14 Aug 2020 20:46 IST

Looking back on the Indian economy’s seven-decade long journey

It has been a story of many misses and some important hits for the economy since Independence

Australian academic David Lockwood in his book The Communist Party of India and the Emergency recounts an interesting incident that took place in 1969. Soon after nationalising 14 private banks, the then Prime Minister Indira Gandhi was approached by the Congress Socialist Forum, a left-wing caucus within the ruling Congress Party, to go ahead and nationalise the top 20 industrial houses!

 

 

 

Ironically, one of the members of this forum was the Chandrashekhar, who would be a future Prime Minister, and who, during his short but tumultuous stint, was busy negotiating with the IMF for a loan to deal with the major balance of payments crisis that was brewing in early 1991.

Indira Gandhi, thankfully, did not act on the Forum’s advice though it was during her first stint as Prime Minister that the Indian economy became more ‘statist’ in nature with private industry groaning under an ever-growing list of onerous regulations.

When India celebrates its 74th Independence Day on Saturday, under the shadow of the raging pandemic, it can take some comfort in the fact that the Indian economy in 2020 looks very different from what it did in 1969.

India was a desperately poor country riven by social and economic inequality at the time of Independence. During the colonial period, against the odds, an indigenous industrial class did emerge and at the time of Independence India was the 10th most industrialised nation in the world, not bad for a country that was bled dry by almost two centuries of colonial rule.

The Bombay Plan

In fact, in 1944, three years before Independence, a group of eminent industrialists that included JRD Tata, GD Birla, Lala Shri Ram and economists such as John Mathai and Ardeshir Dalal came out with a unique document called the Bombay Plan. This document chalked out a plan for India’s rapid economic development and even formed the basis of the first two Five-Year Plan models. Interestingly, this bunch of industrialists envisaged a much greater role for the state in the economic development of the country, even bigger in scope than what even Jawaharlal Nehru wanted. Also, crucially, the Bombay Plan called for active state involvement in social sectors such as education and health.

And, a good decade before Independence was achieved the Congress Party had set up a National Planning Committee to chart out an economic plan for rapid industrial and social development of the country. This committee had many Congress politicians as its members apart from economists such as KT Shah and even the eminent physicist Meghnad Saha.

The Indian economy’s journey embarked on this policy backdrop in 1947. That the state or government would play a major role in India’s economic development was a foregone conclusion. Nehru was deeply influenced by the Soviet Union’s experience in rapid industrial development as were many other influential world leaders at that time.

The ‘commanding heights’

The State-led heavy industry formed the basis of the second Five-Year Plan, with the public sector reaching the ‘commanding heights’ of the economy.

The Nehruvian model did have its critics. The most well-known was a plan formulated by economists CN Vakil and PR Brahmananda, who proposed a ‘wage goods model’ with focus on more labour-intensive industrialisation.

But the die was cast and the much-maligned Licence-Permit Raj was ushered in and the private sector was put under a regime of onerous controls and regulation by the government.

After its initial success the economy ran out of steam by the mid-1960s. This was a decade of serious food shortages and epitomised by the ‘ship-to-mouth’ era. India had to rely on food imports especially from the US. The US on its part, led by the World Bank, began leaning on India to loosen government controls on the economy especially after the balance of payments crisis of 1966, which led to the rupee’s first devaluation.

Political backlash

Lockwood in his book gives a fascinating account of how Prime Minister Lal Bahadur Shastri took the first steps towards liberalising the economy. According to Lockwood, Shastri was keen to open up the economy and even approached the industry chamber FICCI to give a list of sectors which it wanted to be liberalised. The FICCI members couldn’t even reach a consensus on that!

But thanks to the severe political backlash over the devaluation experience, Indira Gandhi made her ‘Left turn’ , resulting in more state controls, bank nationalisation, abolition of privy purses (a sort of pension given to erstwhile princes for having ceded their ‘kingdoms’ to the Indian union during the time of Independence) and a proposed nationalisation of foodgrain trade. In the early 1970s the income tax for the top income bracket was a whopping 97 per cent!

But by the 1960s and ’70s the international opinion had started swinging towards an export-led growth bolstered by the success of the East Asian economies. This model called for a very different kind of state intervention.

The Seventies is often seen as a ‘lost decade’ for the economy as it was buffeted by high inflation, and low growth. The serious ‘side-effects’ of excessive state regulation of the economy were beginning to manifest themselves in that decade.

Oil shocks

It was again the oil shock in 1979 and a serious recession that made India approach the IMF. Again some half-hearted attempts were made to liberalise the economy. By the 1980s the policy elite in India had come to the consensus that the Nehruvian ‘mixed’ economy model had run its course and the economy was ripe for market-led reforms.

But the country had to wait for another full-blown balance of payments crisis in 1991, before a reforms and liberalisation took root in the country.

There is no doubt that between 1991 and 2011 many millions of Indians were lifted out of poverty thanks to the rapid growth that the reforms era ushered. The Indian corporate sector came of age during this period with the IT sector scaling new peaks.

However, things have not looked that rosy since 2011. The fallout of the 2008 global financial crisis is also blamed for that. But the home-grown reasons trotted out are policy paralysis, corruption and crony capitalism.

Policy climate

The Modi government that came to power in 2014 inherited a very different global and policy climate than the one that existed in the first two decades of reforms. Cracks in the consensus on global trade and free market solutions started appearing. After Donald Trump came to power the rules of the game changed even more drastically. The rule-based global trade regime under the WTO seems to be living on borrowed time.

It is in this era of global uncertainty that the SARS-CoV-2 virus decided to wreak havoc across the world. It’s not surprising that nations are turning increasingly ‘inward’. The government’s turn to ‘Atmanirbhar Bharat’ has to be understood in this context.

Though the Modi government is on firm ground politically given the Prime Minister’s undiminished popularity, how it traverses the economic minefield in the next two years will prove crucial to the aspirations of many millions of Indians.

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