for the easy understanding of both students and laypersons.]

  • 1. S.B Mehta, "Economic Ideas of B.R Shenoy" in V.K.R.V. Rao and B.R. Shenoy — Economic Ideas in Contrast, by Kamta Prasad (ed.), Deep & Deep Publications, New Delhi, 2001, pp. 103.
  • 2. See B.R. Shenoy "An Equation for the Price-Level of New Investment Goods," The Quarterly Journal of Economics, vol. 47, no. 1 (Nov. 1932), pp. 138–149.
  • 3. B.R. Shenoy "The Interdependence of the Price-Levels," The Quarterly Journal of Economics, vol. 48, no. 2 (Feb. 1934), pp. 362–368.
  • 4. Milton Friedman "Indian Economic Planning" May 6, 1963, pp. 17; Parth. J. Shah, "Friedman on India," The Centre for Civil Society, New Delhi, 2000, pp. 16–17.
  • 5. Niranjan "Shenoy's Prophecy," Businessworld, June 30, 2003.
  • 6. Sauvik Chakraverti, "Peter Bauer — A True Friend of the World's Poor," View Point 4, The Centre for Civil Society, New Delhi, pp. 13.
  • 7. B.R. Shenoy, "The Second Five Year Plan: A Note of Dissent on the Basic Considerations Relating to the Plan Frame," in Planning Commission, Papers Relating to the Formulation of the Second Five Year Plan, 1956.
  • 8. K.J. Udeshi "Economic Reforms and the Relevance of Professor B.R.Shenoy," the Birth Centenary Memorial Lecture of Prof. B. R. Shenoy, given on June 4, 2007 at the Economics Research Centre in Mumbai.
  • 9. Milton Friedman, "Indian Economic Planning," May 6, 1963, pp. 17; Parth. J. Shah, "Friedman on India," The Centre for Civil Society, New Delhi, 2000.
  • 10. Peter Bauer, "B.R. Shenoy: Stature And Impact," The Cato Journal, Vol. 17, No. 3, 1998.
  • 11. B.R. Shenoy, "The Second Five Year Plan: A Note of Dissent on the Basic Considerations Relating to the Plan Frame," in Planning Commission, Papers Relating to the Formulation of the Second Five Year Plan, 1956.
  • 12. B.R. Shenoy, "The Failure of Planning," Freeman, Vol. 28, No. 1. January 1978.
  • 13. M.P. Bhatt and S.B. Mehta (eds.), Planned Progress or Planned Chaos? Selected Prophetic Writings of Prof. B.R. Shenoy, Madras: East West Books, 1996.

Contact Chandrasekaran Balakrishnan

B. Chandrasekaran is an economist who works in public policy. He is known for his expertise on the literature of Indian liberalism. He has written for the Wall Street Journal Asia, and Pragati — The Indian National Interest Review. He is based in New Delhi and blogs at Hayek Order.

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