THE neoliberal assertion that our country entered a relatively high growth track only since the nineties is contradicted by facts of history. Actually India’s growth story has passed through two distinct phases, both marked by very different policy regimes corresponding to the international trends of the times, with a transitional intermediate phase in the 1980s. Each phase initially yielded better results compared to the previous one but ended up in a crisis sooner or later, thereby calling for a policy shift. Actually in this respect the experience of the latest (post-1991) phase is not all that different from the preceding ones, as we shall see in the next chapter.

Early ‘50s to late ‘70s:

‘Hindu’ Rate of Growth and ‘Nehruvian’ Socialism

The so-called Hindu rate of growthA phrase popularised by Prof. Raj Krishna in the seventies, during the period of increasing controls and slowing growth rate. (an average 3.5% annually) of the first phase (1950-80) was, it is scarcely remembered, five times the average rate of growth (0.7% per annum) during the 30 year period from 1917 to 1946. The latter, of course, was an exceptionally difficult period marked by world wars and the Great Depression, but it was also more than double the 1.5% per annum growth achieved during the normal period of 1900 to 1913.Occasional Paper India’s economic growth history: fluctuations, trends, break points and phases, Arvind Virmani, January 2005, INDIAN COUNCIL FOR RESEARCH ON INTERNATIONAL ECONOMIC RELATIONS, New Delhi; www.icrier.org If attainment of political independence and stoppage of direct colonial plunder (which continued by various indirect means all the same) was the fundamental reason behind this progress, some credit was also due to the Nehru-Mahalanobis development strategy.

This strategy took industrialisation as the main lever of development and assigned the state a very prominent role in it through five-year plans. It was also marked by (a) regulated promotion of private capital preventing cut-throat internal competition through licensing and other control devices and (b) protection from foreign capital primarily through a restrictive trade regime and regulation of foreign investment through the Foreign Exchange Regulation Act (FERA). Purely financial investments were discouraged or banned; some sectors were kept out of the purview of foreign investors while caps on foreign equity holding were set in others; terms for technology transfer were regulated and foreign partnership with domestic capitalists was prioritized over FDI. These steps were necessary, at least deemed necessary, for the protection and growth of India’s ‘infant industries’.

This period, particularly the first half (1950-1965) saw considerable progress in basic industries, mining and power generation in the public sector and that facilitated development of light industries in the private sector. The continuing neglect of agriculture, however, began to exact a very high price particularly since the middle of 1960s in the form of acute food crisis, price rise and unemployment problem, generating waves of militant mass struggles and armed peasant upsurges under revolutionary communist leadership.

The ruling clique tried to meet the twin challenges of economic crisis and political unrest by taking recourse to measures like nationalisation of commercial banks and certain other sectors like coal mining and the “green revolution” as well as political intrigues and repressive measures, but never came to grips with the situation. To make matters worse, the four-fold hike in international crude prices in 1973 resulted in massive increases in petro-products (including fertilisers) prices as well as in the general price level (by as much as 22% in 1972-73 alone). Foreign exchange reserves were drained and recession deepened further. It was amply clear that the Nehru-Indira model had come to a dead end and some sort of reform was needed.

1980s: Initial Steps to Reforms

And that was inevitably attempted when objective conditions matured in the mid-1980s. On the world scale the Soviet model was rapidly losing its shine while neoliberalism had started replacing social democracy/welfare state frameworks; on the national stage the removal of Indira GandhiIt was during her second term itself that the move towards liberalization had started slowly and became conspicuous later under Rajiv Gandhi. and the massive mandate received by the pragmatic third generation ruler of the Nehru-Gandhi clan helped economic policy to start coming out of the old, worn-out framework.

Material prerequisites had also matured by then. With state stewardship and assistance, the flabby Indian capitalist class gained the minimum economic muscle needed to step into the basic industries hitherto earmarked exclusively for the public sector in the Industrial Policy Resolution of 1956. Accordingly, the heavy/basic industries sector was gradually opened up to them. In the mid-1980s FERA was partially relaxed and foreign collaborations were more encouraged than before. Fiscal discipline was loosened, so the government could boost spending by taking advantage of the enhanced availability of foreign loans and investment. Easy accessibility of foreign finance also allowed large-scale import of food and other essential items to ward off price rise and resultant discontent. Thanks mainly to increased state spending and newly introduced incentives – including tax concessions – to industrialists, the Rajiv years saw an impressive 8% per annum growth in industry and average GDP growth rate surpassed the five per cent per annum mark for the first time.

The carefully calibrated relaxation or liberalization of 1980s would by its own logic lead to further restructuring sooner or later; in 1991 an opportunity presented itself, as is the norm in capitalism, in the shape of a crisis!

Crisis of 1991 and Big Bang Reforms

The accelerated growth since mid-1980s was achieved at the cost of (a) heavy domestic borrowing, which pushed the gross fiscal deficit of governments (at the centre and in states) to 12.7% of GDP by 1990-91 (b) since these deficits had to be met by borrowings, the internal debt of the government accumulated rapidly, rising from 35 percent of GDP at the end of 1980-81 to 53 percent of GDP at the end of 1990-91 and (c) foreign exchange reserves which stood at $1.2 billion in January 1991 was depleted by half by the middle of the year, barely enough to last for roughly 3 weeks of essential imports (in other words, India was only weeks way from defaulting on its external balance of payment obligations). The caretaker government under Prime Minister Chandra Shekhar secured an emergency loan of $2.2 billion from the International Monetary Fund by pledging 67 tons of gold as collateral, which was airlifted to London.

There was a public outcry when it was learned that the government had pledged the country’s gold reserves against the loan but, as Montek Singh Ahluwalia would write later, the historic crisis “became an opportunity for unveiling more systemic economic reforms.”Entry on Planning, “The Oxford Companion to Economics in India”, Kaushik Basu (ed), Oxford University Press, 2007, p 400 The main components of the “Structural Adjustment Programme” (SAP) prescribed by the IMF and executed by its man Friday Manmohan Singh were (a) fiscal correction through stringent austerity measures, (b) tightening of monetary policy and devaluation of the rupee, (c) gradual dismantling of the license-permit raj and opening up of all sectors of the economy to private investment, both Indian and foreign, and (d) liberalisation of foreign trade and investment followed by the replacement of FERA with a toothless Foreign Exchange Management Act (FEMA) in 2000.

The new spate of reforms, however, did not provide any significant fresh impetus to growth in the short or medium run. It stayed at 5.8% during 1990-96 and at 6% when the entire decade of 1990s is considered – only slightly higher than what was achieved in 1980s. It was only since 2003-04 that a new level of high growth was attained, and that for no longer than five or six years.

Different Policies, Same Purpose

An important question arises at this point: how do the different phases relate to one another and how do we characterise them? Interestingly, authors who emphasise the role of the 1991 reforms (Arvind Panagariya in India: The Emerging Giant (2008) for example) tend to belittle the first tranche of liberalisation in 1980s and the noticeable rise in growth rate that accompanied it; while those who take due note of the latter often view this as a departure from “socialism”. Thus Arun Kohly in his latest publication Poverty Amid Plenty in the New India (New Delhi, Cambridge University Press, 2012) views the change that took place in 1980s as a “shift away from socialism” (p 12). Similarly, in his entry on Growth Experience in the Oxford Companion, B Subramanian writes that in the 1980s “The Congress went from being hostile to private business to mildly supportive and eventually quite supportive”ibid, p 233.

But was the ruling Congress or the Central government really ‘anti-business’ in the pre-1980 period?

Well, a keener observation from the Marxist viewpoint would reveal that it was not. One of the first to draw attention to this cardinal fact was Charu Mazumdar. At a time when official Marxists were eulogising the state sector as a socialist element in the mixed economy, he pointed out as early as in 1965 that the public sector actually served the interests of private capitalists. The latter needed the products of basic industries for setting up light industries geared to quick profits, but could ill afford the heavy investments and long gestation periods required for founding steel, coal, power, petroleum and such other industries on the required scale. To fill this gap and to supply steel, power etc. on a non-profit basis or even at subsidised rates to the private sector – such was the role assigned to the public sector in the first phase of development of capitalism in independent India.

Indeed, there was nothing socialist about it. Nor was there an iota of hostility to private, including foreign, business interests on the part of Congress government, except perhaps in platitudes of economic nationalism and ‘mixed economy’, which were ‘politically correct’ as well as economically advantageous in those early years of the Republic. And the policy shifts – in 1980s as well as in early 1990s – only marked separate junctures in the same continuous evolution of capitalism in India, with the state always trying to faithfully promote the interests of monopoly big bourgeoisie with different policy regimes suitable in different national-international contexts. As regards attitude to foreign capital, tensions in government policy often reflected conflicts within Indian bourgeoisie itself. As Sojin Shin points out, in the early 1990s “the Associated Chambers of Commerce & Industry (ASSOCHAM) argued in favour of the need for free flow of foreign investment while the Federation of Indian Chambers of Commerce and Industry (FICCI) opposed the liberalisation of FDI policy. The FICCI, whose membership is dominated by the indigenous business groups, felt that “the final judgment on whether or not such investment is desirable should be left to the Indian entrepreneurs”. The so-called Bombay club, comprising a section of Indian big business represented by the Bajaj, Birla, Thapar, Modi, Godrej, Singhania and some others, also voiced some initial resistance.FDI in India Ideas, Interests and Institutional Changes, EPW January 18, 2014.

With this overall historical perspective, let us now survey the present policy regime, including the genesis of the current economic crisis in India.