Economic development in India after Independence
The economic history of India should be understood within the context of many forces internal and external acting upon the new nation. The United States, Soviet Union, the World Bank, the International Monetary Fund, the Planning commission all had an effect on the course of Independent India. Economic reform was the need of the hour to transform the poverty stricken country to a developed nation. British India had left the country in tatters, leaving India's GDP at a small percentage of the World GDP. The Indian government's biggest priority was to alleviate extreme poverty and manage its limited foreign exchange.
The future of Independent India's economy has traces in China's twenty-first century ascent. The two Asian nations differ in many respects but when it comes to economic development undertaking the similarities they share are strong enough to compel a persuasive case for one-to-one analysis. Not only China's long overdue industrialization has a counterpart in India's, but also both countries have been endowed with factors of production that are identical in size, whose role in the accumulation of capital is crucial. In the beginning, both countries-China under Mao and India starting with the Second Five-year plan-made a strategic error by undertaking industrialization on the back of not the most abundant factor of production, labor, but of the least abundant of all, capital.
In the postwar era, as was the case with many nations in South Asia and East Asia both countries had large adult population and a mobilisation of that abundant factor of production in the manufacture of labor-intensive, light industry consumer goods for export would have been the most sensible start. In the beginning, with almost nil foreign investment forthcoming, the capital scarcity acts as a motivator to import product machinery from foreign countries using foreign exchange earned from those exports-as happened with the successful North East Asian nations. That, as we know, would raise savings rate and national income, accelerating capital-income.
But India and China deviated from the common sense approach. They were two of the biggest countries being led by parties or people influenced by socialism, and naturally, the countries embarked on the popular model of building capital-intensive heavy industry straightaway and assuming state-ownership of industries. The Indian planners reasoned that their plans envisaged a leading role for public sector undertaking of the commanding heights of the economy.
We cannot, however, counteract the past industrial policy resolution based on the sole consideration of economics. It would be a mistake to do so since many a country's industrial development were at least triggered if not sustained the industrialisation process under national security concerns. In the case of India and China, much of the planning, of course, was undertaken under the exigencies of national security, especially when the two countries went to war in 1965.
Much has been written about China's opening and reform in 1978 following the death of Mao. But what's most interesting is not that China has realized the error and has switched to labor-intensive goods consumer goods production-its neighbors South Korea and Taiwan already standing as exemplars to be emulated-but that the reform & opening happened when it did. That was the decade when tensions eased between the United States and China and the threat of nuclear attack evaporated. Since then, China, but not India, had made full utilization of its abundant factor of production, labor, in manufacturing activity.
Within the economic sphere, even though India & China have an identically sized factor of production in labor and began with identical industrialization efforts, they still differ in other economic respects. Land reform efforts and the power of the state in enacting the same are critical to defining the extent of easy provisioning of land for economic development. A common thread binding all successful late industrializing countries is their creation of an environment that allowed a fast provision of land for industry, urbanization, and public infrastructure. China's modern founding in 1949 gave way to distribution of land to farmers, but then collectivization ensued taking away family land. From 1978 to 1983, the land was again redistributed back to the farmers under a long-term lease. In 1978 when China's reform and opening took off with complete state-ownership of land, the Chinese government in the ensuing 30 years oversaw the transfer of control of land from the state to individuals and entities, provisioning land at various stages first for agriculture, then infrastructure and industry, domestic highway and expressway transportation, dams and canals for hydroelectric energy production, airports and high-speed rail, urban housing and supporting infrastructure, universities, research hubs, etc.
India, in contrast, has legacy problems in land ownership and provisioning. Even as incomplete land reforms remained the norm across the country since Independence, the large-scale, semi-feudal type ownership structure was broken and small plots were distributed to the lower gentry rather than to the land tillers. There was some success in eliminating the largest landowners but much less so in redistributing land to the rural landless. It's not just those post-independence land reforms driven by political environment of the country that were a failure. Several subsequent rounds of land reform, with some variation across the states, were also.
Land reform in the postwar era was a job half-done because not only India's population increased enormously, resulting in much smaller broken plots, but incomplete land redistribution meant controversial land ownership titles & ever-expanding accumulation of land by some small segment of the population persisted. Therefore, India in the early 2000s found herself with a large number of small farm plots and controversial land ownership titles, with no big land reform in the pipeline to crack the land controversy mud. Without easy and fast procedure to provision land, which also means combining multiple adjacent plots to make way for development projects such as highway construction, installation of industrial plants, public infrastructure including highways and airports, large housing blocks, etc. remains hard. State governments to some extent overcame land problems. It is, therefore, not hard to see why some parts of India, especially the southern states such as the then intact Andhra Pradesh, Karnataka, and Gujarat have grown faster than others and become comparatively modern. In contrast, extreme backwardness remains the norm in states such as Bihar, Madhya Pradesh, etc. where the state governments made little gains in terms of land provisioning for development.
Overall, China and India appear quite different when it comes to their capacity to deploy land for industry and modernization. Another important feature and the other side of the nexus, although political, but has enormous economic implications is the power of the state. China has a unique form of authoritarian government, which has shown to be flexible in the past, and thus its unusual capacity to mobilize large resources. India, in contrast, has a constitutional democracy and provides for a democratically elected central government, which has shown to be extremely rigid in its methods and operations. And therefore, India remains frail when it comes to amassing the capability to mobilize large resources. We'll revisit that part in later sections and see to what extent that has changed in the recent past.
When India commenced its plans to build heavy industry based on a detailed inter-sectoral, comprehensive planning memo of the Second Five-year plan 1956-61, it assigned special role to public sector investment. India at that time, and much more especially during the 1970s, was a socialist, command and control economic system with a minimal role for the private sector. It helps to understand India's failures to industrialize from a theoretical and practical standpoint.
In retrospect, it is easy to see, from a practical standpoint, why India going with big ambitions of industrialization had failed to build competitive final goods heavy industry. From a theoretical standpoint, equipped with the theory of rapid economic development through the industrialization route developed in the prior Chapters, it is possible to finally and steadfastly argue the self-defeating nature of the theoretical underpinnings of India's industrial and trade policy.
The Indian government favored industrialization by embarking on heavy industry because the leaders saw industrialization and economic development as synonyms. That is, their view held that achieving industrialization in and of itself was taking giant steps on economic development radar. That kind of thinking, widely held by many influential people at the time, seems to be not the cause but rather the effect of specific fallacious ideas, as we'll see, sprung from some corners of the debate.
The mainstream thinking guiding India's economic policy at that time went something like this. That a poor country, to rapidly grow its economic output, ought to start making machines that help make other goods including other machines. That thinking was the crux of what was then known as the Calcutta school of thought propounded by Professor Prasanta Chandra Mahalanobis (1893 - 1972), of the Indian Statistical Institute. The counter school was the Bombay school of thought, which held the view that since India lacked financial capital but had plenty of cheap labor, investment, therefore, should be poured into making mass consumer goods. Academic, technical, and welfare interests drove the Calcutta school, while business, commercial, and industrial interests drove Bombay school. As was the case, eventually, the Calcutta school of thought prevailed. India was to divert its few precious resources to building capital-intensive heavy industry, particularly, as the Plan envisaged, making investments in industries that make machines that help build other goods including other machines. Right here, obvious to us from a big picture vantage point, the Indian policymakers of the Calcutta school of thought were operating under a macroeconomic fallacy.
The macroeconomic fallacy-which we know from the macroeconomic backdrop of the theory of economic development and discussed elsewhere as part of an extensive analysis of a typical economic research paper-is: if only a country musters resources to invest, or provides incentives to invest, or stimulates the economy to invest then its entrepreneurs and businesses will then begin to invest, causing as a result a higher annual investment rate and savings rate.
In India, the thinking that if only the Indian government mobilizes resources to manufacture the machines and not waste on efforts to produce consumer goods would the country will see its output grow faster helping to industrialize. That because the country would then have more machines to produce much more output than would have otherwise, it was believed, it made sense to pour resources into making machines in large-scale. It is the same macroeconomic thinking prevalent today, and that has since continued to solidify even into our times as the prior analysis of Prof. Naughton's 2010 article on China illustrated. But implementing state policy based on that thinking could and will lead to devastating failures.
For India, there was actually a double blow, and it came from the then rising Indian populace looking for employment. Since India's employment policy, which aimed to create jobs for the then-exploding adult population, did not square with its industrial policy, which aimed to build capital-intensive (and labor-light) heavy industry. The Indian government looked to the textiles & apparel industry, which was deemed to consume labor exhaustively, to reconcile the differing policy objectives.
Since the time when the government wanted textiles to be the future engine of employment, it began to starve the industry from capital. Because the government already prioritized heavy industry by leaving light industry to the fringe, it dropped any semblance of reliance on labor and its development in favor of investment in capital. Anyhow, it turned out at that time during the Second Five-year plan, there weren't much savings to go around. But by going with that plan, the government regressed and stifled the development of its then only shining industry, textiles, and managed to bankrupt a once globally competitive Indian textiles industry.
To retreat to the original point, we know that the savings rate of a capitalist economy cannot be raised beyond 10% of national income; but to increase it beyond the 10% the country ought to export something and import capital goods. India was not trading actively at the time to enable its economy to eclipse to a higher savings rate, which brings us to another fallacy this time under the microeconomic backdrop of economic development theory.
Coupled with the macroeconomic disaster was the microeconomic fallacy guiding the thinking of policymakers that gave into the decision to take India on an autarkic industrialization route. That was the route of self-reliance way of doing things, shut out from the rest of the world. India withheld itself away from foreign influences of trade, investment, and technology. India was reluctant to engage with foreign countries, which meant the country was cut off from accessing frontier technology to establish a competitive final goods heavy industry. Without frontier technology, the government may establish any number of state-owned enterprises, but technological underdevelopment means industrialization remains elusive.
By disengaging with the rest of the world, Indian economy took itself a double blow and undermined its economic growth and feasibility to move the economy to a higher savings rate level and restore the forces of radical uncertainty indirectly.
Even if the country and the then prime minister Jawaharlal Nehru or later, his daughter, Indira Gandhi intended to export anything to the rest of the world, it couldn't have done so because, besides undermining both macro and micro backdrops of rapid industrialization by declining to trade, the country began development with heavy industry right off.