3.1 The long transition of the Indian economy

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Contemporary India

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The University of Melbourne

Contemporary India

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This course presents some important vignettes of a complex, highly diverse India that is also witnessing unprecedented changes since its formal independence in 1947 from Great Britain. The lectures revolve around social dimensions of change, the continuing influence of ancient texts on contemporary India, political democracy, economic transition from the state to the market, gender relations, India's economic globalisation and changing world view. While one of the objectives is to capture the multifaceted process of change, the course also critically examines some of the tensions inherent in these changes. For example, how does gender inequality play itself out in a changing Indian society, how do the modernist conceptions of art entailing market valuation challenge the more socio-centric values found in South India, what are the politics linguistic identities, and how might India address its myriad development challenges such as poverty and unemployment. No specific prior knowledge is required. However, it would be helpful if students are aware of the socio political dynamics at play in contemporary India and keep themselves abreast with current affairs and debates in the country to fully appreciate the various dimensions and contours if the subject matter in the course. This course is taught in English. View the MOOC promotional video here: http://tinyurl.com/hx8mhxb

À partir de la leçon

The long transition of India's economy

This section will look at the trajectory of India's economic development. It has changed from a state-led economic development model to the one where through a series of a reforms the economy has become more pro-business and market-friendly. You will be introduced to the basic features of first and second-generation reforms, the transformation of the economy since India liberalized in 1991 and the challenges of poverty and job creation that still needs to be tackled.

3.1 The long transition of the Indian economy20:53

3.2 Substance of state intervention7:24

3.3 Exhaustion of state-led development12:53

3.4 1991 Market reforms and state retreat11:56

3.5 First generation of reforms and achievements18:07

3.6 Second generation of reforms8:42

3.7 Where does India stand? India's place in the world economy11:46

3.8 India's global economic visibility16:42

3.9 Major challenges ahead: poverty, employment, inequality18:42

Rencontrer les enseignants

Anthony D'Costa
Professor
School of Social and Political Sciences

Greetings everybody and welcome to this session of contemporary India lectures.

What I'm going to be speaking about today

is the long transition of the Indian economy.

Really what it's trying to do in this lecture is that what I'm trying to do

really here is simply to look at the trajectory of Indian economic development,

through the evolution of the Indian economy itself and

just to sort of summarise you can of course see the different sub

topics that I will be addressing in the remainder of this lecture.

There are two really important parts here.

One of course is the at the time of Indian Independence,

the government of India as well as the political leadership behind it,

including some of the prominent sort of business houses in India,

decided that they would follow more of a state led economic development model.

And that was pretty much what was agreed upon in one way or another.

But then we find, and as you will see, in the lecture,

the rest of the lecture itself, that over time,

the Indian economy begins to face certain severe sort of challenges.

Both structural and non structural kinds of problems.

And then the question then becomes well what does India do?

And clearly of course what India embarks on is

a series of reforms, which of course now most of the world recognises.

And I will touch upon then, that second part which will basically be tracing again

how the Indian economy has changed from a state led developing model to one that is

built largely on a pro-business market driven kind of an economy.

So, that's sort of in a summary fashion is what I'm going to be talking about.

So let's begin, then, with the state led development model.

Here, what I'm going to be doing, of course,

is talking about state intervention in independent India.

Now there are, I guess, four, sort of,

points that I would like to cover in this part of the lecture.

And that is, first of all,

let's talk a little bit about the post independent state-led development.

And the colonial pattern of trade, because India as you know,

was a colony of Great Britain for quite a long time.

And that obviously created a certain structure of the Indian economy.

And many historians and economic historians would argue, of course,

that this particular, sort of,

relationship between say the colony which was India and the coloniser which was

Great Britain that relationship was not particularly beneficial to India.

And that's largely because of the type of

pattern of trade that emerged from that relationship.

Then we'll talk a little bit about the so called Bombay plan.

And not many of you will know what the Bombay plan is.

But those who are familiar with Indian economic history certainly

modern economic history would know that this Bombay plan

was essentially a gathering of Indian political leadership.

The politicians who would become national leaders in independent India

along with prominent private businesses.

And there they of course agreed upon a certain course of action for

an independent India.

So we will talk a little bit about what was the sort of path available for

India in terms of its economic development.

And I will then sort of go through some of the reasons, for intervention.

In other words, you know, why did India follow

that particular sort of model of state intervention.

And obviously there were certainly a number of global influences

that dictated that sort of a policy.

So when you look at the post-independent state-led development

you know, obviously, this is something that I've already talked about.

The colonial pattern of trade.

Although I'll have a few more things to say about it

in a sort of diagrammatic sort of way.

And then I also mentioned briefly about the Bombay Plan of 1944.

But then let's come to some of the other sort of global influences.

One, of course, I, and I'm sure many of you would have heard

about John Maynard Keynes, the British Economist.

A very, very well known economist, who obviously was a one of

the leading thinkers about the Great Depression of the 1930s.

There of course, Keynes, one of his solutions to the Great Depression era

was essentially a very simple one, I would say.

In fact, on hindsight it seems very, very simple that when demand in

the economy falls you raise the aggregate demand through essentially public spending

or what we call fiscal deficits in these days.

And that's basically

an idea where the government gets involved with the economy directly.

So, in that sense, the post-independence Indian government

was influenced by Keynesian sort of ideas and one might even say that

many of India's political leaders as well as economists were trained in England.

Particularly in Oxford and Cambridge.

And of course that's where Keynitian ideas were very very prominent, at the time.

So when they did return to India they also brought back some of those ideas.

And when in government or when in, places in the government

itself, they were able to sort of implement some of those condition ideas.

The other sort of source of influence one might say, was the Soviet Union or

the former Soviet Union.

We know that the Soviet Union, you know, it's an interesting

country because today we can't sort of imagine

the Soviet Union in the sense that what it was and what

it had become, One must remember that

Russia was at one time a very poor country, an underdeveloped economy.

And the Bolshevik revolution, which was sort of an experiment in many ways, leaves

the first set of Communist type of a government that came into power in a very,

very big way, it transformed a feudal sort of Russia into one

that was not only highly industrialised, but also became one of the super powers.

In fact, today we talk about, you know, a single super power,

largely because it is the United States, but at that time, and

certainly right until the late 1980s, when Soviet Union did exist,

we actually talked about two super powers and the Soviet Union clearly competed

with the United States in a number of areas, including in terms of influence.

Now this transformation of Russia into a very modern sort of Soviet Union

an industrial Soviet Union was not lost on the Indian, sort of, political leadership,

but it was also not lost on developing countries in general because for

one thing, they could clearly see that how a poor country could transform itself.

So, what did the Soviet Union do that might have been relevant for India and

other developing countries was that largely

it had to do with industrial planning.

And as we will see, that India also launched its own sort five-year plans

to basically foster economic development.

The Soviet Union, interestingly enough, use its five-year plans largely for

rural electrification.

And given the size of the country at the time certainly,

it was a giant sort of project, if you will.

India, to some extent, sort of shares that characteristic because India is also

a very, very large country and

therefore, development meant that you had to sort of do it on a very large scale,

and at that time of course, because the State was favoured to lead the country,

then what we have is government led five-year plans essentially to

bring about industrialisation and modernisation of the Indian economy.

So that was the other.

And the third one was the foreign influence so to speak.

In terms of at least ideology and thinking was Fabian Socialism.

Now Fabian Socialism was not quite the Soviet type of socialism, but

it was something that essentially believed

that the commanding heights of the economy should be in the hands of the government.

What it really referred to essentially was the public sector.

So the public sector in India has been at the commanding heights of the economy.

So think of all the large steel mills, the mining companies,

the fertiliser companies and so on and so forth.

These large scale manufacturing enterprises were under the government.

And Fabian Socialism believe that these things should be in the hands of

the government.

Now, of course there are economic arguments one might say that why they

should be in the hands of the government, mainly because the capital required.

But there was also a public purpose, the public purpose being that

in such an economy where the government was at the commanding heights,

it would mean that it would provide essential industrial inputs and

other services to the rest of the economy.

And essentially, the public would benefit at large.

So these were the sort of three sort of foreign ideas, if you will, or

ideologies that influence India at the time of India's independence.

And its sort of immediate sort of economic development path.

Now, we also have individuals at this time who are also very very instrumental in

changing India and bringing India from a colonial sort of state to one that was

in at least trying to become modern and more progressive and democratic as well.

And it was Jawaharlal Nehru

who was India's first sort of prime minister

who had a vision and

in fact his vision was very much a modernist democratic one,

where he tried to use the public sector to bring about major transformation in India.

And I talked about the five-year plans, and clearly they were very,

very important in the way the government sort of intervened.

Or what I have called state-led development.

And it introduced what we call import substitution.

It's actually import substitution industrialisation.

Import substitution industrialisation is essentially what you were importing before

now you basically produce it at home.

So this allows not only the creation of local employment,

but also local technological capability and so on and so forth.

And it sort of encourages other related industries to develop as well.

So five-year plans and

the emphasis on import substitution industrialisation were clearly one, or

two of the sort of major sort of instruments of state-led development.

And then there are of course issues of politics, clearly.

Although we won't get into this dimension at this time

other lectures will cover this as well.

And there are issues of governance as well.

How do you govern an economy which is just coming out of a colonial state into one

that is trying to become modern and industrial?

And then of course finally,

I will sort of talk a little bit about the exhaustion of state-led

development which then of course will lead to the discussion of economic reforms.

But before we do that,

there are a few more things that I need to talk about state-led development.

Something that I already touched upon.

But some things that we need to keep in mind when thinking about

why India pursued a state-led development model.

So here is a sort of a diagram that shows the colonial pattern of trade.

And as we can clearly see that essentially what you have is you can consider this

to be Britain.

And you can consider this to be you know, India.

And you can see that the nature of trade involves essentially Britain

exporting manufactured goods to the periphery.

So you can see it's going this way, and

then of course India exporting primary goods.

Now, to give you some examples of manufactured goods,

clearly, of course, Great Britain with its industrial revolution

was able to pretty much dominate global industry.

So today, we might talk about China as being the workshop of the world.

But there was a time when Great Britain was really the manufacturer of the world.

And what we see of course, is that Great Britain was exporting plant and

equipment machinery, and other such things.

Whereas India was essentially exporting, to begin with initially, it was indigo,

which is a dye used for

washing clothes, to brighten up your clothes.

But it was also exporting jute, and other kinds of primary products.

So clearly, the colonial pattern of trade was something that was not particularly

beneficial to the periphery, which in this case was India.

Now, there are various sort of economic arguments to show actually why

it may not be beneficial.

But basically, the main argument that is associated with this kind of

trade relationship is the declining terms of trade,

which you can see at the bottom of the, of the screen over here.

The declining terms of trade.

What it really means that the ratio of prices of exports to prices of imports

is essentially changing against, if you will, the periphery.

So in other words, the prices obtained for Indian jute

rises far less or rises slowly

compared to, let's say, the prices of imported machinery coming from Britain.

And as a result of which India does not benefit.

And as a result of this kind of colonial pattern of trade, what you have is

actually known as economic dualism, which you of course see over here.

And economic dualism simply means that there is a small, modern sector,

but there is a very large what we call a traditional sector.

So in other words it's a kind of a dual economy which suggests that there

is a great degree of inequality not only in terms of incomes in the two sectors,

but also in terms of technology, in terms of productivity,

in terms of export capabilities, and so on and so forth.

So this is the nature of the colonial pattern of trade which clearly, of course,

India was trying to get out of through state-led developing.

By encouraging domestic and industrialisation.

This would mean that essentially if we have successful industrialisation,

then what it would mean essentially that Britain would no longer be

exporting manufacturing.

What instead would happen is that the periphery would be manufacturing at home

for its own home market.

So this is basically what the outcome would be if you begin to see

if there is successful trans industrialisation down the road.

Now, there were obviously a number of debates as to the path of Indian

development.

And clearly of course, you can see that,

how to go about creating a future of the Indian economy

and how should the society be placed in it.

So I mentioned the Bombay plan.

Clearly, it set the tone that business, as well as the government,

would be in partnership and they would work together for the benefit of India.

So this was the kind of division of labor that was agreed upon.

And Nehru was the moderniser, so which I have mentioned.

But then there was a competing idea as well, and

that came from Mahatma Gandhi, who many of you are familiar with.

Who was a leading sort of independence seeker from Great Britain.

And he was quite a charismatic leader if you begin to see, you know,

the way he tackled the British who had essentially the monopoly of

arms and monopoly of the police force, and so on.

Gandhi's idea was very simple.

I mean, you know he himself was a very austere man.

And he also believed that India should sort of follow a path in

which the villages would be very, very significant in dictating social life.

So in other words, he wanted essentially self-reliant,

small scale village type of setting.

And that would be India and sort of.

But interestingly enough, as you, as we all know,

that although Gandhi's ideas are still very attractive, and often

environmentalists often follow his ideas.

And then there are sort of very strong followers of Gandhi as well,

in India, but they a small minority.

In the end, of course, it was Nehru's ideas that won out

in the whole, sort of development, sort of process.

And what we have, obviously, is that modernisation and

industrialisation was the way to go as far as India is concerned.

Now here's some details about the Bombay Plan which I'm sure you can just sort of

look up in terms of who were these people who might have been involved

at least from the business side of things.

And that gives you also a little bit of history, economic history,

as far as India is concerned.

Now, how do you justify state intervention?

Of course as I said,

there are certain types of economic arguments as well as political arguments.

A political argument has to do with economic independence, and

clearly the colonial pattern of trade was not helping it.

Now, state intervention in,

some ways is essentially an escape from economic backwardness.

And that is an idea that has been sort of, written about by, you know, Gerschenkron.

And Gerschenkron, of course, wrote about Russia,

how the Russian state was involved in getting Russia out of backwardness.

So in many ways, many of the developing countries,

including India, used the state to escape from economic backwardness.

And largely because the state has a certain capability in terms of investment

resources, it can sort of set, set out some plans and some targets.

And then it can hopefully convince the, the private sector and

its citizens to work toward those sort of plans and goals.

And the Soviet experience, as I mentioned before, was certainly

instrumental in shaping some of the ideas about Indian economic development.

And furthermore, the economic ideas behind this kind of state-led development model,

was that India was structurally dependent on the world economy through the colonial

pattern of trade, and then there was also the idea that somehow,

and it is kind of interesting that at that

time the thinking was that the world market was not large enough to export.

So there was such a feeling known as export pessimism, which kind of

raises the question that India pursued this industrialisation policy,

especially one that would encourage domestic production, but

also domestic consumption.

And they did not pay much attention to exports, mainly because they thought

the world market would not be able to accommodate India's exports.

I talked about the Keynesian View and

in which the state is involved in propping up aggregate demand.

But then there are these other, kind of,

sociological arguments, about why there was state intervention.

And one has to do with the fact that any sort of economy that

has been poor, you know, conventionally poor, has been colonised,

the chances are that the domestic capitalist class would also be weak.

And what that means then is that if there is a weak capitalist class then you cannot

expect the kind of investments

that could take place in getting the economy growing.

So in that sort of a situation then the state becomes involved, and

is a major investor in the economy.

And finally of course,

state intervention also allows certain types of what I would call industrial and

technological leapfrogging, mainly because of the resources it has.

Mainly because it can also command certain resources such as skilled professionals,

and so on and so forth.

So these are some of the reasons for justifying state intervention.

Now, to sort of end this segment of the lecture,

I just wanted to show you some pictures.

One of course is that, you know, you can see

an earlier sort of graph about the Soviet Union's economy.

And clearly of course this also indicates how the Soviet Union was also publicising

its accomplishments in various parts of the world,

and certainly to the developing countries.

The other is that the black and white picture that you see in front of you,

of course is John Maynard Keynes.

And of course clearly his ideals have been influential, not just in India, but

also among the advanced capitalist economies, including today, for

example, in many large economies such as the United States,

particularly after the global financial recession, the idea of raising

aggregate demand, the idea of government spending is still with us.

And then the third sort of it's a stamp actually, what you see,

shows of course the connection,

the political connection between the former Soviet Union and India.

And this is of course the picture of Mrs. Indira Gandhi who was one of India's

leading prime ministers for quite some time.

So I will now move onto the next sub-topic.

Thank you.

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