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Business News/ Opinion / 70 years of Indian Economy: A whistle stop tour

70 years of Indian Economy: A whistle stop tour

A look at how several structural changes and policy reforms over the years drove Indian economy from stagnation to regeneration

India suffered a long period of industrial stagnation after 1965 as the Nehru-era boom petered out. Controls were tightened. Photo: Hindustan Times

The Indian economy had stagnated in the last five decades of colonial rule. It is thus no surprise that Vallabhbhai Patel said in a speech a few days before independence that the economic regeneration of India was the main task of the new nationalist government. Most Indian nationalists other than M. K. Gandhi had believed that the best antidote to mass poverty would be rapid industrialization led by the state—Jawaharlal Nehru, Subhas Chandra Bose, B. R. Ambedkar and V. D. Savarkar, for example.

The Indian economy accelerated in the 1950s after the long stagnation. The industrial policy resolution of 1948 was a relatively liberal document given what was to follow. Economic historians say that it was Patel who ensured that the private sector was not pushed into a corner even while accepting that the public sector would have an important role to play in independent India.

Nehru had consolidated his power by 1956. The government he led introduced two seminal policy frameworks in that year. The industrial policy resolution of 1956 had a far more statist flavour than the 1948 policy. The second five-year plan was designed with a view to not just push economic growth but also bring about a rapid structural change in the Indian economy. The focus was on the expansion of capital goods rather than wage goods.

Few today know that industrial production began to grow in double digits as a result of this push. India, for the first time in its history, began to develop a modern industrial structure. The Indian economy continued to be relatively open to foreign trade as well as foreign investment, even though the prevailing mood across developing countries was of export pessimism following the collapse of global commodity prices in that decade, after the end of the Korean war.

The initial success of the Nehruvian growth push did not mean that there were no major flaws in the strategy. B. R. Shenoy pointed to four problems. First, the ambitious plans were heavily dependent on deficit financing, and that would lead to balance of payments pressures. Second, the focus on capital goods rather than wage goods for mass consumption would be inflationary. Third, high taxation to finance the plans was becoming a heavy burden on people. Fourth, the spread of the state into so many economic activities would eventually put Indian political democracy at risk.

The flaws in strategy were becoming increasingly evident. Lal Bahadur Shastri took over from Nehru in 1964. P. N. Dhar has written in his autobiography that Shastri was a practical man who saw that the heavy hand of regulation was doing a lot of harm. Soaring food prices convinced him that policy focus needs to move from heavy industry to agriculture. He saw that the spread of the black market was because resources were being allocated through physical controls rather than financial incentives. The growing inefficiency of public sector investment strengthened the case for a bigger role for the private sector and imports.

Shastri had a short stint because of his untimely death. Indira Gandhi inherited a weakening economy. One of her first decisions was to devalue the rupee. There were also some minimal trade reforms. These decisions were made more out of desperation than conviction. She then famously swung left in a bid to get communist support in her battles against the Congress old guard. The choice was between economic liberalism and economic populism. India went in a direction that was opposite to the direction that most Asian countries were following after 1965. The economy was choked in a maze of controls that were used to get political leverage. The government controlled everything. (However, the rapid increase in the bank branch network after nationalization helped increase financial savings needed for the next round of economic growth.)

India suffered a long period of industrial stagnation after 1965 as the Nehru-era boom petered out. Controls were tightened. Economists were divided about the causes of the industrial stagnation. Jagdish Bhagwati, Padma Desai and T. N. Srinivasan argued it was because of the inefficiencies of a dirigiste regime. Sukhamoy Chakravarty believed it was because industrial growth was constrained by the lack of an adequate home market for industrial products. India was also hit by two severe shocks at the time—the quadrupling of global oil prices in 1973, plus two consecutive droughts. Inflation went to record heights. Street protests almost swallowed political stability.

The Janata Party government that came to power in 1977 began an overdue process of policy rethinking. Expert committees were set up to take a fresh look at everything—trade policies, controls, economic administration taxation and subsidies. The role of finance minister H. M. Patel is tragically underestimated in popular accounts. The Janata Party collapsed under its own weightlessness. Indira Gandhi rode back to power in a new avatar.

Indira Gandhi 2.0 seemed to have learnt her lessons. Political scientist Atul Kohli has said she made her peace with Indian business houses. The worst excesses of the licence raj began to be rolled back. It was now easier to expand industrial capacity, import inputs for technology upgradation, and taxes began to come down. Rajiv Gandhi accelerated the process. V. P. Singh presented a reformist budget in 1985. The seventh five-year plan, authored by Manmohan Singh, shifted the focus from capital accumulation to productivity. However, the economic reforms of the 1980s, though important, were designed to help existing businesses become more efficient rather than make India a truly competitive economy.

Indian economic growth had its second structural break in 1980. The first was in 1950. However, the growth acceleration in that decade was built on heavy foreign borrowings and an expansion in fiscal deficits. The inevitable happened in 1990—a severe balance of payments crisis after Saddam Hussein invaded Kuwait. India was two weeks away from an international default. The new minority government led by P. V. Narasimha Rao ended industrial licensing, cut tax rate, began to open the economy for international trade and much more. The progress of reforms since then has been in fits and starts. But that story is well known.

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Updated: 18 Aug 2017, 06:52 AM IST
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