Figure 1.--India at independence still has many traditional sectors and an inefficent agicultural sector. This boy at Varanasi is posing near a ghat (a flight of steps leading down to a river) on the Holy Ganga, but also near many blocks of cow dung drying in the sun. The blocks are used as fuel to cook. That my be the business of the boy's father. The British had overseen the contruction of basic infrastructure during the Raj. the Soviet helped build a steel industry and India's new leaders introduced a substantial defree of state planning. Very limited progress, however, was made in building a modern economy are in lifting a substantial part of the poplation out of progress.

India achieved independence after World War II (1947). India's new leaders at independence accepted the importance of democracy. Economic development was a very high pripority for India's new government. The economy they inherited was diverse, but still inclded many trditional elements using technologies unchanged for centuries. India's new leaders, however, failed to appreciate the power of free market capitalism. Ghandi was a champion of handicraft most notably domestic spinning and homespun textiles. (The flag of India includes the spinning wheel.) Nehru and other Congress leaders were impressed with Soviet development and strongly influenced by socialist thought. As a result, they pursued statist solutions to development. At independence, the new Indian Government established a Planning Commission was set up to plan and control Indian economy--the Indin version of Stalin's Five Year Plan. And a Five Year Plan was developed to launch arange economic policies and industrilization. The first plan primarily aimed at developing agricultural and industrial sectors. The Soviets helped build a steel industry. The result of this and subsequent Five Year Plans was large state-owned industries which were both inefficent and uncompetitive on the international market. The state industrues and huge beaureacracy not only failed at developing the Indian economy, but proved an enormous drag on the economy. The expected rapid development of the country with independence did not occur to the consternation of India's leaders. They so fervenly believe in socialism and were conviced that it had been the British that were impeding the country's developmernt. And after more than four decades of independence, India remained poor and backward in comparison not only to Europe, but many other asian countries. The Asian Tigers Singapore, South Korea, and Taiwan which adopted free market economic policies, in prticulr, achieved spectcular growth in contrst to India's stagnant economy.

Indian Mindset

The Indian mindset at indepence in terms of economic thining was teo fold. First was the idea that Britain had been bleeding the country dry, essentially like a blood sucking parasite. The general belief was that the British Raj had been a disasater for India and independence would usher in an era unparraled prosperity allowing the country to very rapidly reduce the abject poverty of the great mass of the country's population. There was a widespread belief that Britain was responsible for this as well. This thiking even today still exiats. Second was the idea that capitalism with its unpredutable markets system was a failed economic system and it was siocialism which could propel India into a bright economic future. Here they were influenced by the seeming economic success of the Soviet Union with its commnd economy and state-owned industry. It was, however, not only the Soviets that were influencung Indian economomists and politicans. It was the growth of socialist thought in Western Europe as well. Most notably, the British Labour (socialist) Party had won the 1945 General Election and was lunching wide-spread socialist reforms.

Independence

India achieved independence after World War II (1947). Lord Mountbatten was sent to India by Britain's post-War Labour Government to be the last Viceroy and oversee independence. Mountbatten's wife Edwina played an important role in partnership with her husband, a rather complicated relationship. India's independence was achieved by the Congress Party. Ghandi through the Congress Party had promoted the idea of a secular Indian state in which people of all faiths could live harmoniously. Muslims were an important part of the Congress Party coalition. Here both Ghandi and Nehru played central roles. The two admired each other and were close friends, but did not agree on many issues. In the negotiations over independence, Muslim leader Jenna insisted Muslims needed a separate state--Pakistan. Britain granted India independence August 15, 1947 and two new states were creates--India and Pakistan. Inter-communal rioting in 1947 resulted in hundred of thousands of deaths if not more than a million. There was no accurte accounting. Muslims fled from India and Hindus from Pakistan--one of the largest migrations in history. Thousands more died in violence as these collumns foraged or food and were set upom by villagers also inflamed by religious and national zealotry. The two collumns also fought with each other. The British have been criticised for leaving India before key aspects of independence, such as the facr of the princely states had been finalized. At the time, however, the Indians were pressing for independence.

Indian Economy

The economy independent India inherited from the Raj was diverse. The British had promoted some econmic development. And they left India with substantial modern infrstructure such as a huge railway network. After a rather slow start in 1853, the construction of the railway network envisaged by Lord Dalhousie exploded after the 1857 Rebellion nd came to ply a mjor role in the economy. The Indian economy, however, still inclded many trditional elements using technologies unchanged for centuries. But all of this was privatey owned.

Indian Leadership

India's new leaders at independence accepted the importance of political freedom--democracy. Eonomic freedom (capitalism) was a very different matter. Economic development was a very high pripority for India's new government. India's new leaders like most new leaders in the Third World, failed to understand the power of free market capitalism. Of course this was also the case in Europe at the time. Brtain vited n a socialist government and a range of siicvilist policies were adopted throughout Europe. Ghandi was a champion of handicraft most notably domestic spinning and homespun textiles. (The flag of India includes the spinning wheel.) Nehru and other Congress leaders admired Ghandi, but ther eye was on heavy industry. They were what might be called Fabian socialists. And not only was there a Socialist orientation, but, Inda's new leaders were impressed with what seemed at the time successful Soviet development.

Initial Economic Policies

As a result of the beliefs of the new Indian leaders and the widespread attitides of the the religuous, academic, and business communities, India at independence pursued statist, socialist, and protectionist economic solutions to development. Many Indians became convinced that the Soviet Union which seems to have made the transition from an agricultural economy to a modern industrial power was the best model for rapid developmnt in India--at least the economic model. The Indins kept the British olitical model--parlimentary democracy. At independence, the new Indian Government established a Planning Commission was set up to plan and control Indian economy--the Indin version of Stalin's Five Year Plan. And a Five Year Plan was developed to launch a range of economic policies and industrialization. India's Five-Year Plans involved steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, and many other industries which by the 1950s were either nationalized outfight or effectively nationalised through regulation. [Staley] Other industries were founded from the beginning as state-owned companies. The first plan primarily aimed at developing agricultural and industrial sectors. The Soviets helped build a steel industry. India durng the Raj primarily prsued British free trade policies. At independence a new approach of autarky and protectionism was put in place. The Raj was seen as essentially exploitive. As a result with the explotive British gone, protectionist tariffs in place and import substitution policies in place, it was widely believed that a new era of prosperity and rapid economic growth would begin. Fabian Socialism was not Communism and Indian leaders did not wipe out the private sector. They did nationalize basic industry and they pursed industrialization at the state level through state planning. The state also intervened in the private sector that still operated. A very large Government established was created and business was heavily regulated. [Kelegama and Parikh] The idea was to control market forces which were seen as largely destructive. Labor and finance in particular were regulated. A massive regulatory regime was pit in place which became known as the License Raj. Beginning almost immediately at indepndence, Indians needed a license to pen a bisiness (1947). These licenses and regulations created a byzantine maze of red tape which significantly impaired the operation of markets and the private sector. ["Street hawking ..."] It was not just Indian businessmen were affected. There was no interest in attracting foreign investment which was seen as a negative force. Ad the Indian Hovernment went after foreign companies operating in the country. And this continued for decades. Coca-Cola is is a good example of what occurred. Newly elected politicans which had campaigned against foreign companies in India demanded that The Coca-Cola Company which at the time dominated the soft drink market partner with a minor Indian company, essentially confiscating half of the Coca-Cola Indian operation (1977). Coke refused and instead exited India. India became one of the few non-Communist countris where you could not buy a Coke. This was all part of a process of closing the Indian economy to international markets. The Indian rupee was inconvertible on international currency markets. High tariffs ere imposed on foreign goods. And an import licensing system further prevented foreign goods from entering the Indian market. There was considerable popular support for the system imposed by Prime-Minister Nehru and his Congress Party colleages. He was a democratically elected leader and opposition to his policies in Parliament was ngligible. As a result, Nehru and Congress put in place the system that they wanted without any real constrait. The only problem ws that it did not work. The Indian economy did not develop and grow. The optimistic dreams at independence simply did not materialize. Indstries that did develop like the soviet financed steel system were created, but it proved to be inffcent. This meant, for exmple, tht Indian business that had no choice but to purchase Indian steel had to pay hihj prices for an inferior product. Similar riples flowed throughout the economy. This made Indian products uncompetitive on orld markets. It also meant that Indian companies could not pay high salaries to their workers. It also mean that Indiaws closed off to technological advances in the West.

Impact

The result of this and subsequent Five Year Plans was large state-owned industries which were both inefficent and uncompetitive on the international market. The state industrues and huge beaureacracy not only failed at developing the Indian economy, but proved an enormous drag on the economy. The expected rapid development of the country with independence did not occur to the consternation of India's leaders. They so fervenly believe in socialism and autarky. It was a virtual religious blief. India's leaders were conviced that it had been the British that were impeding the country's developmernt. And this continues to a widely held belief throughout India. The new Indian officials believed that independence alone would radically change India because Britain couilf no longer exploit its colony. The Government as arioruty sought to industrialize. Government funds were invested in industrialization. At the same time, high protective imports were established to protect the new industries from foreign compeition. Import tariffs can protect new industries, but shieled from competition they also do have the mechnism oif competition to force the debelopmenof efficient operations. This was a serious problem becuse it was the Soviets who help found an imprtant steel industry. The Soviets had a major steel industry, but the steel that came out of Soviet mills was actually worth less than the material inputs that went into their mills. And after more than four decades of independence, India remained poor and backward in comparison not only to Europe, but many other Asian countries. The Asian Tigers Singapore, South Korea, and Taiwan which adopted free market economic policies, in prticular, achieved spectcular growth in contrst to India's stagnant economy. India on the other hand, remained poor, backward, and largely agricultural.

Sources

Kelegama, Saman and Kirit Parikh. Political Economy of Growth and Reforms in South Asia (2000).

Staley, Sam. The Rise and Fall of Indian Socialism: Why India Embraced Economic Reform (2006).

"Street hawking promise jobs in future," The Times of India (November 25, 2001).

Created: 7:14 AM 10/3/2015
Last updated: 1:06 PM 9/7/2022