As we turn 76, the Indian economy is both still and pulsating, just like how the Rig Veda describes the state of neither death nor immortality. And, perhaps, much like the Nasadiya Sukta's Hiranyagarbha -- the golden-hued cosmic womb and the subsequent Big Bang theory -- India, 'by the power of its own intent,' could regain its 'indescribable power and energy.'
Seen in that spirit, India's Centenary should be all about cracking the 25:25 matrix -- regaining 25% of the global GDP in the next 25 years. This isn't an aimless chip shot, but based on IMF's economic rankings projecting India as the third largest after China and the US by 2040. That's seven years ahead of the Centenary!
Such a feat will be befitting for an economy that once was the most prosperous, often described as the bird of gold, or the jewel in the British crown as documented by British economist Angus Maddison in his seminal book, The World Economy, a Millennial Perspective. Around 18th century, India was the 'GDP-Giant' with its 27% share of the global economy -- a position now firmly held by the US, with China closing in at breakneck speed.
Colonisation took away our riches and for about 50 years prior to Independence, the average growth rate squatted at zero! By 1947, India was among the poorest nations, accounting for just 3% of global GDP.
Seven-and-half decades have passed since and yet, we are nowhere close to regaining our glorious past. No retrospective analysis is ever complete without ranting about India blowing up its chances and how its own governments and its intellectual wrong turns led to self-destruction.
Focusing on the doughnut, not the hole
But hey, as the Irish say, let's first focus on the doughnut and not the hole. For, we have survived and prospered -- politically, socially and economically -- and so some stunning facts are in order.
Food production at 55 metric tonnes in 1950 saw six-fold jump to 305 metric tonnes in 2021. Forex reserves grew from $10.29 billion to $600 billion now. From a GDP of $103 billion in 1947, India now commands $2.9 trillion.
There have been trying times every now and then. The country weathered more than two mini Balance of Payment (BoP) crises and a full-blown crisis, the rupee saw a knock-in-the-skull-level devaluation of 57.4%, inflation hit nasty double digits countless times, fiscal deficit breached past acceptable limits and so on. Each time, the Asian tiger fought back to stand on its feet.
A meaningful turning point for India's economic resurrection began under PV Narasimha Rao in 1991 -- more than four decades, or precisely 44 years after Independence. Sadly though, the task of shifting India away from state-directed economic development, remains unfinished, even three decades after the plan was first set in motion.
The curious case of the Bombay Plan
Before Independence too, profit was a dirty word, private enterprise a necessary evil and industrialists were seen to have a 'robber baron' image. This is why India Inc's maiden economic plan never made it out of the natal ward.
It was January 1944, when eight industrialsts led by none other than JRD Tata and GD Birla hunkered down in Mumbai to draft a 15-year economic vision document, now known as the 'Bombay Plan.'
Its targets may seem overwhelmingly ambitious than the Planning Commission's, but were logical in hindsight.
Given India's population was growing by 5 million a year, GDP needed to be trebled in 15 years. While the Bombay Plan targeted a real GDP CAGR of 7.6%, five-year plans aspired for a dismal 2.1%, 4.5% and 5.4% increase in the first, second and the third plan, respectively.
The Bombay Plan was criticised from the get-go, with the CPI (Communist Party of India) theorizing it as a blueprint for capitalism, while the Congress-led government, with its newly minted 'socialist pattern of society,' distanced itself to avoid attracting a 'pro-business' tint.
The Planning Commission's shortsighted approach began to reveal itself in its formative years, as the government fell behind targets. Birla argued against the Mahalanobis strategy, led by P C Mahalanobis, the architect of Indian economic planning, and how restrictions on factories would create massive shortages of goods, jobs, and investments. Prof Amal Sanyal documented this in his paper The Curious Case of the Bombay Plan.
In an article in the Eastern Economist, which he owned, Birla described Mahalanobis as a 'statistician completely devoid of a sense of economic organisation', and the second plan framework as 'a theoretical shibboleth which if enforced, would in one sweep endanger India's future industrialisation.'
Years later, in 1948, when the Economic Programme Committee report published its nationalisation proposal, industrialists felt the shot in their lungs. Birla was so perturbed and wrote to GB Pant, the first Chief Minister of Uttar Pradesh: 'The British have gone and the princes and the zamindars are in the background. The Congress, accustomed to a target for its hatred, is now finding only one target, that is the capitalist.'
In sum, the Rs 10,000-crore-plan that proposed structural transformation of the economy, envisaging a 130% increase in agricultural output, 500% in industry and 200% in the services, taking the share of agriculture, industry, and services to GDP from 53%, 17%, and 22%, respectively at the time, to 40%, 35%, and 20%, in 15 years, died a still-born.
Thus began the post-Independent India's journey with protectionist and interventionist policies, and where 'Indian bureaucrats loved saying no to business.'
'You get out': The lost years
Jawaharlal Nehru's industrial policies of 1948 and 1956 went all-in with the State assuming direct responsibility of key sectors, and leaving 'others' for private enterprise. Nehruvians defined this combination of socialism and capitalism as a 'mixed economy,' Marxist critics' called it 'state capitalism,' while free marketers saw it as 'bureaucratic socialism.'
Whatever it actually was, in the end, the first two policies rather than driving growth, disappointed even those who initially championed them.
One such person includes renowned economist Jagdish Bhagwati, a self-pronounced protectionist, who switched sides after witnessing ground realities. His protege, Arvind Panagariya recalls the deleterious impact of protectionist policies in one of his books.
In a letter to Harry Johnson written during Bhagwait's tenure at the Indian Statistical Institute in the early 1960s, Bhagwati complained about India's craze for everything foreign. To which, Johnson promptly replied that if the quality of the paper on which Bhagwati wrote was any indication of the quality of homemade products, the craze for the foreign seemed perfectly rational!
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Still oblivious to the happenings around, the namesake 'mixed-economy' concept went on for decades. At one point, MNCs like IBM, Kodak and Coca-Cola began exiting. Their frustration peaked when George Fernandes took over as the Industries Minister under the Morarji Desai government in 1977.
Fernandes, popularly known as 'George the Giantkiller,' insisted that foreign companies comply with the laws of the land and dilute 60% stake to locals and retain 40% foreign ownership. This was unacceptable to many and at one point, at least 50 exit applications piled up at the RBI.
A deeply socialist Fernandes later justified his decision saying IBM was taking away Indian jobs. In another media interview much later, he further reasoned: "IBM was very cocky. They went to the extent of telling me that they have refused to accept what the French President, General Charles de Gaulle, had told them (to dilute their equity). So I told them, ‘if you think the General succumbed to you, I am telling you that I am not succumbing to you. You get out.’ Yes, I said ‘You get out’.”
On the other hand, Coca-Cola was willing to transfer its stake, but not share its secret concentrate to Indian shareholders. The government denied a licence to import Coke concentrate, literally forcing the company out.
It, however, returned in 1993 after liberalisation. In the meantime, filling the void, Fernandes launched an indigenous drink labeled Double Seven, or Satattar, akin to naming a baby after its birth year, in this case, 1977. But it evaropated in no time.
The bottom line was Indian businesses could neither grow domestically nor compete abroad. And as if the exorbitant tax rates and restrictions to do business weren't enough, industrialists were hounded for tax evasion. During Rajiv Gandhi's tenure, finance minister, VP Singh organised raids on high-profile industrialists like Dhirubhai Ambani, SL Kirloskar and Lalit Thapar, who came under the scanner despite his closeness with Rajiv Gandhi. The authorities lost the plot in courts, yet it was clear that businesses were viewed with suspicion.
With industry and services sector left in foster care, India's growth rate averaged 3.5% between 1950 and 1980 -- a period which the left-leaning intellectuals call the 'Hindu rate of growth,' pinning it on the Hindu outlook of fatalism and contentedness. But modern neoliberal economists dismiss it and instead point to Nehru's failed dirigiste model with state-directed economic activity that led us here.
As Principal Economic Advisor, Sanjeev Sanyal, once noted, the term (Hindu rate of growth) was an attempt to suggest that it was not Nehruvian economic policies that had failed India, but India's cultural moorings that had failed Nehru.'
Into the Woods: The great devaluation exercise that unleashed economic ruin
The 1960s was a challenging time, including two wars, droughts and a foreign exchange crisis. The economy was failing. Debt and inflation shot up, agricultural production was flat, defence spending doubled, followed by higher public spending under the Third and Fourth Five Year Plans resulting in a mini Balance of Payment crisis.
The country was left with no choice, but to devalue the rupee by 57.4% from 4.76 per dollar to 7.50 on June 6, 1966. After discounting for trade reforms, net devaluation stood at 36.5%.
What stood out was the casualness to such an important policy move as recalled by BK Nehru -- Jawaharlal Nehru's cousin and then ambassador to the US -- in his autobiography, Nice Guys Finish Second: "F'ixation of an exchange rate is a matter of complete guesswork... Pierre Paul (then head of the IMF) had wanted Rs 10 but I thought Rs 7.50 would be about right. He (Govindan Nair, economic secretary) said that gave a rate of Rs 21 to the pound, which meant that the value of a rupee would be less than a shilling. That he said was psychologically bad. (But) I said... Rs 7.50 was a nice round figure."
Finance Minister Sachin Choudhury's 1966 pro-trade budget proposals though were rolled back as quickly as they were announced. A disappointed John D Rockefeller reportedly briefed then World Bank President George Woods: "The devaluation was a flop; India did not make the policy changes we expected."
Evidence also suggests that Indira Gandhi was responding to external pressure, with little intent to liberalise. Donor agencies were pushing India to open up and then World Bank president George Woods deployed Bernard Bell to evaluate the crisis in October 1965 itself. TT Krishnamachari, the then Finance Minister, wasn't convinced of the Bell Mission's recommendations. Aid distribution was conditioned upon rupee devaluation, and when Krishnamachari delayed action, he was forced to resign in December, 1965. The next month, following then Prime Minister Lal Bahadur Shastri's untimely death, Gandhi took over the reins on January 19, 1966.
By then, food and forex shortages made India critically dependent on the US, the World Bank and the IMF. Despite a net aid of $1.3 billion, or 2.4% of GDP, India barely had two months of import cover with forex reserves at Rs 2 lakh crore. In essence, financial need rather than a pro-trade orientation drove rupee devaluation in 1966, and Gandhi's top priority was to address the forex crisis and consolidate power, argued Professor Rahul Mukherji in his informative paper India's Aborted Liberalization - 1966.
"John Lewis, then director of USAID in 1966, corroborated as much two decades later: When, in the course of a 1986 conversation, I asked him about the sources of the two great reform initiatives of the sixties, Jha (LK Jha, Gandhi's then secretary) was rather chauvinistic on the subject of agriculture; agricultural reform, he insisted, reflected mainly Indian ideas and initiatives. But when I asked about liberalization-cum-devaluation, he laughed merrily. 'Oh that', he said, 'that was what George Woods told us we had to do to get aid," Professor Mukherji recounted.
The rupee devaluation ended up as a political and economic disaster, replete with food shortages, inflation and an industrial recession. Yet, Gandhi, who managed to win the 1967 general election, began unleashing a new political populist identity, further abandoning private enterprise. In 1969, when the Dutt Committee report on industrial licensing batted against industrial licensing, calling it a negative instrument, it severed whatever little trust, or rather hope, existed between the government and businesses.
Unmindful, Gandhi rained draconian controls on industry, placed onerous restrictions curbing 'concentration of economic power' and increased the highest marginal tax rate to 97.5%. Among all, the fiercest blow was bank nationalisation. The wholesale nationalisation of insurers, coal and oil industries, followed soon after.
In reverse gear
Morarji Desai, the then finance minister, also deputy PM, was against bank nationalisation and reasoned that credit could be diverted towards social sectors, simply by controlling banks and amending the banking laws. The differences between Gandhi and Desai soured so much that the latter was drummed out of office as FM on July 17, 1969. The next day, he resigned as deputy PM, in protest.
Based on the memoirs of DN Ghosh, who was in the Ministry of Finance, only a handful were aware of the move.
On the night of July 17, 1969, Ghosh was summoned to Gandhi's private secretary PN Haksar's residence. The latter wanted to know how many banks accounted for 80-85% of the total banking resources, to which Ghosh blurted out, 10-12. Just then, the union minister of state for company affairs, KV Raghunatha Reddy strolled in and offered an unsolicited, bold plan to nationalise all banks, but was duly dismissed.
Haksar seemed unsure of sorting out the legal conundrums and having the ordinance ready in the shortest time. But it was easier than imagined, thanks to an earlier draft from 1963 when nationalisation of five banks was first proposed. Ghosh, Haksar and a few others, sworn to absolute secrecy, began preparing the executive order. Finally, at 8.30 pm on July 19, 1969, Gandhi announced the move on All India Radio.
For all her talk of garibi hatao, an economy, whose growth perked up to 5.5% from 3.5%, did not have much tax revenue and government schemes were underfunded to touch the lives of poor. The sources of tax revenue were so skewed that, indirect taxes accounted for a staggering 75% of total taxes by 1991. This was prohibitive since the poor spend most of their income on consumption. Indirect taxes were hurting them more than the rich and the middle class.
The 1970s and 1980s was the golden period when the interface between the State and the market evolved globally. But India went in reverse embarking on a nationalisation spree. It neither supported the private sector nor expanded the public sector and the fallouts were visible.
India's progress pales in comparison to East Asian countries with similar income levels in 1950s. Elsewhere, the right policy mix produced South Korea's Miracle on the Han river, followed by the Taiwan Miracle, but such luck eluded India. Over the decades, we kept moving away from agriculture to services bypassing industry throughout, especially the manufacturing sector, whose share stood pat at 15-16% of GDP in at least half-century. In contrast, the East Asian average is an enviable 30%.
Prime Minister Rajiv Gandhi made some token attempts, adopting the East Asian model of export promotion, but didn't go the full distance with liberalization, consciously avoiding a 'pro-business' image. His government was soon caught in a web of scandals, relegating economic policymaking to the back benches. India was growing in debt, landing us in the 1991 crisis.
The fuse is lit
The 1991 crisis was a long time in the making.
Oxford economists Vijay Joshi and IMD Little date it back to the 1970s, with Indira and Rajiv holding the fort for 22 of the 27 years they studied between 1964 and 1991.
From Nehru's time and till the end of 1970s, the Indian government was known for its 'fiscal conservatism,' and balanced budgets. But as populism took over, budget and fiscal deficits mounted with Current Account Deficit rising from -1.7% to -2.9% in five years by 1990, while external debt trebled from $20.6-$64.4 billion in ten years.
Worse, private debt piled up, thanks to external commercial borrowings allowing Indian companies to borrow overseas. The government's internal debt too jumped from 36% to 54% of GDP by 1991. Fiscal deficit rose from 6.3% to 8.2% by 1990.
Even with an overwhelming majority, Rajiv couldn't avoid the crisis and instead neglected the danger signs evident in 1985-86. Ironically, Moody's boosted India with a A2/Prime 1 investment grade rating, encouraging us to pile on debt. Their assessments changed, only with a change in government.
In August 1990, it drew sudden attention towards the fiscal implications of the VP Singh government's farm loan waivers, the fiscal and economic impact of extending reservations, and the likelihood of a minority government taking adequate policy action to deal with growing external uncertainties.
By the end of the decade, it turned worse and all it needed was a spark to light the fuse. A strictly temporary shock like the Gulf war thus sparked a full-blown Balance of Payment crisis.
The Chandra Shekhar government was formed in November 1990. For the first time since Independence, India was facing its worst Balance of Payment crisis and unfortunately, a minority government, bereft of any mandate, was in charge. A default was to be avoided at all costs. And the only simplest, though politically tough, option was to pledge gold. A proposal, already examined by the RBI, was revived.
Gold's sentimental value is such that, a family that mortgages it, is a family in despair. And the giant Indian family was under untold distress. A default would knock out the rupee, cause bank runs, freeze oil and food imports and most of all, allow foreign creditors and governments to wield influence over Indian policy, putting us back in a variant of colonisation.
After the customary briefing, Shekhar was furious."I don't want to go down in history as the man who sold gold for buying oil."
"But, sir," replied his Cabinet secretary, "you have to choose between going down in history as the PM who mortgaged gold or as the PM who defaulted." Author Sanjay Baru recalled this conversation in one of his books.
Chandra Shekhar had no choice. He took it with both hands, perhaps, folded.
For the first time, 20 metric tonnes of confiscated gold, worth $200 million dollars, was sold with a repurchase option to the Union Bank of Switzerland. Both the Bank of England and the Bank of Japan demanded physical shipments and gold was airlifted with utmost secrecy.
Finance Minister Yashwant Sinha too wasted no time making blueprints to resolve the economic crisis. His two immediate priorities included securing IMF funds and preparing a path-breaking budget. But Rajiv, supporting the government from outside, was nervous at the progress made thus far, and forced a delay in the budget presentation. As the rivalry soured, the Rajiv-Chandra partnership fell apart, and the latter resigned in March, without presenting a regular budget. Soon after, rating agencies whacked us with another downgrade.
The Shekhar-Sinha duo's policies could have averted a Balance of Payment crisis if only they were given a chance to undertake reforms. As the government toppled, what was till then an economic crisis, morphed into a crisis of confidence. India's ability was now in doubt and this was a first.
1991: 'The year made him. He made the year'
1991 was also a year when Rajiv Gandhi was assassinated and the Soviet Union imploded. In that dark hour, it fell to a quintessential Nehruvian like PV Narasimha Rao, a diminutive, uncharismatic and India's first 'accidental' PM to rise to the occasion and launch what's now described as the post-Nehruvian era, as Vinay Sitapati writes in Half-Lion.
Rao steered the country in a new direction, liberating itself from the straitjacket of bureaucratic socialism and was India's first PM who had the political courage to confer a business leader, JRD Tata, with the Bharat Ratna.
The task was monumental, as Bhagwati summed up, to 'clean up the decisions of a quarter of a century.'
PM Rao began with a rather innocent question: "Is the situation this bad?
"Sir, it is slightly worse," the Cabinet secretary replied.
On his first day, PV's 'no-time-to-lose' inaugural speech to the nation vowed to turn the crisis into an opportunity and open up the country, rather than shutting its doors. In the months to come, he liberalised and reintegrated India into the global economy, with specific focus on East Asian economies.
His second significant statement was about making India internationally competitive.One of the worst legacies of the licence raj was restricting the size of the firms and production plants. It was joint secretaries in Udyog Bhavan who decided capacity, and not markets or technology. PV ended this and delegitimzed expansion.
A hop, skip and jump in aid of the rupee
India was so broke, it had just two weeks of import cover. Gold was already pledged, but the danger of default was still lurking around and Rao's immediate task too was to avoid it. Unlike his predecessor Chandra Shekhar, it was a no-brainer for Rao, who later quipped: 'Decisions are easy when no options are left.'
"I was not concerned about the reaction of the common man," the ex-PM told Sanjaya Baru much later.
"The sympathy of the common man is always with the debtor. In all our films, people sympathize with the one who mortgages his family silver. The villain is always the lender," he justified.
A second round of gold mortgaging worth $405 million was authorised in July 1991, with the Bank of England. Even as dollars were earned mortgaging gold, NRIs continued transferring dollars to banks abroad, while the government's move to tighten imports began hurting the economy, spiking inflation. Put simply, we were entering the throes of stagflation.
The rupee depreciated by 11%, still Finance Minister Manmohan Singh favoured a one-time adjustment to stabilize it. The entire exercise was dubbed 'hop, skip and jump' by Singh and Rangarajan, then RBI Governor, a move the two executed in synchronized secrecy.
Rupee was devalued by 9% in round one, followed by 11% next. The PM ratified the move, though he developed cold feet mid-way. He had first-hand knowledge of Indira Gandhi's 1966 devaluation episode, under IMF advice and its fallouts. With second thoughts, Rao ordered holding back the second installment. Singh knew that if the second step wasn't taken as planned, it might never be taken. With hesitation, he dialled up Rangarajan, who calmly replied: The horse has bolted.
In all, the rupee suffered a 17.38% devaluation, slipping from 17.9 per dollar to 24.5. By the end of 1992, it was about 31 and remained there till the end of Rao's term in 1996.
Likewise, in line with the IMF's demands subsidy outgo fell from 11% to 7.5% of central government expenditure by 1996. The period also saw a drastic decline in welfare schemes including education and health, while a rationalized tax policy delivered a 22% increase in government income. All this was a result of Rao's next decisions, within a week following the rupee devaluation.
In yet another momentous decision, the PM liberalised the trade regime, ending India's traditional export pessimism. Combining devaluation with trade policy liberalisation made sense for growth and forex. Explaining the logic, Rao told the nation: "My motto is -- trade, not aid. Aid is a crutch. Trade builds pride", and went beyond crisis management, aligning India with the rest of the world.
Next, complying with the IMF's demands, a surgical cut was made on fiscal deficit, the single most important announcement of Singh's first budget speech in 1991. In fact, it was originally Yashwant Sinha's promise made in December 1990, and one that Singh executed. Fiscal deficit was cut from 8.4%-5.9% of GDP, enforcing steep cuts in subsidies and defence. Singh justified his 'determined action' channelling Victor Hugo: 'No power on earth can stop an idea whose time has come.'
These would have been enough to win over rating agencies and markets. But Rao was a man of many parts and his landmark move dismantling the infamous licence-permit raj was announced without fanfare and in typical PV's low-key fashion. When opposition came from within the party, he resolved it simply by paying generous homage to party gods including Nehru, Indira Gandhi and Rajiv Gandhi and their industrial policies, all favouring state-directed development.
In essence, the real reform of the day involving industrial delicensing, ending decades of Nehurvian 'socialistic pattern of society,' was strategically announced by Junior Minister of State for Industry PJ Kurien, simply tabling a 'Statement on Industrial Policy,' just hours ahead of Singh's historic budget.
PV's pivot, positioning India as an economic superpower was also driven by the logic that power no longer lay in the barrel of the gun, but in economic capability.
His foreign policy, prioritizing national economic interests, saw improved relations with ASEAN and he was the first PM to travel to Korea and urged Korean chaebols to invest in India. In no time, Samsung and Hyundai became household names.
Baru once asked how much credit Rao would take for the 1991 reforms and how much credit would he give to Singh.
Rao, in his characteristic deadpan manner replied: "A finance minister is like the numerical zero. Its power depends on the number you place in front of it. The success of a finance minister depends on the support of the prime minister."
As for Singh, who earned the sobriquet the '1% Singh' after his famous declaration to bring inflation rate down to 1%, he ran into trouble in his first budget. The finance minister was forced to roll back the Rs 100 crore allocation towards the Rajiv Gandhi Foundation, a pecuniary gesture to the slain leader's memory. But focus was on reducing public expenditure to tide over the crisis and he eventually rolled it back.
New to the inner world of politics, he threatened to resign more than thrice, as criticism mounted. But he learned the ropes over the years, and he evolved into an astute policymaker.
For instance, when Rao needed to diversify his economic advisers, Singh's choice of replacing left-of-centre Deepak Nayyar with a pro-market economist Ashok Desai, sparked another controversy. He silenced critics with his famous punchline: "The Finance Ministry is not a debating society.'
The challenge ahead
India had paid off the last of its IMF dues in 2000, and its long-term debt has remained stable since.
India's turnaround, from being the show pony of relief agencies to an IMF creditor began thereafter. In 2003, India became a lender to the IMF making a meaningful contribution to the reserve fund that bails out countries in a trouble. Separately, it also began writing off debt of heavily indebted poor countries like Mozambique, Tanzania and others since.
If sustaining a rising trend of economic growth was one of the major achievements in the past 75 years, poverty reduction is another.
Extreme poverty defined in terms of $1.9 a day fell from 63% in 1977 to 20% by 2011. Between 1990 and 2013 alone, 170 million were lifted out of poverty and another 100-200 million the following decade. But, the pandemic reversed some of these gains, pushing millions, who were on the edge of the poverty line, back into poverty.
For a country passing through the youth bulge, engineering growth that can create adequate jobs for 12 million, who join the workforce every year, is no mean task. But the next 25-year plan must do more than the previous governments, to make India whole again.
This is part of the web-only series of articles on newindianexpress.com.