How India Built a Modern Economy in the 20th Century

When India gained its long-awaited independence in 1947, its position was not so different from countries that managed to enter the big leagues, such as Korea or China. Today, it is among the leaders in many industries, from digital technology to pharmaceuticals, but it remains very poor. Even Chinese levels of prosperity are something most Indians can only dream of.

It's all about the peculiar model of economic modernization. From 1947 to 1991, the Indian authorities tried to launch economic growth using command methods. As a result, the growth rate was 3-4%. At the same time, the population increased by about 2% per year. These figures look good for Switzerland, but are insignificant for a developing country.

In this article, we will tell you where exactly India's leaders went wrong before 1991. And in the next article, we will tell you how the republic was able to find its growth trajectory, and whether it will ever solve its eternal problems.

The Land Question: Why India Still Undernourished

According to World Hunger Index18% of Indians are undernourished and 35% of children suffer from stunting due to poor nutrition. Two-thirds live less than $5 a day, and half lives in the slums. The situation is changing, but very slowly.

In articles about modernization China, Japan, Korea And Taiwanwe talked about their models of economic modernization. First, these countries carried out land reform – most of the fields were distributed to peasants.

Free small farms are more productive than large ones, it is easier for them to feed a poor country. Farmers become a class capable of buying domestic industrial goods, ensuring the growth of more complex industries. The ideologist of land reforms in Asia, the American economist Wolf Ladyzhinsky recommended the same reform in India. But they did not dare to carry it out. Why?

The key Indian prime ministers of the first decades – Jawaharlal Nehru (1947-1964) and his daughter Indira Gandhi (1966-1977, 1980-1984) called themselves socialists, but in their decisions on the peasant issue they acted very conservatively.

The land issue was acute. After the partition of British India, Pakistan received the region's main breadbasket, the province of Sindh, as well as part of the fertile Punjab. But the most populated areas went to India. The economic gap between landowners and tenant farmers doomed millions to poverty and did not create incentives for the development of agriculture. There was huge hidden unemployment in the countryside. In the northern states, the zamindari system, invented by the British, was in effect, very similar to serfdom.

The Indian land reforms that began in 1951 were not aimed at dividing the land among everyone. They had other priorities:

• Fairer terms of land lease – sometimes, but not always, with the gradual transfer of ownership of the land to the peasants themselves;

• Getting rid of middlemen who collected rent from peasants in the interests of landowners, often by force;

• Redistribution of surplus land from landowners to landless peasants – for example, through the establishment of property limits;

• Unification of disparate holdings.

Researchers they call Only the second group of measures – getting rid of intermediaries – were clearly successful. The rest either did no good or did harm.

First, landowners resisted the reforms using a whole arsenal of means, from lobbying to the forced expulsion of peasant tenants so that they would not receive the right to hereditary lease.

The second factor is federalism. India is an ethnic federation with high autonomy of subjects. Therefore, land reform was carried out by states based on their political situation.

When landlord-dominated governments were in power, reform was slowed down. Conversely, the most radical land distributions occurred in Kerala and West Bengal, states with Indian communist influence.

Third, the reform dragged on for decades. Operation Barga in Bengal, the radical redistribution of landlords’ lands to peasants that is considered the best example of reform in India, began in 1978. And in the poorest Indian state of Bihar, the last key decree on land reform was adopted in 1986!

Some researchers, summing up the results of the reforms, come to the conclusion that these measures even had a negative impact on agricultural productivity. Others note that there were positive effects, however – the agrarian reform reduced the level of poverty in the countryside.

Another project that can improve the situation in rural areas is was concept of Bombay economists K. N. Vakil and P. R. Brahmanand. They proposed to launch a program that would direct unemployed peasants to the production of handicrafts – toys, shoes, simple industrial foodstuffs.

This class would consume its own goods and quickly get on its feet, and the investment would pay off in just a few years. Very similar to the ideas of Henry Ford, who sold cars to his workers.

But the Indian government's industrial-obsessed economic planners ignored these proposals. A rural smallholder class never emerged, inequality persisted, and the reforms failed to force farmers to adopt better methods.

Green Revolution: Why India Is Undernourished But Not Starving

In 1965-1966, India suffered a famine due to a severe drought. The country was saved only by American grain, on which it had become dependent since the 1950s.

In 1966, Nehru's successor, Prime Minister Lal Bahadur Shastri (he ruled for only 19 months and died during negotiations in Tashkent) launched the only large-scale economic project of that era that can be considered effective: the Green Revolution.

The Green Revolution was a campaign to rationalize agriculture. Farmers were encouraged to grow more resistant hybrid varieties of rice and wheat, and to use fertilizers, pesticides, and machinery.

The key success of the Green Revolution was that while before it the increase in food production was extensive – due to the cultivation of new lands (hello slash-and-burn method), after it it became intensive – due to more sustainable and efficient agricultural practices on the land that was already in use.

If in 1955 from 1 hectare collected in 700 kg of wheat and 870 kg of rice, then in 1985 – already 2030 and 1560 kg respectively. The multiplier effect was the demand for industrial products necessary for land cultivation – fertilizers, tools, equipment.

But it was not possible to save the country from malnutrition. From 1950 to 1991, the growth rate of food production was 2.7% per year, with the population growth rate being over 2%. If in 1960 the average Indian had access to 384 g of grain (wheat or rice) and 3.2 g of oil, then in 1990 it was 432 and 5.3 g, respectively. And the figure for legumes only decreased – from 65 to 41 g.

The financial gains from the “revolution” went into the pockets of landowners – they had previously leased out their land, but now many of them began to cultivate it using hired labor, which turned out to be much more profitable. Unemployment fell and incomes increased – in just two years, wages for hired peasants doubled, but structural inequality did not.

Nehru's Idealistic Industry: The Political Over the Rational

Indian politicians of the first decades put values ​​or immediate political goals above economic expediency. The very model of the Indian economy was proposed by Jawaharlal Nehru, a man with very peculiar ethical ideas about the economy.

Nehru firmly believed that independence began with the rejection of imports. And what India lacked most was heavy industry products, especially steel. This idea was purely political, not economic – with a huge domestic market, India could not be afraid of becoming too dependent on exports and growing through them.

These ideas were fueled by the economist Prasanta Chandra Mahalanobis, who, without holding any real post, became the grey cardinal and architect of the system. With Nehru, they dreamed of steel or chemical city-factories, just like in the USSR – but without Stalin's cruelty.

An economic planning body was established, and the first five-year plan began in 1951. Like the Soviet Gosplan, the model divided the economy into two sectors—production of means of production and consumer goods—and gave preference to the first group.

And in 1956, key industries were “reserved” for the state — private entrepreneurs could not work in them. The need for such an economic regime was justified by the fact that business did not have the resources to invest in these industries. This was true for the 1950s, but in the 1960s, funds appeared — in the 1960s, one of India’s largest business families, the Birla, asked the government several times for the right to open a steel plant, but was refused.

Nehru also despised capitalist competition and the idea that profit was the measure of efficiency. Korea had five-year plans and state capitalism, but by giving companies money, the state deliberately pitted them against each other, stimulating natural selection. This way of thinking was repugnant to the Indian leader – that is why state investments of truly Stalinist proportions always led primarily to the growth of bureaucracy and corruption, and only sometimes to economic development.

In some places it looked funny – state-owned factories, staffed and equipped, stood idle for years due to a shortage of some simple consumable or component. Often remembered is the fertilizer plant in Haldia, West Bengal, founded in 1979, which employed 1,500 people. It did not produce a single gram of fertilizer in 21 years of operation, while regularly receiving funding from the budget.

However, the early successes of Indian industrialization were strong. From 1950 to 1964, the volume of industrial production grew up 2.8 times. However, growth in consumer goods was much more muted, and some sectors, such as textiles, where India was once a world leader, stagnated.

Another problem was the lack of attention to energy – in East Asia, it usually became a priority at the very start of modernization. India has oil and gas, but for many years their deposits were hardly developed. International companies were not interested in India, since energy resources would have to be sold to the Indians themselves and cheaply. Much less profitable than production in Norway or the Middle East, where there are few people, and it can be sold at a higher price to rich countries.

Therefore, both industry and consumers were under-received energy for decades. India began to develop oil fields only in the 1960s, thanks to the USSR. Oil was cheap on the world market at that time, so the country was in no hurry to increase production – and therefore suffered greatly from the crisis of 1974, when the price of oil increased fourfold in a few months.

The situation began to improve only in the 1980s, when production increased and fuel became more affordable. This became one of the incentives for the economy, whose growth rate in the 1980s increased to 5.5% per year – the best indicators until 1991.

License Raj: Suppressing MSMEs

In building a system of state dominance in the economy, the Indian government retained private ownership of small and medium enterprises, as well as large ones in non-core industries. But it tightly controlled private owners through a complex and extensive licensing system.

Every enterprise, except the smallest ones, had to obtain a license for almost any action: to expand production, import components, launch a new product, etc. Production in excess of the declared capacity without a license was a crime.

Reviewing applications from businesses required an army of skilled bureaucrats that India simply could not muster. The final say on the fate of businesses was often given to people who barely knew what they were doing, and reviewing applications took many months or even years.

The system was truly stifling – that's why it was called with a bitter smile “License Raj” (literally – license rule), by analogy with the British Raj – this is what the period under the rule of the British Empire was called in the country.

The License Raj was needed to control business in both a political and economic sense. The government was afraid that the private sector would pull the blanket over itself, taking resources away from key industries.

The system survived until liberalization in 1991, although it was partially dismantled in the 1980s.

Populism and atrocities: the apotheosis of an overly political economy

From the mid-1960s to about 1980, the situation began to deteriorate. The modest growth rate of the Indian economy fell to levels that, in such a country, could be considered stagnation.

This was accompanied by a change in the content of the political factor in the economy. If Nehru and his people were mostly honest, but not very talented idealists, his daughter Indira Gandhi went to the other extreme.

When she took over India in 1966 after Shastri's death, she inherited a country that was rapidly losing faith in the Indian National Congress party, which had ruled since 1947. Shastri was trying to find a way out of the crisis, based on liberalization and support for entrepreneurial initiative – but he died at the wrong time.

In her fight for the people's love, Indira chose a different path: she radicalized Nehru's leftist rhetoric and turned it into an aggressive populism in which immediate handouts to the masses were more important than long-term growth priorities.

Renowned Indian writer Gurcharan Das sadly wrote:

«After Shastri's death, values ​​left our political life and governance became immoral. A new personalized style of politics emerged. Institutions began to crumble.“.

Indira increased pressure on private business and inflated the state sector, brought pricing to the point of absurdity and nationalized banks. The number of workers in the organized sector of India (firms with more than 10 employees and official employment) directly dependent on the state reached 70%. Corruption and India's isolation from the world community increased.

The crippling Antitrust Act of 1969 barred any group with total assets of more than Rs 200 crore from expanding.

In 1974, protests against the government's economic policies began in India. A year later, the Supreme Court (let's not forget that the republic has always been and remains a true democracy) tried to deprive Indira of power due to election manipulation. In response, she declared a state of emergency, which turned her into a totalitarian ruler for two years.

The apotheosis of this period was the program of voluntary-compulsory sterilization of poor men, which was conceived by Indira's son Sanjay Gandhi. The Indian government had been trying to reduce the birth rate since the 1950s, but nothing worked. Sanjay offered his mother a radical option – sterilize men.

At first, those who would agree voluntarily. But when the KPIs were not met, the Gandhis began pressuring officials to speed up the pace. On the ground, this turned into coercion, with police forcing poor people into a doctor’s office (and often a dirty van) with batons.

The program was discontinued in January 1977. Between 6 and 8 million sterilizations had been performed, and about 2,000 men died as a result of the operations. Sanjay died in a plane crash in 1980, and Indira was killed by her bodyguards in 1984.

From 1984 to 1989, India was led by Rajiv Gandhi, Indira's eldest son. He began liberalizing the economy and dismantling the most odious creations of his mother and grandfather. However, large-scale liberal reforms that completely rebuilt the country's economy began in 1991, when Narasimha Rao became prime minister. Let us recall that China had gone through similar reforms 14 years earlier.

We will talk about the current state of the Indian economy and its prospects in the next article.

Author: Alexander Artamonov