The Indian Development Experience In The Second Half Of The 20th Century

The post Independence development experience of India has always excited much interest, not least because, while India is one of the poorest countries in the world in terms of per capita income, it is also the world’s largest liberal democracy. Furthermore, it has managed to retain this political system, however inadequate and flawed, while many democratic experiments in other countries have foundered and occasionally collapsed. This raises the obvious question: to what extent has this influenced the nature of social policy in India? Have the pressures on the state that result from democratic functioning meant greater attention to particular types of social policy, and which social groups or classes have they benefited? Why has democracy itself not resulted in greater attention to the provision of basic goods and minimally acceptable levels of public services for all citizens? These issues are further complicated by the fact that India has not only a system of liberal democracy but also a federal polity, in which a substantial number of the concerns which are particularly important from the perspective of social policy (land reforms, education, health, rural infrastructure) are either specifically “state government subjects” or are concurrently under both state and central governments. This in turn means that the different political groupings in different state governments can have significant implications for both social policy and its effects. This partly explains why there is so much regional variation in terms of major demographic, economic and social variables across states. There is a further dynamic as well, in that certain types of social policy, as discussed above, have ripple and process effects which affect the various classes in society directly, but also determined their desire and appetite for further public intervention. This point is elaborated below, when the specific experience of some states is considered. But first it is necessary to provide a brief review of the development experience in general. At the time of Independence from colonial rule in the mid twentieth century, there was broad social consensus in India on the role of the state as a crucial player in the development process. State led capitalism and state intervention in various ways were seen as essential instruments for the development of a relatively autonomous Indian capitalism, displacing metropolitan capital from the pre-eminent position it had occupied in the colonial economy. The economic policy regime that was erected in the 1950s had its roots in the nationalist freedom struggle, which emphasised that freedom meant freedom not only from political control, but also from external economic domination. It was felt that this could not be ensured without giving the state in independent India a major role in building up infrastructure, expanding and strengthening the productive base of the economy, setting up new financial institutions and regulating and coordinating economic activity. This was recognised to be necessary for building capitalism itself, though some no doubt entertained the fond hope that all this would add up to an eventual transition to socialism.

However, there were a number of features of India’s post-Independence growth strategy that structurally limited the potential of the economic system to expand in a sustainable manner. Many of these features, which stemmed from the political economy of class configurations at the time, contributed in turn to the specific manner in which the development process unfolded and to the limitations of social policy in accelerating the process of development. The most significant such feature was the inability of the Indian state in general to address the most basic form of inequality in the country, that over the ownership and control over land. Despite the overt declarations regarding the need for land reforms and for curbing the concentration of economic power, relatively little was done to attack or redress asset and income inequality. Similarly, while some monopolistic practices were curbed, private asset concentration in the industrial sector was never really challenged. In fact, state intervention became yet another mechanism for existing monopolists to consolidate their positions. One consequence of the associated persistence of asset and income inequality was that there were definite limits to the expansion of the market for mass consumption goods in the country. This in turn meant that employment and income growth in the private sector was limited. The absence of any radical land redistribution meant that the domestic market, especially for manufactured goods, remained socially narrowly based. It also meant that the growth of agricultural output, though far greater than in the colonial period, remained well below potential. Under these circumstances, continuous growth in state spending became essential for the growth of the market since it was the key element in whatever overall dynamics the system displayed. Further, given the strength and assertiveness of the domestic industrial capitalists, the government was not in a position to discipline them to the extent required to launch a mercantilist strategy that sought to use cheap labour resources as the base for a thrust into the international market for manufactured mass consumption goods. This meant that the stimulus for growth had to be internal, even though the autonomous expansion of the domestic market was constrained by the inequality of asset distribution. The central government provided domestic capitalists with a large once-for-all market for manufactures by widening and intensifying import protection and encouraging import substituting industrialisation. It then sought to expand that market through its own current and capital expenditures. Simultaneously it supported the domestic capitalist class by investing in crucial infrastructure sectors. Like many other Asian newly industrialising countries, control of financial intermediation was seen as key to the process of development, and therefore the Indian government also concerned itself with channelising household savings to finance private investment through the creation of a number of industrial development banks.

For the first two decades after Independence, this strategy did pay dividends in terms of economic growth. Rates of industrial growth were creditable by international standards, the country built up a diversified industrial base, and the public sector expanded rapidly. As a consequence, public economic activity was able to continue to provide crucial infrastructure services, industrial raw materials and capital goods to sustain industrial growth even when the foreign exchange available to import these commodities was limited. However, because this strategy did not involve a widening of the mass market in any significant way, it proved to be unsustainable beyond a point. By the mid-1960s, the once-for-all stimulus offered by import substitution was exhausted. Further, the ability of the state to continue to serve as the engine of growth through its own expenditure was undermined by its inability to raise adequate resources through taxation and other means. This reflected not only the state.s inability to discipline the domestic elites in a manner necessary for rapid industrialisation, but also the fact that this lack of discipline involved explicit and implicit subsidisation of private investor.s activities. The consequence of this was that by the late 1960s, aggregate growth decelerated. The growth revival of the 1980s was once again based on increasing state expenditure, this time relying on the rapid (and ultimately unviable) accumulation of public external debt and on an import boom, which allowed the consumerist aspirations of the growing middle class to be at least partially satisfied. This process, in turn, was halted by the balance payments crisis of 1990 91, which heralded the onset of a more systematic programme of neoliberal economic programme, involving wide-ranging deregulation, liberalisation of many activities and reduction of overt state involvement in a number of crucial economic areas. Over the 1990s, the Indian economy experienced rates of growth averaging between 5 and 6 per cent, and very substantial increases in income accruing to a small minority of the population, which have fuelled the increases in market demand. Essentially the last two decades of the 20th century marked the emergence of a slightly different macroeconomic strategy, which was openly based on the demand stimulus emanating from certain sections of capital and what could be called a “labour aristocracy” comprising middle class professional groups and more skilled workers. While this demand was necessarily highly import intensive, the very fact that it could be fulfilled because of the combination of deregulation and import liberalisation meant a short-lived boom in certain consumer goods sectors. However, by the turn of the decade (and the century) it was already evident that the limits to this type of expansion also had been exhausted, and the growth process decelerated once again. The economies of South Asia – and especially India – are often portrayed in comparative discussion as among the “success stories” of the developing world in the period since the early 1990s. The sense that the Indian economy performed relatively well during this period may simply reflect the much more depressing or chaotic experiences in the rest of the developing world, with the spectacular financial crises in several of the most important and hitherto dynamic late industrialisers in East Asia and Latin America, and the continuing stagnation or even decline in much of the rest of the South. Compared to this, the Indian economy was largely stable and was also spared the type of extreme crisis that became almost a typical feature of emerging markets elsewhere. But the picture of improved performance is a misleading one at many levels, since in fact the Indian economy experienced economic growth that was actually less impressive what was achieved in the preceding decade. Further, the growth process was characterised by low employment generation, greater income inequality and the persistence of poverty. In other words, despite some very apparent successes in certain sectors or pockets, on the whole the process of global economic integration did little to cause a dramatic improvement in the material conditions of most of the population, and added to the greater vulnerability and insecurity of the economies in the region. Thus, the rate of growth of aggregate GDP in constant prices was between 5.5 per cent and 5.8 per cent in each five-year period since 1980, and the process of accelerated liberalisation of trade and capital markets did not lead to any change from this overall pattern. Further, while investment ratios increased slightly (as share of GDP) this reflected the long-term secular trend, and in fact the rate of increase decelerated compared to earlier periods. More significantly, the period since 1990 was marked by very low rates of employment generation. Rural employment in the period 1993-94 to 1999-2000 grew at the very low annual rate of less than 0.6 per cent per annum, lower than any previous period in post-Independence history, and well below (only one-third) the rate of growth of rural population. Urban employment growth, at 2.3 per cent per annum, was also well below that of earlier periods, and employment in the formal sector stagnated. Other indicators point to disturbing changes in patterns of consumption. Thus, per capita food grain consumption declined from 476 grams per day in 1990 to only 418 grams per day in 2001. The National Sample Survey data also suggest that even aggregate calorific consumption per capita declined from just over 2200 calories per day in 1987-88 to around 2150 in 1999-2000. Given the aggregate growth rates and the evidence of improved lifestyles among a minority, this points to substantially worsening income distribution, which is also confirmed by the survey data. While the evidence on poverty has been muddied by changes in the procedure of data collection, which have made the recent survey data non-comparable with earlier estimates, overall indicators suggest that while the incidence of head-count poverty had been declining from the mid –1970s to 1990, subsequently that decline has been slowed or halted. Meanwhile, declining capital expenditure by the government has been associated with more infrastructure bottlenecks and worsening provision of basic public services. The major positive feature which is frequently cited, that of the overall stability of the growth process compared to the boom-and-bust cycles in other emerging markets, reflects the relatively limited extent of capital account liberalisation over much of the period, and the fact that the Indian economy was never really chosen as a favourite of international financial markets over this period. In other words, because it did not receive large inflows of speculative capital, it did not suffer from large outflows either. Meanwhile, stability to the balance of payments was imparted by the substantial inflows of workers’ remittances from temporary migrant workers in the Gulf and other regions. The less than satisfactory performance during the decade of economic liberalisation was not just the result of the nature of integration with the global economy. It also reflected the continuing contradictions in Indian political economy that have been so crucial in inhibiting economic growth and reducing the wider spread of its benefits across all the citizenry, over most of the second half of the 20th century. There were at least four such mutually reinforcing and interrelated political economy contradictions.

First, the state has had to simultaneously fulfill two different roles that have turned out to be incompatible in the long run. On the one hand it has had to maintain growing expenditure, in particular investment expenditure, in order to keep the domestic market expanding. At the same time, however, the state exchequer has been the medium through which large-scale transfers have been made to the capitalist and proto-capitalist groups, so that the state effectively became the most important instrument for primary accumulation by the domestic bourgeoisie in its various manifestations. This has occurred through various mechanisms such as tolerance of fairly widespread and growing tax evasion, actual reduction in tax rates and incidence, a variety of subsidies and transfers, lucrative contracts and government procurement policies, and most recently even through privatisation of public assets. This contradiction between these two different roles of the state has been necessarily manifested in the government’s worsening fiscal position. Since in such circumstances the continued increases in public expenditure which would be required to sustain domestic demand would only be possible through increased borrowing, there are obvious limits on the process over time. So the effort to combine political legitimacy with economic dynamism created contradictions that could not be resolved within the existing parameters of macroeconomic strategy.
The second contradiction lay in point already mentioned above: the inability of the state to impose a minimum measure of “discipline” and “respect for law” among the capitalists, without which no capitalist system anywhere can be tenable. Disregard for the laws of the land, including especially those relating to taxes and also other laws which affected the economic functioning of the system, was an important component of capitalist primary accumulation in the post Independence Indian case. This absence of a collective discipline in turn meant that a successful transition could not be made from an explicitly interventionist regime to an alternative viable capitalist regime with state intervention of a different and less overt kind. Thus, as already noted, the states of countries like Japan and South Koreas were also strongly interventionist even in a country like Japan and South Korea, but these were forms of interventionism based on close collaboration between the state and capital, which also simultaneously promoted fairly rigorous discipline among the capitalists. However, in India because the domestic capitalist class as a whole proved manifestly incapable of submitting to or imposing upon itself a similar degree of discipline, such an alternative state-supported capitalist regime could not emerge. This is why the only feasible alternative to the earlier dirigisme was seen to be a process of deregulation and liberalisation that also involved exposing the economy to the caprices of international capital, and reduced its ability to withstand shocks.
The third contradiction had its roots in the social and cultural ambience of a developing country like India. Metropolitan capitalism, which is characterised by continuous product innovation, has experienced the phenomenon of newer goods constantly entering the market and even creating new lifestyles, whereas most developing countries have not only less dynamic innovative capacity because of less resources devoted o such innovation, but also more narrow markets which cannot benefit from economies of scale to the same degree. This creates an imbalance between the possibilities of domestic production and the patterns of demand emanating from the relatively affluent sections of society who account for much of the growth of potential demand for consumer goods. The international demonstration effect has been a powerful instrument in the hands of metropolitan capital in its efforts to prise open the markets of developing countries in general, and India has been no exception.
The fourth contradiction reflected the political economy configurations in India throughout this period, which implied a high level of social tolerance for high and growing asset inequality, persistent poverty and low levels of human development among a vast section of the population, especially in the rural areas. Two striking features of this pattern of development, even in the more dynamic phases, have been the growing rural-urban divide in terms of per capita incomes, and the inadequacy of productive employment generation relative to the expansion in population. The same socio-political forces which allowed such features to persist and become accentuated, also meant that social policy which ensured the provision of basic needs to the entire population was never a priority, nor were provisions which focussed on improved work conditions in most workplaces.

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