Term I: Indian Economic and Political

History
Objectives, Content & Evaluation - Part II

Professor Sebastian Schwecke

Public Policy & Management Group
Email: sebastian_s@iimcal.ac.in
The Liberal Case for Economic
Planning

 American and Continental European

industrialization and import substitution
 The failure of classical liberalism to deal with the
“labour question”
 Soviet industrialization in the 1930s
 Economic planning and the war experience
 Germany’s military-industrial complex in WWI
 German and US experiences in planning in WWII
 Britain and Indian economic planning in WWII
The Idea of Economic
Planning in Liberal Doctrine
 Schumpeter: Short-term benefits of top-down
economic planning vs. the long-term benefits of
“creative destruction”
 Kalecki: Importance of ensuring high wage levels for
development; cf. Fordism
 Keynes: Public spending with the aim to balance
business cycles
 The emerging neoliberal dogma; the state assisting
(private) capital accumulation
 The social market economy (Continental neoliberalism)
 Neo-classical influences and the turn towards
deregulation in Anglo-saxon neoliberalism
The Rationale for Planning in India
Nehru’s consolidation of power and its impact on
economic policy
The objectives of planning – Why plan?
The three assumptions underlying the planning process:
o the basic constraint on development was the deficiency of capital
o Industrialization provided the means for surplus labour to be
productively employed
o Government needed to control investment because if market forces
operated concentration of investment (both location and holding)
would continue and investment would flow to non-essential sectors
The objective was to make India a high-growth, self-
reliant, modern economic power by implementing five-
year plans for investment and growth
The Mahalanobis Four-Sector Plan Model, 1955
The Economy

Capital Goods Sector Consumer Goods Sector

(Public Sector)

Factory Sector Small and Household Social Services

(Both Public & Industries (including (Health and
Private Sector) agricultural products) Education)
Sector

Public investment was to be concentrated in capital-goods sector and in social

services sector. Investment in the factory sector by private industry was to be
regulated, thus creating demand for small and household industries
Sectoral Contribution to GDP – 1951/52
to 2013/14
(Source: http://statisticstimes.com/economy/sectorwise-gdp-contribution-of-
india.php)
Institutionalizing Planning - The
Three Pillars of Planned Economic
Growth

1. The Industries (Development & Regulation) Act

of 1951

2. The Licensing System

3. Progressive Taxation
 The Industries (Development &
Regulation) Act, 1951
The most complex and comprehensive system of
control and regulation of private sector
enterprise devised worldwide
Objectives:
o regulation of investments according to plan
priorities and targets
o prevention of concentration of holding in the private
sector
o balanced industrial development to reduce disparities in
levels of development
o protection and encouragement of small-scale industries
.
Delegated vast powers to the bureaucracy
All existing industries had to register

Licenses were required for new

investments, capacity addition
or over- production
Industries were subject to
regulation that included the
power to:
 investigate the operations of a firm
 assume management control if necessary
 control supply, distribution and prices of products
.
The Act initially covered 42 industries and
150 articles of manufacture
The list was expanded in 1956 to include an
additional 26 industries and by the mid-
sixties it covered almost all industries
Negotiating the System
We needed to import steel and copper, and had to make the
payments to an English company. So that meant we had to: one,
get an import license; two ask the RBI to release the foreign
exchange; three get the payment released; four get the
permission to manufacture.

For foreign collaboration, like we had between TVS and Lucas,

we had to prove it was justified: how much it would cost, how
long it would last, whether expatriates were needed, then how
much they would be paid, how many days’ travelling would be
required. Each stage – each permission – took us six months to
a year. We had to set up a large office in Delhi in order to apply
to the ministries. Twice every month, my father had to fly from
Madras to Delhi

Gopal Srinivasan quoted in Patrick French, India: A Portrait

(Allen Lane/Penguin: 2011)
Taxation Policy - Objectives

…produce a sizeable addition to public revenue

…provide incentives for larger earnings and more
savings
…restrain consumption over a fairly wide field so as
to keep in check domestic inflationary pressures and
release resources required for investment
…initiate such changes in the tax structure as would
make tax yields progressively more responsive to
increased income and facilitate an orderly
development of the economy with due regard to the
social objectives we have adopted

– T.T.Krishnamachari, Budget Speech, 1957-58.

Progressive Taxation
Taxation was related not just to economic
policy but to social strategy as well
Income tax rates were hiked both to collect
additional revenue and reduce disparities in
income
New Taxes were introduced
– Estate Duty (1953)
– Capital Gains Tax (1956)
– Wealth Tax (1957)
– Gift Tax (1958)
The Impact of Planned
Development
 Growth rates remained high during
the 50s
 Industry grew at an average of
about 7% during this period
 Agricultural production
increased by an average of 4
percent
 Planned economic development
was seen as a success
Percentage of budget allocated to
capital expenditure (1950/51- 1960/61)

60.00
50.00
40.00
30.00 Series1
20.00
10.00
0.00
 Why was growth in the 50s not
sustained?
• Rapid growth in the 50s was the result of
unique circumstances
• Huge increases in budgetary support for public
sector investment increased output
• Good monsoons in 1953-54 and 1954-55 which
increased agricultural production, reduced
inflation and generated demand for manufactured
goods
• Large sterling balances accumulated during the
war years provided capital necessary for imports
 Low growth and policy change
 By the mid-sixties it became apparent that
growth in the 50s would not be sustained into
the 60s
 The sixties was a decade of relatively low
growth caused by the inefficiencies in
investment, the cost of two wars, a series of
poor monsoons and also policy instability
 Public sector investments were not generating
sufficient returns, and resource scarcities and
the inefficiency of the licensing system was
hampering investment
 GDP Growth and GDP Growth
Per Capita 1951-66
6

3 GDP
PER-CAPITA

0
1951-56 1956-61 1961-66
 Two wars diverted capital to defence
spending
 The monsoons failed in 65-66 and 66-67
and the country relied on food-aid under the
US PL-480 programme
 ‘Export pessimism’ depleted foreign
exchange reserves and created inefficiencies
in investment
 In June 1966 the rupee was devalued by
57% from Rs.4.76 to Rs.7.50
 Export Pessimism and its
Impact on Policy
 The emphasis in planning was on investment
in the public sector, particularly heavy
industry which was seen as the key to growth
 ‘Export pessimism’ meant that an export led
model was seen as unworkable
 India had to become ‘self-reliant’ through
import substitution industrialization, made
viable by high trade barriers
 Self-reliance also meant development of
diversified indigenous industrial capabilities
that would eventually create a base for
exports
 The policy of import substitution led to an excessive
pre-occupation with self-reliance without regard to
efficiency or economies of scale
 Licensing constrained private investment (except by
large firms) and created inefficiencies in the
economy
 Impact on location and holding

 Concentration of location and holding continued

in the private sector
• Share of assets held by the top six firms (Tatas, Birlas, Martin
Burn, Mafatlal, Associated Cement and Bangur Group)
increased from 20 to 21 percent between 1958 and 1967

 No significant change in location of industry

• 40 percent of licenses were for investments in and around the
port cities of Bombay, Calcutta and Madras.
• Industrialization of poorly industrialized regions was primarily
through the public-sector
 The Economic and Political Impact
of Low Growth

 Economic Crisis and Popular Discontent

• Low rates of economic growth, food shortages, inflation
• Increasing income disparities
• Decline in foreign reserves and rupee devaluation in June 1966

 Political Instability
• Nehru, Shastri and Mrs.Gandhi
• The ‘Syndicate’ and the ‘Young Turks’

 Congress Performance in the 1967 Elections

• Congress Party performance
• Causes of decline

.
Land reforms, though enacted was rarely
effective on the ground for three reasons:
– Political power of the landowners which made reform
ineffective (alienation of land and bonded labour)
– Inability of peasants to mobilize
– Poor financial support systems which led to further
concentration of holding

 Two other means by which agricultural

surpluses could have been redistributed were
not successful in India

 These were taxation of agriculture and high

minimum wages in agriculture
 Agriculture and Poverty
Reduction
 While agricultural production increased it did
not have a significant impact on poverty

 Returns from increasing yields went primarily to

larger landowners, despite attempts at land
reform

 Land reform is often unsuccessful in the

absence of complementary policy reforms
and these were absent in India
 The ‘Green Revolution’ in
Agriculture
 There was more targeted investments in
agriculture to reduce dependence on food aid
 Achieving self-sufficiency in food was the
great success story of the seventies
 Investments in irrigation and extension
services increased yields and made output
less dependent on monsoon
 The green revolution involved high-yielding
seeds, chemical fertilizers and pesticides –
and lots of water supplied through major and
minor irrigation projects
. Agricultural growth was also spatially concentrated in
areas with well developed irrigation infrastructure,
primarily select states and districts in the north-west,
east and south (Spread of Irrigation)

 The Food Corporation of India began to procure

output at minimum support prices which provided an
assured market for produce for large farmers

 Income disparities in agriculture, however, continued

and this made government intervention through
poverty alleviation programmes essential
 Annualized Irrigated Areas
International Water Management Institute
 The Direction of Economic Policy:
Greater Control or Liberalization?

 Policy at crossroads
 AICC recommendations
• Social control over banking
• Nationalization of general insurance
• Implementation of the Monopolies Commission
Report
• Abolition of privy purses