India After Independence: 1947-2000 (59 page)

Table 26.1: Gross Domestic Savings and Gross Domestic Capital Formation

(As per cent of GDP at current market prices)

Source: Calculated from
Economic Survey, 1996, GOI

A new feature of the eighties was the phenomenal increase in new stock market issues, the stock market thus emerging as an important source of funds for industry. It has been estimated that in 1981 the capital market accounted for only 1 per cent of domestic savings, whereas by the end of the eighties this proportion had increased by about seven times. The new stock issue in 1989 was Rs. 6,500 crores, which was about 7.25 per cent of Gross Domestic Savings of 1989-90. Another estimate shows that in 1990 Indian companies raised an unprecedented Rs 12,300 crores from the primary stock market.

The early eighties also saw a highly successful breakthrough in the import substitution programme for oil under the supervision of the ONGC (Oil and Natural Gas Commission), a public sector organization. The large loan received from the IMF in this period helped this effort considerably. In 1980-81, domestic production of oil was 10.5 million tonnes and imports 20.6 million tonnes, the oil import bill taking up 75 per cent of India’s export earnings! With new oil finds at the Bombay High oil fields, by the end of the Sixth Plan (1980-85), the target of indigenous production of 29 million tonnes was achieved. As a result, in 1984-85, the net import of oil and oil products was less than a third of the domestic consumption and the oil import bill was also down to a third of export earnings.

By the mid-seventies, the industrial growth rate also started picking up from a low of about 3.4 per cent between 1965-75 to about 5.1 per cent between 1975-85. If the crisis year of 1979-80 was omitted, then the industrial growth rate during 1974-75 to 1978-79 and 1980-81 to 1984-85 was about 7.7 per cent per annum. In the eighties as a whole the industrial growth rate maintained a healthy average of about eight per cent per year.
Again it was in the eighties that the barrier of the low, so-called ‘Hindu rate of growth’ of 3 to 3.5 per cent that India had maintained over the previous two decades was broken and the economy grew at over 5.5 per cent. By one estimate the average real GDP growth rate between 1980 to 1989 was an impressive 6 per cent.
¹

While on the one hand the Indian economy in the eighties seemed to be doing quite well, on the other hand there were certain long-term structural weaknesses building up which were to add up to a major crisis by 1991 when the country was on the verge of defaulting. It is this crisis which brought home to the country the immediate necessity of bringing about structural adjustment and economic reform.

Broadly, there were three sets of problems which had gathered strength in the Indian economy over time and which needed urgent reform.

The first set of problems related to the emergence of structural features that bred inefficiency. The import-substitution-industrialisation (ISI) strategy based on heavy protection to indigenous industries was as we saw earlier, very effective in deepening and widening India’s industrial base and giving the economy a lot of freedom from foreign dependence. However, over time, the excessive protection through import restrictions started leading to inefficiency and technological backwardness in Indian industry.

This situation was further accentuated by the so-called ‘licence-quota’ Raj, i.e., a whole plethora of rules, regulations and restrictions which stifled entrepreneurship and innovation. The MRTP Act and the reservation of sectors for small-scale industry are cases in point. The MRTP Act went against the basic principle of economies of scale, which is at the heart of capitalist development (or for that matter of socialist production). It also punished efficiency, as any company, which expanded due to efficient production, good management and research and development (R & D), would face severe restrictions, including refusal of permission to increase capacity once it crossed a prescribed limit. It has been pointed out that the combination of the ISI strategy focussing on the domestic market together with restrictions on large industry from fully exploiting the domestic market through MRTP restrictions was particularly damaging for growth. Industry could neither expand in the domestic market nor were the ISI policies encouraging them to exploit foreign markets.

Again, reserving certain areas (the list kept growing) for small-scale industries meant excluding these areas from the advantages of scale and larger resources for R & D activities. This made the sector often internationally uncompetitive, leading to India losing out to its competitors in many areas. Also, the policy towards small-scale industry forced entrepreneurs in the reserved areas to remain small, as any expansion as
a result of efficient and profitable functioning would deny the enterprise the special incentives and concessions. This inhibited efficiency and innovation in this sector. Further, industrial licensing cut off domestic competition just as import control cut off external competition and the two combined left little impetus for indigenous industry to be efficient.

The large public sector in India, which controlled ‘the commanding heights’ of the economy, also began to emerge as a major source of inefficiency. The early emphasis on the public sector was critical to India’s industrial development. It is the public sector which entered the core areas, diversified India’s industrial structure, particularly with regard to capital goods and heavy industry, and reduced India’s dependence on foreign capital, foreign equipment and technology. However, over time, the political and bureaucratic pressure on the public sector undertakings gradually led to most of them running at a loss. They were overstaffed, often headed by politicians who had to be given sinecures, became victims of irresponsible trade unionism and were unable to exercise virtually any efficiency accountability on their employees. State-run utilities like electricity boards and road transport corporation were notorious for incurring enormous losses. Apart from rampant corruption and lack of accountability, these enterprises, under populist pressure, often charged rates that did not cover even a small fraction of the actual costs. The extreme case of course was of the recent (1997) Punjab government decision to distribute electricity
free
to farmers! Even the critical banking and insurance sector, which after nationalization had expanded phenomenally, mopping up huge resources, soon began to suffer from the public sector malaise of inefficiency and political interference. Many banks started running at a loss and the insurance sector remained inefficient and covered only a fraction of its enormous potential market.

While licensing, MRTP, small-scale reservation and the like made entry or expansion of business very difficult; since the mid-seventies virtually no exit was possible for inefficient loss-making companies as they could not close down or retrench without government permission. Powerful trade unions, which had led to a dramatic increase in collective bargaining, the index number of man-days lost rising from 100 in 1961 (base year) to 891.6 in 1980, made such closures very difficult. The government ended up taking over many ‘sick’ companies which otherwise needed to be closed down—the National Textile Corporation which took over a number of ‘sick’ textile mills becoming a major contributor to the total losses incurred by the public sector.

All this led to the investment efficiency in India being very low or the capital output ratio being very high. A 1965 study shows that the public sector Heavy Electricals Limited was set up in Bhopal with a capital output ratio of between 12 to 14—with no questions being asked or enquiry set up! Though this is an extreme case, estimates for the economy as a whole show that the capital used per unit of additional output or the incremental capital output ratio (ICOR) kept rising, it being a little over 2.0 during the First Plan and reaching 3.6 during the Third Plan.
According to one estimate between 1971 and 1976 the ICOR had touched a high of 5.76. This explains why despite substantial increases in the rate of investment (see
Table 26.1
) there was an actual decrease in the overall growth rates of aggregate output or GDP between the fifties and seventies. The ICOR started declining in the eighties though it still remained around 4 in the nineties. Even during the eighties, one estimate shows that the (simple) average rate of financial return on employed capital in public sector enterprises was as low as 2.5 per cent. Actually, the rate of return was much lower if the 14 petroleum enterprises were excluded, as these accounted for 77 per cent of the profits in 1989-90.

The controls, restrictions, intervention etc., discussed above were paradoxically often resorted to in the name of introducing ‘socialist’ principles and equity but actually ended up building a distorted, backward capitalism, as they went against the basic laws of capitalism such as the need for continuous expansion on the basis of innovation and efficient investment. Low efficiency or low productivity levels are of critical consequence in today’s ‘post-imperialist’ world, where economic superiority is established and transfer of surplus from one country to another occurs not through direct political or economic domination but through processes such as unequal exchange occurring between countries with different productivity levels. Economic thinkers of the left and the right are agreed on placing the question of productivity at the centre of any national development. In today’s context of rapid globalization, pursuing excessively autarchic policies in search of autonomy (something a section of the Indian left and the newly-discovered
Swadeshi
path of the right, such as the RSS, still argues for) may, through fall or stagnation of productivity levels, destroy precisely that autonomy and push the country towards peripheralization.

This brings us to the second set of weaknesses that emerged in the India economy and which relate to the continuation of the inward-oriented developmental path followed by India since independence. India failed to make a timely shift from the export pessimism inherent in the first three Plans, a pessimism which, one must recognize, was shared widely by development economists the world over in the fifties. The failure lay not in adopting the policies that emerged from the wisdom of the forties and fifties but in the inability to quickly react to changes occurring in the international situation and to world capitalism after World War II, particularly since the sixties and seventies.

Some of the important changes that needed to be taken cognisance of are mentioned here: first, the nature of foreign capital and multinational corporations was changing. A process of ‘internationalisation of production’ had started. Multinational corporations, instead of just looking for markets or sources of raw material, now looked for cheaper production areas, Instead of creating enclaves in the backward countries, which had backward and forward linkages with the home country (this was the typical colonial pattern), they were now bringing in investments which had major multiplier effects on the local economy, including of technology
transfer. It became common for multinational companies to ‘source’ a large part of the components that went into the final product from all over the developing world and even shift entire production plants to the under-developed countries. Then, along with, and partially as a result of, the above process, there were massive capital transfers between countries, reminiscent of the capital transfers of the nineteenth century at the height of colonial expansion, but very different in character. The above two processes contributed to another major international development, that of an unprecedented explosion of world trade. Between the fifties and seventies, world output of manufactures increased four times but world trade in manufactures increased ten times. The percentage of world produce that went for export doubled between 1965 and 1990. What is most significant is that while there was a massive increase in global industrial exports, the Third World was able to rapidly increase its share of total industrial exports, especially since the seventies, from about 5 per cent in 1970 to double the figure in 1983.
²

The East Asian Miracle, i.e., the rapid industrialization of the East Asian countries, beginning in the sixties, which gradually shifted the industrial base of the world from the West to the East, took advantage precisely of these kinds of opportunities of capital and market availability. Japan’s example of explosive post-World War II growth was being repeated by South Korea, Taiwan, Singapore, Hong Kong and, more recently, Thailand, Malaysia, China and Indonesia. The four Asian Tigers, South Korea, Hong Kong, Singapore and Taiwan increased their share in world export of manufactures from 1.5 per cent in 1965 to 7.9 per cent in 1990. Even the newly industrializing economies (NICs), Indonesia, Malaysia and Thailand increased their share from 0.1 per cent to 1.5 per cent over the same period.
³
South Korea’s manufactured exports, which were negligible in 1962, amounted to four times those of India by 1980. Again South Korea was exporting $41 billion worth of manufactured goods to the OECD countries in 1990 to India’s mere $9 billion.

India did reasonably well till the mid-sixties, basing herself on an inward-oriented, import-substitution based strategy. However, she failed to respond adequately to the new opportunities thrown up by the changing world situation despite the availability of the East Asian experience. In fact, since the crisis of the mid-sixties, she got pushed by immediate circumstances to take a tighter ‘protectionist’ and inward-looking tum in the late sixties and early seventies instead of taking advantage of the globalization process.