Economic Policies followed by the Indian Govt.

, from 1950s to the present

I Phase From 1951-52 to 1964-65- avg. annual growth rate of 4%. II Phase-1965-81 , growth rate 3.2%
III Phase-1981-90,growth rate of 5%. IV Phase-1991, continued late, growth Rate-6.5%, nearly 9% from 2003 onwards except for 2008-09.

Phase I-(1951-1965)

Nehruvian Socialist rate of growth" is used to refer to the low annual growth rate of the economy of India before 1991. It stagnated at around 3.5% from 1950s to 1980s, while per capita income growth averaged extremely low 1.3% a year. At the same time, Pakistan grew by 8%, Indonesia by 9%, Thailand by 9%, S.Korea by 10% and in Taiwan by 12%.

Phase I(1951-1965): Takeoff under a Liberal Regime

The key element in Nehrus thinking on trade policy- India needed to be independent of the world markets, its essential for maintaining political independence.

Instead of import barriers Nehrus philosophy was interventions in production via public sector participation & licensing of private sector investment to progressively align the domestic production basket with the consumption basket.

The Discovery of India

The Objective of the country as a whole was the attainment as far as possible of national self sufficiency . International trade was certainly not excluded, but we were anxious to avoid being drawn into the whirlpool of Economic Imperialism. The first charge on the countrys produce should be to meet the domestic needs of food, raw material & manufactured goods and the surplus production would not be dumped in the foreign markets rather for exchange of such commodities as we might require.

Bombay Plan contd..

Indian businessmen supported Nehrus idea on Central Planning.

They too believed that free trade and laissez-faire policies of British Raj- root of countrys economic problems.
They had benefited from the British Rajs intervention in the interwar years. High tariffs on imported goods- allowed them to control the market.

 J.L.N appointed new cabinet-technocrat C.D Deshmukh- Fin. Minister, T.T. krishnamachari (T.T.K)Commerce minister

First Election-1952

First Five Year plan- Progressive liberalization

Evidences

B.K Nehru quoted (Jt. Sec. In charge of International Finance in the ministry of Finance).

I- TTK was keen to expand investment and the economy, and would not led fears of the depletion of foreign exchange reserves get in the way of imports. II Consumer Goods import including items cutlery, hardware, electric goods, an integral part of the import basket. Presence of imports of household consumer goods is indicative of a relatively relaxed trade regime. III- During 1950s established importers who were licensed to import goods for sale to other buyers were allowed to operate relatively free.

Year
1950-51 1951-52 1952-53

Exports/GDP
6.1 6.8 5.6

Imports/GDP
6.1 8.4 6.8

Merchandise Imports and Exports as Proportions of the GDP (1950-67)

1953-54
1954-55 1955-56 1956-57

4.7
5.6 5.6 4.7

5.4
6.6 7.1 6.5

1957-58
1958-59 1959-60 1960-61 1961-62 1962-63 1963-64 1964-65 1965-66

4.2
3.9 4.1 3.7 3.6 3.5 3.5 3.1 2.9

7.8
6.1 6.1 6.5 6.0 5.8 5.4 5.1 5.1

T.T krishnamachari

Morarji Desai as Finance Minister

Restrictions on Imports: Morarji Desai as FM

The policy of benign neglect on the trade policy front continued till the end of 1957. B.K Nehru quoted The reserves were by now beginning to get so low that that threw as a danger of not meeting obligations. The First Foreign exchange budget was presented in the middle of 1958- Morarji Desai had become the Finance minister. This was the beginning of Indias turn to a much more restrictive trade and investing license regime.

An open Foreign Investment Regime

Both Congress and left Wing party hostile to Future Foreign Investment in the country. INC advocated the elimination of existing foreign capital from the key industries. Industrial Policy Regulation (IPR)1948 shared these sentiments.
It should recognize that participation of foreign capital, industrial technique & knowledge required for the rapid industrialization but it is necessary the conditions under which they participate should be carefully regulated in the national interest. Only Concession IPR1948 indirectly made- Govt. would not nationalize any business holdings & takeover of any foreign firm for 10 years. Despite of hostility PM J.L.N saw a clear need for foreign investment in India. He seized the initiative from the opponent and incorporated none of the restrictive provisions mentioned in IPR in the Foreign Policy Statement he delivered to the parliament in April 1949.

An open Foreign Investment Regime contd..

Foreign Policy statement 1949 says: Govt. would encourage new foreign capital by framing policies to enable foreign capital investment on terms and Conditions that are mutually advantageous. Although majority ownership by Indians preferred- Govt. will not object to foreign capital having control of a concern for limited period, if it is found to be of national interest. The findings of a census survey by RBI, 1969, reported :Total firms827 private firms with foreign partnership of some kind. Of these 591 had equity participation(262 having majority foreign holdings), remaining 236-had technical collaboration agreements.

A Restrictive Industrial Policy Regime

Policy toward industry were considerably more restrictive than those toward trade . Mahalanobis Model-on which rested the 2nd Five Year Plan suggested growth of heavy Industries. Question: Who should build the heavy industry? National independence objective: Country could not rely on foreign firms even if they are willing to invest in this sector- which they were not in any case. Resources of Indian private firms were too meager to allow them to fulfill the task.

Public Sector- only viable option.

Flaws with the policy: 1) It underestimated the benefits of foreign trade via. Specialization in products of comparative advantage. 2) Expansion of its role. Leadership greatly overestimated the role of govt. to efficiently perform a wide variety of functions.

e.g. First Five year plan- few projects- govt. could manage with limited capacity; but as economy grew larger & complex diseconomies of management grew.

Steel- Central to Revolution- Mahalanobis Major Emphasis of II Five Year Plan- Steel
1) Rourkela(Orissa) West German Loan 2)Durgapur(W. Bengal) British Loan 3)Bhilai (M.P) Soviet Union 4)Bokaro ( Jharkhand)- U.S didnt help then Soviet Union. India tilted towards Soviet Union. Alternative vision of Bombay Economists-C.N Vakil and P.R Brahmanand (neither glamorous nor technically rigorous) Huge disguised unemployment in countryside Surplus labor should be engage in making consumer goods- toys, bicycles, shoes, clothes radios.
Low capital, low risk, attract many entrepreneurs- rapid returns on investment.

It was ignored.

Role of the Public Sector-1948 Industrial Policy Regulation

1.
2.

3. 4.

Industries- State Monopolies. Limited to atomic energy, arms & ammunitions, and railways. Basic Industries in which state would have the exclusive right to new investments, though it could invite pvt. Sector cooperation if in national interest. 6 industriesIron & Steel, shipbuilding, Mineral oils, Coal , Aircraft Production& Telecommunication equipment. Industries of National Importance that the state might regulate & license in consultation with the state governments. 18 industries. All other industries that would be open to the privates sector without constraints.

1956- Industrial Policy Regulation

3 categories of Industry. 1) Schedule A-State Monopolies+ state reserved the right to seek cooperation from private sector.9 industries from (1+2 of IPR 1948)+9 other heavy industries, etc. 2) Schedule B- Open to private sector but state would increasing establish new undertakings in them.12- Minerals& Aluminum and other not included in Schedule 1. 3) Schedule C - Industries to be developed principally through initiative & enterprise of the public sector. The state reserved the right to enter in them as well.

QUESTION

Why India was able to shift its growth rate from less than 1 % in the first half of the twentieth century to 4.1% in the first 14 years of the post independence era?

Probable Answers
1) At independence, India inherited a largely honest & efficient bureaucracy & judiciary; strong Political Leadership under Nehru & a vibrant entrepreneurial class. 2) Since Economy was not very complex& no. of projects were small 3) While the general direction of the policy was towards increased controls, especially after mid 1958 but implementation of controls was not as vigorous in the early years as in the later years. 4) Since the foreign investment regime was still relatively open & the domestic machinery sector still in its infancy, machinery imports were less likely to be denied. Thus entrepreneurs were able to access the benefits of the innovations embodied in foreign machinery & management with relative ease. 5) Finally growth was sustained by borrowing abroad. But this was an unsustainable strategy & carried the seeds of crisis. Two consecutive droughts-1965-66 and 1966-67 was thrown India into an explicit crisis.

First Scam of Independent India

Independent India's first dramatised financial irregularity was the Jeep Scandal (1948), which related to the purchase of army jeeps for the country. The charge was that the then Indian High Commissioner to Britain, V.K. Krishna Menon, bypassed protocol to sign a Rs. 80 lakh deal with a foreign firm. The case was closed in 1955 and soon Menon, against whose personal integrity there was not a shred of evidence, joined the Jawaharlal Nehru Cabinet. The Cycle Imports Scandal, reported in 1951, saw the first conviction in a major corruption case, when an ICS Secretary to the Government of India, S.A. Venkataraman, went to prison for accepting bribes and the conviction was upheld by the Supreme Court.

Mundhra scandal-1958
Sale of fraudulent shares by a Calcutta-based businessman, Haridas Mundhra, to the Life Insurance Corporation of India.
Issue raised by Feroze Gandhi (INC), represented the Rae Bareli seat in the Parliament of India. Prime Minister Nehru constituted a one-member commission headed by Justice M.C. Chagla to investigate the deal. After finding that a prima facie case had been made out against the businessman, Justice Chagla concluded that Mundhra had sold fictitious shares to the LIC and defrauded it to the tune of Rs. 1.25 crore. The businessman was convicted and sentenced to a long imprisonment and Krishnamachari was obliged to quit the Cabinet. A point to be noted is that in these early cases, the judgments came in an unbelievably short time.

Indias single most important mistake

India ignored the critical importance of International trade. Rather than turn to outward oriented policies that exploited the export potential in labor- intensive products, as Korea did in early 1960s. India pushed import substitution deeper and deeper. Moreover ever tightening licensing policy even hampers domestic competition as well.