PP-101 Indian Economic And Political History

Session 8

Professor Biju Paul Abraham

Public Policy & Management Group
Email: abraham@iimcal.ac.in
Virtual Lounge – Fridays 4.00 – 6.00 pm (July 16th and 23rd)

Command & Control – Problems of

Competitiveess

1
 The Impact of Planned Development

Growth rates remained high during the 50s

Industry grew at an average of about 7%
during the first two plan periods
Agricultural production increased by an
average of 4 percent
Planned economic development was seen as
a success

Why were growth rates high in the 50s,

and why could it not be sustained?
Rapid growth in the 50s was the result of
unique circumstances
Huge increases in budgetary support for
public sector investment increased output
Good monsoons in 1953-54 and 1954-55
which increased agricultural production,
reduced inflation and generated demand for
manufactured goods
Large sterling balances accumulated during
the war years provided capital necessary for
imports
4

2
 Percentage of budget allocatted
to capital expenditure (1950-51
to 60-61)
60.00
50.00
40.00
30.00 Series1
20.00
10.00
0.00
1

1
-5

-5

-5

-5

-5

-6
50

52

54

56

58

60
5

Problems of the licensing system

Delays in clearances
• Large number of applications, inadequate
infrastructure for review
Sequential consideration of applications
• Designed to prevent unnecessary investment, but
restricted competition
Absence of criteria for selection
• Arbitrary decisions, opportunities for corruption

3
 Impact on concentration of
holding and location
Concentration of holding continued in the private
sector
• Share of assets held by the top six firms (Tatas, Birlas, Martin
Burn, Mafatlal, Associated Cement and Bangur Group)
increased from 20 to 21 percent between 1958 and 1967

No significant change in location of industry

• 40 percent of licenses were for investments in and around the
port cities of Bombay, Calcutta and Madras.
• Industrialization of poorly industrialized regions was achieved
primarily through public-sector investment

Export Pessimism and its Impact

on Policy
The emphasis in planning was on investment
in the public sector, particularly heavy
industry which was seen as the key to growth
‘Export pessimism’ meant that an export led
model was seen as unworkable
India had to become ‘self-reliant’ through
import substitution industrialization, made
viable by high trade barriers
Self-reliance also meant development of
diversified indigenous industrial capabilities
that would eventually create a base for
exports
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4
 The policy of import substitution led to an excessive
pre-occupation with self-reliance without regard to
efficiency or economies of scale
Licensing constrained private investment (except by
large firms) and created inefficiencies in the
economy

The Economic and Political Impact of

Low Growth
Economic Crisis and Popular Discontent
• Two wars (1962 and 1965) and an increase in defence spending
• Low rates of economic growth, food shortages, inflation
• Increasing income disparities
• Decline in foreign reserves and rupee devaluation in June 1966

Political Instability
• Nehru, Shastri and Mrs.Gandhi
• The debate on public-sector investment and licensing

Congress Performance in the 1967 Elections

• Congress Party performance
• Causes of decline

10

5
 Additional Regulation
The MRTP Act of 1969
– The Act applied only to private sector firms, not
government undertakings
– Enforced by the MRTP Commission
– The Commission divided Indian Industry, outside the
small and medium-scale sector into three categories:
 Large Industrial Houses (assets in excess of 20 crores)
 Dominant Undertakings (market share of 33 percent)
 Foreign firms and subsidiaries

11

Foreign Exchange Regulation Act 1973

– Foreign firms had to divest foreign shareholding to 40% within two
years
– Restrictions included limitations on profit transfer and acquisition
of property
– The maximum permissible equity holding was 74 percent
– Exceptions being made only in rare cases where a firm was
engaged in ‘core activities, used sophisticated technology or met
specified export commitments

Acceptance of the concept of the ‘joint-sector’

12

6
 Increases in Taxation
Tax rates were increased, both as a way of
collecting additional revenue and as an
important tool of both social policy and
political signaling

Both corporate taxes and income taxes

increased in the 70s

The top rate of corporate tax reached 63%

and the top rate of income tax reached 97%
by the mid seventies

13

The ‘Green Revolution’ and the

failure of poverty reduction
Agricultural production increased sharply because
of the green revolution.
However, it did not have a significant impact on
poverty
Returns from increasing yields went primarily to
larger landowners, despite attempts at land reform
Land reform is often unsuccessful in imporivng
living standards in the absence of complementary
policy reforms, and these were absent in India

14

7

.
Land reforms, though enacted was rarely effective
on the ground for three reasons:
– Political power of the landowners which made reform ineffective
(alienation of land and bonded labour)
– Inability of peasants to mobilize
– Poor financial support systems which led to further concentration
of holding

Two other means by which agricultural surpluses

could have been redistributed were not successful
in India

These were taxation of agriculture and high

minimum wages in agriculture

15

.
Agricultural growth was also spatially concentrated in
areas with well developed irrigation infrastructure,
primarily select states and districts in the north-west, east
and south (Spread of Irrigation)

The Food Corporation of India began to procure output at

minimum support prices which provided an assured market
for produce for large farmers

Income disparities in agriculture, however, continued and

this made government intervention through poverty
alleviation programmes essential

16

8
 Annualized Irrigated Areas
(Source: Prasad S. Thenkabail, et.al. (2009). ‘Irrigated Area Maps and Statistics of India Using Remote
Sensing and National Statistics’, Remote Sens. 1 :50-67)

17