Indian Economic Development 1950-1980: An Assessment

Summary

Indian Economic Development 1950-1980: An Assessment is a Forum of Free Enterprise pamphlet reproducing Dr. R. M. Honavar’s A. D. Shroff Memorial Lecture, delivered at the Madras Centre of the Forum in October 1981. Honavar, then Director of the Institute for Financial Management and Research at Madras and a former Economic Adviser to the Government of India, takes the thirty-year mark of planned development as an occasion for a stock-taking. He opens by conceding the textbook achievements — net national product up 165 per cent at 1970-71 prices, agriculture lifted out of pre-planning stagnation to a 2.7 per cent annual growth, a savings rate that has climbed from 8 per cent to about 16-17 per cent of national income, and a tax-take that has nearly tripled as a share of national income — and then proceeds to argue that, judged against any reasonable benchmark, the performance has nonetheless been unsatisfactory.

His assessment is structured around four diagnoses of failure. First, India failed to control population growth: the decennial rate ran to 24.8 per cent at the 1971 and 1981 censuses, far above the planners’ assumption of 13-14 per cent, and the State has neither offered Chinese-style incentives nor — more damningly — raised female literacy in the high-fertility States of UP, Bihar, MP and Rajasthan. Second, agricultural growth lagged what other South and South-East Asian countries achieved: irrigation, fertiliser and rural electrification projects were spread too thinly across constituencies for political reasons, completion schedules stretched to 15-20 years, on-farm water management remained poor, and the water-fertiliser-HYV package was effectively confined to wheat and rice and to larger farmers with capital. Third, industrial production grew at only 6.1 per cent on average and collapsed after the mid-sixties: the post-Third-Plan resource constraint, the exhaustion of easy import substitution, MRTP-driven rejection of scale economies, and a licensing regime that produced a class of rentier entrepreneurs were compounded by a refusal to pursue export-led growth on the mistaken view that a country the size of India could not export at scale.

Fourth and finally, Honavar examines resource mobilisation and the public sector. Net domestic capital formation, he notes, only crossed 19 per cent of national income by 1978-79 — still well below comparator countries — and the State has been unable to suppress non-developmental expenditure or to generate surpluses from public sector enterprises. The ‘no profit, no loss’ philosophy, fear of cost-push inflation, the burden of overmanning (Coal India is singled out), the suspicion of discretion that produced a ‘plethora of rules,’ and the early staffing of industrial enterprises with civil servants together explain why some Rs. 20,000 crores of investment cannot generate an adequate return. He closes the rendered portion of the lecture with a critique of fiscal practice: more than four-fifths of tax revenue comes from regressive indirect taxes, and the failure to mobilise resources has forced a slide into deficit financing whose inflationary consequences make further mobilisation harder still.

Key points

• Honavar grants the headline numbers — NNP up 165 per cent, agriculture growing 2.7 per cent annually, the savings rate roughly doubled — but argues per-caput income gained only 45 per cent over thirty years and per-caput consumption only 1.1 per cent annually, making the record poor by comparator standards.

• He diagnoses four causes of underperformance: failure to control population, agricultural growth below South and South-East Asian peers, slow industrial growth, and weak resource mobilisation.

• Population control faltered both because incentives were meagre relative to China’s and because female literacy was neglected — Kerala has the lowest birth rate and highest female literacy, while UP, Bihar, MP and Rajasthan combine the lowest female literacy with the highest fertility.

• Agricultural investment in irrigation, fertiliser plants and rural electrification was diluted by the political imperative to spread allocations thinly across regions; construction periods of 15-20 years were normal, and the water-fertiliser-HYV technology effectively reached only wheat and rice farmers with sufficient capital.

• Industrial growth was strangled by the exhaustion of easy import substitution, by an MRTP-driven rejection of scale economies, and above all by a licensing regime that produced ‘so-called entrepreneurs who looked upon the industrial licence as the modern equivalent of the sanad given by Lord Cornwallis to the Zamindars in Bengal.’

• Export-led growth was summarily ruled out by Indian economists on the assumption that a country the size of India could not export at scale — an assumption Honavar regards as a costly historical error, citing Japan, Hong Kong and Korea.

• Public sector enterprises have generated negligible surpluses because of the ‘no-profit-no-loss’ price philosophy, fear of cost-push inflation, civil servant management, and political resistance to retrenchment in overmanned units like Coal India.

• Fiscal mobilisation has come overwhelmingly from indirect taxes (more than four-fifths of revenue), which weigh more heavily on the poor and feed cost-push inflation, while the failure to tax agricultural income or check evasion has pushed Government into ever heavier deficit financing.