Mid-1960s Economic crisis

The success of the first three plans was significant but a crisis created around the 1960s led to the failure of the planning with a long-term perspective and led to annual plans for three years till the fourth plan could begin in 1969. The reasons for this were the rise in food inflation due to low agriculture production due to drought. The fiscal deficit had peaked and was now at 7.5% of the GDP due to massive borrowings for the Indo – Pak war and the Indo – China War. The industrial recession was seen which led to unemployment and the closing of industries. This had to be stopped and India was brought back on its financial track. There was a necessity for foreign aid but the US the biggest donor had suspended the Food aid program and President Johnson wanted to put India in control of its foreign policy measures like support to the Anti-War movement in Vietnam. Thus the US wanted to use Food Aid to discipline India.

It was in such conditions that India approached external aid agencies like the World Bank and IMF. In return for their help, India had to undertake certain harsh policy initiatives like devaluation of the rupee and liberalizing trade and investment, and also adopting a newer strategy for agriculture. The initiatives like Rupee devaluation and liberalization were treated as attacks on the economic sovereignty of India. Although they have been beneficial in the long run. The policies were criticized for exploiting India’s vulnerability by the Capitalist nations and were denounced by Nationalists even before their effects were visible. The reduction in fiscal deficit was done via a reduction in government expenditure and this affected industrial growth rates which came down significantly. The rupee devaluation saw a backlash as the Congress government at the center split and Indira Gandhi adopted a more radical Left-of-the-center approach toward economic planning. The nationalization of private banks, insurance, and coal mining was done. The foreign capital was regulated and monopolies of Indian capitalists too were restricted by legislation. The government also took over many sick industrial units and continued production instead of closing them down.

The policies were important for improving the fiscal situation in India and restoring her power and image domestically and in front of the World. Although a few of these policies had debilitating effects they were necessary considering the grim economic situation of those times.

Achievements and Failures

Indian economic policy from the mid-1960 to the 1980s was governed by Indira Gandhi. It has to be judged considering the factors like droughts, food imports, oil shocks in the 70s where cost quadrupled, 1970’s Bangladesh crisis where 10 million refugees entered India, and Indian policy during the Vietnam war which cost the Food imports from the US. Thus food security was a critical issue for the economy and also linked to having an independent foreign policy. The Green Revolution helped in improving food availability and poverty reduction. Food security turned India’s image from a begging bowl nation to an independent nation. Food security in turn reduced problems during drought years and alleviated rural crises.

Secondly greater autonomy and self-reliance were seen in the economy. The boom in the middle eastern countries increased the foreign exchange reserves and India reached an import cover of 9 months from the initial 2 months. The arm twisting by donors was reduced due to emphasis on self-reliance not only for crisis-like situations such as droughts and natural calamities but also for short-term means to develop key capabilities. A reduction in the dependence on foreign capital was seen in the policy and the share of foreign capital as a ratio of total investments declined. The expansion seen by domestic banks too was far greater than the foreign banks. The GDP growth also increased as also the Growth of industrial production. The dependence on foreign import of oil which was a large part of India’s foreign exchange earned from exports also declined due to newer oil fields discovered.

However certain long-term weaknesses too were seen in the economy that needed structural adjustments and economic reforms. One problem was import substitution of the economy that had increased its industrial base and made the country self-reliant but in the long term, it was responsible for creating inefficient production and technologically backward industry. The protection of domestic industry made them obtain a monopoly and they didn’t fear competition. This made them in-competitive in the global market and also prevented foreign efficient production from entering India. The Monopolies restriction Act prevented companies from expanding after prescribed limits were reached thus affecting economies of scale. The act thus affected the main principle of production by punishing efficiency. Along with this, the import substitution protection would prevent companies from exploiting the foreign market. The small-scale sector too was affected by the licensing rules as the ever-increasing list of items was reserved for small-scale manufacturing. The small-scale entrepreneurs got multiple concessions but he too was constrained as any attempt to increase production or investment would make him ineligible for such concessions. Also, the small-scale licenses prevented the domestic industry from competing and thus made it inconvenient to have an impetus to be efficient. The License Quota rules prevented entrepreneurship and innovation.

Government legislation protecting the public sector industries was initially good as these occupied commanding heights of the economy. But the problem of inefficiency and corruption affected them too. The PSU became a victim of political interference and they couldn’t make any decisions for promoting efficiency. Trade unionism too affected them. The charges for services were deliberately kept low to ensure populism for the ruling party but this also meant that all of them faced huge losses. The Indian economy made it difficult to enter into sectors as they would be reserved for small industries or the public sector but it also prevented exit as loss-making firms couldn’t retrench employees without government permission. The Indian policy also couldn’t take advantage of changing economics of the World. The multi-national corporations which earlier followed a policy of colonization had now changed their outlook. They now wanted to shift the manufacturing base to cheaper destinations which would have lowered the cost of production. Thus foreign capital would be diverted to developing countries and along with this technology transfer and industrialization too would develop. The old days of looking at foreign capital as a dominating force were over. But even in this changing scenario, India failed to change its policies. In fact, the import substitution and protectionist policies were further tightened. It couldn’t take advantage of the shift in manufacturing base from West to East, unlike the East Asian countries. Thus countries like Singapore, Taiwan, and Indonesia which were underdeveloped like India reaped rich dividends and now have become superpowers comparable to developed countries. But India has still remained at the bottom of the heap.

It was these economic policies that led to the meltdown of 1991 and forced the minority government of Narasimhan Rao and his PM Manmohan Singh to attempt economic reform – “New Economic Policy” that would emerge as the most important reform since independence and in the long term transform India.

New Economic Policy 1991 and after

The combination of long-term factors like industrial licensing, protectionist policies, restriction on foreign investment, and domination of Public sector undertakings along with short-term factors like a middle-east crisis, oil shock, stop in foreign remittances and NRI deposits created a balance of payments crisis. This led to the government approaching international assistance agencies like the World Bank and IMF which agreed to assist but also imposed conditions of liberalization of the economy. All structural measures were together called the New Economic Policy. Manmohan Singh one of the most distinguished economists proposed these policies for opening up the economy. These reform measures were advocated as early as the 1960s but weren’t implemented due to the export pessimism and import substitution policies. Indira Gandhi and Rajiv Gandhi government’s too tried to implement structural reforms by the devaluation of the rupee, and pruning of subsidies but these were met with stiff resistance from political parties. Although even after the reforms were implemented the economy still wasn’t transformed as the Chinese or Soviet transformation. This was due to the nature of Indian society where consensus had to be built and all opinions had to be considered.

However, in spite of achieving major improvements for the Economy, the reform measures were inadequate in certain sectors. The instability in the Central government continued as no party was able to achieve a majority and hence populist measures continued. The high spending on subsidies also continued and food, fertilizer and fuel subsidies became a major portion of the economy. The political inability to undertake harsh measures by pruning subsidies led to a burden on State finances. It also promoted a black market and a parallel economy as real beneficiaries were excluded from the benefits. Similarly little was achieved in terms of disciplining public sector companies by preventing political interference. Many banks, electricity companies, and transport corporations continued to make losses. These losses made it impossible for them to invest in the up-gradation of infrastructure and thus infrastructure bottlenecks were created affecting the pace of the economy.

The progress towards labor reforms and allowing inefficient firms to exit also was not made. This was due to the opposition of labor unions fearing large-scale job loss. However current legislations prevent companies from investing in up-gradation and also introduce a myriad of complex rules which make compliance difficult. Both these measures have contributed to increasing contracting and sub-contracting. In-efficient firms have been forced to remain in operation and governments have taken over such firms instead of allowing them to shut. This has wasted precious resources of our country which could have been utilized inefficient industries. Such regulations have benefited the rich owners instead of the laborers.

India’s opening of the economy didn’t mean surrendering to international imperialism or subjugation at the hands of IMF-WB but it should us that moving towards our goals of self-reliance now needed a different strategy like liberalization and globalization. There was a consensus even amongst the left parties that the economic reforms should be allowed to continue. When the East Asian economies faced a crisis in 1997 India and China weren’t affected. But the flexibility of Chinese policy took advantage of the crisis and today China is the world leader in manufacturing. Indian reforms need such flexibility by which the bottlenecks shall be removed. The reforms don’t mean that the Nehruvian strategy had failed but now for aspiring toward the same goals a newer strategy was needed.