India After Independence: 1947-2000 (58 page)

Jawaharlal Nehru and the early Indian planners were acutely aware of India’s backwardness in science and technology (an area left consciously barren in the colonial period) and therefore made massive efforts to overcome this shortcoming. Nehru’s ‘temples of modern (secular) India’ consisted not only of steel and power plants, irrigation dams, etc., but included institutions of higher learning, particularly in the scientific field. During the First Plan itself, high-powered national laboratories and institutes were set up by the Council of Scientific and Industrial Research for conducting fundamental and applied research in each of the following areas: physics, chemistry, fuel, glass and ceramics, food technology, drugs, electro-chemistry, roads, leather and building. In 1948 the Atomic Energy Commission was set up, laying the foundations of the creditable advances India was to make in the sphere of nuclear science and related areas. This was in addition to the unprecedented increase in the educational opportunities in science and technology in the universities and institutes. National expenditure on scientific research and development kept growing rapidly with each Plan. For example, it increased from Rs. 10 million in 1949 to Rs. 4.5 billion in 1977. Over roughly the same period India’s scientific and technical manpower increased more than 12 times from 190 thousand to 2.32 million. A spectacular growth by any standards, placing India, after the dissolution of the Soviet Union, as the second country in the world in terms of the absolute size of scientific and technical manpower. This was a major achievement despite the fact that the quality of education in general, and particularly in the university system, tended to deteriorate over time and there was massive brain drain, mainly to the US, of a significant part of the best talent produced in the country. Yet, it is an achievement of considerable significance, as increasingly today ‘knowledge’ is becoming the key factor of production and there is a global awareness of the necessity to focus on education and human resource development. That India can even think of participating in the globalisation process in today’s world of high technology, with any degree of competitiveness and equality, is largely due to the spadework done since independence, particularly the great emphasis laid on human resource development in the sphere of science and technology.

In the enthusiasm to support the very necessary economic reforms being undertaken by India today (since 1991), it has become fashionable in some circles to run down the economic achievements of the earlier periods, particularly the Nehru era. Nothing could be more short-sighted and ahistorical. It is the Nehruvian era that created the basic physical and
human infrastructure, which was a precondition for independent modem development. Today’s possibilities are a function of the achievements of the earlier period; they have not arisen despite them.

Also, the Nehruvian phase has to be seen in the global historical context of that period. As Dr Manmohan Singh, the brilliant economist who as finance minister inaugurated the structural adjustment programme for India in 1991, was to acknowledge: ‘In 1960, if you had asked anybody which country would be on top of the league of the third world in 1996 or 1997, India was considered to be the frontrunner.’
¹¹
There was a consensus among a wide variety of economists, including prominent ones in the West—W.W. Rostow, Rosenstein-Rodan, Wilfred Mandelbaum, George Rosen, Ian Little, Brian Reddaway, to name just a few—that the direction of the Indian planning effort was a very positive one with great potential. (It was common to eulogise the democratic Indian path as opposed to the model followed by totalitarian China.) There was, in fact, a dialectical relationship between the evolution of contemporary development theory and the Indian experience. As the reputed economist Sukhamoy Chakravarty noted, ‘Dominant ideas of contemporary development economics influenced the logic of India’s plans, and correspondingly, development theory was for a while greatly influenced by the Indian case.’
¹²

Surely, over time, changes needed to be made, learning from the experience of this novel effort to bring about industrial transformation in the modern (mid-20th century) environment of a post-colonial backward country, while fully maintaining a functioning democracy. Clearly, some of the policy instruments—viz. industrial licensing, price and distribution controls, import restrictions shielding inefficient domestic producers, dependence on an increasingly inefficient public sector, etc., needed to be given up or amended. Also, changes in the nature of world capitalism called for novel ways of seeking economic opportunity, which,
inter alia
, involved a greater opening up to the world economy. However, the possibility of such a change got short-circuited by a series of crises faced by India in the mid-sixties and changes in the international and internal political situation which forced her to move further in a protectionist, inward-looking and dirigiste direction. We look more closely at this aspect in the next chapter on the Indian economy from 1965 to 1991.

The significant achievements during the first three Plans notwithstanding, the Indian economy was in the grip of a massive crisis in many respects by the mid-sixties, which rapidly changed India’s image from a model developing country to a ‘basket case’. Two successive monsoon failures of 1965 and 1966, added to the burden on an agriculture which was beginning to show signs of stagnation, and led to a fall in agricultural output by 17 per cent and foodgrain output by 20 per cent. The rate of inflation which was hitherto kept very low (till 1963 it did not exceed 2 per cent per annum) rose sharply to 12 per cent per annum between 1965 and 1968 and food prices rose nearly at the rate of 20 per cent per annum. The inflation was partly due to the droughts and partly due to the two wars of 1962 (with China) and 1965 (with Pakistan) which had led to a massive increase in defence expenditure. The government consolidated (state and centre) fiscal deficit peaked in 1966-67 at 7.3 per coat of GDP.

The balance of payments situation, fragile since 1956-57, deteriorated further, with the foreign exchange reserves (excluding gold) averaging about $340 million between 1964-65 and 1966-67, enough to cover less than two months of imports. The dependence on foreign aid, which had been rising over the first three Plans, now increased sharply due to food shortages as well as the weakness of balance of payments. Utilization of external assistance, which was 0.86 per cent of Net National Product (NNP) at factor cost in 1951-52, increased to 1.05 per cent in 1956-57, 2.37 per cent in 1957-58, 2.86 in 1960-61 and 3.8 per cent in 1965-66. Amortisation and interest payments as percentage of exports (debt service ratio) rose sharply from 0.8 up to the end of the First Plan to 3.9 during the Second Plan, 14.3 during the Third Plan to 20.6 in 1966-67 and a whopping 27.8 in 1966-67. Given the overall situation, long-term planning had to be temporarily abandoned and there were three annual Plans between 1966 to 1969 before the Fourth Five-Year Plan could commence in April 1969.

It was at this most vulnerable time for the Indian economy—with high
inflation, a very low foreign exchange balance, food stocks so low as to threaten famine conditions in some areas, calling for large imports, and nearly half the imports having to be met through foreign aid—that the US, the most important donor at that time, decided to suspend its aid in response to the Indo-Pak war (1965) and refused to renew the PL-480 (wheat loan) agreement on a long-term basis. Also, the US, in President Johnson’s words, wanted to keep India ‘on a short leash’ so that she did not stray too much from the policies preferred by it, which they now sought to pressurize India to accept.

The US, the World Bank and the IMF wanted India to (a) liberalize its trade and industrial controls, (b) devalue the rupee and (c) adopt a new agricultural strategy. While there was considerable indigenous support for a new initiative in agriculture (which was successfully implemented), there was plenty of suspicion over trade and industrial liberalization and particularly over devaluation. As it happened, the devaluation of the rupee (nominally by 36.5 per cent though effectively much less) and the trade liberalization that was initiated by Prime Minister Indira Gandhi in the mid-sixties got associated with the continuing recession in industry, inflation, and the failure of exports to pick up, all of which was at least partly caused by ‘exogenous’ circumstances like the second major drought of 1966-67 and partly by the inadequate manner in which these policies were initiated. In any case, these policies were condemned before their long-term effect could be realized.

The perceived failure of the devaluation and liberalization of controls on trade and industry combined with the resentment at the ‘arm-twisting’ resorted to by external agencies in favour of these policies, using India’s economic vulnerability, led to an ‘economic nationalist’ response based on a reversal to (and often considerable accentuation of) the earlier policies of controls and state intervention. The immediate imperative was seen to be the restoring of the health of India’s balance of payments situation, creation of sufficient foreign exchange reserves and the removal of dependence on food imports by improving agricultural production and creating food reserves.

The method chosen for meeting the balance of payments crisis and reducing the fiscal deficit (the two being linked) was a severe tightening of the belt, involving drastic cuts in government expenditure rather than increases in tax levels. The cut fell mainly on government capital expenditure, which in real terms decreased by about fifty per cent between 1966-67 and 1970-71. This was an important factor in the continued industrial recession in this period. The industrial slowing down continued till the mid-seventies, the industrial growth rate coming down from an average of 7.8 per cent per year between 1951 and 1966 to 4.99 per cent per year between 1966 and 1974.

Further, the political developments in this period had important implications for economic policy. In the 1967 elections, the Congress party received a major setback in the Centre and particularly in the states. The prime minister responded by adopting a radical stance which led to
differences within the Congress and eventually a split in November 1969. After the split Mrs Gandhi could retain the government only with the support of the Communist parties and some regional parties, and this accentuated the radical left turn in her policies. In December 1970, she called for a general election and, campaigning on the slogan of
garibi hatao
and promising radical socialist policies, she romped home with a landslide victory in March 1971.

The post-1967 period therefore saw the launching of a series of radical economic policies which were to have long-term effects on India’s developmental effort. Some of these policies accentuated the shortcomings that had begun to emerge during the first phase of planning itself, i.e., in the fifties and early sixties, others created new distortions. The major private commercial banks in India were nationalized in 1969. The same year the Monopoly and Restrictive Trade Practices (MRTP) Act, severely restricting the activities of large business houses, was passed. After the 1971 election victory, a series of further such measures increasing government control and intervention were introduced with the active support of left radical intellectuals like P.N. Haksar, D.P. Dhar and Mohan Kumaramangalam, Thus, insurance was nationalized in 1972 and the coal industry was nationalized in 1973. A disastrous effort was made to nationalize wholesale wheat trade the same year, which was abandoned after a few months. The Foreign Exchange Regulation Act (FERA) was passed in 1973, putting numerous restrictions on foreign investment and the functioning of foreign companies in India, making India one of the most difficult destinations for foreign capital in the world. The government also decided to take over and run ‘sick’ companies, such as a number of textile mills, rather than allow such loss-making companies to close down.

The debilitating long-term effects of many of these measures on the overall economy have been discussed later in this chapter.

It must be remembered, though, that the new policies, which were partially a result of the historically specific economic and political situation, met many of the critical problems faced by the country at that time. They pulled India out of the economic crisis most creditably and restored her independence and dignity
vis-à-vis
the advanced countries. We shall briefly review these achievements in the next section.

In the considerable economic achievements between the mid-sixties and the end-eighties, Indira Gandhi, (often too easily dismissed as populist) played a major role. All these are to be viewed in light of the series of formidable internal and external shocks witnessed during this period. For example, following the crisis of the mid-sixties discussed above, there was the genocide in East Pakistan (Bangladesh) resulting in the huge burden of over ten million refugees from that region (nearly half the population of a country like Australia!) taking shelter in India, the 1971 war with
Pakistan, two droughts of 1972 and 1974, the major oil-shock of 1973 leading to a quadrupling of international oil prices and hence of cost of oil imports, the oil-shock of 1979 when oil prices doubled, the disastrous harvest of 1979-80 caused by the worst drought since independence, and the widespread successive droughts of 1987 and 1988.

Concerted efforts were made after the mid-sixties to,
inter alia
, improve the balance of payments situation, create food security, introduce anti-poverty measures and reduce dependence on imports for critical inputs like oil. These enabled India to weather the impact of the droughts, war and the oil-shocks without getting into a debt crisis and a recessionary spin as happened in the case of a number of developing countries, especially in Latin America in the eighties, and without serious famine conditions, let alone the huge number of famine deaths that occurred in Communist China in the late fifties.

On the food front the situation improved rapidly. The adoption of the Green Revolution strategy of introducing a package of high yield variety (HYV) seeds, fertilisers and other inputs in a concentrated manner to some suitable select areas paid immediate dividends in creating food security and poverty reduction (discussed in detail in chapter 31). Between 1967-68 and 1970-71 foodgrain production rose by 35 per cent. Net food imports fell from 10.3 million tonnes in 1966 to 3.6 million in 1970, while food availability increased from 73.5 million tonnes to 89.5 million tonnes over the same period. Food availability continued to increase sharply to 110.25 million tonnes in 1978 and 128.8 million tonnes in 1984 and food stocks had crossed the 30 million tonnes mark by the mid-eighties, putting an end to India’s ‘begging bowl’ image and creating considerable food security even to meet extreme crisis situations. For example, the economy was able to absorb the massive successive droughts of 1987-88 without undue pressure on prices of food or imports. In fact, the rural poverty index continued to show a decline in these crisis years as rural employment and incomes were maintained through government programmes using the surplus food stocks. This was the first time since independence that rural poverty was not exacerbated during a drought or a poor harvest.

Apart from food self-sufficiency, certain other features emerged that pointed towards a greater autonomy of the Indian economy and increased self-reliance. The fiscal deficit was brought down sharply from 7.3 per cent of GDP in 1966-67 to 3.8 per cent in 1969-70. The balance of payments situation improved considerably with reduced food and other imports, a certain improvement in exports and particularly with the surge in remittances made by Indian workers from the oil-boom rich Middle East. By 1978-79, the foreign exchange reserves had risen to a peak of about $7.3 billion (including gold and SDRs), more than nine months of imports cover compared to less than two months cover in 1965-66.

Given the arm twisting of the donors, self-reliance was seen as the need to reduce dependence on foreign aid not only in crisis situation such as those created by drought or other natural disasters, but also on aid as a short-term means to develop key capabilities, as was envisaged in the
earlier Nehru-Mahalanobis strategy. Partly as a result of this shift in perspective, foreign aid began to decline rapidly. Net aid as a proportion of Net National Product (NNP), which had peaked to an average of 4.22 per cent during the Third Plan (the last few crisis years of the Plan partly accounting for this high rate), came down to 0.35 in 1972-73 and rose only slightly after the 1973 oil crisis, but yet averaged not more than 1 per cent of NNP till 1977-78. The debt-service ratio, i.e., the annual outflow of interest and repatriation of principal due to existing debt as a proportion of exports of goods and services, fell to a low and easily manageable 10.2 per cent in 1980-81 from an estimated 23 per cent in 1970-71 and 16.5 per cent in 1974-75.

We have already seen (chapter 25) that the rapid expansion in the indigenous capital goods industry, which started in the Nehru years, had greatly reduced India’s dependence on the external world for maintaining her rate of investment (and growth) as the share of equipment that needed to be imported in the total fixed capital investment in India had fallen from 43 per cent to 9 per cent between 1960 and 1974.

Private foreign investment continued to be very low in proportion to total investment. Unlike many Latin American and some East Asian countries, foreign capital or multinational corporations played a very minor role in India. In 1981-82, only about 10 per cent of value added in the factory sector of mining and manufacturing was accounted for by foreign firms which included FERA companies with diluted foreign shareholding. Till the eighties, most foreign collaborations were technological collaborations not involving any foreign share or equity capital. For example, in 1977-80, 86.5 per cent of technology import agreements did not involve any foreign equity. Foreign capital was marginal in the financial sphere as well. It was negligible in the insurance sector and foreign banks accounted for only 8.9 per cent of total deposits in the organized banking sector in 1970. Between 1969 (the year of bank nationalization) and 1981, while the number of branches of all commercial banks in India rose from 8,262 to 35,707, the number of branches of foreign banks rose from 130 to 132. By 1992, the corresponding figures were 60,601 and 140. (It may be noted here, as an aside, that more than 60 per cent of the massive branch expansion of the Indian banks was in the rural areas, not only creating a much wider base for mopping up savings but also for extending credit, and thus enabling priority credit to agriculture, and that too increasingly to the poorer households as part of the second wave of land reform and the
garibi hatao
campaign. (See also, chapter 30.)

Thus, while the volume, of foreign private investment remained marginal and foreign aid declined and the ratio of foreign savings to total investment fell and remained low throughout the seventies, the rates of domestic savings and investment increased rapidly. As Table 26.1 shows, from an average savings rate of 10.58 per cent and a rate of Gross Domestic Capital Formation or investment of 11.84 per cent in the fifties, the savings and investment rates nearly doubled to 21.22 per cent and
20.68 per cent respectively between 1975-76 and 1979-80. The eighties and nineties saw further increases in the rates of domestic savings and capital-formation, making them comparable to several high growth economies.