The Raisina Model by Meghnad Desai

Author:Meghnad Desai
Language: eng
Format: epub
ISBN: 9789387326491
Publisher: Penguin Random House India Private Limited
Published: 2017-12-16T05:00:00+00:00

The Economy after Nehru

During his prime ministership, Nehru nationalized only two private sector firms—the Imperial Bank of India which became the State Bank of India, and the Life Insurance Corporation. The tsunami of nationalization began with Indira Gandhi. She went into a left-wing radical stance, split the Congress in 1969 and, according to many contemporary observers, made it into her personal fiefdom. Planning lurched more to the left, became more suspicious of the private sector, and incorporated a more extensive licence-permit raj. In 1969 she nationalized the largest commercial banks.

The Indian economy had already slowed down during the 1960s, and the next decade was disastrous for it. Partly due to international factors such as dollar depreciation and oil price rise, inflation in India spun out of control. The growth rate of income which had been 3.8 per cent per annum during 1960–69, came down to 3.2 per cent during 1970–79. Slower growth led to pressures which were reflected in the political system as Indira Gandhi declared an Emergency in 1975 partly to counter protests against inflation. Even so, there was no course correction. Policy continued to be left-oriented. This meant a greater distrust of the private sector, with more restrictions on output expansion by private entrepreneurs. There was a brief period when foodgrain distribution was nationalized but this disastrous policy was soon corrected. The Janata Party government which came to power after Indira Gandhi’s defeat in the general election of 1977, flirted with a Gandhian strategy but did not succeed. By the time of the second oil price rise in 1979, the Indian economy was in serious trouble. The long-run (secular, in economics jargon) rate of growth of income was just 3.5 per cent (1 per cent per capita) which led the economist Raj Krishna to quip it was not the secular rate of growth but a Hindu rate of growth. This rare piece of humour by an economist has been much misunderstood. It was just a pun on the word secular, not a criticism of the Hindus as some Hindu nationalists are complaining today.

On her return to power in 1980, Indira Gandhi changed her strategy. India took a hefty IMF loan to tide over the balance of payment crisis. The idea of self-sufficiency was abandoned. India had been the recipient of aid given by the USA, the USSR, the UK and Germany as a result of the Cold War. Thus the UK had helped build a steel plant in Durgapur, while West Germany helped with a steel plant in Rourkela, and the Soviet Union in Bhilai. The USA had provided food aid. Now India decided it could attract private funds as well. The licence-permit raj was relaxed by Rajiv Gandhi when he became prime minister in 1984 after the tragic assassination of his mother. He liberalized imports and embarked on borrowing from NRIs. The growth rate perked up to 5.6 per cent during the 1980s.

But the economy had not been reformed. Imports had been liberalized but exports were still sluggish.

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