India: Retrospect and Prospect

Jagdish Bhagwati

Table of Contents

India in the 1950s: On Track, Phase I
What Went Wrong: Derailing after the 1950s, Phase II
Why Did the Reforms Happen? The Sources of Phase III
The Reforms to Date and Prospects

At the outset, I must thank you for the great honour that you have extended to me by inviting me to give the K R Narayanan Oration. The honour is twofold.

Vice President Narayanan, whom I have the privilege of knowing well, is a man of great courtesy, charm, acuteness of intellect, and accomplish­ment. I believe that men and women matter. They defy the tenets of historical determinism, shaping instead of bending to history. They lead themselves, and their nations, to what Prime Minister Jawaharlal Nehru, a great and moving orator, called their ‘tryst with destiny’. Dr Narayanan is one of them. But, let me assure the economists assembled here, he is also a man of impeccable taste: he studied economics and even enjoys the dismal science!

And that brings me to the other reason why I am flattered by your invitation today. Australia is in the memories of every Indian of my generation, of course. Many were the days when we ran truant from our school to watch the Indian cricketers locked in combat with the visiting Australians, fascinated in particular by the incredible speed of Lindwall and Miller as they terrified our batsmen: those were the days of exhilarating 5-day Test Matches between Cricket Teams, not the fast-track deviants now played between Squads! And Don Bradman was to us, as to you, a legend.

But as I grew older, and my tastes turned to Economics, and within that to International Economics, I also realised that Australia had produced many of the best international economists in the world: Murray Kemp, Max Corden, Trevor Swan, Ross Garnaut and Heinz Arndt among them.

For me to come to Australia finally is to come therefore, not just to the country of the irresistible koala, of the exotic kangaroo, of genius in cricket and tennis, of Breaker Morant and a wonderful cinema, and of a literature crowned by the Nobel Prize, but also to a great scholarly tradition in the subject closest to my heart. But that is not all. Mr Vice-Chancellor, I must add that your world-renowned university has housed many of the splendid economists that Australia has produced: there could then be no better place for me to be giving this Oration than right here!

Indeed, Mr Vice-Chancellor, I would be remiss if, on an occasion that celebrates the growing friendship between our two countries, I did not also recall the fact that I first met Trevor Swan of your university, a venerated figure among Australian and indeed all economists, in India in 1958, I believe. He had come as part of an advisory team of eminent economists that included Ian Little of Oxford and was led by Paul Rosenstein-Rodan of MIT, a great development economist. Swan had come with enthusiasm, eager to put his expert Australian shoulder to the wheel in India’s developmental efforts.

Mr Vice-Chancellor, I must entertain you by recalling the contrasting story of the reluctant economic adviser that the Nobel laureate, Princeton economist Arthur Lewis regaled his friends with. Once he found himself invited to a fundraising luncheon by the Princeton University President for the Iranian Ambassador in Washington, a man known only to those who read the Style sections of the newspapers because he used the sudden oil wealth of his nation to entertain flamboyantly the likes of Elizabeth Taylor. So, Lewis was minding his manners and quietly getting through the lunch when he was suddenly startled to hear the President promising the Ambassador: ‘We would be happy to send Professor Lewis to Iran to help you with planning your development’. As he walked back morose from the luncheon, Lewis ran into the sociologist Marion Levy, a man of some wit, who asked him what the matter was. When Lewis told him, Levy said: ‘Arthur, you should have told the President that Professors can be bought, but not sold.’

As it happens, Trevor Swan’s early visit to India provides me with the main theme of the Oration today: the reasons why India’s monumental developmental efforts went astray and why, for the very same reasons, the current reforms hold great promise. Swan came to India at a time, in the early 1960s, when India’s developmental efforts were attracting attention worldwide. And the attention and interest were equally from economists. To understand this, and also to put the subsequent disenchantment into perspective, let me explain why what we were doing in India through the 1950s was sensible and worthy of the huge interest everywhere.

India in the 1950s: On Track, Phase I

At her independence in 1947, India already had a fair degree of industrialisation under her belt. Textiles and steel were among the many industries that had come up exclusively from market forces and with domestic investment, under a colonial government that certainly had not seen itself as a developmental agency and had therefore virtually abstained from ‘infant industry’ protection or promotion. India also enjoyed the presence of an active entrepreneurial class and a modest but definite integration into the world economy. The country was also endowed with a first-rate civil service and administrative structure, world class leaders and a democratic form of government.

But the poverty was huge, with corresponding standards of living appalling for many, the literacy levels were abysmal even as the higher levels of education were impressive, and the challenge to the new government was clearly immense.

The key strategy that defined the resulting developmental effort was the decision to target efforts at accelerating the growth rate. Given the immensity of the poverty, simple redistribution was considered to be both negligible in its immediate impact and of little sustained value. The central anti-poverty strategy had therefore to be the creation of increasing numbers of jobs that would draw ever more of the underemployed and unemployed into gainful employment that would yield them both greater incomes and higher standards of living. Accelerated growth was thus regarded as an instrumental variable, a policy outcome that would in turn reduce poverty, the latter being the true objective of our efforts.

I have often reminded the critics of Indian strategy, who attack it from the perspective of poverty which is juxtaposed against growth, that it is incorrect to think that the Indian planners got it wrong by going for growth rather than attacking poverty: they confuse means with ends. In fact, the phrase ‘minimum income’ and the aim of providing it to India’s poor were very much part of the lexicon and at the heart of our thinking and analysis when I worked in the Indian Planning Commission in the early 1960s.

Equally, the populist notion that pushing growth to kill poverty is a passive and conservative ‘trickle-down’ strategy is wholly obtuse. In the Indian context, it was an active and radical, what I have called ‘pull-up’ strategy. Nor were we unmindful that added policy instruments were necessary to ensure that the growth process would indeed extend to all groups. For instance, just as the United States has a ‘structural’ inner-city problem, we have (among others) a ‘tribal’ problem: each underprivileged group fails to have equal and ready access to the mainstream economy. Nor were social expenditures relegated to oblivion. The first Five-year Plan itself had addressed this matter, and the Planning Commission had at the time a distinguished social worker, Mrs Durgabai Deshmukh, as a Member who formidably minded her portfolio on the social questions.

But substantial and expanding sums could not be spent on the social questions and on the improvement of the ability of the underprivileged to access the growing mainstream economy unless you had growth in the first place. Spending on education and on public health, chief among our concerns, could not be expanded or even sustained unless a growing economy produced the added revenues to finance these and other expenditures.

To those who use the cliche of ‘development with a human face’, I respond:

Yes, indeed. But remember that the face cannot exist by itself, except as a mask in a museum, but must be joined to the body; and if the body is emaciated, the face must wither no matter how much we seek to humanise and pretty it up.

So, we return to growth as the centrepiece of the Indian strategy for assaulting poverty and providing minimum incomes to the poor. And we must remember that it was the government’s task to accelerate economic growth. I believe that we could say, in a stylised way but with plausibility, that the central conception underlying India’s growth-accelerating strategy was the devising of a planning framework that would produce the enhanced investment rates. Thus, the objective was to jolt the economy up into a higher-investment mode that would generate, say, a 5 per cent growth rate as against the conventional lower-investment equilibrium with a 2 to 2.5 per cent growth rate.

The planning framework then rested on two legs. First, it sought to make the escalated growth credible to private investors so that they would proceed to invest on an enhanced basis in a self-fulfilling prophecy. Second, it aimed at generating the added savings to finance the investments so induced.

The Five-year Plan framework was an important aspect of this two-pronged policy. Simply by demonstrating that the government was committed to a higher growth rate, it assured potential investors that demand would grow at higher rates and that the risk of investment would be correspondingly reduced. Besides, at the core of the Plan, there was commitment to substantial governmental spending, mostly on infrastructure, that added yet greater credibility to the high-growth scenario in what was otherwise an ‘indicative’ Plan in terms of its investment profile. Moreover, the commitment to use fiscal policy to raise public savings to levels necessary to finance the projected growth of investment was also a credibility-enhancing factor for bringing about the enhanced investment.

The bulk of the 1950s can then be called the favourable Phase I of Indian developmental effort; and it broadly coincides, in approach, to much of the East Asian experience where, however, the Five-year Plan framework was not utilised. The governmental intervention, as described, led to an investment boom and hence to an enhanced growth. I may, in fact, recharacterise what happened, in more familiar technical terms, by reference to the Rosenstein–Rodan argument that has now been formalised by Vishny and Shleifer in their fine article in the Journal of Political Economy as a case of multiple equilibria.[1] In his classic 1943 Economic Journal article, which is arguably the most beautiful piece of creative writing on development, Rosenstein–Rodan was basically arguing that, for developing countries stuck in a Nash equilibrium with low levels of investment, there existed a superior cooperative equilibrium with higher levels of investment and growth.

The Indian planners, in formulating the first Five-year Plan (1951–56), were essentially exploiting this insight. This was an indicative Plan, without the straitjacket of controls and targeted allocations that would presumably reflect the contours of the superior equilibrium. In fact, it is absurd to imagine that anyone, either in India or in East Asia, could have worked out such a Rosenstein–Rodan–Vishny–Schleifer equilibrium even if there had been complete information to do so! What did happen instead was that, as I already suggested, the large component of public spending on infrastructure which was built into these indicative programs made the government’s commitment to kicking the system up into some bastardised version of the Rosenstein–Rodan –Vishny–Shleifer equilibrium quite credible to the private sector, triggering the self-fulfilling private sector investment response that lifted the economy into higher investment and growth rates.[2]