1965: The other story

The past few weeks have seen intense discussions about the 1965 war with Pakistan. Less attention has been paid to an intriguing possibility: the surge in popularity for the diminutive Lal Bahadur Shastri after the war could have given him the political heft to pursue the sort of radical economic reforms that India eventually embraced in 1991.




Shastri was a practical man. He saw early in his tenure that the economic policies India had been following since independence needed to be changed: the emphasis on physical controls rather than prices, the neglect of agriculture because of the focus on heavy industry, and the growing web of controls spun by central planners. But Shastri had to face stiff opposition from within the Congress party, which quite naturally considered it sacrilegious to retreat from the path laid down by Jawaharlal Nehru so soon after his death.

“The victory in the 1965 war had made him very popular in his own right. During the brief period of his stewardship he had acquired his own popular political support that would, I believe, have given him added confidence to pursue an agenda of economic reform of the kind that was taken up only twenty-five years later, in 1991,” economist P.N. Dhar later wrote of Shastri in Indira Gandhi, the ‘Emergency’ and Indian Democracy, his insightful book on his years as a policy advisor.

Independent India started off with a belief that the state should take the lead in industrialization. Nehru is most closely identified with this development strategy, but several other leaders had also held similar views: B.R. Ambedkar, V.D. Savarkar and Subhas Chandra Bose. They all argued in favour of quickly building an industrial base, not just to create jobs outside agriculture, but also to give a country emerging out of colonial rule more strategic depth in a hostile world. I had earlier written a more detailed essay on the good, bad and ugly of Nehruvian economics.

What India did in those years was in tune with what most development economists of the time believed in, ever since Paul Rosenstein-Rodan wrote his landmark paper in 1943 about the need for a big push towards industrialization. There were only a few dissenters who stood outside the development economics consensus of the day. One of them was Peter Bauer. Most major developing countries tried some variant of the strategy India had chosen.

Independent India saw economic growth accelerate in its first decade of planning, after almost two centuries of economic stagnation. The initial success of the Nehruvian plans soon petered out. B.R. Shenoy had warned in his famous dissent note to the second Five-Year Plan that the aggressive investment push through deficit financing would lead to inflation as well as balance of payments pressures.

India stumbled into a balance of payments crisis in 1957, and the system of import controls was put into place to ration foreign exchange. This bizarre system soon grew large enough to strangle the Indian economy.

Dhar says that Shastri saw what needed to be done. “Lal Bahadur Shastri, the unassuming prime minister who had succeeded the charismatic Nehru, seemed an unlikely person to face up to the (economic) situation. But in his own quiet way he did initiate a series of steps which would have not only brought the economy out of the existing crisis but possibly put it on a high-growth path in the long run. He wore no ideological blinkers; he saw facts as they were in all their starkness. Chronic food shortages made him shift investment from basic industries to agriculture. Roaring black markets persuaded him to make a relative shift from controls to incentives, and the glaring inefficiency of the public sector made him accept a larger role for the private sector and foreign investment. He also took measures to shift the locus of economic decision-making from the Planning Commission to the ministries and from the Centre to the states. These measures reduced the influence of the Planning Commission—which had developed a rigid, almost doctrinaire outlook on economic policies—and at the same time decentralized decision-making.”

Shastri died before he could begin the course correction. This was broadly the time when several countries in East Asia had begun to shift their policy focus to internal liberalization plus exports. South Korea is a classic example. Indira Gandhi, on the other hand, responded to the mounting problems in the country with political mobilization rather than with economic reforms. Her response was a sharp turn to the left after 1969.

India began to retreat from that position in baby steps: 1975, 1981 and 1985. The tentative policy changes of those years reduced some of the restrictions on the private sector within the existing system of controls. The old system was decisively junked only in 1991, 25 years after Shastri prematurely died in Tashkent.

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