jay tharappel - indian economic history

8/13/2019 Jay Tharappel - Indian Economic History

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TABLE OF CONTENTS

1.0 INTRODUCTION 3

2.0 DIRIGISME: AN OUTGROWTH OF THE COLONIAL EXPERIENCE 5

3.0 THE INTERNAL CONTRADICTIONS OF DIRIGISME 8

3.1THE CONSTRAINING IMPACT OF STAGNANTAGRICULTURE 8

3.2THE FIRST THREE FIVE-YEAR PLANS:ATRANSIENT PHENOMENON 12

3.3THE STAGNATION PERIOD AND ITS CAUSES 14

3.4THE RISE OF THE INTERMEDIATE REGIME 17

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3.5THE FIRST PHASE OF INTERNAL LIBERALISATION 22

4.0 THE SIGNIFICANCE OF THE 1991 REFORMS 27

5.0 CONCLUSION 29

6.0 APPENDIX ERROR! BOOKMARK NOT DEFINED.

7.0 REFERENCES ERROR! BOOKMARK NOT DEFINED.


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inefficiency, corruption, bureaucratic red-tape, and stagnant economy of the socialist dirigiste

period; and the era of economic liberalisation that came afterwards, which, by promoting

economic freedom, supposedly alleviated poverty. A sign of the extreme disconnect between this

hegemonic paradigm on the one hand, and reality on the other, is that according to the former,

the notion that poverty has fallen since the reforms is accepted without question despite

empirical evidence suggesting otherwise. According to Bhagwati and Panagariya (2013, p. 48)

poverty failed to decline during the heyday of socialism [the dirigiste period] and that it has seen

a steady decline in the post-reform era is now incontrovertible. Although the governments

official estimates (see Item 1 in the Appendix) display a sharp fall in poverty, this statistical feat

was achieved by continually lowering the definition of poverty. In 1972-73, the poverty line in

rural areas was defined as the minimum expenditure needed for a person to access 2200 calories

per day, but by 2009-10 this definition was reduced to 1780 calories per day. Similarly in urban

areas, this calorific definition was reduced from 2100 in 1972-73 to 1720 in 2009-10. However if

the calorific definition (see Item 2) is held constant, poverty is shown to have stayed the same

during the final phase of dirigisme, and increased dramatically since the 1991 reforms. In

response to the controversy regarding definitions of poverty, Bhagwati and Panagariya (2013, p.

54) simply assert that poverty has fallen, and that the integrity and qualifications of the

Planning Committee responsible for producing the official data are beyond reproach. For these

reasons, the argument that dirigisme was abandoned because it held back the poverty alleviation

effort is clearly a myth that needs to be challenged by determining the realunderlying causes for

Indias economic changes.

Often the hegemonic paradigm regarding Indian economic history tends to issue superficial and

oversimplified judgements about dirigisme primarily as a way of defending the existing social

order, while silencing debate about its faults by invoking the spectre of the dirigiste period and

its worst features. At the core of this superficiality lies the idealist and ahistorical conception of

history promoted by the likes of Bhagwati and Panagariya (2013, p. 25) who argue that dirigisme

was a product of Nehrus socialist ideas. This paper rejects such idealist notions and instead

argues that dirigisme originated as an outgrowth of the economic processes that defined

colonialism, which in turn influenced the political orientation and class interests driving the

independence movement. Furthermore, every instance of dirigismes dysfunctional character can

always be traced back to the fundamental dialectic of the class-relations of production

constraining the expansion of the productive forces. To demonstrate this, this paper presents a

chronological account of Indias economic history to identify the key pivotal points of change

leading up to the 1991 reforms. Firstly, dirigisme was a product of the economic processes that

prevailed throughout the colonial era, the effect of which was to restructure the Indian economy

around the interests of British capital, and as such, the definingfeature of dirigisme was that it

sought to reverse the colonial experience by attempting to expand the domestic market while

shunning the export-orientation that had prevailed until then. Secondly, although the first three


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Five Year Plans (FYPs) were a period of strong industrial growth (1951-1966), the contradictions

of dirigisme could be seen emerging, and they stemmed from the failure to adequately conduct

land-reforms and redistribute wealth. Thirdly, these contradictions are what contributed to the

rise of the intermediate classes, who, by benefiting from the inflationary tendencies of the

economy, helped perpetuate the stagnation period (which lasted from around 1966-1975).

Fourthly, the declaration of the state of emergency in 1975 was the sign that the rule of the

intermediate regime had reached the end of its tether, which in turn resulted in class power

shifting more in favour of upper-income consumers and large domestic private firms, whose

interests the state acted upon by internally liberalising the economy beginning in the late 1970s,

which eventually paved the way for the 1991 reforms.

2.0 Dirigisme: An Outgrowth of the Colonial

Experience

To provide a materialist explanation for why dirigisme was eventually abandoned, it is important

to determine why it emerged in the first place. Clearly there were a range of conditions that led

the Indian political class to pursue these policies, conditions that eventually changed, thereby

paving the way for the abandonment of this system. To the extent that dirigisme sought to

redress the social imbalances and poverty inherited from nearly two centuries of colonial rule,

these objectives were ultimately governed by the class-configuration of the Indian state. For the

political class leading the struggle for independence, the injustices of Indias colonial experience

was an indispensible component of their ideological arsenal, with the year 1757 representing for

them a crucial moment in history. It was after all the year British forces led by Colonel Robert

Clive led the East India Company to victory in the Battle of Palashi, paving the way for the

plunder of Bengal; for Britains eventual takeover of the Indian subcontinent; and for 190 years

of economic exploitation during which Indias per-capita income did not rise (Davis, 2001, p. 311).

A brief overview of the mechanisms by which India was looted helps explain the appeal of a

dirigiste state and of economic planning in general. Prior to the Palashi victory, the pre-capitalist

mode of production prevailing across India was based on the relative autonomy of towns and

villages, in which farmers would exchange food supplies for the goods provided by artisans.

However, owing to the growing European demand for Indian goods, demand for the goods

produced by Indian artisans began outstripping the demand for goods at the village level. At the

time, Indian merchants accepted only gold or silver as payment, because prior to the Industrial

Revolution, British industry wasnt capable of producing the goods that were demanded by the

Indian market. Growing European demand intensified the flow of bullion into India, leading to

the emergence, beginning in the late 17thand early 18thcenturies, of a class of Indian merchant

capitalists whose wealth even allowed them to begin issuing loans to the various European

trading companies (Sen, 1980, p. 15-45).


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Whats unanimously agreed upon by Indias independence leaders was that the British victory

set in motion a reversal of Indias economic development that could only be rectified through

conscious state planning. Indeed in the words of Indias future first Prime Minister Jawaharlal

Nehru, a significant fact which stands out is that those parts of India which have been longest

under British rule are the poorest today (Nehru, 1946, p. 296). The first phase of British rule,

from 1757 to 1813, according to Anupam Sen (1982, p. 47), killed indigenous Indian capitalism

in its nascent stage, the argument being that India was on the cusp of its own bourgeois

revolutionary epoch much like the ones that emerged in Europe. Prior to the Palashi victory the

nascent Indian merchant capitalist class accumulated capital in the form of bullion, which they

received as payment in exchange for Indian goods. The British victory meant the East India

Company no longer needed to pay in bullion, as their military control allowed them to set

artificially low prices, and as a result India exported its riches for a relative pittance, and

domestic consumption was squeezed (Habib, 1985, p. 358). Dirigiste policies sought to redress

these injustices by attempting to rejuvenate the domestic market, which, initially at least, was a

task that aligned comfortably with rebuilding the relatively weak Indian capitalist class. The

second phase of British rule, beginning with the Charter Act of 1813, ended the East India

Companys monopoly over Indian trade in favour of the interests of British industrialists who

proceeded to transform India into a producer of cheap raw materials, such as indigo and cotton,

and into a market for finished goods. The experience and knowledge of this process, which

deindustrialised India back into an agrarian country, inspired the ideology of the Swadeshi

movement (Sharma, 1999, p. 65) with its emphasis on self-reliance a key component of dirigiste

principles. Finally, in the last half-century of British rule, as a result of Indias export-oriented

polices designed to prioritise the production of cheap raw materials at the expense of food, the

per capita availability of foodgrain began to fall drastically (Patnaik, 2004, p. 9), culminating in

the 1943 Bengal famine. India emerged as an independent nation with a weak capitalist class,

and with productive forces that were geared towards the needs of the imperial centre. Given this

historical context, it is quite clear that dirigisme emerged because the absence of an

interventionist state would have entrenched the status quo.

The colonial experience strongly suggests that dirigisme emerged as a product of the multi-class

alliance of the independence movement, which united different sections of Indian society against

a common enemy. According to Sen (1982, p. 103), the movement, led by the Congress party, was

effectively dominated by the educated middle-class, the professionals, small businessmen, small

landlords, rich and poor peasants, and its leadership comprised of petit-bourgeois intellectuals,

in what Nehru had described as a front populaire against imperialism (Venkatasubbiah, 1961,

p. 7). As such it is little wonder the Indian state that emerged from this movement would

eventually be forced to deal with these differences by accommodating, mediating, and where

necessary prioritising certain class interests over others. This helps explain why a common line

of reasoning that runs through much of the literature contends that the unsustainability of the


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dirigiste model stemmed from its deepening class-contradictions, which took on a variety of

different forms, and eventually resulted in the abandonment of dirigisme itself. In addition to the

argument that dirigisme emerged out of this multi-class alliance, conditions after independence

dictated that the only institution capable of making the large scale investments needed to build

the industrial basis for Indian capitalism was the state, primarily because of the absolute

weakness of the Indian bourgeoisie. Indeed according to Sen (1982, p. 88), in 1950-51, tax paying

income earners constituted 0.6 percent of all income earners and commanded 4.7 percent of all

total disposable incomes. If the wage-earning employees are deducted from this, the size of the

bourgeoisie is evidently extremely small, which rendered them incapable of building a national

economy on their own. For this reason, economic growth relied on public expenditures, which

rather than crowding out private investment, actually induced a crowding-in effect by firstly

building the industrial basis for Indian capitalism, and secondly, by acting as a major source of

demand for the goods and services offered by the private sector (Patnaik, 1998, p. 165).

Although the movement was led by the elite, it would nevertheless be unfair to cynically describe

dirigisme as merely a tool of elite Indian interests; or as the replacement of foreign exploiters for

indigenous ones; or to discount the ideological influence of Indian socialism as a material force

capable of applying pressure democratically to effect measures of economic redistribution.

Asserting this angle isnt for reasons of nostalgia, rather the importance lies in recognising that

although Marx & Engels (1848) famously characterised the government of a capitalist state in

general as a committee for managing the common affairs of the bourgeoisie, there are problems

with applying this formulation to a country like India, which didnt proceed along the same

historical path as European capitalism. Instead the vacuum left by colonialism, combined with

the weakness of the Indian bourgeoisie, meant that a more diverse range of class forces,

especially among the dominant proprietary classes, assumed state power. These included the

more radical first-generation of political leaders whose ideological motivations and experiences of

direct persecution would arguably have put them above merelyacting as agents of elite interests.

This tendency can be seen in the section of the Indian Constitution titled The Directive

Principles of State Policy, which although not legally binding, made very clear its general

socialist character. Its author, the famous Dalit activist B.R. Ambedkar had argued that

although there was equality in the formal political sense of one man one vote and one vote one

value, the vast inequality of social life amounted to deny[ing] the principle of one man one

value (Venkatasubbiah, 1961, p. 7). Even Nehru, writing in 1933, was critical of the notion that

it was possible to forge unity between classes, or that the role of the post-colonial state should be

merely to prefer home interests to foreign interests (Nehru, cited in Sen, 1980, p. 101).

Although this paper prioritises the contradictions among the dominant proprietary classes as the

driving force behind dirigisme and its eventual abandonment, the ideological appeal for social

justice cannot be ignored as a factor behind the adoption of dirigiste policies.


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3.0 The Internal Contradictions of Dirigisme

3.1 The Constraining Impact of Stagnant Agriculture

Independent Indias first challenge was to achieve security and self-sufficiency in foodgrain

production, as a means of providing the surpluses needed for industrialisation. However these

attempts were constrained by the inability of the state to discipline the dominant proprietary

classes, especially the rich landlords in the case of agriculture. Or in Marxist terms, the class-

relations of production, in this case the persistence of rural inequality, effectively constrained the

expansion of the productive forces. The need to expand agriculture was recognised by the First

FYP, which stated, for the immediate five year period, agriculture, including irrigation and

power, must in our view have the topmost priority (Nehru et al, 1952). The planners were

keenly aware that in order to build a modern, industrialised, and diversified economy while

consistently improving living standards, and keeping inflation under control, it would be

necessary to rapidly improve the output and productivity of agriculture. They were confronted by

a backward national economy in which agriculture and mining together employed 73 percent of

the labour-force, but contributed only 53 percent to GDP". This implied an extremely low level of

productivity in agriculture relative to the other sectors of the economy, which was also recognised

by the planners who noted that, productivity per worker in organised industry, commerce and

transport is about three times that in agriculture (Nehru et al, 1952). Planners also recognised

that reducing rural inequality through land reforms was necessary for increasing agricultural

output#. Indeed as early as 1951, the Planning Commission recognised that despite the high level

of public expenditures on agriculture in the short period since independence, there have been no

marked gains in production, adding that, the bulk of the agricultural producers live on the

margin and are unable to invest in the improvement of the land (Tomlinson, 2013, p. 156).

These findings coincided with pressure for greater land reforms. The economic argument against

Zamindari was put forwards by the United Provinces Zamindari Abolition Committee in 1948,

1The figure for agriculture and mining (73 percent) is taken from Sen (1980, p. 89), whereas the figure for

what this sector contributed to GDP is taken from Economic Survey (2013, p. 8). However the latter

includes Forestry and Fishing as well. Nonetheless theyre similar enough for the purposes of making

comparisons.

#Where land is managed directly by substantial owners and there are no tenants in occupation, public

interest requires the acceptance of two broad principles: i) There should be an absolute limit to the amount

of land, which any individual may hold. This limit should be fixed by each State, having regard to its own

agrarian history and its present problems. The census of land holding and cultivation, which it is proposed

to hold during 1953, will give the data relevant to this decision. ii) The cultivation and management of landheld by an individual owner should conform to standards of efficiency to be determined by law. (Nehru et

al, 1952)


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who reasoned that because Zamindars$invested very little capital in expanding production, that

the removal of intermediaries between the tiller of the soil and the State will in itself go a good

way towards the rehabilitation of agriculture (Tomlinson, 2013, p. 155). The argument in favour

of a more egalitarian distribution of rural land-holdings through land-reforms is that as a

strategy for boosting food production, it has a high output-investment ratio meaning that it

increases output without needing any additional investments normally associated with

agriculture, i.e. irrigation, electricity generation, and storage (Patnaik, 1998, p. 162). The reasons

for this are fairly self-evident. What the market produces is itself an expression of the existing

distribution of wealth, which means under conditions of extreme inequality, the market will be

biased towards producing luxuries even if the poor lack necessities. As such if tenant farmers and

landless-labourers are given their own land, especially in countries where theyre among the

poorest classes, theyll prioritise their own consumption, whereas previously theyd produce what

the landlord could sell on the market, which itself was governed by the inequality of purchasing

power between the rich and poor.

There are numerous cases where land reforms have been cited as playing a major role in

increasing output. Japanese land reform in the post-war era placed the upper limit on land-

ownership at 2.45 acres. A large population of tenant farmers who had previously been burdened

by heavy rents then acquired the surplus lands. According to Nakamura (cited in Patnaik, 1994,

p. 272), these reforms were the main reason for the increase in productivity. Similarly, according

to Brun & Hersch (1976, p. 128-29) North Koreas achievement of self-sufficiency in foodgrainproduction by the early 1960s are also attributed to land reforms (this is of course prior to the

economic disaster following the collapse of the Soviet Union). In 1945, 60 percent of arable land

was controlled by landlords who comprised only 4 percent of all households, which was later

reformed by placing an upper limit of 12 acres on land ownership and redistributing surplus

lands (Brun & Hersch, 1976, p. 127-130). In 1946, owing to food shortages caused by the ravages

of war, rice rations were set at 500 grams per day (Brun & Hersch, 1976, p. 120). In that same

year land reforms were announced and by 1956 and 1960, foodgrain availability had increased to

747 grams, and 912 grams per-capita per day respectively (Brun & Hersch, 1976, p. 202).

In India there were three major types of land reform conducted throughout the period of the first

three FYPs; 1) the abolition of Zamindari, 2) land ceiling legislation, and 3) tenancy reform

(Bharadwaj 1994, p. 297). Under the colonial system of collecting land revenues, feudal landlords

known as Zamindars, who at the time of Indian independence controlled 50 percent of total land,

were given rights to extract tributes from their tenants, and in return would be required to pay

$Zamindars were the traditional Indian aristocracy who were often the former princes of large territories

whose sovereignty had been ceded to the British, although they were permitted to keep their titles(Tomlinson, 2013, p. 154).


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taxes to the colonial authorities (Ghatak & Roy, 2007, p. 252). The Indian government was

successful in abolishing the Zamindar class, whose lands were then distributed against a newly

created second-tier of wealthier farmers (Patnaik, 1998, p. 162). However the other two types of

land reform were mostly unable to be implemented. For instance the measures aimed at

imposing land-ceilings, that is, placing an upper limit on the area of land able to be owned, was

mostly a failure as there were enough loopholes enabling landowners to circumvent legislation by

registering their land under the names of different family members. As a result, only 1.7 percent

of total owned and cultivated land was declared as being above the land ceiling and only 1

percent ended up being redistributed (Ghatak & Roy, 2007, p. 252). Similarly, when tenancy laws

were introduced to provide greater protection for tenant farmers, this resulted in large

landowners circumventing these measures by shifting their tenants to different plots of land, and

in the worst cases evicting them. In the state of Bombay the introduction of these new laws in

1948 resulted in the number of tenancies falling by 20 percent; similarly in the state of

Hyderabad%, which also introduced similar measures in 1950, estimates are that the number of

protected sub-tenants fell by 57 percent between 1949 and 1953. The broad trend that followed

resulted in landowners leasing back the land to its former tenants on a crop-sharing basis

thereby perpetuating the inequality of land-ownership, and proliferating a large population of

landless labourers (Tomlinson, 2013, p. 158).

Although planners in India recognised the macroeconomic benefits of land reform, and despite

the relatively modest land-reform measures already introduced, the Indian state has throughoutits post-independence history been unable to successfully implement any radical measures.

Patnaik (1994, p. 272) notes that compared to the other industrializing Asian nations, India has

the dubious distinction of being the only one, which after passing a larger number of land reform

acts than any other, today has much the same level of concentration of landed property as four

decades ago. Indeed in 1953-54 when the first NSS surveys of landholdings were carried out, the

wealthiest 13 percent of farming households owned 66 percent of the land; while the wealthiest 5

percent owned 43 percent of the land. This translated to a GINI&coefficient of 0.63 in the rural

sector, and by 1973-74, the coefficient had fallen only marginally to 0.60 clearly not significant

enough to impact rural inequality or to stimulate the rural economy. By comparison, the effect of

land reforms conducted in China, which were far more extensive and egalitarian, meant that by

1985, the GINI coefficient in rural China had fallen to between 0.20 and 0.30 (Patnaik, 1994, p.

272-3). As a result of these reforms, combined with other factors influencing agricultural output,

per-capita foodgrain availability expanded rapidly from 547 to 1094 grams per day between 1949

%Prior to the States Reorganisation Act (1956), Bombay and Hyderabad were large states, and not merely

cities.

&The GINI coefficient is a measure of inequality with higher numbers corresponding to higher levels of

inequality.


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and the early 1990s (Zhang, 2011, p. 3708). Compare this to Indian agriculture where this per-

capita figure for all foodgrains has languished at between 400 to 500 grams per-capita per day

throughout the post-independence period (see Item 3). That despite India having anywhere

between 60 to 35 percent more arable land per person than China since 1960, which is when the

World Bank (2012) began compiling this data.

The failure to tackle agrarian inequality also explains why the Mahalanobis model, which was

adopted from the second FYP onwards, while theoretically coherent, was ultimately

unsustainable in the long run. This is because it was superimposed over grossly unequal class-

relations that prevented these plans from ever reaching their full potential. In 1953,

Mahalanobis conceptualised a two-sector model comprised of consumer goods and capital goods,

which suggested that to industrialise quickly, expenditures should prioritise the capital goods

sector. Indeed according to Mahalanobis, if industrialisation is to be rapid enough, the country

must aim at developing basic industries and industries which make machines to make the

machines needed for further development (Ahluwalia, 1994, p. 349). Theoretically, if prior to

implementing this plan the output of consumption goods is growing at the same rate as the

population, shifting investment towards capital goods will result in a decline in per capita

consumption, which would manifest itself through inflationary pressures causing a fall in real-

wages. To prevent such a decline, especially in a poor country where a large section of the

population lives in extreme poverty, it would be necessary to ensure that shifting investment

towards capital goods leaves the consumer goods sector growing by at least the same rate as the

population (Patnaik, 1998, p. 165). In a poor country like India, this invariably requires the

expansion of foodgrain output, which India has historically failed to achieve.

This is where Mahalanobis revised four-sector model (Somashekar, 2003, p. 158), which formed

the basis for the second FYP, actually lends itself to arguments in favour of land reform. The new

model included capital goods (K), factory consumer goods (C), household industries including

agriculture (C2), and services (C3). If the purpose is to shift investment allocations towards

capital goods, while simultaneously ensuring that basic human needs are being met, the question

would be; how can the output of foodgrains be increased without investing greatly in agriculture?

Land reforms were the obvious solution because they would have raised foodgrain output (C)

with very little additional investment needed. The argument against land reform was that even

if it did manage to increase agricultural output, it would reduce the marketed surplus of grain,

because the new landowners would be more inclined to consume their output than sell it, thereby

raising food prices in the cities and hindering industrialisation (Patnaik, 1998, p. 166). However

according to Patnaik (1998, p. 167) even if that did happen, it would be an overwhelmingly

positive development for two reasons. Firstly, because the beneficiaries of the land reforms, who

constituted a large share of Indias population, would be consuming more for the first time in

generations. Secondly, given that land reforms have been shown to increase agricultural output,


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eventually these producers would have diversified their consumption, which would increase their

demand for industrial goods, thereby providing a source of demand for the industrial sector, and

also it would increase the portion of grain theyd sell on the market. Failing to conduct land

reform made the problem worse since it resulted in Indian industry relying on landlord-

capitalism for its food supplies a problem that will be covered later.

Prioritising investment in capital goods requires forgoing short-term consumption in order to

achieve the long-term goal of a higher growth trajectory and therefore improved living standards.

But why should consumption goods be treated as a homogenous entity? Surely it would make

sense to differentiate between necessities such as food on the one hand, and the luxury

consumption goods demanded by the wealthier sections of society on the other. Making such a

distinction would lead to the conclusion that the former should be prioritised by heavily taxing

the latter. For this reason the four-sector model actual lends itself favourably to radically

redistributive policies when taken to its logical conclusion. However this is where, again, the

inability of the Indian state to enact permanent structural changes to the existing class-

configuration stifled economic progress and therefore laid the groundwork for the eventual

dismantling of the dirigiste system. Given that economic growth according to this model requires

squeezing the rich through taxes on luxury goods, and expropriating their land for redistribution,

the extant class relations of Indian society, especially in the countryside, constituted the original

fetter on the expansion of the productive forces.

3.2 The First Three Five-Year Plans: A Transient Phenomenon

The first three FYPs spanning from 1951-65, and corresponding with Jawaharlal Nehrus tenure

as Indias first Prime Minister (1947-64), were relatively successful in terms of industrial growth,

which grew by an average of 7.7 percent per annum during this period. What followed was a

period of industrial stagnation (referred to from now on as the stagnation period) from around

1965 to 1975 during which industrial growth more than halved to 3.6 percent per annum

(Nayyar, 1994, p. 219). The advent of this stagnation period begs the question as to why

industrial production grew so rapidly during the first three FYPs in the first place? More

specifically, to what extent were the conditions that enabled roughly fifteen years of initial

expansion exhausted, thus leading to the stagnation of the mid 60s? Firstly, India had inherited

significant foreign exchange reserves as a consequence of the Second World War, which enabled

the government to import the capital goods needed to initiate the industrialisation process. These

reserves depleted rapidly. At the beginning of the first FYP, foreign exchange reserves stood at

10.25 percent of GDP, which fell dramatically over the following fifteen years to around 1-2

percent where it remained until the economic revival of the late 70s (see Item 4).


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Secondly, the rapid industrial growth during the first three FYPs was essentially a temporary

phenomenon. It involved exploiting numerous opportunities for industrialisation via import-

substitution, especially for products that could easily be produced in India including basic

consumer goods such as cotton, textiles, and sugar, as well as other crude, basic and

intermediate goods, such as steel cement and paper (Bagchi, 1977, p. 78). However this process

can only provide a temporary stimulus, because once domestic industries are capable of

producing the goods that were hitherto imported, industrialisation via import-substitution

eventually exhausts itself of further opportunities (Chandra, 1982, p. 519). In addition to this,

India received large quantities of food aid from the United States, which rose from Rs. 5.1 crore

during the years 1951-6, to Rs. 853.2 crore during the years 1961-6, which helped keep

inflationary pressures down during this expansionary period. This aid soon diminished for

reasons to be covered later. Ultimately the absence of the conditions that made the first three

FYPs successful surrendered the economy to its inexorable constraint stagnant agriculture. In

essence, every attempt by the government to revive the industrial sector with increased

investment ended abruptly as soon as food-price inflation caused real-wages to fall, thereby

constraining the overall purchasing power needed to absorb industrial output.

Thirdly, because the government had failed to increase agricultural output by tackling rural

inequality, the growth in industrial production couldnt be matched by the expansion of domestic

purchasing power for industrial goods, which ultimately ensured that industrial production

would gravitate towards the consumption demands of the wealthy. In the case of a backward

economy that manages to steadily increase per-capita foodgrain availability, it would make

logical sense for the proportion of per-capita consumption on industrial goods to increase.

However, the consumption patterns of the Indian population overall shows that the domestic

market for industrial goods began shrinking even during the first three FYPs when industrial

growth was strong. Between 1952-53 and 1964-65, the per-capita expenditure on industrial goods

in both rural and urban India experienced a downward trend (see Item 5 & 6), which is a

testament to the effects of food-price inflation stemming from the lack of per-capita agricultural

output growth in that period. Furthermore that the demand for industrial goods was heavily

concentrated among richer sections of society suggests another cause for the stagnation period

that came afterwards, namely the inequality of industrial consumption. In Rural India, between

1952-53 and 1964-65, the richest 5 percent of households consumed anywhere between 20 to 25

percent of all industrial goods, which was roughly equivalent to the consumption of the poorest

60 percent of households (Sau, 1974, p. 41). Similarly in Urban India, this figure oscillated

between 24 and 29 percent between 1952-53 and 1964-65, which was roughly equivalent to the

consumption of anywhere between roughly 50 to 60 percent of the poorest households depending

on the year (Sau, 1974, p. 42). This trend continued throughout the stagnation period as

evidenced by the gross inequality in the ownership of assets. In 1962 the top 10 percent of

households owned 51.13 percent of assets, and by 1972 this figure was still a high 50.68 percent;


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while the bottom 50 percent owned 8.52 percent of total assets in 1962, which fell only slightly to

7.76 percent in 1972 (Srivastava, 1994, p. 207). The constraining impact of the existing class

relations on the expansion of the productive forces is evidenced by the fact that although the first

three FYPs showed strong industrial growth, that is, although the productive forces expanded,

they operated at well within their production frontier as evidenced by the utilisation ratio for all

manufacturing industries falling from 87.7 to 79.6 percent between 1960 and 1970 (Raj, 1976, p.

55).

The first three FYPs were considered relatively successful, especially when evaluated according

to their own modest targets (see Item 7), and especially when compared to the former colonial

regime, because for the first time in nearly two centuries the forces of the state mobilised its

resources towards its own internal development, whereas previously Indias role was to enrich

British industry at the expense of its people. Although the new economic regime represented a

major historical advance over that which preceded it, by failing to solve the agrarian question

through land reform, that is, by failing to address the original structural cause of Indias

economic backwardness, the grinding inequality of the Indian countryside not only prevailed, but

also constituted a major macroeconomic opportunity cost, and proceeded to constrain all future

attempts at economic development and poverty alleviation. It was a case of the relations of

production strangling the further development of the forces of production, a situation that could

have been rectified only by at the very least, reforming those unequal property-relations in

favour of greater equality, without which the results of planning would remain incremental, and

fail to achieve the inclusive economic growth made possible only by qualitative changes to Indias

overall class-configuration.

3.3 The Stagnation Period and its Causes

The stagnation period provided a major ideological weapon to those favouring the eventual

abandonment of the dirigiste system, and in the contemporary discourse on economic policy, is

often invoked as an example of the inefficiencies of Indira Gandhis socialist policies, primarilyby those in favour of ceding greater economic space for the private sector. The defining feature of

this period was the sharp fall in the rate of growth of capital goods, which fell from an average of

14.16 percent per annum during the first three FYPs, to 2.6 percent between 1965 and 1975 (see

Item 8). Since investment in capital goods is what enables an economy to expand its productive

forces, such an abrupt slowdown indicates that during the stagnation period the productive

forces of the economy had stopped expanding. However it is not enough to simply cite the

symptoms of that stagnation period as the reason for the economic changes that emerged later,

rather the analysis must extend to explaining, firstly, how stagnation was an outgrowth of the


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class-configuration of Indian society, and secondly, how the economic effects of stagnation

mobilised certain class forces into a critical mass capable of overthrowing dirigisme.

The immediate causes for explaining the stagnation period can be summarised as the

governments failure to mobilise domestic financial resources for reinvestment and economic

expansion. Over the course of the first three FYPs, fiscal revenues, as a percentage of GDP, rose

from 6 percent in 1951 to 14.1 percent in 1965-66, declined to 13.2 percent in 1968-69, and

remained at around this level throughout the stagnation period; and by 1973-74 this rate had

only increased marginally to 14.7 percent. As a result, between 1960-61 and 1964-65, the average

annual growth rate of public expenditures was 13.2 percent, however during the stagnation

period between 1964-65 and 1973-74, this rate fell substantially to 2 percent (Jha, 1980, p. 66).

Aside from the gradual exhaustion of the states revenue raising abilities and the lack-of-demand

problem raised earlier, it could be argued that the government could have boosted expenditures

on capital goods during the stagnation period by resorting to deficit spending. However there

were three major barriers to pursuing such a policy. Firstly, the economy was already

experiencing inflationary pressures stemming from the inability to boost agricultural output. As

such it would have been politically difficult to pursue industrial expansion, which would have

arguably exacerbated this problem (Bagchi, 1994, p. 405). Secondly, the generous food-aid India

had received from the United States diminished, and from then on it had to be paid for in hard

currency, which made imports more expensive especially after the 1966 devaluation of the Rupee

(Chandrasekhar, 1988, p. 325 & 333). Thirdly, the effect of the Green Revolution was that it

drastically raised input costs (especially on fertilisers and pesticides), which in turn translated to

farmers demanding higher procurement prices, which only exacerbated inflation further

(Patnaik, 1998, p. 179).

There were a few major reasons for the inability of the state to mobilise the financial resources

needed for economic expansion. Firstly there was the prevalence of a large untaxedparallel

economy, which was an invariable outgrowth of the contradiction between the Indian states

development strategies on the one hand, which were predicated on the ability to mobilise

domestic resources, and the need to superimpose this model over a largely informal Indian

economy. In the words of Prabhat Patnaik (1994, p. 119), the strategy was predicated upon the

assumption of a sort offiscal omnipotenceon the part of the government which was obviously

unjustified in the context of the Indian economy (emphasis added). The first official

investigation into this problem was carried out by the Wanchoo Commission in 1970, which

estimated concealed income to have risen from Rs. 700 Crore to Rs. 1400 Crore per year between

1961-62 and 1969-69. However this was considered an underestimation by one member of the

Commission, D.K. Rangnekar, who argued the real figures were Rs. 1031 Crore and Rs. 2833

Crore for those same years. According to the Commission, the opportunity cost of being unable to

capture this revenue amounted to forgoing an average of Rs. 1000 Crore per year, which was


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approximately 37 percent of total tax revenues, for the time period analysed (Jha, 1980, p. 46-8).

Furthermore the exchequer came increasingly to rely on exacting tax revenues from an

incredibly small percentage of the Indian workforce. Indeed in 1980, Indias income tax-base was

comprised of 3.75 million people, or 0.55 percent of the population (Jha, 1980, p. 107); and by

1995 this tax-base had grown only marginally to 12 million, or 1.3 percent of the population

(Sharma, 1999, p. 241). Squeezing those on fixed-income salaries of course contrasts sharply with

the generous state subsidies offered to rich farmers who the state were unable, if not unwilling,

to tax. It is for this reason that despite agriculture contributing between 50-30 percent of GDP

between 1951 and 1986 (Economic Survey, 2013, p. 8-9), during that same period, agricultural

taxes as a percentage of total tax revenues dwindled from 7 to just less than 1 percent

(Bharadwaj, 1994, p. 320).

The reason for this resource mobilisation problem stemmed from, according to Rai (1992, p 11),

the inability of the state to impose a minimum measure of 'discipline' and 'respect for law'

among the capitalists. On the one hand, the dirigiste state ensured the nascent Indian

bourgeoisie had a protected market free from international competitors; their monopoly status

empowering them to inflate their profits, while the weakness of trade unions and the large

reserve army of labour ensured a disciplined workforce (Patnaik, 1977, p. 127). Moreover by the

end of the third FYP it is estimated the state contributed 60 percent of total national investment,

and provided the effective demand for the majority of the output of private firms, including half

the cement, one third of the paper, and half or more of the steel, aluminium, and copper produced

in the country (Jha, 1980, p. 67). In addition to this, private firms often received lucrative state-

contracts, generating large fortunes for their owners (Rai, 1992, p. 10). On the other hand, the

general inability, if not unwillingness, of the Indian state to exact the revenues needed to

continue its expansionary policies was the primary factor behind the sharp fall in the growth of

public investment. It is especially telling that tax evasion was according to Rai (1992, p. 10)

something the state generally turned a blind eye upon, which of course implies significant

levels of corruption between elites and the state machinery in general, and also correlates well

with Patnaiks (1977, p. 134) argument that stagnation stems from the growth of economic

surplus in private hands relative to that with government. In summary, the Indian bourgeoisie

needed the state, but were unwilling to replenish the exchequer with the revenues needed for

reinvestment.

Admittedly there were also exogenous constraints on the Indian economy during the stagnation

period; namely the 1962 war with China, followed by the 1965 and 1971 wars against Pakistan,

which compelled the state to divert more resources away from the civilian economy and towards

import-intensive militarisation; the 1973 OPEC oil embargo, which was a major supply-side

shock; and the droughts of 1965-67 and 1971-73, which resulted in food shortages (Rangarajan,

1982, p. 292). The impact of the droughts in particular reinforces the argument that the logical


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outcome of agricultural stagnation is ultimately the hindrance of industrial growth, as evidenced

by the slow to negative growth experienced during those aforementioned periods of drought (see

Item 9). Nonetheless it is the structural causes stemming from the class-configuration of Indian

society that provides the best explanation for the changing economic regime.

3.4 The Rise of the Intermediate Regime

The most compelling argument for explaining the stagnation period was put forward by Prem

Shankar Jha (1980, p. vii) who contends that Indira Gandhis first term as Prime Minister (1966-

77) coincided with the rise to dominance over the Indian economy of the intermediate classes,

who had a vested interest in the perpetuation of a stagnant economy. The concept of an

intermediate-regime was originally coined by Michal Kalecki to refer to the lower-middle class

and the rich peasantry who in his view constituted the ruling class of some countries. The

relevance of this theory to the Indian context was first recognised by K.N. Raj (1973, p. 1189),

according to whom the conditions originally cited by Kalecki that would allow this class to

consolidate its power were directly applicable to India. Firstly, the state had carried out some

basic land reforms to dismantle feudal-property relations, which in turn created a new class of

landowners with characteristics of this intermediate class (covered later). Furthermore, the

economic assistance of the socialist camp, led by the Soviet Union ensured that India could assert

a degree of independence from imperialist capital, thereby offering this class breathing room to

carve out its own economic space. In the Indian context the intermediate classes were comprised

of 1) rich farmers, that is net-sellers of foodgrain; 2) civil servants; and 3) small-proprietors

(including self-employed industrialists, owner-managers of small companies, family owned

companies, small manufacturers, and traders).

The development of capitalism in Europe ensured that these classes, roughly analogous to the

petit-bourgeoisie, would assume a subordinate role to the bourgeoisie in terms of their ability to

influence state policy. In India this wasnt the case because capitalism didnt emerge as an

outgrowth of its own indigenous contradictions as it had in Europe, rather it was imposed by aforeign bourgeoisie who displaced their Indian rivals. As a result, post-independence India

emerged with a small bourgeoisie, and a much larger intermediate class. While the latter

werent as wealthy as the industrialists who authored the Bombay Plan, they made up for this by

their numerical size. According to Jha (1980, p. 103), this class was comprised of at least 20

million people multiplied eight to ten times as many dependents. Additionally, their levels of

education and wealth were relatively better than the general population making them a political

force to be reckoned with. According to Jha (1980, p. 98), both Kalecki and Raj had failed

recognise the specific characteristic that consolidates all the aforementioned groups into a unique

class, namely that under conditions of shortages, these groups are in a position to charge higher


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pay the costs involved in transporting, storing, and distributing this grain. It covered these costs

by importing cheaper wheat from the United States, which it could sell at a higher margin, but

eventually gave up this practice when world wheat prices rose drastically after 1973 presumably

as a result of the oil supply shock. That imported wheat (prior to 1973) was cheaper than the

procurement price offered to farmers provides an indication as to how high procurement prices

were. The ostensible reasons for these policies were that theyd ensure large wheat supplies, but

in reality they reflected the powerful influence exerted by thefarm lobby (Jha, 1980, p. 103-4).

Indeed according to Mitra (1972, p. 108), the terms of trade between industry and agriculture,

between 1961-62 and 1973-74, shifted in favour of the latter by 50 percent.

Secondly, in 1969 the Indian government nationalised 14 of the largest banks holding 85 percent

of total bank deposits in the country (Mahapatra, 2013). On the surface this appears to be an

appropriate solution towards solving the problem of mobilising domestic resources for

reinvestment. Although the ostensible purpose of this move was to extend low-interest loans to

the so-called priority sectors of the economy including agriculture (Tomlinson, 2013, p. 176), the

primary beneficiaries of this move were again rich farmers whose access to these loans even

strengthened their position as moneylenders as they often re-loaned these funds to poorer

farmers at usurious rates. Finally, that rich farmers benefited greatly from the stagnation period

is evidenced by the greater concentration of land ownership by rich farmers during that era. In

1961-62, farms larger than 10 hectares accounted for 24.4 percent of total farmland, this figure

rose to 31 percent by 1970-71 (Jha, 1980, p. 105). In essence the opposite of the Soviet scenario

was unfolding, and Indias kulaks, far from being squeezed, were being subsidized heavily with

only marginal improvements in per-capita foodgrain availability being achieved as a result.

3.4.2 Civil Servants: A Kind of Pseudo-Proprietor

The bureaucracy, referring to the managerial strata of the civil service, is the second

intermediate class in that they too had an interest in perpetuating stagnation by pushing the

burden of inflation onto other classes. Although civil servants are technically on fixed-incomes,which means they should have class interests opposed to the intermediate class, Jha argues that

because their position empowers them to accept bribes in exchange for services, this actually

makes them a kind of pseudo-proprietor. More importantly, the worse the shortages, the greater

theyre able to increase their earnings through corruption, with practices including but not

limited to; blackmarketing, bootlegging, smuggling, colluding in the evasion of excise levies, or

speeding up the process of obtaining official sanctions (Jha, 1980, p. 100). A direct consequence

of the inability of the state to raise tax revenues was that during the stagnation period the

bureaucracy grew at a faster rate than jobs in the material sectors of production (Jha, 1980, p.

105). This was because creating a job in the productive sectors of the economy is significantly


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more expensive than creating a new job in the bureaucracy. Indeed according to the Reserve

Bank of India, the average cost of merely creatinga job in the public sector during the first three

FYPs was (in 1968-70 prices) around Rs. 14-15,000, whereas the average annual salary of a civil

servant was Rs. 5000 (Jha, 1980, p. 79). In addition to this, because expanding these jobs was

relatively easy and cheap in the short-term, it was politically useful way of satisfying the demand

for jobs. This is why overstaffing became a serious problem throughout the 1970s and is

potentially as bad as generating unproductive jobs given the diminishing marginal returns on

additional workers. Indeed Bagchi (1994, p. 394) cites the example of the Durgapur Steel

Factory, which was designed to operate with a workforce of 7,500, but in fact operated with a

workforce of 15,000 by the 1970s even though similar plants around the world would require

only 3,500 workers. Creating a job in the productive sector increases the pool of material goods

available in the economy, whereas creating a job in the bureaucracy amounts to an act of

consumptionsince it takes from the material sphere of production without adding to it. This isnt

to say bureaucratic jobs are unnecessary, indeed every state needs its general staff in order to

function, only that once the optimal level of bureaucracy is reached, theres an opportunity cost

involved in pursuing the strategy of generating employment by this method. Thats because this

money could be better spent creating jobs in material production, which although will initially be

more expensive, the firms that hire these workers will potentially become solvent entities

capable of raising their own revenues by selling their products, and thus no longer needing any

exogenous government investment, much unlike the bureaucracy which will need to pay the

salaries of their workforce for a lifetime.

3.4.3. The Small Proprietor

The third intermediate class was the smallproprietor. Here an important distinction needs to be

drawn between privately owned large firms run by professional managers on the one hand, and

small-proprietors, referring to owner-managed small to medium firms on the other. There are

two reasons why the latter constituted an intermediate class, and as such, benefited from and

helped perpetuate stagnation. Firstly, on the question of whether small-proprietors benefit from

inflation, Jhas argument is less convincing than those made for rich farmers and bureaucrats.

He implicitly argues, firstly, that allsmall-proprietors benefit directly from inflation since they

earn the proceeds of the higher prices they charge, whereas because the professional managers of

large firms are paid fixed-salaries, their real-wages fall as a result of inflation. While this is

logical in the abstract, whether small-proprietors benefit from inflation ultimately depends on

the relationship between what they sell and which commodities have become more expensive.

Aside from the impact of exogenous supply shocks, the ultimate cause of inflation in the Indian

context was stagnant agriculture. As such small-proprietors would benefit from food price

inflation if they were selling food (or commodities linked with food). However if they were selling


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constraining the growth of large firms, the economy remains dominated by small-proprietors who

are more likely than large firms to accumulate revenues through untaxed channels, which in

turn adds to the problem of mobilising domestic surpluses for reinvestment.

3.5 The First Phase of Internal Liberalisation

The stagnation period ended when economic policy shifted from representing the interests of the

intermediate classes to those of rich consumers and large firms. Industrial growth throughout

the entire dirigiste period had been concentrated among the wealthier sections of society, whose

growing desires to imitate the consumerist lifestyles of the west could no longer be satisfied by

the limited range of goods offered by the autarkic system. What began therefore in the late 1970s

and continued throughout the 1980s was a period of internalliberalisation, which removed the

restrictions on incumbent businesses, particularly those that had restricted the growth of large

firms. This phase was defined by large firms being permitted to import specifically the capital

goods for the domestic production of the commodities demanded by the affluent. Although these

processes ushered in periods of strong economic growth during the Fifth, Sixth, and Seventh

FYPs, it resulted in a growing balance of payments crisis, and worsening debt levels, which

added to the growing pressure for the 1991 reforms.

As Kalecki had argued, continuous economic growth was a necessary condition for intermediate

regimes to remain in power, as such, the stagnation period couldnt have continued indefinitely

without political repercussions. Taking this into consideration, Jha (1980, p. 147) argues that

although the Allahabad High Courts decision to dismiss Indira Gandhi from office certainly

triggered the declaration of the two-year State of Emergency, the state had grown increasingly

authoritarian since the mid-sixties, which correlated closely with the economic pressures brought

about by the contradictions of the intermediate regime. The Emergency erupted after a decade of

the state offering sizable concessions to the intermediate classes while fixed-income groups were

squeezed by taxation and inflation. This explains why the number of industrial disputes had

grown as sharply(

as the size of the police force throughout the stagnation period, which

eventually culminated in the banning of strikes during the emergency. Or why, of the promises

made by Prime Minister Gandhi in 1975, only the ones favouring rich farmers and small-

proprietors were actually acted upon (Jha, 1980, p. 177). Indeed Jha (1980, p. 186) argues that

the Congress lost the 1977 election because a critical mass of those who had suffered as a result

of the intermediate regimes legacy of unemployment and inflation, withdrew their support, and

voted for the Janata in protest. For these reasons the emergency can be interpreted as the

(The number of man-days lost in industrial disputes rose from 5-7 million in 1961-62, to 18-20 million by

the middle and late 1960s (Jha, 1980, p. 162)


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intermediate class fighting back against challenges to their rule. However the defeat of the

Congress in 1977 didnt change the economic regime immediately, because the victorious Janata

party represented the same intermediate interests, especially those of rich farmers. Indeed a

telling sign of the kulak lobbys influence over the government was clear when in 1978, then

Deputy Prime Minister Charan Singh (Morarji Desai was Prime Minister), organised for one

million farmers to descend upon Delhi from neighbouring states to issue to their demands.

Afterwards Charan Singh was made Finance Minister allowing him to implement a federal

budget that offered even more subsidies, including a 50 percent tax reduction on fertiliser, and

higher procurement prices policies that contrasted sharply with the Janata partys neglect of

poor farmers (Sharma, 1999, p. 200).

Although the return to democracy in 1977 briefly intensified the states commitment to

intermediate interests, the re-election of the Congress party in 1980 for Indiras Gandhis second

term as Prime Minister represented a qualitative break from the intermediate regime that had

dominated India from the 1960s onwards. This corresponds well with the argument put forward

by Rodrik & Subramanian (2004, p. 28), writing for the IMF, that the governments attitude

towards the private sector had shifted considerably from being outright hostile to supportive,

which is a perception they argue was shared by business as well. The first thing to notice about

the year 1980 was that it represented a qualitative break from the past in the sense that the

economy moved on to a higher growth trajectory. Indeed according to an econometric analysis of

both the aggregate and per-capita GDP of Indias post-independence history, the first qualitative

shift towards a higher growth trajectory took place in the early 1950s, prior to which the colonial

economy had experienced close to zero growth in per-capita income; and the the second shift was

in 1980 (Nayyar, 2006, p. 3). Even a cursory glance at Item 9 appears to support the view that

the year 1980 did indeed represent a break from the past, with a much smoother growth curve,

and without the volatility seen earlier.

This new growth trajectory cannot be understood without recognising an important consequence

of the earlier stagnation period, namely that the productive capacity of the economy stopped

growing, and continued to reflect the superior purchasing power of the upper-income sections of

society. While this class may only constitute the wealthiest 10 percent of the population, thats

still a huge market in absolute terms, especially since their purchasing power is roughly

commensurate with that of their middle-class counterparts in the OECD countries (Bagchi, 1994,

p. 418). The desires of the affluent for the lifestyles prevailing in the advanced capitalist

countries could no longer be reconciled with the intermediate regimes favouritism towards

small-proprietors and its bias against large firms. The main reason for this being that unlike

small-proprietors, large firms possess the technology and the economies of scale needed to

produce the consumer goods demanded by the rich.


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insolvency of the public sector was grossly exaggerated. Indeed a study conducted by Sankar,

Tilak, and Sai (cited in Bagchi, 1994, p. 412) between 1983-84 and 1985-86 compared the

profitability of public sector firms with their private sector counterparts (541 firms in total), and

concluded that although the latter realised a larger return on capital than public enterprises),

if the sick private enterprises that had been nationalised by the government, and the highly

profitable public sector oil companies were excluded, the difference between public sector and

private firms was only 1-2 percent in favour of the latter. Furthermore this sample included only

the solvent private firms, which means if a comparison were to be made between private and

public sector firms in the original sample without any of the above qualifications, it would have

been unfairly biased against the public sector. Secondly, Kamaths (1992) argument that the

growth of the public sector [was] at the expense of the private sector ignores the reality that

private sector firms by the mid 1980s were heavily indebted to public sector banks and abusing

the credit provided to them. Indeed according to the same study by Sankar, Tilak, and Sai (cited

in Bagchi, 1994, p. 413), the total outstanding debt of 597 private firms, each with a credit limit

of Rs. 10 million or more, came to Rs. 26,553 million, which amounts to a debt-to-capital ratio of

10 percent. Thirdly, according to a BBC article (1998) detailing a similar set of arguments,

between 1986 and 1991, state owned enterprises made 39% of gross investment, but generated

only 14% of GDP, however this ignores that public sector companies intentionallykept their

prices low, which the private sector benefited from (Bagchi, 1994, p. 412). In summary, according

to Patnaik & Chandrasekhar (1995, p. 5), the state exchequer was the medium through which

large-scale transfers were made to the capitalist and proto-capitalist groups. Much of what wastechnically public sector debt amounted to disguised private-sector debt in the form of the

nationalisation of insolvent, or sick private firms, and enormous outstanding loans to the

private sector.

There is a major difference between the first phase of liberalisation implemented before 1991 and

the second phase implemented afterwards. The first phase was characterised by internal

liberalisation, that is, it focused on lifting import-restrictions on specifically those capital goods

needed to produce consumer goods domestically, so long as those capital goods didnt have any

domestic competitors producing them (Ahluwalia, 2003). However the second phase was focused

more towards externalliberalisation, which involved lifting restrictions on the importation of

finished consumer goods, thereby forcing domestic firms to compete directly with international

capital. Of critical importance is recognising that externalliberalisation of the kind that

happened in 1991 was not unanimously supported by the entire Indian capitalist class. There

was of course the classic schism between those who see international competitors as a threat to

their own domestic empires, and those who stand to gain from an export-oriented economy. The

)This is measured as the ratio of profit before tax plus interest to total capital employed (Bagchi, 1994, p.

412)


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question then becomes; what were the factors that shifted the balance in favour of the latter set

of interests favouring the externalliberalisation of the economy?

Firstly, in an economy where licenses and regulations governed commercial activities,

transaction costs will be extremely high, which in turn necessitates the emergence of different

kinds of middlemen whose skills arent associated with material production as much as they are

with working around the system and obtaining favours by corrupt means. It was argued by

Patnaik & Chandrasekhar (1995, p. 6) that such a class of international racketeers, fixers [and]

middlemen were more inclined towards external liberalisation as it would allow them to expand

their own business opportunities, especially in import-export operations, that had until then been

hindered by the dirigiste system, albeit its slimmed down 1980s form. Secondly, if industrial

growth serves the affluent whose incomes are comparable with those of the middle-class in the

OECD countries, then they, along with the private firms that produce the commodities they

consume, both have a shared interest in dismantling specifically those government controls that

restrict their consumer choices; but this shared interest extends only so far. This is because while

the upper-income consumer wants access to allconsumer products even if it means undermining

protectionism, domestic private-sector proprietor would only want to dismantle those controls

that prevent them from importing the capital goods needed to produce these commodities

domestically, while still relying on protectionist barriers to prevent direct competition from

overseas companies. Theres much to suggest that on the question of this particular conflict of

interest, the sympathies of the political class were closer to those of affluent consumers. Indeed

according to P. Chidambaram, who as Minister of Commerce played a major role in the 1991

reforms, because of this protected market, the Indian people were being given shoddy goods and

services at very high prices. Similar sentiments were echoed by Manmohan Singh that could

also be interpreted as being somewhat antagonistic to domestic business, if you have a

controlled economy cut off from the rest of the world by infinite protection nobody has any

incentive to innovate (PBS Documentary). Furthermore, according to Patnaik & Chandrasekhar

(1995, p. 7), the basis on which the political class pushed for import-liberalisation policies in

general was that although the segment of the population with the purchasing power to buy these

goods was small, their absolutesize made them quite a large market, which is of course true.

Finally, for India to jettison export pessimism in favour of its capitalist class gaining a share of

the worlds export markets, international capital, represented by the World Trade Organisation

(WTO), would invariably demand reciprocity in terms of gaining access to the Indian market

otherwise India couldnt have joined the WTO in 1995.

4.0 The Significance of the 1991 Reforms


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Changes to an economic regime often benefit some classes for the very same reason they harm

others. While it is true that a balance of payments crisis needs to be fixed, the manner in which it

was fixed was more an expression of the interests of the wealthy than it was a purely objective

and scientific solution to the problem. The immediate cause of the 1991 crisis was a worsening of

the current account deficit. This was as a result of the First Gulf War, which resulted in oil prices

surging*; a reduction in exports to the Middle East; and a loss of remittances from workers in the

Gulf. However, theres much to suggest the 1991 balance of payments crisis could have been

easily averted, and that its intensification wasnt an inexorable event as much as it was a

product of short-term mistakes and confusion about the future of dirigisme. At the time many

Indians working in Kuwait wished to shift their savings, which had an estimated value of 5 to 7

billion US Dollars, to Indian banks, which the latter refused because they were unsure about the

outcome of the war, and therefore the future value of the Kuwaiti Dinar. If they had accepted the

money, the foreign exchange crisis could have been prevented but instead that money was lost to

foreign banks (Patnaik & Chandrasekhar, 1995, p. 1). Admittedly, the government had imposed

import-restrictions as a purely short-term measure in early 1991, which transformed the trade

deficit into a surplus by March 1991 (Patnaik & Chandrasekhar, 1995, p. 2), however this didnt

solve the crisis as it was offset by speculation as funds illegally left the country.

The realsignificance of the 1991 reforms was not that it averted a looming crisis, rather that it

provided a pretext for the implementation of a whole range of structural adjustment reforms that

benefited the wealthiest 10 percent. This is evidenced by the long-term structural shift towardsdevaluation as opposed to import-restrictions. Implemented in July 1991, the first short-term

measure of the reforms was to allow the Rupee to devalue in two stages by 25 percent (Patnaik,

1996, p. 3), the reason being, to counter the massive draw down in the foreign exchange

reserves (RBI, 2010), after all to maintain a pegged exchange rate (which India had until March

1993) it is necessary to draw down foreign exchange reserves so as to boost the demand for the

Rupee. The pressure for such reforms reflected the growing mismatch between the dirigiste

attempt to build internal markets, and the cosmopolitan lifestyles demanded by upper-income

consumers. Indeed in the aftermath of the 1991 reforms, the surge in imports has been

increasingly comprised of capital goods for the production of luxury consumption goods in what

Utsa Patnaik (1996, p. 5) described as a private spending spree by the well to do. The effect of

growing inequality in the lead-up to the 1991 reforms was that it forged an alliance between the

agenda of the World Bank and IMF (i.e. the BWI, or Bretton Woods Institutions) and wealthy

upper-income consumers, which combined to form a powerful ideological force for change. The

dirigiste model, which at least triedto build an internal market, was predicated on using foreign

exchange reserves for priority purposes, namely, for importing oil, food, and capital equipment

for industry, while placing restrictions on the import of non-essential goods such as luxuries. By

*For most of the 1980s, oil prices had been falling, until it rose sharply in 1991.


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contrast, the combination of devaluation and trade-liberalisation after the 1991 reforms has

essentially reversed this developmentalist equation. It has engineered a situation whereby the

country sustains its ability to absorb imports is by squeezing the poor through food-price

inflation. This is because in order to facilitate a surge in luxury imports, while simultaneously

trying(and currently failing) to counter a potential balance of payments crisis, it becomes

necessary to boost exports, which invariably involves exporting food.

The result of these policies can be gauged in terms of food security, as evidenced by the fact that

prior to the 1991 reforms, between and including the years 1961 and 1990, India was a net

importerof grain, importing 2.84 million tonnes of foodgrain per year on average. Whereas in the

years following the reforms when trade was increasingly liberalised, between 1990 and 2011

inclusive, India became a net exporterof grain, exporting 4 million tonnes of grain per year on

average (Economic Survey, 2013, p. 24). Admittedly, the most recent export figures shows that

agricultural exports make up only between 10 and 15 percent of the total value of exports

(Economic Survey, 2013, p. 93), however Indias trade-deficit would presumably deepen even

further if an export ban were imposed on foodgrains without similar restrictions being imposed

on unnecessary imports as well. Earlier in this paper it was argued that a problem with the

dirigiste model was that for a variety of reasons, it was unable to significantly raise foodgrain

output. Despite this, foodgrain output was at least growing, albeit slowly, in the decades leading

up the 1991 reforms, whereas afterwards, per-capita foodgrain availability has been trending

downwards (see Item 3). The plan, according to the RBI (2010), was to improve domestic

competitiveness, but as Item 10 shows, the devaluation didntlead to an export boom, rather the

trade-deficit rose dramatically along with the reliance on trade and today India finds itself in the

midst of a second balance of payments crisis.

5.0 Conclusion

The original sinof the dirigiste system, which lies at the foundation of every one of the

aforementioned contradictions, was the governments failure to adequately redistribute wealthand land. The dialectic in operation here is that afailureto achieve greater equality undermines

the ability of the system to remain viable and tilts the economic balance in favour for those for

whom the system has already served its purpose and has since become a hindrance. This failure

stemmed from the contradictions among the multi-class alliance that assumed power after

independence. They were unified on the understanding that since the conscious use state-force by

the Raj was needed to exploit India, reasserting Indias economic independence would also

require an interventionist state, the absence of which would ensure Indias continued subjugation

by foreign capital. Having achieved the objective that initially united them, the state would have

to reconcile the competing interests that divided them, resulting in a somewhat dysfunctional


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$+

regime that was forced to prioritise one set of interests over another in an anarchic manner. At

the one extreme, the purpose of the state for the fledgling capitalists was to offer protection from

foreign competition, and for landowners, to offer high procurement prices; whereas at the other

extreme, the poor hoped independence would lead to the redistribution of assets and income,

which could only be achieved by disciplining and dispossessing the wealthy. Even assuming that

the poorest sections of society, namely the landless agricultural and menial workers, never had

any serious influence over the state to begin with, the differences among the various proprietary

classes were still mutually antagonistic enough to prevent the system from acting with a unified

purpose.

Despite the first three FYPs having achieved significant industrial growth, the inflationary

barrier of high food prices hindered the potential for this to continue. The origins of this problem

stemmed from a failure to radically redistribute land like in other countries where such policies

greatly increased output. Instead the abolition of Zamindarimerely created a larger,

homogenous class of landlords who benefited from the inflation caused by food shortages. Other

than the economy being held to ransom by this class, the rich landlords offered absurdly little to

the exchequer by way of taxes, which of course compounded the problem of mobilising domestic

resources. As a result, the inter-sectoral terms of trade moved in favour of agriculture and

against industry, which was the exact opposite direction to that which was envisaged by the

Mahalanobis model, and a primary factor behind the stagnation period. The onset of industrial

stagnation had its origins in an inability to significantly raise agricultural output, but it also

gave rise to the even more bizarre phenomena of the intermediate classes who actually benefited

from stagnation by being in a position to at the very least pass on its worst effects to the poor. To

ensure continued political support, and given the prevailing industrial stagnation, which made it

more expensive in the short-term to hire workers in the material sectors of production, the

government sought to fulfil the promise of creating jobs via the growth of an inefficient

bureaucracy that today has, perhaps superficially, come to symbolise the dirigiste period.

Although the fledgling capitalists needed state protection and investment as a prerequisite for

the expansion of their own domestic empires, they were unable or unwilling to be disciplined

through taxation for the purposes of replenishing the very exchequer they relied upon. What

emerged among capitalists was the contradiction of the prisoners dilemma in the sense that

individual capitalists were motivated by their own self-interests to evade taxation, despite the

collective interests of Indiancapitalism requiring they be disciplined. By being unable to

mobilise these domestic resources, the untaxed surpluses fuelled conspicuous consumption by the

wealthy whose desires to imitate western lifestyles generated social pressure for controls on the

importation of luxury goods to be relaxed, and eventually, their objective interests could no

longer be contained by the dirigiste system, and the broader social interests it at least attempted

to serve. The resources spent on luxury consumption amounted to a major opportunity cost since


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$"

those resources could have been directed towards expanding the material sectors of production.

This lopsidedness of consumption existed even during the first three FYPs when industrial

growth was strong, which drives home the point made earlier that if there is a lack of wealth-

redistribution, that is, if purchasing power remains concentrated among the affluent, then

naturally production begins prioritising their interests and tastes over other more pressing social

objectives. Under such conditions Dr Ambedkars thoughts offer fresh relevance for

understanding Indias changing economic landscape, because its only to be expected that where

theres economic inequality alongside formal political equality, those with a vested interest in

perpetuating the former will dominate and subvert the latter.


32/39

Year

Changing

OfficialCalorie

Benchmark

RuralPoverty

Changing

OfficialCalorie

Benchmark

UrbanPoverty

1972-73 !!"" #$%&"' !""" &(%!"'

1983 !"$" %)"' *("# &!%!"'

1993-94 *(+" ,)%,"' *++# ,!%$"'

2004-05 *+!" !+%,"' *)(# !#%)"'

2009-10 *)+" !,%""' *)!" !"%("'

Year

Rural

Poverty

(2400

Carlories)

Rural

Poverty

(2200

Calories)

Urban

Poverty

(2100

Calories)

1972-73 72.00% 56.40% 60.00%

1983 70.00% 56.00% 58.80%

1993-94 74.50% 58.50% 57.00%

2004-05 87.00% 69.50% 64.50%

2009-10 90.50% 75.50% 73.00%

,!

6.0 Appendix

Item 2. Consistent Poverty Estimates

(Patnaik, 2013)

Item 1. Official Poverty Estimates (Patnaik, 2013)

,#"

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33/39

1952-53

1953-54

1954-55

1955-56

1956-57

1957-58

1959-60

1960-61

1961-62

1963-64

1964-65

!!

Item 5. Percentage of Per Capita Consumer

Expenditure Spent on Industrial Goods in Rural India

(Sau, 1974, p. 39)

Item 6. Percentage of Per Capita

Consumer Expenditure Spent on

Industrial Goods in Urban India (Sau,

1974, p. 40)

All

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34/39

Target Rate Actual Rate

First (1951-56) !"# $"%

Second (1956-61) &"' &"!(

Third (1961-66) '"% !"(&

Plan Holiday (1966-69) )*+ $",

Fouth (1969-74) '"- $"$%

Fifth (1974-79) &"& &"((

Sixth (1980-85) '"! $"-$

Seventh (1985-90) ' '"%%

Plan Holiday (1990-1992) )*+ $"$'

Eighth (1992-97) '"% %"'%

1951-55 1955-60 1960-65 1965-76

Basic Goods 4.7 12.1 10.4 6.5

Capital Goods 9.8 13.1 19.6 2.6

Intermediate Goods 7.8 6.3 6.9 3

Consumer Goods 4.8 4.4 4.9 3.4

Consumer Durables - - 11 6.2 Non Durables - - - 2.8

General Index 5.7 7.2 9 4.1

$&

Plans

!"#$ &' ()*# +#,- ./,01 23,145 67775 8 99:;

20>$)= ?@-*#A5 679B5 8' 97;

Item 8. Annual Compound Growth Rates in the Index of Industrial Production

(Chandrasekhar, 1988, p. 334)

.%

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%

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8' 97;


35/39

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36/39

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jay tharappel - indian economic history

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