Patel was expressing an idea that was embedded in Indian nationalism from its earliest days. From sharp criticisms of colonial economic policy to industrial conferences held parallel to the annual meetings of the Indian National Congress, to continued campaigns for the spread of technical education, to success in negotiating some element of financial autonomy. After 1919, until the establishment of the Reserve Bank of India in 1935 – Indian nationalists had invested a great deal of energy in economic issues.
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The transfer of power on 15 August 1947 provided him an opportunity to take action. It was not an easy situation. Economic output was stagnant for several decades, median income was badly underfunded, the new state was under-funded compared to other former colonies, food conditions were dire, and a narrow industrial base centered around a few large cities. was. Most Indian leaders across the political spectrum—with MK Gandhi being the most important dissident—broadly agreed that breaking out of this trap would require rapid industrialization led by the state.
The challenge was not just to increase the average income. The long journey out of mass poverty involved profound changes in the structure of the economy. The Indian economy had to create opportunities for people to move from farms to factories/offices, from villages to cities, from domestic enterprises to formal enterprises. Each shift will enable labor to move from low productivity to high productivity activities, thereby increasing income. This is what India has tried in the last 75 years – with mixed results.
The initial record was impressive.
Economists have used statistical techniques to pinpoint 1950 as the first major structural break in India’s economic trajectory, with 1980 being the second. The economy has boomed after several decades of stagnant production. Economic growth between 1950 and 1965 averaged 4.2% per year. Industrial production grew at a rate of 7.1% annually. The fact that industry developed faster than the rest of the economy meant that India began to reverse the de-industrialization that began in the last years of Mughal rule. Equally important, economist S Sivasubramaniam, in his monumental work on Indian economic development in the 20th century, showed that total factor productivity grew at a rate of 1.8% per annum for the 15 years to 1965.
The elements of the classic Nehruvian development strategy are well known: a focus on public sector investment rather than private sector investment, capital and intermediate goods rather than consumer goods, and the domestic market rather than foreign trade. There was more to the game than just economics. The focus on capacity building in steel, machine tools and mining was an attempt to maintain strategic autonomy in the Cold War era – similar to what countries today, including India, are trying to build domestic capacity in semiconductors, electric batteries and telecommunications equipment. Example.
The campaign to raise the investment rate when national savings were low meant that India faced periodic shortages of foreign exchange, which were mitigated through foreign aid. The attempt to earn foreign exchange from exports had not received enough attention, as pointed out by a young Manmohan Singh in his PhD thesis in the early 1960s.
Breaking the twin barriers of domestic savings and foreign exchange was a major concern in development economics of the time. Interestingly, PC Mahalanobis believed that the public sector would soon be profitable enough to generate internal resources for the next wave of industrial investment. Oh sweet innocence!
There were also two other powerful criticisms of the Nehruvian development strategy. Mumbai-based economists CN Vakil and PR Brahmananda argued that India should invest more in agriculture and production of consumer goods – or what they call wage goods.
Economist BR Shenoy’s famous disagreement gave four red flags. First, excessive reliance on deficit financing for industrial capacity building will lead to balance of payments pressures. Second, a focus on capital goods rather than wage goods for mass consumption would be inflationary, as those employed in new industries would receive money income but would have nothing to spend on them. Third, higher taxation would put a burden on citizens to finance the schemes. Fourth, the increasing control of the government over the economy will ultimately harm Indian democracy.
Nehru died in 1964. During his rule, India managed to build a diverse industrial base despite an inefficient industrial base. Many East Asian countries made such a reform at the same time, from import substitution to export promotion, that would have made a difference to the world. That was not to happen.
Lal Bahadur Shastri’s short tenure as prime minister offered hope for change. To control the rising food inflation, Shastri wanted more investment in agriculture. He saw that physical controls were creating artificial shortages and black markets; He preferred financial controls. And the failures of the public sector convinced him that the private sector should have a bigger role in the economy. One of the tantric questions in Indian economic history is whether India would have adopted liberal economic reforms 25 years before 1991, had Shastri’s tenure not been cut short by his premature death.
Indira Gandhi began with a relatively liberal economic agenda, which included devaluation of the rupee and easing of trade restrictions in response to balance of payments pressures. However, in response to the international geopolitical situation as well as domestic political calculations, she turned leftist after 1969. The economy was stalled by stringent laws such as tight licensing, credit rationing, import controls, as well as monopolistic and restrictive trade. Dealing Act and Foreign Exchange Regulation Act. Between 1965 and 1980 a series of exogenous shocks – wars, droughts and oil prices – further affected the economy.
The 1970s was a lost decade with low growth and high inflation. However, there were two important structural breakthroughs. First, the Green Revolution that began in the late 1960s helped India make a big dent in food shortages. Second, the proliferation of bank branches after nationalization may have helped, lowering the barrier to household savings. There were also the first signs of introspection on the nature of Indian economic policy in several official committee reports, although actual policy reforms were not yet on the horizon. The lesser budget speech by HM Patel as finance minister of the short-lived Janata Party government led by Morarji Desai in 1978, deserves more attention.
The first temporary economic reforms began after Indira Gandhi came back to power in 1980. Political scientist Atul Kohli has written about how he made peace with Indian business houses. The license raj was relaxed. Taxes were reduced. VP Singh presented a reformist budget in 1985, when Rajiv Gandhi was the Prime Minister. Manmohan Singh led the Seventh Five Year Plan. It focused on technology, productivity and efficiency. The Reserve Bank of India allowed the rupee to depreciate gradually to boost exports.
The pace of growth in the 1980s was supported by a large increase in international borrowing along with the fiscal deficit. It was not sustainable. The road to the 1991 crisis was ahead. The macroeconomic crisis was a turning point in the midst of political and social instability. The duo of PV Narasimha Rao and Manmohan Singh abolished industrial licensing, reduced import duties, opened up the financial sector, attracted foreign capital, stabilized public finances and made the rupee convertible on the current account. In his landmark budget speech in July 1991, Manmohan Singh categorically argued that the balance of payments crisis was a symptom of a deeper malaise: macroeconomic imbalances, low productivity of public sector investment, loopholes in the tax system, indiscriminate patronage that encouraged incentives. had weakened. To export, lack of domestic competition, a weak financial system that was not efficiently allocating capital, lack of access to the latest technology, and more. The great achievement of 1991 was not the isolation of each reform, but the introduction of a comprehensive reform program in which the various parts complemented each other.
The development state was replaced by the regulatory state. Government is no longer the main source of investment. That work was delegated to the private sector, while new regulators were established or empowered to ensure that things worked well in a wide range of markets.
The reforms carried out in the decades that followed—fiscal laws, bankruptcy codes, inflation targeting, for example—were all designed to strengthen the market economy. The Goods and Services Tax (GST) introduced by the Narendra Modi government is a huge federal deal as well as a necessary step to integrate the Indian market through national supply chains or internal free trade agreements. The infrastructure that started with the Atal Bihari Vajpayee government, and has accelerated in recent years, will also help strengthen the general Indian market. Since 2018, India has had a strange combination of new restrictions on the business account with greater openness on the capital account, contrary to the longstanding argument of economists like Jagdish Bhagwati. India has to remain a trading nation if it is to prosper, and the recent flurry of free trade agreements is expected to counter any decline in renewed protectionism.
The economic journey of the last 75 years gives lessons for the future. Here are some of the major challenges.
Independent India began as a poor country that had seen hardly any economic development for several decades. The World Bank now defines it as a lower middle income country. This is an impressive transition. However, there are still large sections of extreme poverty. And while economic growth over the past 75 years—and especially in recent decades—has helped reduce poverty, India lags behind more successful countries such as South Korea and China, which have similar were on the level. The development is not that long ago.
The process of development in most countries involves the movement of people from farms to factories. India has not been able to generate enough quality jobs to absorb the millions of people leaving agriculture. Therefore, many people are stuck in small informal enterprises that cannot be scaled up. The lack of quality jobs can be a political fault line in a country with rising aspirations, and successive governments have tried to eliminate this blame line by increasing income support schemes, which provide support for growth-driven public goods, merit subsidies and infrastructure. Leave less money for
One way of looking at the Indian development journey over the last 75 years is to break the structural shackles for development. India has been freed from three important constraints- the food barrier, the domestic savings barrier and the foreign exchange barrier. A major structural constraint that remains is energy. India is short of energy, and runs the risk of economic stress whenever global energy prices rise. The planned transition to green energy in response to climate change provides an opportunity to address energy shortages.
– The final question is of political economy – will India be like East Asia or Latin America? Countries in East Asia have managed to achieve inclusive growth through the creation of competitive enterprises as well as quality jobs for citizens. Public finances have been well managed. Latin America tends to grow with wide income inequalities, macroeconomic imbalances and social tensions. Where will India find itself in 2047? The answer isn’t clear yet.
The author is CEO and Senior Fellow at Earth India Research Advisors and a member of the Academic Advisory Board of the Meghnad Desai Academy of Economics.
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