Sunday, September 29, 2013

Where did India go wrong in her economic policies after independence?

Every time we talk of India's GDP ,we inevitably compare it with China's and China outnumbers India by a long shot. Both the countries or for that matter all the Asian countries became independent around the same time. All of these countries were torn apart by the foreign rule at the time of independence .Since then they all followed different economic models and now they are either reaping the benefits or paying for the policies that their founders choose to pursue. In this blog i will be looking into the economic policies followed by India since independence: what were they? what went wrong? when did it go wrong? could we have done anything different? 

India became independent from 200 years of British rule on 15th Aug 1947. At the time of independence India was plagued by a vicious circle of poverty characterized by the lowest levels of per capita income and consumption levels in the world.The economy was dominantly rural and around 85% people lived in the villages.Illiteracy was as high as 84%. India at the time of independence was truly an underdeveloped country. 

Immediately after independence, our leaders had to choose the economic model that our country would pursue.Jawahar Lal Nehru ,India's first PM, was impressed with the Soviet Union's style of command and control economy ever since his first visit there. Soviet style central planning model(a task assigned to the Central Planning Commission) and import substitution model(aiming to be self sufficient in producing whatever we need rather than paying foreigners for our needs) to run the economy was adopted. Public Sector Units(PSUs) were set up; several dams ,steel mills and other industries were constructed and premier institutes including the IITs were started, all built and operated by the government. Nehru aptly dubbed our factories, research laboratories, irrigation dams and power stations as the “temples of modern India”. However, Nehru also sought active participation of private entrepreneurs (though working within the purview of Planning Commission) in the country's development

Did we got it wrong right at the outset? No. Socialism was the order of the day and was very much in vogue at that time  . Also, we had got independence from British and hence were afraid of imperialism of any kind including economic. So government took control of the commanding heights of the economy . This model served well for India at least for the 1st two plan period. The GDP growth for the 1st and 2nd plan period is 3.6% and 4% respectively which was quite an achievement given the condition of the economy which we had inherited from the British. The initial economic model served India well in the 1st decade since independence. 

In the beginning of the 1960s India had to face a war with China which was a big drain on the exchequer .Then there was a war with Pakistan which further exposed the economic problems. With Indira Gandhi at the helm
after Nehru's death in 1964, began the true socialist era of Indian economy. At this stage, our democracy had stood the test of time and economy was in a much better shape. This was the time to switch gears of the Indian economy by encouraging private entrepreneurship and reducing the role of government in economy. But what happened was exactly opposite. Several private enterprises including Banks, Insurance, Oil companies were nationalized. Although Nehru was a socialist at heart, he never prevented private companies from growing. But Indira Gandhi (after her initial years in politics) became a socialist to the core. At a time when the entire world was accepting export led policies, India continued with import substitution model. 

It was from here India started to flounder. Indo-Pak-Bangladesh war happened in 1971 and then came the oil shock in 1973 which were a huge drain on the exchequer. Despite repetitive reminders in form of high inflation ,India did not mend her economic policies. Indira Gandhi's economic policies were very much leftist and that left India in a lurch at a time when East Asian economies has started their very sensational growth story. 
 Instead of investing into capital formation, India under Indira pursued populist policies under her slogan of "garibi hatao" which only worsened the economic indicators. Her other policies like strengthening the labor laws(which made it almost impossible for an industrial enterprise with more than 300 employees to either retrench its workforce or even close down without government permission, which was rarely given) are still  haunting Indian economy. Instead of opening up of economy, she made the economy more inward looking by Small Scale Industry(SSI) reservation which  prevented the entry of medium and large scale Indian industries into segments like garments, shoes, toys, sporting goods, small electrical appliances etc . It was precisely in these segments that East Asian countries started their manufacturing led growth.  India became a laggard in manufacturing because the SSIs were neither efficient nor could they take advantage of large scale manufacturing to reduce costs.

So, inspite of the Writing on the Wall, why did India stick to her import substitution model? Answer to this question  is more political than economic. Indira Gandhi, with time, became more and more socialist. Even when the writing  was on the wall, she stuck to her populist measures. It was not as if she did not have political support; after breaking "the syndicate"and  Indo-Pak-Bangladesh war, she had became a towering political figure and had all the political power to pursue whatever economic policy she wanted. But her political outlook passed onto her economic policies.

The results were devastating: per capita income rose from 775 per month in 1969-70 to just 815 in 1976-77 at 1999-2000 prices. The average per capita income growth during the period was just 0.8% with no reduction in poverty achieved. India had lost almost an entire decade!

Whatever economic reforms were undertaken, they were taken because India was pushed to the wall and had no other option. However these  measures were simply not enough.There was definitely a spurt of growth in GDP in the 1980s  but the investment was made using our foreign capital reserves which led to the much known Balance of Payment crisis of 1991 which i will deal with in the next post.

But Indian economy would indeed have been in a much better stat; had the leaders after Nehru  given due importance to progressive economic policies and opened the economy at  sometime in the 1970s. Then, we could have been at par with China and our ASEAN neighbors today.