During the late month of August, the economic state gave a big jolt to every Indian when the GDP contracted by a record of 23.9 percent in the April-June quarter following a National lockdown to prevent the spread of the coronavirus. There is little doubt that the Indian economy was already going through a rough patch, earning the government a great deal of flak. From opposition, to the left leaning intellectuals hounded the Indian government for the contraction. In 2019, Indian surpassed UK & France to become the 5th largest economy in the world, still it had a struggling economy in terms of GDP growth! So, what went wrong?
To find the answer, let us look at the insights of Indian economy from the time of independence!
INDIAN ECONOMY- POST INDEPENDENCE
Independence brought dreams of not just individual, but also economic, social and political freedom. India's independence was in itself a turning point in its economic history. The country was hopelessly poor as a result of steady deindustrialization by Britain. Less than a sixth of Indians were educated. Cambridge historian, Angus Madison's work shows that India's share of the world income shrank from 22.6% in 1700 to 3.8% in 1952. This was almost equal to that of Europe I.e.23.3% in 1952. As former prime minister Manmohan Singh put it: "The brightest jewel in the British crown was the poorest country in the world in terms of per capita income at the beginning of the 20th century"
INDIA'S ECONOMIC MODEL: THE STATE'S AUTONOMY OVER INDIVIDUAL ENTERPRISE
Prime minister Jawaharlal Nehru's development model envisaged a dominant role of the state as an all-pervasive entrepreneur and financier of private businesses. The industrial policy resolution of 1948 proposed a mixed economy. Earlier, the Bombay plan proposed by eight influential industrialists including J.R.D. Tata and G.D. Birla, envisaged a substantial public sector with state interventions and regulations in order to protect indigenous Industries. The political leadership believed that since planning was not possible in a market economy, the state and public sector would inevitably play a leading role in economic progress.
PLANNING, COMMISSIONING, EXECUTING THE PROGRAMME TO HASTEN GROWTH. India set up the planning commission in 1950 to oversee the entire range of planning, including resource allocation, implementation and appraisal of five-year plans. The five year plans were centralized economic and social growth program modelled after those prevalent in the USSR. India's first five year plan, launched in 1951, focused on agriculture and irrigation to boost farm output as India was loosing precious foreign reserves on food grain imports. It was based on the Harrod-Domar model that sought to boost economic growth through higher savings and investments. The plan was a success, with the economy growing at an annualized 3.6% beating the target of 2.1%.
THE FREE MARKET PROPONENT WHO OPPOSED THIS POLICY- BUT WAS PROVED RIGHT LATER ON.
A Student of libertarian economist F.A. Hayek, B.R. Shenoy was an influential early advocate of free market liberalism. In a celebrated dissent note, he warned that the Government control over the economy would undermine a young democracy. Shenoy was proved right when India faced an external payment crisis a year after the plan period began. He was also critical of Nehru government's penchant for import substitution. Though ignored in his lifetime, his ideas outlived him and became part of India's mainstream economic doctrine. The second five year plan and the industrial policy resolution 1956 (long considered the economic constitution of India) paved the way for the development of the public sector and ushered in the license raj. The resolution set out as national objective, the establishment of a socialist pattern of society. It also categorized industries of basic and strategic importance were to be exclusively in the public sector. The second group comprised industries that were to be incrementally state owned. The third comprising mostly consumer industries, was left for the private sector. The private sector, however was kept one tight leash through a system of licenses. Marxist called it state Capitalism.
THE CURSE OF SOCIALISM:- HOW NEHRU-INDIRA LICENSE RAJ RUINED INDIA'S ECONOMIC PROGRESS
"IF LEFT FREE FROM THE EXTENSIVE INTERFERENCE OF VARIOUS LEVELS OF GOVERNMENT, THE ENERGY AND CREATIVITY OF THE INDIAN PEOPLE COULD SOON ALLOW THEM TO BE AMONG THE RICHEST ON EARTH." ~ CHRISTOPHER LINGLE
While India's political culture reflects the beliefs of its founding fathers there is the additional matter of the modified preamble to it's constitution that specifies: "India is a sovereign, secular socialist republic" It was Indira Gandhi who had the words "socialist" and "secular" added in the late 1970s when she had imposed Emergency in the country. At the same time, she also amended the relevant section in the representation of peoples' act to require that all recognized and registered parties swear by this preamble since all parties must stand for socialism, no party espouses classical liberalism. (Yet there are numerous communist parties). There is no secret of the fact that Jawaharlal Nehru was an avowed socialist. Nehru acclaimed to the Lahore Congress in December 1929 that he was "a Socialist and Republican". In fact, in 1927, at the Brussels congress, he was made an honorary president of the openly Marxist-Leninist league against imperialism, and later that year visited Moscow for a four day visit to explore the practical application of socialism and communism.
BUT HOW SOCIALIST WAS NEHRU-INDIRA AND REST OF THE CONGRESS?
Well, in the 1950s, they followed socialist creed and the state seized control of steel, mining, machine tools, water, telecommunications, insurance and electrical plants, among other industries. The Indian government had seized the commanding heights of the economy. But they had not finished. The banks came next. In 1950 there were 430 commercial banks in India. In 1955, the Imperial Bank in India was nationalized and renamed the State Bank of India. In 1969, all commercial banks holding over Rs.50 crores (just over 200 million pounds in modern money) were nationalized. The 14 largest banks transferred 70 percent of deposits into Indira Gandhi's hands. In 1980, all remaining banks were nationalized. As ever the aim was to ensure more people had bank accounts, 'fairer' credits access, restriction of monopolistic, a reduction in equality and to ensure lending was prioritized according to political directives. It was called 'social control' and Prime Minister Desai said it would mean India's politicians could "regulate our social and economic life so as to attain the optimum growth rate for our economy and to prevent at the same time monopolistic trend, concentration of economic power and misdirection of resources." Result of such policies was inevitable. During Nehru's tenure, India's per capita GDP at PPP as a proportion of average world per capita GDP at PPP was reduced by 11%, it fell further during the 1965 war and was at 23% when Indira Gandhi first came to power. By 1976, it further declined to 21% of the world levels. It remained at the same relative level in 1980. In terms of per capita income, growth data confirms that Indian economic growth was slower than that the rest of the world. Between 1960 and 1979, India's per capita GDP grew at an average growth of per capita world GDP of 2.7% per annum. Though many intellectuals argue that socialist policies were fine as growth was faster than under colonial rule. The truth is that after 1950, the whole world did better in terms of growth, and thus "India did better" tells nothing about the effectiveness of these policies. Again, if compared to India, many other countries performed better in terms of economic development by adopting alternative policies. In 1977, The Janata government headed by Prime Minister Morarji Desai did try to change the direction of economic policy. It appointed a committee on "controls and subsidies (DAGLI)" and the "Alexander committee on import-export policy", to analyze the LPQ raj and suggest a new approach. The Morarji government fell before Dagli or Alexander committee recommendations could be implemented. Even the short lived prime minister, Mr. Chandra Shekhar (November 1990 to June 1991) took the charge of clearing the economic mess. Mr. Chandra Shekhar could have been India's man of destiny. But destiny chose PV Narsimha Rao. It was only after 1991, when Mr. Pamulaparthy venkatesh Narsimha Rao, and his government who took the responsibility to bring the country out of economic crisis. Capital and coverage ratios were reduced, branch licensing was abolished, interest rates were to be determined not by politicians but by market forces. As privatization of state owned companies began and reductions on foreign capital and foreign direct investments took effect, growth took off- reaching an average of 7% a year between 1997 to 2011. Nehru was half right when he said "without social freedom and socialistic structure of society and the state neither the country nor the individual could develop much". Half right because you need social freedom-that's the beauty of the liberal democracies. But you need economic freedom too, not socialist structures and plans. The collapse of Soviet union in 1991 was a warning sign that you need to free it's citizen from the dead hand of the state if it has to develop to it's full potential.
In the next article, we will tell you how PV Narsimha Rao's liberalization policy changed the economic sphere of India and steered the country through the uncharted waters of post-cold war world.
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