Economic Development

Abstract:

I was motivated to write this analysis due to my interest in the emerging economies in the east, of which India is a major player. A lot of interest has risen in policies and reforms used by the eastern powers and the means through which they have reached their economic prosperity. It is very important to understand the commitment of the Indian government to the parliamentary principles after Independence and the nature of India’s backwardness and its transformation into the country it is today. India has, through thick and thin, stayed with its parliamentary government. Having to accommodate all of its various castes, creeds, classes, religions and tribes with all of their different traditions, languages and cultures is a herculean task that India has managed to steer clear of without much strain. The economic transformation from a broken state to the economic force that it is today is very interesting and important. This paper, although focusing from independence to today, mainly focuses on the reforms from the 1980’s onward. More weight is given to this period as the reforms implemented during this time were the most influential in shaping the India of today. Comment by user: It looks like an intro than abstract. Abstract is the summary of your research reslts you have completed.

Introduction:

During the 15th through 17th century the world was a very different place. The center of the world lay in the east, not the west. The world was very much Sino-centric. Sino centrism is the perspective that China is the center of the civilization. The claim that world system was Sino-centric meant that the region most ‘central’ to the global economy during 1500-1800 was China and the east. The eastern economies were the foremost amongst all other economies during this period in terms of production in agriculture, industry, and trade. China and India were the leading exporters of silk, copper, ceramics, gold and tea. This made the east the ‘ultimate sink’ of the worlds silver due to its huge export surplus. The balance of trade was in favor of the east with China and India having huge trade surpluses. The arrival of the East India Company marked a turning point in the world economic history.

Prior to independence in India, the British had very effectively drained India of a lot of capital and growth rates very were very low for much of the first half of the 20th century. The British, despite their bad credibility, had also done a lot of good, they invested heavily in a railway system; which was at the time one of the largest in the world, and had also provided a new system of property rights and commercial law in rural and urban areas.[footnoteRef:1] World War II was perhaps the most influential event of the century and certainly a major influence on most of the economics and politics of the world. The war had resulted in the formation of two major economic powers the U.S.S.R. and the U.S.A., the latter being capitalist and former communist. Aligning oneself to either of these countries meant alienating the other and all its alliances. India initially choose to be non-aligned, so as to not take sides. [1: See Pg. 3, The Political Economy of Development in India since Independence, Stuart Corbridge.]

The first two five-year plans:

India finally managed to coax the British into giving them independence on the 15th August 1947. This, although a glorious moment, was anything but peaceful. With the partition of India leading into the civil war in Punjab, the aftermath of World War 2, and the extreme poverty across most of the rural areas, India’s future looked very bleak. It was then that Jawaharlal Nehru stepped up to the role of prime minister with Prasanta C. Mahalanobis[footnoteRef:2] as his economics advisor. Together they managed to steer India through the wake of Independence albeit with steady growth rates of only around 2-3% through the first two five year plans, the end of which coincided with Nehru’s death in 1964. His daughter, Indira Gandhi succeeded Nehru. India is today, unquestionably one of the fastest developing countries of the modern world. [2: See Pg. 7, Foundations of India’s development Strategy: The Nehru-Mahalanobis Approach, Chakravarthy. ]

Considering the hardships that India had just come out off, the first two five year plans were a major success. India implemented her first five-year plan in 1951. This model included the Industrial act, which provided the framework for industrial licensing. According to the industrial act, to set up a ‘scheduled’ industry an entrepreneur had to get a license form the licensing committee set up for the act.[footnoteRef:3] This set up the base for the license raj that would characterize India’s economy until the early 1980’s. The model also gave the government control over private enterprise and control over price and distribution of goods. The IIT’s were also started as major technical institutions thus creating a very strong educational base. The model was also very successful and growth increased significantly. [3: See Pg. 3, Indian Industry, Policies and Performance, Dilip Mookerjee.]

In India’s second five-year plan, the Industrial Policy Resolution implemented some similar goals, mainly to accelerate economic growth, develop heavy industry and to build up a large cooperative sector. India did not create any communes or did not implement any land reforms like her neighboring countries China. Instead she used accommodative politics to ensure that everyone would develop together, even if they have to do so slowly. Nehru implemented this plan with the help up Prasanta C. Mahalanobis his then economic advisor. Together the Nehru-Mahalanobis plan aimed at increasing the growth rate of industry and generating employment. The plan was somewhat successful with decent growth rates but food shortages and still very elaborate proceedings for starting up businesses. Nehru had a strong belief in Fabian socialism.

The 60’s and 70’s:

The 60’s were a very tumultuous time for India. The Nehru-Mahalonobis model presupposed that India would be governed by a developmental state of the type that would soon take shape in East or South-east Asia.[footnoteRef:4] The events of the 60’s however proved to be very influential in taking the economy in a different direction. The Sino-Indian war took a great toll on its capital. The Pakistan war was also causing even more major problems. Therefore India started to take on more socialist inspired policies and reforms, such as raising industrial growth though shifting from agriculture to more manufacturing based growth. The third five-year plan also focused its attention more toward development of military and defense industry. The Monopolies and Restrictive trade practices act [M.R.T.P act] came about in 1970, which restricted big firms from growing and regulated them. Such firms would have to seek special permits to grow by more than 25% of existing levels. Again the obstructions of the license-quota raj, the nickname for the red tape that surrounded bureaucracy, prevented economic growth. The 1973 Foreign exchange and regulation act [F.E.R.A. act] came into play. This resulted in the dilution of foreign equity holdings. Import of foreign technology was also very hard and tightly regulated. Overall the strains of the red tape and ‘license raj’ were beginning to slow the economy and cause obstructions to what should have been a time of heavy growth. [4: See Pg. 7, The Political Economy of Development in India since Independence, Stuart Corbridge.]

The term ‘Hindu rate of growth’ was coined during the 70’s. It sums up most of the decade that was dogged by the ‘permit-license-quota-raj’ and the emergency state that had been declared by Indira Gandhi. The term ‘Hindu rate of growth’ was used by many an economist to describe the squeeze placed on the country’s developmental state by aggressively sectional interest.[footnoteRef:5] An average growth rate during the 70’s was 2.9% per annum, which was barely positive in per capita terms. It was also during this period that criminals moved into politics, a problem, which still represents itself today. The criminalization of politics, especially in the north, posed yet another barrier to economic reform. [5: See pg. 9, The Political Economy of Development in India since Independence, Stuart Corbridge.]

After 1980’s:

It is commonly believed that the reforms of 1991 were the catalysts for the high growth rates and current economic standing of India. This belief is only to some extent, true. The actuality of the situation was that growth rates started to accelerate nearly a decade or so earlier. There is a significant spike in the growth per capita of net national product from the early 1980’s.[footnoteRef:6] It was actually the pro-business policies implemented in the early 1980’s during the tenure of the then prime minister, Indira Gandhi, that caused the growth rates to accelerate. The process of Indian reforms started around this period with Indira Gandhi cutting off most of the red tape that obstructed the big firms and businesses and supporting a more pro-business stance. To understand the process of reforms we must understand the political and economic situation in India at that time. [6: Pg. 1254, Politics Of Growth, Kohli, Part 1, Figure 1.]

Prior to 1980 India was very ‘average’ in terms of growth. The ‘Hindu rate of growth’ was a term, despite its derogatory expression, that was very apt for the stagnant growth that India had faced. When Indira Gandhi came into power in 1980, she did so as ‘a leader of the masses’ with slogans such as ‘garibhi hatao’ (remove poverty) etc. She now faced the task of pleasing the masses, who gave her their vote, as well as at the same time diverting Indian economy thinking from a more leftist, state intervening, socialist-esque one to a more rightist path that involved more capitalistic thought of development. This would allow growth rates to increase and curb inflation and improve employment, but it meant that big firms and business would have to be supported and labor would have to be more controllable. This move was not broadcast throughout India as the government still wanted to portray Indira Gandhi as a leader of the masses and thus they ‘camouflaged’[footnoteRef:7] her image. After these schools of thought were introduced and implemented the Indian democracy started to shift away from socialistic economic system to a more capitalist one. Thus she started to allow the private sector to expand and removed many of the licenses and permits that characterized the economy since Independence. [7: Pg. 1255, Politics of Growth, Kohli, Part 1.]

As soon Indira Gandhi came into power she put economic reform on top priority. She now had to find a path that would allow for the ‘accommodating’ of India’s masses and at the same time increasing growth. This new model fro development that was proposed was to place higher emphasis on state and business alliance for growth; however, this new model went against the ideals and policies set up by most of previous economic thought. Nonetheless, the government under Indira Gandhi started to limit the growth of public sector, moved towards a more anti-labor stance and started to downplay the role of economic planning. These reforms were not trumpeted across India, but they were still very important when considering India’s current economic position. Indira Gandhi at that time had the ‘poor vote’ of India behind her and she felt that aligning herself to a more businesses would propel growth and lower inflation, which would please the poor very much.

Thus the main three components of this new model was making economic growth a top priority, supporting a more pro-business outlook, and accepting that taming labor was a necessary aspect for achieving this growth. Committee’s were set up to study how these policies would be implemented. Specific committee’s would study specific areas such as trade, financial reforms and economic administration. The first of the pro-business reforms that were implemented was the toning down of the Monopolies and Restrictive trade business act[footnoteRef:8] [M.R.T.P. act] thus allowing for the private sector to venture into areas that were hitherto reserved for the public sector. License restrictions were removed and big businesses were allowed to delve into core industries such as chemicals, drugs, power generation and cement. To finance these industries the government liberalized credit and also gave tax brakes so as to incentivize investment. Legal framework was also re-aligned so as to allow the corporate sector to mobilize funds from the public sector. Anti-labor policies were also implemented albeit more quietly. Indira Gandhi decided that the ‘national situation’ was more important than that of labor interests and thus legislations that discouraged labor strikes were implemented to ‘tame’ labor. [8: See Pg. 1255, Politics of Growth, Kohli, Part 1.]

All of these new policies were not without their setbacks. With the implementation of all of these policies there was a major financial strain. Expenditures were growing significantly due to the need for keeping up with military standards of the rest of the world and also to sustain infrastructure growth. Added to this was the reduction in revenue from direct taxes due to the concessions for the big firms and businesses. To reduce the financial strain on the country there were cutbacks in the public sector and abandonment of the food for work program. Nonetheless foreign debt grew and continued to rise rapidly during the tenure of Rajiv Gandhi who came to power after the assassination of his mother in 1984.

Rajiv Gandhi continued with the implementation of policies that his mother had set up. He; however, did not pretend to be socialist like his mother and instead completely dropped the façade. He opened up the economy even more and rates of investment increased significantly thus improving growth significantly. The economy moved towards a more ‘laissez faire’ outlook and industries such as computers and electronics were also introduced. Business giants such as reliance, Birla’s and Tata’s appeared and created the necessary competition for a more capitalist oriented market. Under Rajiv Gandhi economic reform included the industrial deregulation, encouragement of capital and commodity exports and tax rationalization. This resulted in an economic boom with growth rates of around 5.6% and a very significant rise in aggregate labor productivity. This reform was initially very good but it was to be only temporarily sustainable.

With the high expenditure the import bill rose to 3% of G.D.P. and foreign debt, which began to rise during Indira Gandhi’s time due to the borrowing to ease the financial strain, came to a point where, “ more than a quarter of exports were going to pay international debt service by the end of the 1980’s.” (Pg. 27, India: An Analytical Growth Narrative, Brad De Long.) All of these issues ended with the exchange rate crisis in 1991. This and the collapse of the U.S.S.R. led to the famous reforms of 1991.

The breakdown of the Soviet Union in 1990 had a very significant impact on India. Despite early on having been non-aligned between the soviet and the U.S., India during Indira Gandhi’s first time in power had grown to lean towards more socialist ideals and depended on the Soviet Union for financial funding and for trading in a variety of goods such as “oil, armaments and defense materials”[footnoteRef:9] This breakdown of the soviet union allowed India to open up even more thus finally allowing India to become a free market. [9: Pg. 1362, Politics Of Growth, Kohli, Part 2.]

In 1991, India was politically and economically in bad shape. Politically the climate was very stressed with two of the past prime ministers having been assassinated and the economic outlook was very bleak with India facing the exchange rate crisis and thus having to pledge 67 tons of India’s gold reserves as collateral for the emergency loan that was to be taken out. It was under this climate that Narasimha Rao came to be prime minister with Manmohan Singh becoming his economic advisor. Upon coming to power Narisimha Rao’s government had only 43% of the seats in parliament, which when compared to the Nehru-Gandhi era was considerably smaller. Another issue was the prominence of the B.J.P. party who had the second largest party in the Lok Sabha. Despite these blockages Narasimha Rao and his government held on for five years and brought about very significant reforms to the economy.

Under the advise of Manmohan Singh the cautious steps that were taken during Indira Gandhi and her son, Rajiv Gandhi’s, tenure, were now sped up to a rapid pace. Tariffs were reduced from 85% to 25% of import value.[footnoteRef:10] Foreign direct investment was highly encouraged and trade restrictions were removed. Foreign exchange reserves were built up and the M.R.T.P. act, which was only partially diluted, was now fully abolished. India tried to completely reduce its budget deficits of the past but was not fully able to do so. [10: Pg. 30, India: an Analytical Growth Narrative, Brad De Long.]

The rupee was devalued by 20% against the U.S. dollar in July of 1991 and in august of 1994 the floating exchange rate regime was adopted.[footnoteRef:11] Thus industrial growth grew at a rapid pace and India was able to, albeit very minimally, penetrate the world markets in Industrial products. Annual growth was around 6% and the balance of payments had been considerably improved. India became an active destination for foreign direct investment. [11: Pg. 4, India, A Decade of Reforms.]

The Vajpayee Government came to power in 1998 and despite its party, the Bhartiya Janata Dal [B.J.P.], having opposed the neo-liberal policies implemented in 1991 continued to support and further the economic agenda. India became one of the worlds fastest growing economies second only to China. The Rao and Vajpayee governments, more or less, followed the same agenda and furthered the Indian economic stance.

Conclusion - India Today:

Despite all of the Indian reforms and the very good rates of growth the underlying issues that dogged India at independence continue to prevail. India still has a very high rate of poverty especially in rural areas. Growth in India has been rapid in some states and little to nothing in most others. Infrastructure is still inadequate, electricity provided is of low quality, corruption is still a major problem in politics and inflation rates continue to keep rising despite many measures taken. There is still a lot of red tape and the public sector that had areas reserved for them is now inefficient and very erratic.

These limitations are rooted in part in the nature of the society, but also in patterns of politics. The caste and class structure of Indian society, and the changing balance of class forces, especially the growing power of big capital, put definite limits on redistributive possibilities in India.[footnoteRef:12] However, politics also matters, the ideology and organization of rulers, quality of bureaucracy, mobilization of the lower strata, and of course, pressures of democratic politics, all have some bearing on the extent of redistribution and poverty alleviation. [12: See Pg. 22, Politics of Growth, Kohli]

With growth and development, issues of scarcity and high population have also arisen. The problems India faces today are of a much different nature. The 66th round of national sample survey in India, which was conducted by the National Sample Survey (N.S.S.) showed interesting reports on India’s jobless growth during the period of the eleventh five-year plan. (2007-2012) The reports show that, despite India’s increasing growth, there has been little to no job creation. A mere two million jobs have been created in a workforce of over 470 million people.[footnoteRef:13] India’s economic growth up to this point has been driven by service sector expansion, which has grown at a very fast pace. Employment growth in the organized sector has been painfully slow when compared to the service sector. Other factors such as wage rates have increased but the Job market at the moment looks to be very bleak. [13: See MOSPI, 66th round, national survey. ]

Despite all of the issues India still manages to achieve growth rates above 7% and is still the second fastest growing economy after China. The future looks promising, but will depend on whether or not the government will implement strict policies and reforms without being influenced by corruption. Still the growth and development India has achieved is remarkable, considering its state before Independence.

References:

1.) Chakravarty, Sukhamoy. Development Planning: The Indian Experience. Oxford [Oxfordshire: Clarendon, 1987. Print.

2.) Francine, Frankel. "India's Political Economy." By Francine R. Frankel Book (9780195683790). Web. 12 May 2012. <http://www.boomerangbooks.com.au/Indias-Political-Economy/Francine-R-Frankel/book_9780195683790.htm>.

3.) Corbirdge, Stuart. "The Political Economy of Development in India since Independence."- LSE Research Online. Web. 15 May 2012. <http://eprints.lse.ac.uk/20381/>.

4.) Mookherjee, Dilip. Indian Industry: Policies and Performance. Delhi: Oxford UP, 1995. Print.

5.) Kohli, Atul. "Politics of Economic Growth in India, 1980-2005." Www.princeton.edu. Princeton University. Web. 13 May 2012. <http://www.princeton.edu/~kohli/docs/PEGI_PartI.pdf>.