India: Seeing the Future in its Past

Summary

Delivered on 20 January 2006 in Mumbai as part of the Forum of Free Enterprise’s Golden Jubilee series, this lecture by IMF Chief Economist Raghuram G. Rajan asks whether the ‘buzz’ surrounding India’s growth at mid-decade is justified, and reads the answer back through the country’s post-Independence policy history. Rajan opens by saluting A. D. Shroff and Nani Palkhivala as lonely voices of free enterprise during decades when Indian regulation, in his view, transferred wealth ‘from the honest rich to the dishonest rich,’ and positions himself, despite his international bureaucratic post, as a sympathetic visitor to that classical-liberal lineage. The booklet’s front matter — M. R. Shroff’s note on the Forum’s fifty-year history and Sunil S. Bhandare’s editor’s preface — frames the lecture as a critique of planning that nonetheless credits the post-1980 ‘constrained adaptation’ for India’s diversified industrial base.

The analytical core of the lecture is Rajan’s reading of pre-1980 policy as the source of three durable distortions: a nurturing-then-suffocating protectionism that bred infant industries which never grew up (the Ambassador car as a ‘version of the Oxford Morris which remained virtually unchanged over 40 years’); a ‘commanding heights’ allocation of scarce capital to inefficient public-sector heavy industry; and small-scale and labour-law regimes that, while branded pro-worker, blocked the formation of large labour-intensive firms and therefore the very jobs they claimed to protect. He insists that ‘despite all the rhetoric about socialism, government policies were of the few, by the few, and for the few,’ arguing — only half-charitably — that this may have been intentional, cloaked in ‘smoke and mirrors.’ India’s silver lining, he notes, was an unintentionally diversified manufacturing base and Nehru’s investment in higher education and science, which positioned the country to seize the liberalisation openings under Indira and Rajiv Gandhi and the deeper 1991 reforms.

Turning to the present, Rajan describes a self-reinforcing dynamic in which capability-intensive sectors (autos, telecom, finance, software, pharmaceuticals) and reform-minded states (Delhi, Gujarat, Karnataka, Maharashtra, Tamil Nadu) skip the labour-intensive phase typical of East Asian catch-up. He warns that the ‘laggard states’ will not reform on their own, that urban services (he singles out Mumbai’s ten-hours-a-day water against Paris’s 24×7) are deteriorating, and that the ‘license-permit raj’ survives in higher education — India needs ‘50 IITs, not 7,’ real fees with scholarships, and the entry of private and foreign institutions. Other prescriptions: a cautious capital-account opening, building Mumbai into a world-class financial centre, fiscal discipline so the deficit stops crowding out private investment, transparent and incentive-based rather than coercive government, and policies that enlist citizens’ self-interest rather than fighting it.

Rajan closes by treating BRIC-style straight-line extrapolations with scepticism and offering ‘churning’ — the devas-and-asuras myth of the ocean of milk — as the defining metaphor for India: entrenched interests displaced, jobs created and destroyed, Bharat becoming India and India becoming Bharat again, with the amrita of sustained 8 percent growth available only after more hard work. The Eugene Black epigraph on the rear inside cover — ‘People must come to accept private enterprise not as a necessary evil, but as an affirmative good’ — distils the booklet’s polemical purpose.

Key points

• Rajan situates himself as an IMF bureaucrat speaking ‘from the same forum as these stalwarts,’ explicitly honouring A. D. Shroff and Nani Palkhivala as lonely defenders of free enterprise in the 1950s-70s.

• He reframes India’s pre-1980 policy regime as ‘constrained adaptation’ — protective barriers raised to nurture infants that never grew up, with the Ambassador car as the canonical example of an ‘infant’ frozen for 40 years.

• The ‘commanding heights’ strategy directed scarce capital to inefficient public-sector heavy industry while small-scale reservations and rigid labour laws blocked the rise of large labour-intensive firms, throttling formal job creation.

• Rajan argues that India’s post-1980 growth was unintentionally well-positioned by a diversified manufacturing base and by Nehruvian investments in higher education, science and public-sector technology (Bharat Electronics, CMC, ECIL, State Bank of India).

• Pre-1991 liberalisation under Indira and Rajiv Gandhi, plus political decentralisation after the decline of Congress dominance, shifted competitive pressure onto state governments and produced uneven but real reform across Delhi, Gujarat, Karnataka, Maharashtra and Tamil Nadu.

• India is skipping the labour-intensive phase of East Asian growth, advancing instead in capability- and skill-intensive sectors (autos, telecom, pharma, software, finance) — creating both a vibrant capital market and a sharp labour-market bifurcation between dynamic and laggard states.

• Policy prescriptions: cautious capital-account opening and a Mumbai financial centre, fifty IITs with real fees and private/foreign entry, urban infrastructure for migrant labour, incentives (not bans) for formal job creation in laggard states, and fiscal discipline so the public deficit stops crowding out private capital.

• The concluding metaphor of ‘churning’ (the devas-asuras myth) frames sustained 8 percent growth as available only after further dislocation of entrenched interests and warns against straight-line extrapolations like the Goldman Sachs BRIC report.