India After Independence: 1947-2000 (57 page)

Another critical element of the Nehru-Mahalanobis strategy was the emphasis on growth with equity. Hence, the issue of concentration and distribution in industry and agriculture was given a lot of attention though perhaps not with commensurate success. It may be added that the strategy did not posit equity against growth but assumed that higher growth enabled higher levels of equity and was critical for meeting the challenge of
poverty; utmost attention was therefore given to rapid growth.

State supervision of development along planned lines, dividing activity between public and the private sector, preventing rise of concentration and monopoly, protecting small industry, ensuring regional balance, canalizing resources according to planned priorities and targets, etc.—all this involved the setting up of an elaborate and complicated system of controls and industrial licensing, which was done through the Industries Development and Regulation Act (IDRA) of 1951. Further, the balance of payments’ crisis and acute shortage of foreign exchange that occurred in 1956-7, at the very start of the Second Plan, led to the imposition of stringent import and foreign exchange controls. The seeds of the Kafkaesque web of licence-quota rules and regulations were thus laid and in later years it was found that it was not easy to dismantle a system that had acquired a vicious stranglehold over the Indian economy. The bureaucracy-politician nexus and certain sections of business that were beneficiaries of the system resisted such a change.

We shall now briefly review some of the bold beginnings made in the Nehru years during which the first three Plans were conceived, though the full impact of many of the initiatives was to be felt in the years following his death.

Considerable progress on several fronts was made during the first phase of the development effort, spanning the first three Five-Year Plans, i.e., by the mid-sixties. The overall economy performed impressively compared to the colonial period. India’s national income or Gross National Product (GNP) grew at an average rate of about 4 per cent per annum, between 1951 and 1964-65 (omitting the last year of the Third Plan, i.e., 1965-66, which saw an unprecedented drought and a war). This was roughly four times the rate of growth achieved during the last half century of colonial rule. The rate of growth achieved by India after independence compared favourably with the rates achieved by the advanced countries at a comparable stage, i.e., during their early development. To quote the eminent economist Prof K.N. Raj:
⁸

Japan is generally believed to be a country which grew rapidly in the latter part of the 19th and the first quarter of the 20th century; yet the rate of growth of national income in Japan was slightly less than 3 per cent per annum in the period 1893-1912 and did not go up to more than 4 per cent per annum even in the following decade. Judged by criteria such as these the growth rate achieved in India in the last decade and a half (1950-65) is certainly a matter for some satisfaction.

Stepping up the rate of growth required a substantial increase in the investment rate. An important achievement in this period was the rise in the savings and investment rates. On the basis of rather rudimentary data,
the Draft Outline of the Fourth Plan estimated that domestic savings and total investment in the Indian economy were both 5.5 per cent of national income in 1950-51, rising to savings of 10.5 per cent and investment of 14 per cent in 1965-66. The gap between domestic savings and investment in the later years was met partly by liquidating the foreign exchange reserves (mainly the huge sterling balances, about Rs 16 billion, that England owed India in 1947, because of the forced credit she had extracted from India during the War) and partly through foreign borrowing and aid. It has been estimated that the total investment in 1965-66 was nearly five times the 1951-52 level in nominal terms and more than three times in real terms.

On the agrarian front, the comprehensive land reform measures initiated soon after independence, the setting up of a massive network for agricultural extension and community development work at the village level, the large infrastructural investment in irrigation, power, agricultural research, and so on, had created the conditions for considerable agricultural growth in this period. During the first three Plans (again leaving out 1965-66), Indian agriculture grew at an annual rate of over 3 per cent, a growth rate 7.5 times higher than that achieved during the last half century or so of the colonial period. The growth rates achieved compared very favourably with what was achieved by other countries in a comparable situation, say China or Japan. For example, Japan achieved a growth rate of less than 2.5 per cent between 1878-1912 and an even lower growth rate till 1937. What was particularly creditable was that India, unlike most other countries (such as China, Japan, Korea, Taiwan, Soviet Union, Britain, etc.) achieved its land reforms and agricultural growth in the context of civil liberties and a modern democratic structure. However, the commendable agricultural growth achieved during this period was not sufficient to meet the growing demand of agricultural produce, necessitating increasing imports of foodgrains throughout the first three Plans. Since 1956, India had to rely heavily on food imports from the US under the controversial PL-480 scheme. It was only after the process of the Green Revolution took off, since the late sixties, that this dependence on imports ceased. (The whole issue of land reforms and agricultural growth which affected the lives of not only the vast majority of the Indian population dependent on agriculture but the Indian economy as a whole has been dealt with separately in chapters 28, 29 and 30.)

Industry, during the first three Plans, grew even more rapidly than agriculture, at a compound growth rate of 7.1 per cent per annum between 1951 and 1965. The industrial growth was based on rapid import substitution, initially, of consumer goods and particularly, since the Second Plan, of capital goods and intermediate goods. The emphasis on the latter since the Second Plan was reflected in the fact that 70 per cent of Plan expenditure on industry went to metal, machinery and chemical industries in the Second Plan and 80 per cent in the Third Plan. Consequently, ‘the
three-fold
increase in aggregate index of industrial production between 1951 and 1969 was the result of a 70 per cent increase in consumer goods industries, a
quadrupling
of the intermediate goods
production and a
ten-fold increase
in the output of capital goods,’
⁹
a stupendous growth of the capital goods sector by any standards.

Tables 25.1 and 25.2 reflect this growth-pattern (over a longer period) in which intermediate and capital goods industries like basic metals, chemicals, transport equipment and electrical and non-electrical machinery grew very rapidly and much faster than consumer goods industries like textiles, particularly between 1951 and 1971.

Table 25.1: Indices of Industrial Production in India: 1951-1979

Table 25.2: Rates of Growth in Indian Manufacturing: 1951-52 to 1982-83 (per cent)

This growth pattern went a long way in reducing India’s near total dependence on the advanced countries for basic goods and capital equipment, which was necessary for investment or creation of new capacity. At independence, to make any capital investment, virtually the entire equipment had to be imported. For example, in 1950, India met 89.8 per cent of its needs for even machine tools through imports. In contrast to this, the share of imported equipment in the total fixed investment in the form of equipment in India had come down to 43 per cent in 1960 and a mere 9 per cent in 1974, whereas the value of the fixed investment in India increased by about two and a half times over this period. In other words, by the mid-seventies, India could meet indigenously more than 90 per cent of her equipment requirements for maintaining her rate of investment. This was a major achievement, and it considerably increased India’s autonomy from the advanced countries in determining her own rate of capital accumulation or growth. It was this, and the food security India was able to achieve once the process of the Green Revolution took off, which explains India’s ability to retain an independent foreign policy, by withstanding enormous external pressures.

Dependence on external resources, foreign aid or foreign private investment, was kept quite low. Net aid utilized by India was only 0.4 per cent of Net National Product at factor cost during the First Plan, rising to 2.25 and 3.17 per cent during the Second and Third Plan and again falling drastically since the end-sixties (see
chapter 26
). Also, external resources came mainly as official aid, and according to one estimate net aid and net foreign private investment came in the ratio of 6:1 between 1948 and 1961. More than 71 per cent of the foreign aid in the First Plan was used for wheat loans, whereas in the Second and Third Plans foreign aid was used overwhelmingly, nearly 98 per cent, to fund iron and steel projects and general industrial development, transport and communication and power. Overall, in the first three Plans, industry, transport and power utilized about 95 per cent of the foreign aid. (The counterpart funds generated by the PL-480 food aid from USA were allocated to the above areas.)
¹⁰
Soviet aid came in the Second Plan priority areas, i.e., core and basic industries and that too in the public sector.

The weight of the public sector in the overall economy increased rapidly, and it captured the ‘commanding heights’ of the economy, further marginalizing the presence of an already small foreign sector. (In India, unlike certain Latin American countries, the public sector did not grow in collaboration with foreign private capital or multinational corporations.) The total paid-up capital in government companies as a proportion of the total paid-up capital in the entire corporate sector rose from 3.4 per cent in 1951 to 30 per cent in 1961. In the early seventies the proportion had risen to about 50 per cent and by 1978 it had reached a whopping 75 per cent.

Apart from industry and agriculture, the early planners gave utmost priority to the development of infrastructure, including education and health, areas greatly neglected in the colonial past. The average actual
Plan expenditure during each of the first three Plans on transport and communication was about Rs 13 billion, accounting for an average of about 26 per cent of the total Plan expenditure in each plan. The corresponding figures for social/community services and power were Rs 9.4 billion and 19.9 per cent and Rs 6.16 billion and 10.6 per cent respectively. Over time, Plan investment in these areas (and in irrigation) was to prove critical both in stepping up private investment and improving its productivity, as was seen so clearly in the case of agriculture with the coming in of the Green Revolution.

Table 25.3: Growth in Infrastructure, Health and Education

Table 25.3 shows the rapid per capita increase in the availability of some of the infrastructural and social benefits as they grew several times faster
than the population. In 1965-66, as compared to 1950-51, installed capacity of electricity was 4.5 times higher, number of town and villages electrified was 14 times higher, hospital beds 2.5 times higher, enrolment in schools was a little less than 3 times higher and very importantly admission capacity in technical education (engineering and technology) at the degree and diploma levels was higher by 6 and 8.5 times, respectively. The population had then increased only by a little over one-third during the same period.