Brief Economic History of Post-Independence India
India had loads of problems when it started its journey as an independent nation in 1947. Besides widespread poverty and illiteracy it had to deal with practically no saving accounts, insufficient food grains stocks that threatened famine, millions of refugees from Pakistan to be resettled, absence of industrial activity, widespread killer diseases and high infant mortality resulting in very low average age expectancy (32 years), etc and all this with empty coffers. Problems were of such nature and magnitude that it was difficult to prioritize. All these had to be dealt with simultaneously. Luckily, we were blessed with a team of dedicated and committed ministers supported by competent bureaucrats. Most problems were brought under control soon. For the purpose of this essay, the discussion is confined to the economic issues related to the process of industrialization despite non availability of domestic capital for investments. Banks were bankrupt and business had no surpluses to invest.
The financial situation of the country was indeed dire. In the absence of any industrial activity, the country was largely dependent on its agricultural output. The leadership was faced with the dilemma of how to start industrialization as there were no quick-fix solutions for the problems. It is under these conditions that the government of the day decided to borrow capital internationally from who-so-ever was willing to finance our industrialization as long as the conditions attached for lending were acceptable.
A lot of developed countries were found to be willing partners against sovereign guarantees. Prominent among these countries were Germany, UK and Russia. Possibility of private sector accessing foreign loans did not exist. It is under these circumstances, that government decided to take charge of the situation by creating public sector for creation of capital-intensive basic industry through borrowed capital along with required technological support. Alongside, private sector was allowed to manufacture consumable items of daily use that required less capital and this was regulated by the government through licensing. The purpose behind licensing was to regulate and ration the use of very scarce capital in the best possible manner.
Planning Commission was setup for this purpose. The Commission, in addition, was also to take charge of other burning problems of the country. Planning of economy became necessary to optimise outcome. There was no ideological or political dogma. Those who criticize the creation of Public Sector, must look at the overall achievements of the period. Hundreds of new industries sprung into existence producing not just the basic requirements of steel, aluminum, copper, machine tools, etc. but also products of daily use produced by private sectors like bicycles, cars, motorbikes, detergent, soaps, etc.
The country was seen bustling with industrial activity with promise of more to come. Millions of jobs were created helping reduce disparity and poverty. Simultaneously, government was successful in getting rid of killer diseases and infant mortality thereby increasing average life expectancy close to 47 years by mid-sixties. With these successes, general feeling of the people in the country changed from despondency into hope. Government was functioning with purpose, determination, creativity and above all with boldness. I witnessed these developments at an impressionable age. This is not to say that there were no setbacks in the period. China’s invasion in October 1962, was a very big setback affecting our medium and long-term development plans adversely. This marked the end of first era. Jawaharlal Nehru’s bold stewardship ended with his death on 27th May 1964.
On the demise of Jawaharlal Nehru, Lal Bahadur Shastri took over the reins of the country as the Prime Minister. His tenure was marked by the invasion by Pakistan on our western border in 1965. Though Pakistan was defeated decisively, it once again brought to light our inadequate defense preparedness. Quite clearly, the country could not afford to neglect its defence indefinitely. Funds had to be allocated to equip the forces. Unfortunately, Shastri died in January 1966 of a heart attack while he was at Tashkent (part of Soviet Russia at that time) for a meeting with President Ayub Khan of Pakistan that was arranged by the Soviets. Unfortunately, Shastri’s tenure lasted just for a year and a half.
Despite the opposition from the caucus of the bigwigs of the Congress Party, Indira Gandhi got elected as a candidate of her newly formed party “Congress (I)”. She professed to be a socialist with her slogan “Garibi Hatao”. She nationalized 14 major banks of the country in single stroke. In hindsight and objectively looking, it does appear that her socialistic leaning was more out of political expediency rather than of any ideological compulsions. Her taxation policies proved to be very pragmatic and practical.
Though work on ushering green revolution in farming had already started, nationalization of banks proved to be the clincher in making the Green Revolution a reality. Nationalized banks were able to lend money to farmers at reasonable interest rates making local money lenders redundant. This is what actually made Green Revolution possible. The credit for making the country self-sufficient in foodgrain production, therefore, must go to her in full measure. On the political front, her high point was providing military aid to Sheikh Mujibur Rahman, the most prominent and powerful leader of East Pakistan in the civil war that broke out when the powerful military establishment of Pakistan refused to allow Mujibur Rahman to become the Prime Minister despite his wining majority seats in the Parliament.
With Pakistan having lost militarily in the civil war, Mujibur Rahman, decided to secede from Pakistan declaring East Pakistan as a separate country called “Bangladesh”. With Indira Gandhi’s success in achieving dismembering of Pakistan, her popularity in the country soared sky high. Some people nick-named her as “Rani of Jhansi”. Indira Gandhi was representing Rae Bareli Lok Sabha seat in the Parliament which she had won in the elections held in 1971 defeating Raj Narain of Socialist Party candidate.
He assigned his defeat to corrupt electoral malpractices practiced by Indira Gandhi and filed a petition in the Allahabad High Court. The case filed by Raj Narain caught up with her with the High Court upholding the accusations made by Raj Narain and setting aside the election of Indira Gandhi. She was also disqualified to contest Lok Sabha election for next 6 years (which was later set aside by the Supreme Court which led to declaration of emergency by the President of India in 1975.
Indira Gandhi called off emergency on January the 18th 1977 opting for general elections which were held between 16th and 20th of March 1977. In calling for elections, she clearly miscalculated her popularity. Though she had gained huge popularity on successful dismemberment of Pakistan, her act of imposing emergency had angered people at large. Congress did not secure enough seats in this election to form government.
Morarji Desai, who had joined the multi-party coalition, Janta Party, was nominated to be the Prime Minster. He was sworn in on 24th March 1977. He had earlier served as Finance Minister from 1958 till 1967 in Pandit Jawaharlal’s cabinet. He had also served as Deputy Prime Minster with additional charge of Finance from 1967 to 1969 when Indira Gandhi was the Prime Minster. He had resigned from Deputy Prime Minster-ship on developing differences with Indira Gandhi. He still holds the record for having presented 9 annual budgets on the trot. Morarji Desai was an exemplary national figure ranking high in the list of nation builders of our republic. A veteran Ghanaian having firm faith in Hinduism, he cherished and practiced the values of non-violence, uprightness, democracy and secularism.
As Finance Minister, he had authored a very controversial act called “Gold Control Act 1968” to control sale and holding in personal possession of gold. The act was to curb the high demand of gold in the country. This action caused heavy pressure on the valuation of our currency and on foreign currency reserves. The act also proved to be very unpopular with the masses. In an another very unpopular move, he decided to levy 97.5 percent tax on those in the highest slab of earnings. His tenure as prime Minister may otherwise, be viewed as colourless without much to show on economic achievements. Despite being very honest, upright, etc. his unbending nature proved him to be a very unpractical man to head a government. He resigned on 28th July 1979, on the withdrawal of the support by Raj Narain and Charan Singh (coalition partners of Janta Party). He also decided to stay away from active politics thereafter having crossed 83 years of age.
Charan Singh, who was Deputy Prime Minister with additional charge of Home, in Morarji’s government and had developed differences with him who had accused him of favoring industrialists at the cost of farmers, resigned from his ministry. Simultaneously he decided to leave Janata Party, thereby forcing Morarji to resign as Prime Minister. Charan Singh, who claimed to have support of Congress Party (Indira Gandhi), was called upon by the President, to form government. He was sworn in as the Prime Minister, on 28th July 1979.
Coalition was shot lived when Indira Gandhi withdrew her support for some reason. He was thus forced to resign with just 23 days in office leading to another general elections. He remained in the office as a caretaker Prime Minister till 14th January 1980. True to his commitment to his followers, he decided to stop use of light diesel oil by industry and reserved it to be used by farmers alone. This step caused havoc in industries who were solely dependent on this fuel. He holds the record of allowing inflation to climb over 22 percent during tenure. Industry had a sigh of relief when his tenure of just 170 days came to its end on 14th January 1980.
Elections were held between 3rd and 6th of January 1980. The performance of the loose coalition of the various non-Congress parties proved to be messy, unsteady had caused serious harm to the country’s economic growth. Even the law-and-order situation had deteriorated in the period. Public was completely disillusioned by their performance. Despite the earlier public anger against Indira Gandhi for the imposition of emergency, the electorate brought her back in less than three years after having rejected her.
Congress won by a thumping majority with 351 seats in Lok Sabha. Her massive unrelenting campaign of around 60 days, delivering up to 20 speeches a day and campaigning in close to 400 constituencies, proved to be very useful. Her famous campaign slogan of “Garibi Hatao” won the day. In a marked difference to her earlier tenure, she decided to focus more on economic policies in her this term, partly prompted by international lenders and partly also due to falling country’s foreign exchange reserves. She had also to work to fulfill her promise of poverty removal. Changes in policies were designed to improve industrial growth through public sector investments, and simultaneously encouraging private sector participation.
The government also launched an initiative to support small scale industries and for promoting self-reliance through import-substitution. There was indeed some spurt in GDP growth in this period. It was 6.74%, 6.01%, and 3.48% in the years 1980, 1981, 1982 respectively. The process of liberalization was in a way, started by her, albeit in a small way. Though, the country started improving on economic front, Khalistanis (created by a militant group of Sikhs helped by Pakistan) raised their head asking for separation from India. Fighting for the cause was Jarnail Singh Bhindranwale who was heading the militant groups, had taken shelter in the Golden temple. In order to flush out this unwanted presence of militants, she authorized troops to enter the temple. While the objective was achieved, the act of troops entering the shrine, did not go well with some strong believers of Sikhism. She was assassinated by one of her own Sikh security guards on 31st October 1984.
Rajiv Gandhi was sworn in as the Prime Minister on the same day (31st October 1984). He was a professional pilot working for Indian Airlines who had joined politics after the death of his younger brother, Sanjay Gandhi, who lost his life in a plane crash which he was flying in 1980. Rajiv had entered politics, very reluctantly, at the behest of his mother. He got elected, in the following year in August 1981, from Amethi UP, earlier represented by his brother Sanjay.
On becoming Prime Minister, he decided to call for general election which were held in December 1984. Congress Party won a landslide victory by securing 414 seats out of total 541 seats. This sort of strength in the Parliament was never enjoyed by any Prime Minster (not even by Pandit Jawaharlal Nehru). There were obviously a lot of expectations from him. Despite his parliamentary strength, his lack of political background made it difficult for him to navigate through controversies arising while in office such as the Bofors gun deal, sending peace keeping force to Sri Lanka, Shah Bano case, Bhopal gas disaster, etc.
He was well meaning and had a vision for India. He is the one who sowed the seeds for the IT and telecom revolution, spearheaded the Assam and Punjab Peace Accords, thought of empowering people at the lowest level and got the Panchayati Raj Act in place and to curb opportunistic party hopping by politicians got the Anti Defection Act passed. However, on the economic front, his performance was wanting in many respects. He was expected to carry forward the process of the liberalization of economy which his mother had started in a small way.
Unfortunately, in the name of liberalization his government decided to uncap the limits on the output imposed by licenses of the existing manufacturers thereby strengthening the existing monopolists further. This step proved to be counter-productive, inasmuch as, it did not help create competitive environment to reduce cost and to improve quantity – the desired objective of liberalization. He was too timid to disturb the then existing nexus between the bureaucrats and the monopolists. In short, nothing worthwhile was achieved on economic front in his period. In the next elections held in 1989, Congress won only 197 seats.
Vishwanath Pratap Singh had held various cabinet posts including Minister of Finance and Minister of Defense. While he was the Defense Minister, the Bofors case had blown out in public. Singh reigned from the Congress Party and formed his own party called “Janta Dal” Party. After the 1989 election, he formed a National Party and with the help of Bharatiya Janta Party formed his government with him as the Prime Minster. There is very little to report on the economic front of his government. In 1990, the mass exodus of Kashmiri Pandits from the valley and his opposition to Ram Rath Yatra sponsored by BJP, sealed his fate. BJP withdrew their support. He resigned in November 1990.
None of the big political parties were willing to stake claim to form government at this juncture. Chandra Shekhar, who had broken away from Janta Dal and had the smallest number of party MPs in the Lok Sabha, became the Prime Minister on 10th November 1990, with the out-side support of Indian National Congress. He formed his government at very crucial time when the country was facing unprecedented foreign exchange crises with Moody’s having downgraded the country’s rating to below investment grade.
This made it impossible for the government to get even a short-term loan from international lending agencies. World Bank and International Monitory Fund had stopped their assistance to India. He also failed to get his annual budget proposal passed through the Parliament. He was left with no choice but to resign. Before resigning, he had authorized mortgaging of part of country’s gold reserves to avoid country’s default on due payment. This action of his came in for a lot of criticism having been done secretly without informing the Parliament and was done in the midst of the general election in 1991. In short, he proved disastrous as Prime Minister of the country.
Congress came back as the largest single party in Lok Sabha in the election held in mid 1991. In the absence of Rajiv Gandhi, who was Prime Minister from 1984 to 1989 and was assassinated while on an election campaign in one of the southern states by LTTE terrorists, Congress nominated Narsimha Rao as the Prime Minister in June 1991. The Congress was supported by a few small political parties. The country was facing economic crisis of an unprecedented magnitude besides being on-the-verge of defaulting on its financial obligation. IMF (International Monetary Fund), in the meanwhile had suspended its loan program for India.
World Bank also had discontinued its assistance. Both the international bodies had insisted that the country must do away with its current policy of being closed economy governed by licensing regime. They had also insisted that the Rupee be devalued to bring it down to its market level. These steps, they insisted, would help start export of its goods and services to international markets and help the country earn foreign exchange to meet its recurring needs. The situation was so dire that Narsimha Rao was left with no time to lose. He appointed Dr Manmohan Singh, an internationally acclaimed economist, as his Finance Minister with the clear mandate to get rid of Licence Raj and move to liberalize the economy.
Dr Singh decided, as a first step to mesmerized the nation by his bold two-step devaluation of the Rupee – first by 9 percent on 1st July and another by 11 percent on 3rd July 1991. More was still to come. While the level of devaluation of Rupee was a matter of his, and that of the Reserve Bank of India’s, judgement, liberalization of the economy required a lot more homework before it could be implemented. Having P. Chidambaram, a very competent individual as his Commerce Minister proved to be extremely helpful. The two worked day and night as a team, to formulate a radically changed new economic policy document that proposed liberalization of country’s economic activity for presentation to the Lok Sabha for its approval. Being a minority government, getting the radically changed new policy through the house was indeed a monumental task.
Narsimha Rao an acclaimed and astute politician did manage to muster sufficient strength to push the new economic policy through Lok Sabha. For India, it was a new dawn. It was the astuteness, determination and boldness of the leadership that came to rescue. The country was now on the fast tract. International Monetary Fund and World Bank, having seen the changes, decided to open their doors once again offering their help in meeting country’s immediate need of foreign exchange.
Despite Lok Sabha’s concurrence, people, by and large, were not happy with such dramatic and sudden changes in the policy. The industrialists and businessmen who had been working in tandem with bureaucrats to keep their monopolies intact, were left completely unnerved by inevitable competition to their businesses. Having their hold on the press, it was easy for them to create some unease in the minds of the people.
Congress Party, despite having put the country on a solid path of economic growth, could not secure sufficient seats to form their government in the election held in 1996 — proving that perceptions are more important than reality in seeking mandate from people.
General Elections held between 27th April and 2nd May 1996 resulted in a hung parliament with no party having sufficient strength to form their government. Bharatiya Janta Party, having won the largest number of seats decided to form minority government with Atal Bihari Vajpayee as the Prime Minister. Just two weeks later, however, the United Front coalition party dislodged BJP claiming majority in the Parliament. H.D. Dave Gowda became the Prime Minister of India in in 1997 and later Inder Kumar Gujral having the backing of his own United Front became the Prime Minster replacing Dave Gowda. There is very little to talk about the performance of these two Prime Ministers. Due to continued instability, early elections were held between 5th September and 3rd October in 1999.
National Democratic Alliance led by BJP got the mandate to form the government. Atal Bihari Vajpayee was once again chosen to be lead the country as Prime Minister. He was known to be a great statesman famous for his bold and meaningfully speeches in Parliament. He was a humble down-to-earth man credited with three major achievements in his period. a) testing of five nuclear devices (bombs) simultaneously on a single day; b) giving start to building of highways, termed as golden quadrangle, measuring close to 5,700 km, connecting north, east, south and west; and c) sale of air-waves at a very nominal price to those wanting to get into mobile-phone businesses.
The idea behind offering air-waves at nominal cost was based on his strong belief that the country needs to be connected with this new technology in the absence and non-availability of high-cost land lines to people across the country. He wanted every one, even the poor, to be able to possess a mobile phone to be connected with others at a very nominal cost. Thanks to his vision, even our maids, drivers, watchmen, etc all have mobiles and are connectable to people across the world at an affordable cost. Our country offers the cheapest mobile connectivity in the world. He coined “India Shining” as BJP’s slogan for next election campaign. He remains as one of the most respected leaders of the country. Despite all his achievements, BJP lost in the next general election bringing Congress back to power — proving once again that perceptions are very important.
Congress party nominated Dr Manmohan Sigh to lead the country as their Prime Minister. He had been Finance Minister in Narsimha Rao’s government who had successfully saved the country from bankruptcy by ushering the country into a market driven economy in 1991. He now decided to give his attention, to the other burning problems facing the country such as poverty, extreme poverty, malnutrition among children, illiteracy, unemployed, etc. Towards solving these problems, he authored quite a few pathbreaking legislations like National Rural Health Mission, Rural Employment Guarantee Scheme, Right to Information Act, Right to Basic Education for Children up to 14 years, Food Security Act, etc.
He also created Unique Identification Authority which came up with what is called Aadhaar helping transfer of funds directly to the bank accounts of beneficiaries thereby eliminating the possibility of leakage of funds in transfer. One of his most important achievements was, despite strong opposition from the Left parties, who were supporting the government, signing the historic civil nuclear agreement with United States thereby becoming member of the elite group in the nuclear club despite not being a signatory to Non-Proliferation Treaty. In his period, Public Sector grew rapidly adding substantially to country’s GDP growth.
He held 114 press conferences during his 10 years of Prime Minister-ship – setting a new record. Unfortunately, not being a politician, he got bogged down by allegations brought out by the CAG (Vinod Rai) report clandestinely published in early 2014 violating the set procedure that it must be placed before the Public Accounts Committee before being made public. The report charged the government of causing a loss of over Rupees one lac crores to the exchequer by continuing to follow the policy of the earlier government.
The report contested that the government should have instead auctioned the spectrum. It was indeed a mischievous move on the part of CAG to intentionally cause serious damage to the reputation of Dr Manmohan Singh’s government. It’s worth mentioning that 7 years later he (Vinod Rai) apologized to Sanjay Nirupam (a Congress leader) for his malicious report on 2G spectrum – this is what politics is all about. The damage had already been done. Congress lost in the next general election held in mid 2014, ending the best 10 years of the country thus far.
National Democratic Alliance (NDA) won sufficient number of seats with BJP as the largest party. They formed the next government nominating Narendra Modi as the Prime Minister on 26th May 2014. He proved to be the most hard-working Prime Minister of the country. He started with a bang, continuing with the momentum of economic growth, inherited by him from the previous government. His first major step was to get rid of the black money in circulation in the economy.
Towards that end, he demonetized part of the currency in circulation on 8th November 2016 believing that it will bring the unaccounted money to the fore. A very worthy intention indeed. Unfortunately, that did not happen. A lot of people got into the business of converting black money into white at an exorbitant rate of ranging from 30 to 40 percent. It became a windfall for such people.
All the black money in circulation, at the end of this exercise, found place in the bank accounts of those people as white. He was obviously ill advised to demonetise. This exercise did cause drop in our GDP growth in 2016 and 2017. The Second term of this government unfortunately started with the world-wide spread of Covid causing stoppage or scaling down of businesses to restrict the spread of this highly contagious disease
. For two consecutive years 2020 and 2021 we suffered loss of output and services on this account. Despite the two setback, this regime under Modi has done well economically. Having passed labour codes, it has put in place a platform to kick the growth up to a different level.
India is now ready to launch its own ‘NEW DEAL’
Looking beyond our shores, there are many instances of bold actions, on economic front, paying hefty dividends. The most profound example is that of President Franklin Delano Roosevelt (FDR). Coming to power as president of USA, he took charge when economic situation of the country was dire and desperate.
Despite the opposition from Morgan’s, the most powerful banker of USA and his elite country men, he created many authorities to launch projects like Rural Electrification, Tennessee Valley Project to bring some regions of the country into 20th century as part of what he termed as ‘NEW DEAL’. No peacetime President in the years since, has matched the economic growth achieved during his first three full three years of administration. Adjusted for inflation, USA’s economy grew by a whopping 10.8 percent, 8.9 percent and 12.9 percent consecutively for three years viz 1934, 1935 and 1936, respectively.
Over the course of his first term, the unemployment rate plunged from over 20 percent to less than 10 percent. Increasing wages of the federal employees, as part of his NEW DEAL, helped in massive reduction of poverty in the country. He thus became the author of economic miracle. In doing what he did, he had to wrestle with Congress, the Supreme Court and at times with himself to get spending a lot of money from taxes, budget deficit, and from whatever other source was possible, nearly doubling the expenditure of the federal government at one stage.
His federal expenditure, in some years, accounted for over 20 percent of the GDP of the country. His boldness, paid him rich dividend in a multiple ways. He is rated as one of the most popular Presidents that the country ever had. He holds record for being elected 4 times to lead the country as the President. He died, with his boots on, on 12th April 1945, just 18 days before the death of Adolf Hitler by suicide on 30th April 1945. Hitler’s death marked the end of 2nd world war.
India is now ready to take a big leap forward. Our general economic situation is very similar to the conditions inherited by President Roosevelt of USA when he took office in mid 1930s. He had to deal with unemployment, widespread poverty, lower wages, and very low private investment. His bold step to launch “NEW DEAL” transformed USA into a supper power economically and politically. He in-fact proved the famous economist Maynard Keynes’s theory that if a dollar is injected into the economic system, it creates more than one dollar of GDP — what Magrand termed as multiplier effect. FDR’s policies more than proved Magrand’s theory.
OUR COUNTRY IS READY NOW TO LAUNCH ITS OWN VERSION OF “NEW DEAL”.
