Fifty years of India final

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Fifty Years ofIndiaA Journey in Time

The reforms have changed the image o fbusinessmen. In the days o f

controls, every bwinessman was looked upon as a criminal. Today

al l that opprobrium is gone. This is where the greatestpromise

lies, as well as the greatest peril. Although the statw o f hebusinessman has changed, his mentality has not; he is still thepetty

deal-cutter. This wil l change only when businessmen combine in

their dealings with the government. And it is not only a good

administrationwe need. We also needa social conscience.

We do not thinkofour own times

as history. Bu t i f we did, we

would find them farmore inter

esting and educative. I twill neverbe dis

covered whether there was a temple of

Rama at the precise spot ofBabri masjidin Faizabad, also known as Ayodhya; i fit is discovered, the knowledge will still

be irrelevant. But it is possible to fmd out

why suddenly, after 15 years ofin:flation

andshortages, pricesbegan o fall in 1952,

the year in which I joined college. Andstudy of hat singular event might tell us

something about what to do in ou r own

times,whencompetition is increasingand

inflation is coming down.

My first memories are of he war. We

moved to Poona just after it began; I

remember tanks driving down Ferguson

Road. At the foot of he hills in Dec<:an

Gymkhana, whereyou today find a string

of academic institutions, including

Brihanmaharashtra CollegeofCommerce

and the Film Institute. the area was awasteland fullof avines; that is where lhe

Britisharmybivouacked. The agricultural

college gww potatoes and heaped them

along its main road, and coveredthem up

withearth topreserve them. Unfortunately

they rotted; after a few months, that roadstank to the high heavens. In the mean

while, in Bengal across the country, skel

etonswerewalkiiJg thestreetsofCalcutta;

one by one, they lay down on the street

side and died. The scavengers were paid

extra for carrying of f he corpses, whitili

were cremated en masse. Three million

people died in the Bengal famine of 1943

-a number eEeeded only by the casu

alties of he mass riots of1947 and 1948.

My foremost memory ofmy childhoodis ofshortages and inflation. Rationing of

foodgrains was ntroduced in 1939; itwasvery different ftom rationing in recent

times. For it was illegal to sell grainsexcept through ration shops; and thebanonprivate tradewasquite effective.So theweeldyvisittotheration shopand he time

spent in queueswerenecessaryi f ne was

not to slarve. That was one reason wh y

there was suchmass starvation in Bengal:

there wa s no open market in which

foodgrainscouldbebought.The otherwas

that trains were requisitioned for lhe

movement of troops and war material.Everything that the railways transported

requiredsome official approval.And rans

portby truckswa s virtually non-existent.

The rucks in use thenwere imported2· or

4-tonnes Bedford t:rucks; transport by

them was expensive, andwas largely con

fined to cities. A good deal of he goodsstill moved by bulloc k carts everywhere,

and in cities by handcarts.

AB Friedrich List pointed out in 1836,

transport costs determine the location of

economic activity. Cities are concentta

tionsofpeople; theyarenodesofpurchas

ing power, and atlract goods from the

countryside as a magnet attracts iron

fillings. The costlier a commodity is to

Economic and Political Weekly October 18, 2003

transport, the closer it is produced to the

city. Thus a city s surroundedby concen

triccin:lesgrowingvegetables,foodgrains,

meat and so on. And as the city grows,these circles expand, costsof ransporting

their produce go up, and he costof iving

in the ci ty rises.Thehigh transport costs

kept down the size ofcities; and amongst

them, those that had subwban train sys·tems grew bigger. Because of their sub

mban tmins, Bombay and Calcutta were

the biggest citiesof hat time; their popu

lation was 4-5 million. The rest were tiny

by comparison: DelhiandMadrashadhalf

a million, Poona and Bangalore 100,000-

200,000, and most of the rest hardly

approached 100,000. Thegrow1hofcities

in post-war Indiaowes

much to the fallin transport costs relatively to people's

incomes-to argerandmore fuel-efficient

trucks,lowerreal costsofpet rolanddiesel,

and rising purchasing power.

The shortages of the 1940s were due

partly to lack of ttansport; bu t above al l

they were due to purchasing power that

was far in excess of he goods available.Few industrial goods werebeingproduced

in the country at that time; and importswere restricted because lhe governmenthad requisitioned al l shipping and wasusing most of the shipping space for

military transport.

The obverse of the shortage of goods

was the excess ofpurchasing power. That

aroseou t of he new heoryofwar fmance

thattheBritishgovemmentwas rying out.

John Maynard Keynes, the Cambridge

economist, workedin heBritishTreasury

during first worldwar, whichwas largelyfinancedby borrowing. From its experi

ence he drew the lesson that the interest

rate was the price ofmoney; the govern·

ment couldmake it what it likedby regu

lating the supply ofmoney. Money itself

is an interest-free loan from the public to

the govennnent; and the more money

people have, the more government bondsthey will buy, the higher will be the price

of hose bonds, and the lower the interestrate the government bas to pay. Keynes

was he economic brainbehind he British

conduct of second world war; following

his theory, the British government issued

far more money in that war than in the

previous one, an d thereby kept the

interest costs of he war low. The British

4441



government in India followed the homegovernment's lead and followed a cheap

mooey policy.

However, if people have more money

in their hands, they will buy more of

everything, not just government bonds.Hence unless supply ofgoods and services

responds to demand, cheap money can

mean expensive goods - a policy of re

leasing more money can lead to inflation.

In Britain the wartime government kept

inflation in check by very strict rationing;

for instance, milkwasrationed, and people

got only so many eggs a week. In India,

however, the rationing was less compre

hensive and effective, so inflation wasrampant in unrationed goods, and short

ages were chronic.

It was realised even at that time that a

market becomes a black market onlybecause the government declares it so, andthat if here were no mtioning there would

be no black market. The v iew was often

expressed that if only the governmentabolished rationing, prices would rise and

ration out the goods, and shortages woulddisappear. When he became food minister

in 1948, Rafi Ahmed Kidwai tried out this

theory; inflation shot up, however, and he

succumbed to the outcry and reintroduced

rationing after a few months.But all this suddenly changed in 1952,

the year in which we joined college.Foodgrain shortages disappeared, prices

started falling, and the feeling of siege that

had lasted for 15 years began to dissipate.What changed? Everyone at that time

thought that the end of the Korean War

eased inflation all over the world. This was

no doubt partly true; prices ofimportables

certsinly stabilised-andmanymorethings

were imported then than now. Butfoodgrains had never been imported, and

yet inflation in food prices eased. Wbat

changed in the domestic economy? If the

question had been answered then, the

answer would have been relevant in the

late 1990s, which saw a similar easing of

inflatioo.

II

Although the end of inflation was littleunderstood or analysed, it had enormous

political effects. Right till 1952, the new

political rulers had felt embattled. They

were so taken up by short-term economic

problems that they had no time to thinkahead or do anything ambitious. But in

1950, Sardsr Vallabhbhai Patel died, leav

ing the field open for Nehru. Between

4442

1952 and 1956 he, with the help ofP CMahalanobis, wotked out a strategy of

stat<>-led, import-substituting indostrial

isation. There followed nine years of rapid

indostry-led growth from 1956 till 1965.

This was the period when my genemtioograduated and went to work.

The interesting thing about this period

is the contrastbetween whatpeople thought

ofit at that time, and whattheythinkabout

it now. I can think of hardly any contemporary voice against it. Amongst politi

cians, Rajagopalachari opposed Nehru's

policies, and set up the Swatantra par(y in

opposition to the Congress;butheattracted

little support, and never came close to

power even in his native Tamil Nadu.

Amongst economists, B R Shenoy fuught

a looely battle; bot he too attracted no

support. The policies were supposed to bedirected against capitalists; but industrial

ists did not protest either. How is it that

policies that are generally regarded today

as wrong were so widely accepted then?Part of the answer lies in the urban

prosperity of that time. The economy wasgrowing fast, industry was expanding, and

employment was rising. Demand was

buoyant, and it was easy to make money.

The system made industrialisation easy.

All one had to do was to borrow from !DB!or ICICI, sell one's shares to UTI and build

factories. So industrialists were happy, and

so were those they employed.Industrialists were also happy because

British capital was driven out at that time.There was no blatant nationalisation or

expropriation; the ins1rument used wasexchange cootrol. The governmentpoliced

remittance of profits and generally oJ>.

structed it. Without any explicit statement,the message was given: that British enter

prise was not welcome. And the signal was

taken; British managing agents soldout the

tea gardens and jute mills and left. They

went to Kenya and set up a rival tea industry which later took away India's

market.Butlheirsell-<:>utmademanylndian

industrialists rich. Hence their support for

the government.

This period was particularly good for

whit<>-collar workers; and if the middleclass was happy, the press reflected it.

During the independence movement, one

element from which the Congress drew

support was educated young men. Opportunities for white-collar employment were

poor under British role. Industry wasconcentrated in the three major ports.

British firms put British employees in senior

jobs; there was a glass ceiling beyood

which few Indians rose. The nationalistagitation made British employers wary of

taking unfamiliar people; so personal rec

ommendations and guarantees carried

much weight. Indian industrialists also

tended to favour employees of their owncaste and language. When I started work,

most applications for jobs started with an

assurance that the employee came from a

respectable family. But during the rapid

growth of the 1950s and 1960s, the dis

crimination in employment began to break

down. Hence the rising middle class was

quite satisfied with the regime ofthatkind.

Not everyone was. The early 1950swerethe time of the Samyukts Maharashtra

agitation. I remember Nehru coming to

speak at Chowpatty; we tried to go, but

were beaten of f by the police, which had

cordoned off the Chowpatty against

SamyuktaMaharashtraagitators. They also

invaded Sydenharn College and tried to

make us join the strike. Fmther east, there

was an agitation for the break-up of

HyderabadstateandunificationofTelugo

speaking areas. That was also the timewhen DMK emerged as a Tamil separatist

par(y. Shiv Sena came later. All this

subnationalism was about employment for

sons of the soil; the great cities and the

provincial governments were too cosmo

politsn for local tastes. Nehru opposed the

subnatiooalisms andwas defeated by them.

But between them and the original Coo

gress nationalism, the middle class obvi

ously preferred the latter.The trouble with Nehruvian socialism

was that it was unsustainable. Its fragilitybecame evident when rains failed in 1965.

Foodgrain production at that time was 83

million tonnes; the US gave us 11 milliontonnes free that year, and staved offlarge

scale starvation. I was then a bachelor; I

was teaching in Bombay University, and

used to forage around in restaurants of

Flora Fountain andColaba. Prime minister

La! Bahadur Shastri forced restaurants to

close on Mondays to save food, and I

starved.That socialist experiment had conse

quences, some of which were immediate,

whilst some are continuing even now.Immediately, once US aid was scaled down

in 1966, the payments deficit became

unsustainable, and the rupee was deva

lued. Then, in the absence of aid, government investment had to come down; a

three-year plan holiday was declared, and

construction of new public sector plants

carne to a halt. Industries built up in a

booming economy behind impregoable




import barriers proved unviable; in theearly 1970s, thousands of engineering

plants and textile mills closed down. West

Bengal, which had a large engineering

industry, was especially hard hit; its woes

led to the eclipse of he Congress, and the

rise of CPI (M), which continues to rule

West Bengal to this day. Nationally too,

economic adversity raised doubts about

policies and split the Congress. And the

public enterprises, a legacy of that time,

still languish, after 11 years of disinvest

ment and privatisation. Thus 1966 turned

out to be a turning point in the nation's

history. It was in my history too. That is

whenmyhoneymoonwithsocialismended.I leftmy reader's post in Bombay Univer

sity and went to Delhi to join Delhi Cloth

Mills as chief economist

IllWe did not have to wait long for the next

turning point. It came with the oil crisis: in

October 1973, the Arab countries took

control of their own oil production and

raised the oil price fourfold. The blow was

both external and internal. Externally, the

balance of payments again became un-

sustainable, and the government had toscramble to borrow money abroad. Inter-

nally, price rise suddenly accelerated, and

led to strident demands forwageincreases.

The government itself was in desperate

trouble, and could not meet the wage

demands. Hencecametherailwaystrike in

1975, which Indira Gandhi brutally depressed. Soon resistance spread; to sup-

pressit, Indira Gandhi declared emergency.

The emergency is remembered for itsexcesses- the large-scaleimprisonmentof

political opponents, the mass sterilisationcampaign,SanjayGandhi'smobrule. Some

would also remember it because govern-

ment servants started going to work on

time. Butthemostim.portanteventwas the

rapid turnaround of the balance of pay-

ments- by 1976, the crisis was over for

India, and payments became perfectly

manageable. Even the mini-oil crisis of

1978-79 could be tackled with great ease.And importantly, many developing coun

tries borrowed heavily in those years, but

India did not. All of them had defaulted

on their international debts; India had not

taken recourse to private loans, and so

escaped catastrophe. Then in the early

1980s, oil began to flow from Bombay

High, and India's balance of payments

looked extremely solid.

By the early 1980s so many developing

countries had gone hankrupt, and inter

national bankers were short ofborrowers;

India, with its solid balance ofpayments,

lookedvery attractive.Bankers, especially

Japanese ones, poured money into Indiain the 1980s; that was the root of he next

payments crisis in 1991.

That crisis has given the 1980s a had

name. The general impression is thatRajivmessed it up. Elected to power in 1985

with the highest proportion of votes ever

won by the Congress, he ruined the

economy by borrowing too much from

abroad, and the polity by overturning the

ShabBanojudgrnentoftheSupremeCourt.

Butthewayi see it, therealitywasmore

complex and interesting. India is a peculiar

democracy; it is the only functional de-

mocracy in which political parties have no

stable, legitimate, established sources of

income. Most democratic countries have

a leftist party supported by trade unions,

and a rightist party supported by business

men; some nowadays have a green party

supported by an environmental oflilhootof

the left. All these parties have loyal sup

porters, who vote for them, support themand when necessary, fond them. In effect,

therefore, they are voluntary organisations

funded by members. Out of the contri

butions they maintain offices and support

leaders.

In India, however, it is just the other way

round: it is not supporters who fund parties,

it is parties that reward members. Thus,trade unions are virtually penniless. When

they win wage increases, their membersmay pay them somethingoutof generosity.

Some unions run employm ent rackets. But

trade unions have no regular sources of

sustenance. This is equally true of

parties. Hence, it is important for parties

to get into government, and to siphon off

government funds.This pattern essentially emerged in the

period between the oil crisis of 1973 and

the payments crisis of1991. Indira Gandhi

had started a business selling government

favours to businessmen for money in the

early 1970s. LalitNarayanMishrawasher

chief collector. When he was killed, othercollectors emerged; some of hem are still

active in the Congress. But the real need

for party funding arose with theemergence

of political competition - that is, after

Janata Party won power in 1977. Over the

1980s, access to money came to be the

primary aim of getting into power.

Politics based on the capture and sale of

state power is expensive and unstable. It


is expensive because there are too manypolitical forums and hence too many

politicians in our country; the fact that

politics is an occupation whichrequires no

training makes the supply of politicians

highly elastic. An d politics is unstable

because the chances to collect money are

concentrated in the hands of ministers.

They are a minute proportion of the vast

corps of politicians. Unless they keep

collecting enough and feeding the hungry

army of supporters, the latter will break

away. This is the root cause of dissidence,

and of a multiplicity of small parties in

this country.

If parties were divided on ideology and

could attract loyal supporters, they would

need tomilkthestate for money less. Every

once in a while, politicians have tried to

build up such parties. JayaprskashNarayan

started amass movement in 1973 directedagainst Indira Gandhi's corruption; but

he was too old and sick to carry it far.

V P Singh attacked the nexus between

industrialists and Congress politicians in

1985 when he was fmance minister; nowonderhe was thrown outoftheCongress.

Then he tried to set up a party of the

oppressed, starting with the Dalits. Bu t

Rajiv saw the threat he posed to the

Congress, and outmanoeuvred him. TheBJP has similarly tried to find a broad

HinduconstituencybysrirringupAyodhya.

The ploy worked brilliantly - bu t not so

well as to give it an absolute majority

anywhere. Repeatedly, the Indian people

have rejected ideological appeals; and so

they have got fragile governments hasedon alliances ofldeptocratic, opportunisticpoliticians.

Economically speaking, the 1980s were

a golden period. The Hindu rate ofgrowth

of 3Y, per cent prevalent from the 1950s

rill the 1980s was breached; growth went

up to 5Y,percent, well distributedbetween

agriculture and industry. Just as in 1952,

as economic constraints were relaxed, the

politicians also felt more inclined to ex

periment. Thus the frrst experiments in

relaxation ofboth industrial licensing and

import licensing were made in the 1980s.

And each time they worked. Followingrelaxation of import licensing in the late

1970s, exports zoomed. That led to pro

gressive relaxation over the 1980s, albeit

within the old policy framework. Simi

larly, V P Singh's relaxation of industrial

licensing in 1985 led to a great industrial

boom. Thus although the 1980s created

the conditions for the payments crisisthat followed, they also saw experiments

4443



that gave politicians greater confidenceto experiment with hberalisation in the

1990s.

IV

Still, they would not have experimented

with it if here had been no crisis in 1991.I handled the post of Chief Economic

Advisor in the finance ministry from 1991

to 1993, andhadasmallrolein the reforms

that were then carried out. What Iremem

ber most was the volume of resistance and

obstruction. Politicians, without any dis

tinction of party or ideology, did their best

to sabotage the reforms. The strongest

opposition was within the Congress. For

instance, we tried to reduce the subsidy on

fertiliser. There was a massive revolt in

parliament. I tappointed a joint parliamen

tary committee (JPC) headedby Balasaheb

Vikhe Patil, who has the knack oflanding

on his feet: he was in the Congress then,

and now he is a minister in the BJP govermnent at the centre. The JPC he headed

sat on the issue as long as it could. Then

it made a report that it was sure would be

rejected by the government, thereby keeping subsidies intact. It recommended that

the subsidies on nitrogenous fertilisers

should continue, and those on phosphatic

and potassic fertilisers should be abol

ished. Nitrogenous fertiliser subsidieswerethe major ones; if they could not be re

duced, the government would give up indisappointment. Narasintha Rao accepted

the report and abolished the subsidies on

nitrogenous and phosphatic fertilisers. Butthey carne back in another guise before

long. Vikhe Patil and his politician

brothers certainlyknewwhichsideofbread

was buttered. Similarly,Idrafted a propossl

for abolishing the sugar subsidy in phases.Butsuddenlyitwentofftheagenda;I heard

that Sharad Pawar, who was then defence

ministerbutalwaysafriendofMaharashtra

sugar producers, had stopped it.

In spite of the obstruction, the little

reformswemanaged to implement worked

beautifully. They engendered a magoi

flcent industtial boom. It ended in 1996.

But the investment and technology itbrought in fuelled fierce competition in

industry. For seven years, industrialprices

rose less than agricultural prices. So vil

lagers' purchasing power went up; today,

a whole range of consumer goods from

soap to motor cycles have found bigmarkets in the villages. The millennia-old

curse of rursi poverty is lifting. With the

lifting of industrial licensiug, anybody

4444

could produce anything. As a result,

people have diversified their consumption

habits. That is one reason why, despite

years of bad harvests, we have a surplus

offoodgrains: people have more things to

consume,and are eating less rice andwheat.As industry has become more competi

tive, the balance ofpayments has improved

year after year; the current account last

year recorded a surplus for the fust time

in 15 years. The last surplus, in 1978-79,was due to massive foreign aid following

the oil crisis; ifwe exclude foreign aid, the

last previous surplus was in 1954-55. This

year India has virtually stopped taking

foreign aid; instead it has lent money to

the International Monetary Fund. When

I entered Sydeubarn, India was paying

its way; today, as I approach the end of

my career, India is solvent again. That is

the achievement of our reforms of the

early 1990s.

vThe biggest changes are psycbological.

Without the financial independence that

the reforms brought to India, the BJPgovernment would never have dared test

nuclear weapons. Without the liberalisa

tionofexchange control, there would have

been no software boom. Our success in

software chauged the world's image of

India. When I went to Germany in the

1960s, I used to think the Germaos were

the most intelligent people in the world,

because even their children could speak

German. So I was taken aback when, lastyear, a German said to me, "You Indians

are very intelligent, aren't you?" He was

referring to our software engineers.

Within the country, the reforms changed

the image ofbusinessmen. In the days of

controls, every businessman was looked

upon as a criminal. Today all that oppr.,.

brium is gone. Today politicians court

businessmen; the balance of power has

been reversed.This is where the greatest promise lies,

as well as the greatest peril. Although the

status of he businessman has changed, his

mentality has not; he is still the petty dealcutter. It is still the norm for individual

businessmen to approach the government

for favoms, and for politicians to use state

powertoexploitbusinessm.en.Ours isabout

the most protectionistcountry in the world;

and if you wanttoknowwhy,just ask whoasked for the numerous anti-dumping

duties: behind each duty is an industtialist,

and in many industties he has a monopoly.

Ours is also one oftheworld'smostcorrupt

countries. Most corruption is related to

business, and for every bribe-taker there

is a bribe-giver. Corruption is inevitable

when a powerless businessman confronts

an official hackedby the power ofthe state.This will change only when business

men combine in their dealings with the

government. Every import duty that ben

efits a businessman hurts another; if theyact together, there will be no import duties.

Every bribe helps a businessman against

his competitors; ifbosinessmen deal col

lectively with the goverornent, they will

ask for and get an honest administration.

And it is not only a good administration

we need. Wealsoneedasocialconscience.

Today the number of the poor is no less

than a decade ago; no fewer brides are

being burnt, no fewer children are drop

ping out of school. Our society needscompassion, humanity, sensitivity. Now

that businessmen are emerging as the

country's leaders, these needs have become theirresponsibility. We need philan

thropy; bot that philanthropy must comewith a business sense, with a calculation

of bow we can make people better off.

Does our system of private and public

health care make our people healthy? Are

there no cheaper ways of improvingpeople's health? P V Sukhatme used to say

that waterborne diseases of the stomach

are the biggest source ofboth sickness and

malnutrition and that protected water

supply would make people both better fedand healthier. Our schools are a prison for

children; just to make children literate aodnmnerate, they do not have to spend seven

years in school. With today's computer

tecboology, with VSAT and television, it

is possible to teach children much more,

much faster.

Thus, the quest for efficiency, speed and

cost-effectiveness, which is the heart of

business aod industry, affect every aspect

ofourlife,inclndinggovermnentandsocial

services. Now that business hasbeen freed

from shackles, our CEOs and managers

should no longer cottfme themselves to

their own businesses. They must make the

business of the nation their own. lml

Economic and Political Weekly

available from:

Churchgate Book StallChurchgate Station

Opp Indian Merchants ChamberChurchgate, Mumbai - 400 020


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