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As a result of the beliefs of the new Indian leaders and the widespread attitudes of the the religious, 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 development in India--at least the economic model. The Indians kept the British political model--parliamentary democracy. At independence, the new Indian Government established a Planning Commission was set up to plan and control Indian economy--the Indian 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 nationalized 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 during the Raj primarily pursued British free trade policies. At independence a new approach of autarky and protectionism was put in place. The Raj was seen as essentially exploitative. As a result with the exploitative 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 independence, Indians needed a license to pen a business (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. And the Indian Government 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 politicians 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 countries 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 nonconvertible 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 colleagues. He was a democratically elected leader and opposition to his policies in Parliament was negligible. As a result, Nehru and Congress put in place the system that they wanted without any real constraint. The only problem was that it did not work. The Indian economy did not develop and grow. The optimistic dreams at independence simply did not materialize. Industries that did develop like the soviet financed steel system were created, but it proved to be inefficient. This meant, for example, that Indian business that had no choice but to purchase Indian steel had to pay high prices for an inferior product. Similar ripples flowed throughout the economy. This made Indian products noncompetitive on world markets. It also meant that Indian companies could not pay high salaries to their workers. It also meant that Indians closed off to technological advances in the West.
As a result of the beliefs of the new Indian leaders and the widespread attitudes of the the religious, 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 development in India--at least the economic model. The Indians kept the British political model--parliamentary democracy.
At independence, the new Indian Government established a Planning Commission was set up to plan and control Indian economy--the Indian 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 nationalized 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 during the Raj primarily pursued British free trade policies. At independence a new approach of autarky and protectionism was put in place. The Raj was seen as essentially exploitative. As a result with the exploitative 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. The central pillar of Indian economic policy was import substitution. Nehru and other Congress leaders were convinced that India should rely on its own domestic market for economic development. They wanted to move away from international trade. This was the result of both the new socialist doctrines and the experience with British colonization. .
Indian leaders like British leaders after Labour won the General Election (1945), believed that building a public sector would benefit the country. Leaders that profits instead of going to investors would go to the nation. It was generally assumed that profitability would remain the same if not increase under state control. this of course was not the case in Britain and other countries which nationalized industry or ran state-owned industries from the beginning. Indian leaders simply ignored this and launched a program of nationalizing private industry and creating new state-owned industries. A major step was nationalizing the British-owned railways. These companies in India are referred to as a 'Public Sector Undertaking' (PSU). ('Public Sector Enterprise' is also used.) Some or joint ventures, but to qualify as a PSU, the government has to own at least 51 percent of the shares. Both the central and state governments have created these industries. PSUs are regulated by the Ministry of Heavy Industries and Public Enterprises. There was no real thought given to the not understood efficiencies of market economics. It was not only a question of management. The Government limited prices in many companies as kind of welfare effort to aid poorer citizens, especially in rural rural areas. The result was that the the return on capital in the public sector was only about 1.5 percent. [Thakur] While this is very low, it was not negative as the performance of the public sector was in many countries. While welfare can be seen as a social good, it has to be weighed against the benefits of faster growth in the overall economy. And the impact on other companies that had o compete gin the PSUs. There were just five PSUs in India (1951). This had reached nearly 350 (2019). As part of the market reforms there has been much talk of privatization, but this has proven very controversial. Many of the largest PSUs are in the energy sector.
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. [Kotawl]
Other restrictions included: import restrictions restricting access to raw materials, antitrust laws restricting growth, and subsidized state-owned companies they had to compete against. Beginning almost immediately at independence, Indians needed a license to open a business (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 Government 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 politicians 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 countries where you could not buy a Coke. This was all part of a process of closing the Indian economy to international markets.
Independent India instituted adopted economic central planning for the economy. Companies had obtain licenses to invest and develop. The bureaucracy which was created to plan the economy has been described as labyrinthine. It meant that absurd restrictions were created. Something like 80 agencies in some cases had to be convinced before a company or investor could obtain the approvals needed to be be granted a license to commence operations. The Government decided what was produced, how much, at what price and the sources of investment capital. Of course any one would ask, what investor would commit his capital in such an environment. And the answer is, very few. Which is why the Indian economy achieved so little growth. And that was no all. The Government did not allow companies to laying off workers or close factories even if the market turned down. This meant that the risks in opening news business were enormous. Thus in India, Government rather than markets, would control investment and the sectors to which it is allocated.
The Indian rupee was nonconvertible 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 colleagues. He was a democratically elected leader and opposition to his policies in Parliament was negligible. As a result, Nehru and Congress put in place the system that they wanted without any real political constraint.
The only problem was that the economic policies of independent India was that they did not work. The Indian economy did not develop and grow at the expected rate. Or the needed rate to have any real impact in the country's widespread poverty. India's GDP per capita grew at an annual rate of only 3.5 percent in the years prior to the 1980s. [Kotwal] While reasonable for a developed country like the United States, given how poor India was, this was not going to lift the Indian people out of poverty After four decades, the per capita GDP was only US $447 (1985). This was an embarrassment given the stunning successes being reported early by the Asian Tigers. And like many countries that are unable to generate enough revenue finance government projects or welfare programs through taxation, India turned to the debt market and it borrowed heavily. India's government debt reached $70 billion (1991). India had to face the specter of bankruptcy. The optimistic dreams at independence simply did not materialize. Industries that did develop like the Soviet financed steel system, proved to be inefficient. This meant that like the Soviets, significant sales outside the controlled domestic market were very limited. Indian business that had no choice but to purchase Indian steel, meaning high prices for an inferior product. Similar ripples flowed throughout the economy. This made Indian products noncompetitive in world markets. It also meant that Indian companies could not pay high salaries to their workers. And Indians to a substantial degree has shut ed themselves off to technological advances in the West. Few Western companies had any incentive to invest in India. The economic crisis forced Indian leaders to do something they had reject at independence and which they did not want to do, even after the failure of the economic policies which they had endorsed with a passion.
Kelegama, Saman and Kirit Parikh. Political Economy of Growth and Reforms in South Asia (2000).
Kotwal, A., B. Ramaswami, and W. Wadhwa. "Economic Liberalization and Indian Economic Growth: What’s the Evidence?" Journal of Economic Literature Vol. 49, (2011), pp. 1152–99.
Staley, Sam. The Rise and Fall of Indian Socialism: Why India Embraced Economic Reform (2006).
Thakur, R. "Restoring India’s Economic Health," Third World Quarterly (1993) Vol. 14, pp. 137-57.
"Street hawking promise jobs in future," The Times of India (November 25, 2001).
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