Why Growth Matters (4 page)

On secularism, he reiterated his conviction, no doubt against the backdrop of communal violence that would soon engulf the subcontinent and claim the life of Mahatma Gandhi, that India ought to embrace
multi-ethnicity and multi-religiosity, that “all of us, to whatever religion we may belong, are equally the children of India with equal rights, privileges and obligations. We cannot encourage communalism or narrow-mindedness, for no nation can be great whose people are narrow in thought or in action.”

On the economics of poverty removal, he was even more impassioned. He may have been from a wealthy family—his father, Motilal Nehru, used to send his shirts to Paris to be laundered—but Jawaharlal had participated in India's independence struggle alongside Mahatma Gandhi, traveling the vast expanse of India's countryside and seeing poverty firsthand. So, his remarks on India's suffering masses and the immense task facing the nation in extending a generous hand to them and on Mahatma Gandhi's ambitions in meeting that challenge are particularly poignant:

The service of India means, the service of the millions who suffer. It means the ending of poverty and ignorance and poverty and disease and inequality of opportunity.

The ambition of the greatest man of our generation [Mahatma Gandhi] has been to wipe every tear from every eye. That may be beyond us, but as long as there are tears and suffering, so long our work will not be over.

But by the strangest irony, while India began its tryst with democracy with advantages that were unique among the newly liberated developing countries, its economic strategy began (except until the end of the 1950s) with an embrace of a policy framework that was so counterproductive that it produced an abysmal growth rate and therefore made little impact on poverty.

So, while India's democratic “surplus” was initially in abundance and it was only later that it yielded to the problems of governance that have defined the recent anguish, India's economics quickly collapsed into the disaster range, and it was only after the reforms began in earnest in 1991 that India's growth rate emerged from the doldrums and the accelerated
growth rate began to make a serious dent on poverty and on the fortunes of the marginalized groups.

This “crossover” of the politics and the economics of India's post-independence history defines the backdrop against which we proceed to analyze India's performance on the tasks set before it by Prime Minister Jawaharlal Nehru on the fateful dawn of August 15, 1947.

But while we leave the problems of politics aside,
⁴
concentrating on the appropriateness of Indian economic reforms (since 1991) and the challenges that face us as we take these reforms forward, we should not forget that the sorry state of current politics in India and the crisis of governance that is the focus of much soul-searching, is not unrelated to the counterproductive economic policy framework that India had embraced prior to 1991.

Institutions are not exogenous to policies, as many seem to believe; they change as a result of incentives that the policies provide. As we will often observe later, the license-and-permit raj that undermined India's economy was also the major cause of the degeneration of Indian politics. Thus, politicians discovered that they could make money by diverting remunerative licenses to applicants offering cash, while senior bureaucrats enjoyed the power and patronage that licensing gave to them. The economic policies clearly undermined the efficacy of India's political institutions that defined a “liberal” democracy, taking them from an exceptional high to a commonplace low.

Therefore, the conjunction of the politics of democracy and the economics of poverty reduction in Jawaharlal's famous “Tryst with Destiny” speech is apt. It also provides us with the opening theme of our economic analysis: the role of Nehru's socialism in defining the politics and the economics of India after independence in 1947. It additionally provides us with a way to challenge and rebut several myths that have developed around both Nehru's ideas and policies, and around related critiques of India's earliest approaches (or alleged lack thereof) to reducing poverty and improving health care and education of the poor and the underprivileged.

In the chapters that follow, we debunk these myths and clear the debris of ex cathedra critiques of India's reforms. This helps us lay the
groundwork for our subsequent analysis of the ways in which the reforms can now be broadened and deepened.

We cannot emphasize enough that our analysis, while it is addressed to India's development experience and underlines the centrality of growth in reducing poverty, has clear lessons for aid and development agencies, as well as NGOs that continually work to affect poverty.

The Indian experience also shows clearly that antimarket fundamentalism and autarkic policies are surefire ways to undermine growth and hence turn off the most powerful means of accelerating poverty alleviation.

If we squander our resources in merely acquiring for the state existing industries (that we have acquired them may be for the nation's good), for the moment we may have no other resources left, and we would have spoiled the field for private enterprise too. So, it is far better for the State to concentrate on certain specific, vital, new industries than go about nationalizing many of the old ones though, as I said, in the case of some specific vital industry of national importance that might be done.

—
Jawaharlal Nehru in a speech to the

Constituent Assembly (Legislative), New Delhi, February 17, 1948

I am saddened though not surprised, to find that several critics of the NIP [New Industrial Policy] have denounced this as anti-Nehruvian, which only shows how little they knew of the dynamic mind of Pandit Nehru, which faced with the havoc in the economy, would have been the first among the first to salute the NIP.

—
J. R. D. Tata in “Berlin Walls Should Fall,”
Times of India
,
August 1, 1991

S
ocialism, which was part of the rhetoric under Prime Minister Jawaharlal Nehru (who had been schooled in Fabian socialism), did not fully dominate and constrain the policy framework that was adopted under his leadership.
¹
Indeed, Bhagwati, who had been educated at Cambridge University and was influenced by Joan Robinson, his tutor, on his return to India in 1961 went so far as to condemn the policy framework for being deficient on socialism. Working on poverty at the Indian Planning Commission at the time, he went on to characterize the “socialistic pattern of society,” which in December 1954 the
parliament had adopted as the guiding principle of social and economic policy, as mere “socialist patter.”
²

Socialism came to occupy a far more prominent place in the Indian policy framework only under Prime Minister Indira Gandhi, Jawaharlal Nehru's daughter.
³
Whereas, for instance, Jawaharlal Nehru had not embraced nationalization of existing private-sector enterprises (including foreign multinationals) and instead had adopted a “gradualist” policy of increasing the relative size of the public sector by planning a steady increase in the share of investment in it presumably with each five-year plan, Indira Gandhi chose the more radical and rapid path of nationalization on the one hand and ever-tightening regulation of the private sector on the other.

Beginning with the dramatic decision to nationalize the fourteen largest banks in 1969, Indira Gandhi went on to nationalize general insurance, oil companies, and coal mines in the following four years. At the same time, she went after the large private firms, both domestic and foreign, to combat the concentration of wealth and economic power. Among the measures she took were forcing the dilution of foreign equity in virtually all firms to 40 percent or less; confining investments by large domestic and foreign firms to nineteen narrowly defined highly capital-intensive industries; reserving a large number of labor-intensive products for exclusive production by small-scale enterprises; strictly limiting the size of urban land holdings; and restricting the layoff of workers in large firms. To further enhance government control, she additionally extended government monopoly over the imports and exports of several new products. She also attempted a government takeover of wholesale trade in food grains but had to retreat midway once it became clear that this was beyond the government's capacity.

This comprehensive turn to socialism was unsustainable. The economy took a nosedive with per capita incomes rising just 0.3 percent annually between 1965 and 1975, and private final consumption rising even more slowly. By the mid-1970s, evidence was visible that the rapidly expanding government controls had closed nearly all avenues to growth, and at least some within the government began to recognize the need for unwinding the system. A process of ad hoc and piecemeal lib
eralization strictly within the existing policy framework therefore soon got under way.

This process continued haltingly in the 1980s with some acceleration under Prime Minister Rajiv Gandhi, especially in 1985–1986 and 1986–1987. The liberalization, complemented by large fiscal deficits, led to some acceleration in growth in the 1980s. But since the deficits had been financed through substantial external borrowing and the export earnings necessary to finance the resulting debt service payments were small due to inward-looking policies, the economy wound up facing a balance-of-payments crisis in 1991. That crisis provided the occasion for turning the ad hoc reforms into a more systematic and systemic process.

This happened to the chagrin of the intellectuals on the Left. Indeed, during the first half of the 1970s when Indira Gandhi was implementing her socialist agenda, these intellectuals had sought to justify her policy changes by propagating many critiques, indeed myths, about the development strategy that India had adopted at independence. Principally, they had argued that India had pursued growth for its own sake, and that growth had failed to alleviate poverty. They had also insisted that redistribution offered the only effective avenue to alleviating poverty. These and related critiques would now be revived as weapons to undermine the reforms that were clearly a massive shift away from socialism.

The critics had little option but to retreat from reality into fantasy if they were to carry any conviction. By 1980 the wave, in fact a tsunami, of socialist measures had virtually drowned out the prospects for rapid growth of the Indian economy. The long-standing commitment by Indian leaders to the objective of eradicating poverty had also been frustrated by the stagnant economy. It was abundantly clear to those who did not wear ideological blinders that the socialist path Indira Gandhi had chosen had failed to deliver on the promise forcefully conveyed in her memorable slogan, “Garibi Hatao”—end poverty.

The shift to the “liberal” (or “neoliberal,” which sounds more sinister) reforms meant that the myths that had fed the turn to socialism by Indira Gandhi were revived to shift the focus from socialism's failures. The psychological need to decry the liberal reforms, gathering steam since
1991, was all the greater precisely because they were so successful, not merely in accelerating India's growth rate, but also in finally reducing poverty.

These myths in fact are manifold and define a rich tapestry, relating to growth, poverty, and social goals. Among the litany of complaints, one can find passionate assertions that the reforms address growth but not poverty or social goals, that the growth they may generate is in any event not “inclusive,” that the reforms have increased inequality, that they have increased corruption, that they even hurt the socially disadvantaged Scheduled Caste (SC) and Scheduled Tribe (ST) groups, and indeed much else that makes one wonder if the critics have let their ideology and political preferences entirely cloud their judgment.

These myths, endlessly repeated in different forms and contexts in virtually all developing countries that seek to combat poverty by embracing outward-oriented and pro-market policies, and in international forums by self-proclaimed development experts and nongovernmental organizations (NGOs), muddy the discourse on economic reforms. Indeed, the myths are used as effective weapons to wound and maim the reforms in the public eye. Therefore, it is important to sort them out and to refute them systematically with logic and facts.

P
rime Minister Indira Gandhi came to power in 1966 with no real socialist convictions. At the time, a right-of-center coterie of Congress Party leaders known as the Syndicate controlled the organizational wing of the party, and it handpicked her for the country's top post following the sudden death of Prime Minister Lal Bahadur Shastri, the immediate successor to Nehru. The Syndicate's choice had been based on two considerations: it saw Indira Gandhi's connection to Nehru as a major asset in the elections that were due in 1967, and she had no political base of her own, which offered the Syndicate the prospect of ruling the country by proxy.

But Indira Gandhi proved herself to be a determined, ambitious, and skillful politician. She made common cause with the only substantial force within the Congress willing to openly challenge the Syndicate: the party's left wing, loosely organized under the Congress Forum for Socialist Action that included several firebrand young socialists known as the “Young Turks.” Within three years of becoming prime minister, she successfully unseated the Syndicate, split the Congress Party, and firmly established control over its faction that stayed with her. But while doing so, she also made the agenda of her socialist allies her own.

Known as the Ten-Point Program, this agenda included the social control of banks, nationalization of insurance, nationalization of foreign trade, limits on urban incomes and property, tightening of controls on
large firms, and an end to the privileges and privy purses of the former rulers of princely states. As Indira Gandhi proceeded to implement the agenda, many intellectuals on the Left sought justification for it through the propagation of a number of myths about the wisdom of the development strategy India had pursued during the preceding two decades.