The post independence economic history of India can be divided into two parts. First was the era of socialism where the guiding principles were economic nationalism; policies focusing on import substitution to promote domestic production, and economic protectionism; restricting the entry of large producers in certain areas of market in order to preserve the micro and small enterprises, which generate comparatively more employment. During this period the industrial sector was distinguished into three different areas:
1. Areas which is exclusively under the control of state.
2. Areas where private firms could supplement the efforts of the state sector.
3. Areas left for private sector, regulated under licensing system where firms must to obtain license to enter into the market as well as to expand their productive capacity.
This clearly shows that the public sector occupied the commanding heights and intruded even the most micro decisions of the private firms.
This era of socialism has ended with the introduction of new economic policy (NEP) in 1991. The NEP with liberalization replaced the principles of socialism with somewhat resembling Washington consensus; open trade, open capital and reliance on private sector. Reforms along these lines have been adopted by every government over past quarter century and achievements were quite remarkable for a country like India.
1. Open to Trade: It is a geographical fact that large countries tend to trade less, as they have huge domestic market which makes international trading, less profitable for them. India however with population of 1.25Bn performing exceptionally well in this regard. The trade to GDP ratio of India remained at an average of 26.5 percent which increased between 35-40 percent during 2008-16, surpassing the ratio that of China, which is remarkable.
2. Open Capital: Inflow of foreign capital shows favorable expectation from an economy. Despite having significant capital controls India’s net inflow of foreign capital remained at an average of 2-3 percent of GDP, which is quite normal compared with other emerging economies and the inflow of FDI is running at an annual rate of $75 Bn, which is not far short of the amount that China was receiving during its growth boom in mid 2000s
3. Size of Government: India often being accused of having a bloated government sector. This however is not true, when measured against the other emerging economies of Asia. The government sector of India spends as much as it expected to be, thus adhering to Asian developmental standards.
Finally, all these efforts of different governments paid off in the form of 4.5 percent of annual growth of per capita for thirty seven years. This is an exceptional achievement for India as it has been achieved under a fully democratic political system.
II. The Road To Be Travelled
These remarkable achievement is the outcome of the reforms followed by all the governments over the past quarter century. However there are still some fundamental challenges that India require to overcome. These challenges includes
1. Ambivalence about Private Sector and Property Rights : All states and all societies have some ambivalence about the private sector as profit maximization as the basic objective of the private sector does not always coincide with broader social concern, such as public’s sense of fairness. However in case of India, there exist an anti private sector atmosphere. The symptoms of this ambivalence manifest in multiple ways such as.
i. Recently, airport aviation bill has taken the form of awarding management contracts rather that changing ownership.
ii. In fertilizer sector public policy find it easier to rehabilitate public sector plants than to facilitate the exit of egregiously inefficient ones.
2. Property Rights : Initially the right to property was inscribed as a “fundamental rights” in the constitution. But during the socialist era the 44th amendment removed the Articles 19 (1) (f) and Article 31 and replaced with 300-A thereby downgrading the property right to that of “legal right”. The ramification of this decision continue to be felt to this day in such issues of retrospective taxation. Though the government made it clear to not to act on retroactively on tax and other issues. But the legacy issues of retroactive taxation remained mired in litigation. The government also find it difficult to expropriate for various developmental projects as it being seen as favoring the corporates. In case of foreign investment it becomes even more difficult. Several instances can serve like POSCO in Bengal and Land acquisition bill of central government serve as a evidence
3. State Capacity : Second distinctive feature of Indian economic model is the weakness of state capacity, especially in delivering essential services such as health and education. Development of capacity takes place with accumulation of capital or increase in investment. There are two main sources of investment (I) public investment and (II) private investment. India however even after following the guiding principles of socialism and structure of competitive federalism, failed to meet desired level of investment through government as well as private sources.
4. Inefficient Redistribution: This is the third distinctive aspect of Indian development model. There is a huge misallocation of resources which leads to exclusion errors ( the benefit did not reached to the targeted population) and inclusion errors ( the non targeted population getting the benefits) and leakages ( benefits siphoned off due to corruption). This misallocation leads to sharp economic and social inequalities in society which ultimately ends up in exploitation.
III. Possible Explanation
Central to understanding of India’s economic vision is the fact that it has followed a unique pathway to economic success, what might be called “Precocious, Cleavaged India”. Historically economic success followed one of two pathways:
1. Sequential expansion of Democratic state : Today’s advanced economy is the result of gradual and sequential expansion of democracy. They did not begin with universal franchise, voting rights, redistributive function etc which expanded slowly over a time, thus helping them in fiscal and economic development when the state capacity was weak.
2. Non Democratic State : Most of the East Asian countries begin with explicit authoritarianism flavor like military, single party or dictatorship which transformed into democracy after a degree of economic success was achieved.
India on the other hand, has attempted economic development while also granting universal franchise and voting rights from the beginning. India is amongst the few countries –Botswana, Jamaica, Mauritius, Trinidad and Tobago and Costa Rica which are perennial democracies. Even rarer India was amongst the poorest democracies at its independence while at the same time India was also a highly cleavaged society. When compared with other emerging economies, India found to be having the highest ethnic fractionalization. This is what India a precocious and cleavaged society.
1. Private Sector : A precocious and cleavaged democracy that starts poor will almost certainly distrust the private sector. The founding fathers of India wanted to “build country” by developing industry that will make India economically, as well as politically independent. The private sector however conspicuously failed to do the same under colonial rule giving rise to severe doubts if they could ever do so. Paradoxically, state being controlling the commanding heights, further discredited the private sector, because the more the state imposed controls, the more the private sector incumbents were seen as thriving because of the controls, earning society’s opprobrium in the process.
2. State Capacity: Another implication of precocious and cleavaged democracy is that, India had to redistribute early when its capacity was weak. This pressing need to redistribute, India did not invest in human capital –for instance public spending on health was unusually low 0.22 per cent of the GDP in 1950. This has risen only a little over 1 percent which is far below the world average of 5.99 percent.
3. Inefficient Redistribution : A poor country with weak state capacity like India when confronted with the pressure to redistribute had necessarily to redistribute inefficiently, using blunt and leaky instruments. The luxury of effectively targeted programs was not an option in 1950 or 1960 or even 1990. This ineffective redistribution posseses another challenge before the government about the taxation. There is an ambivalence among the general public about the legitimacy of the government over taxation as it has failed to deliver quality of essential services that a government oblige to provide with its tax revenue.