India. Craig Jeffrey
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in the growth rate in the late 1980s’ (2016: 29). Their analysis, however, like that of many others, shows clear differences from decade to decade (see their fig. 1.2, giving decadal averages of growth of output per capita): there were higher levels of growth per capita in the 1950s (at about 2 per cent per annum) than in the 1960s (1.49 per cent), and the 1960s were better than the 1970s (0.84 per cent), which was the time of the so-called ‘Hindu rate of growth’, when the rate of economic growth hardly kept pace with that of the population. Then there was ‘recovery’ in the 1980s (3.19 per cent), even if the acceleration was not sufficient statistically to count as a structural break.
There is another way of understanding the history of the period, however. According to this view, state planning of the economy, in a framework of import substitution industrialization, was really quite a success story, at least to begin with. Thanks especially to the Second Five Year Plan, designed by P. C. Mahalanobis, the country achieved a remarkable transformation of its industrial base over a very short period of time. The industrial growth rate was above 5.5 per cent per annum in the 1950s, and about 6 percent in the 1960s (Kar and Sen 2016: fig. 3.2), and investments in that time in heavy engineering and infrastructure can be shown to have delivered significant benefits for long-run growth. Unlike other countries that pursued import substitution industrialization strategies, India succeeded in developing the capacity to make machines (a point made notably by Griffin 1999).
But in spite of its relative success in the 1950s and early 1960s (the period of the first three five-year plans), state planning entered into crisis in the mid-1960s. An important book from the time had the title The Crisis of Indian Planning (Streeten and Lipton 1968). A range of factors were involved, including the failure to address the problems of the low productivity of Indian agriculture, and the persistent poverty of the mass of the rural population – which also had the effect of constraining the demand side of economic growth. But the increasing inability of the state to raise the necessary resources to maintain the rate of public investment was especially important (Hanson 1966). From the mid-1960s, the rate of economic growth declined quite sharply (as the calculations of both Panagariya and Kohli, reproduced in table 2.3, clearly show). In the view of liberal economists, especially, the situation was exacerbated by policies enacted under governments headed by Mrs Gandhi after 1969 that were decidedly anti-business. Leading banks were nationalized (in 1969); the passage of the Monopolies and Restrictive Trade Practices (MRTP) Act 1970 was aimed at increased regulation of big business houses; and the Foreign Exchange Regulation Act (FERA) in 1973 struck at inflows of foreign investment and technology (see Panagariya 2008: ch. 3).
The conclusion reached by Kar and Sen, ‘that the policy framework played an important role in contributing to the economic stagnation of the 1960s and 1970s’ is well-founded, no doubt. And policy distortions helped to shape a manufacturing sector that used too little labour and too much capital (Kochhar et al. 2006: 17). We think that it is also important, however, to acknowledge both that the late 1960s and 1970s were difficult times in many developing countries – not least in the wake of the oil price rises of 1973–74 and a global economic downturn – and that capabilities were built in India at this time that stood the country in very good stead in later years. We think, for example, of the investments in human capital through the technology, management and research institutes that were established, as well as of the investments in heavy engineering and in infrastructure.
We do not believe, therefore, that the first thirty years of independent India should be written off simply as a time of economic failure, while recognizing that there is no doubt of the accumulation of problems making increasingly for stagnation. The relationships in this time, between the economic elite and the Congress political elite, were uneasy, with mistrust on both sides – not an environment at all conducive to crucial investments involving large initial sunk costs. The Congress political elite was divided: a minority, but one to which Nehru was at least sympathetic, influenced in part by a positive reading of the Soviet experience, sought to move India in a socialist direction; but most were inclined to be supportive of private business even if they thought that the public sector had to be the key driver of growth. The result was that, as Vivek Chibber showed, in an important study of the state and late industrialization in India, ‘the Indian state managers’ agenda was frustrated by a well-organized offensive launched by domestic capitalists’ (2003: 9). India did not build, at this time, a developmental state of the kind established, for example, in South Korea, in which the state was able ‘to harness capitalists to its project’ (Chibber 2003: 9). Their influence in the leading political bloc meant that the prominent business groups were able effectively to scupper the disciplinary part of state-planning. The Planning Commission lacked the capacity to discipline either ministries or firms. At the same time, as Chibber also explains, the Congress government was very effective in weakening the labour movement that might have supported disciplinary planning.
While successfully resisting disciplining by state managers, capitalist firms benefitted from the subsidies and protection offered them under the import substitution industrial strategy. Bureaucrats were able to exercise a great deal of discretion in the allocation of licences, permits and quotas, and big Indian companies devoted a huge amount of effort to lobbying, so as to secure them, as well as to making demands on government to modify regulatory policy. As Bhagwati puts it, ‘the industrial-cum-licensing system … degenerated into a series of arbitrary decisions … because the administrators were so empowered’ (1993, cited by Kar and Sen 2016: 39). In terms of the analytical framework that Kar and Sen set out, there was a disordered deals environment, not at all conducive to growth. It was inclined to be closed as well. South Indian industrialists whom John Harriss interviewed (in 2000), for instance, spoke about their having been excluded from a lot of deals-making in Delhi.
Accelerating Growth in the 1980s
As we have argued, the 1980s saw an acceleration in the rate of economic growth over the trend line of the previous three decades (see table 2.1), even if it was only a ‘nascent recovery’ according to Kar and Sen. We referred earlier to the proximate factors that brought about capital accumulation and the improvements in TFP that are clearly observed in data on the 1980s. But what happened to bring about the changes that took place in patterns of investment, pushing up levels of private investment, and encouraging more investment in machinery?
The nature of state–business relationships began to change when Mrs Gandhi was returned to power in the general election of January 1980, after the collapse of the short-lived Janata regime. Several leading scholars argue that government attitudes changed at this time from being anti- to pro-business (De Long 2003; Rodrik and Subramanian 2005; and Kohli 2006a, 2006b). Kohli says, ‘just after coming to power in January 1980 … Indira Gandhi let it be known that improving production was now her top priority. In meeting after meeting with private industrialists, she clarified that what the government was most interested in was production’ (2012: 30–1). Rodrik and Subramanian, in their joint work, argued that a change in the attitudes of the Congress political elite towards business had a big impact. A much more pro-business orientation on the part of political leaders made for significantly higher growth rates, because India had, until that time, performed so poorly in relation to the quality of its economic institutions – which meant small changes brought about big shifts. The change of attitude may have been a matter of political calculation on Mrs Gandhi’s part – promising to strengthen her hand against the threat still posed by the opposition – but it started to establish a more collaborative relationship between state and business: ‘the Indian state clearly signaled to domestic capitalists its intention to credibly commit to an environment where private enterprise would be supported and growth-enhancing policies followed’ (Kar and Sen 2016: 41).
This trend was further accentuated under the government headed by Rajiv Gandhi, who came to power at the end of 1984, in the general election that followed the assassination of his mother in October that year. Gandhi was interested in new technologies, and sought to encourage new industries, bringing in entrants to the business elite. Non-traditional business groups began to emerge, especially in western India and in the south. And, though they were modest (‘half-hearted’,