"Stop the world, let me off"

INDEPENDENCE SPECIAL: ECONOMY

M Narasimham

Our immediate problem at the time of Independence was to come to terms with the trauma of partition, the enormous problem of rehabilitation of refugees and the tremendous disruption of the economy "" north India, particularly, was dependent upon wheat produced in what is now Pakistan and the mills of Calcutta were dependent on the jute produced in what became East Pakistan.

Suddenly, the Calcutta port found its hinterland had shrunk. And finally, there was the war in Kashmir. Internally, we were grappling with political issues, the framing of the Constitution and integration of the states.

By 1950, this was behind us and we turned our attention to the economy. Planning was the zeitgeist of that time. The First Plan wasn't really a Plan; it was an agglomeration of the various projects at that time (like Bhakra and Hirakud) and tried to put our economic development in an analytical framework. As it turned out, the First Plan didn't really stretch us and we ended it with a measure of comfort, both internally and externally.

The Second Plan was our first serious effort at planning and was heavily influenced by the Soviet physical planning approach. To use Mahalanobis's phrase, the idea was to "build machines that would build machines".

There was a sense of adventure in the air, but given the spurt in industrial investment and loosening of import controls, we ended up with a massive haemorrhaging of reserves. I remember, as a young officer in the RBI, a section of the RBI Act which said that 40 per cent of the currency in circulation had to be backed by forex reserves.

We were at the point of breaching this minimum of 40 per cent and required an ordinance to scrap it. The Plan failed because of the mismatch between the postulates of physical planning and the financial savings required (which had to be voluntary).

Given the serious balance of payments crisis in 1958, we had to go to the World Bank. The Bank organised the first Aid India Consortium meetings and that began our long and tortuous relationship with the Bank.

By the late 50s and early 60s, we were well and truly in trouble "" the budget was out of kilter and the balance of payments was in a mess. This was the backdrop to the ill-starred Third Plan "" during the course of which we faced two wars and two droughts. We

lurched from one crisis to another and became critically dependent upon the World Bank. That was when the devaluation of June 1966 was thrust down our reluctant throats and a spate of policy and administrative changes forced on us, but we did not get the aid promised.

By the late 60s and early 70s, the economy was in deep external and internal crisis with large budgetary and payments deficits. The only bright spot was the Green Revolution which showed our political courage to import seeds from Mexico, our administrative capacity to distribute these seeds and scientific ability to research better varieties.

But the Revolution was only in wheat and confined to certain states, leading to widening of regional disparities. As we were getting our head above the water, we had the oil shock.

But we recouped from this reasonably well since we discovered Bombay High and compressed the gap between discovery and production. We were able to get export projects in the oil-rich Middle East and exported labour, which got us both export earnings and labour remittances.

By now it was clear that while industrial development was widespread, it was very high cost owing to the wide-ranging controls and regulation.

We were perhaps the most regimented country outside the communist bloc and babus, of whom I was one, decided what technology to use, where to locate the projects to license, whom to sell to, the price at which this was to be done and so on.

Competitiveness of industry suffered and the only competition was in getting more permits. Over the three decades, till 1980, GDP grew at 3.5 per cent per annum "" the so-called Hindu rate of growth "" and per capita at 1.5 per cent, which was much too small given the low base.

As far as the financial sector we inherited was concerned, it was oligopolistic "" the coverage was very poor and very little went to agriculture (just 3 per cent). In 1951, half of bank credit went to trade and commerce and a third to industry; by 1961, this was reversed.

There was, however, a feeling that credit went to a favoured few industrial houses, which came to be identified with particular banks. This is what led to the experiment with "social control" and subsequently nationalisation.

One objective of nationalisation was to open more branches to increase banking coverage and this helped the mobilisation of savings. The remarkable quantitative expansion was, however, accompanied by qualitative deterioration. This was the background to financial sector reforms, initiated in 1991.

In the case of industry, we removed some restrictions during the Rajiv Gandhi years and grew at five per cent but this was based on an unsustainable financing pattern, and by 1991, we had a combined fiscal deficit of centre and states of around 19 per cent of GDP and forex reserves equal to two weeks of imports. This was clearly unsustainable and was the backdrop to our economic reforms.

By the 1990s, we rediscovered the importance of exports. In 1950, India accounted for two per cent of global trade and indeed our exports were greater than Japan's. By 1960, it was down to one per cent and by 1980 to 0.5 per cent of global trade. Our policies were inward looking and almost autarkic.

The Broadway musical, "Stop the world, let me off", summed up our policies in this period. At the turn of the century, India is slowly regaining its place in the global economy, in terms of domestic growth and its participation in external trade and commerce, and is beginning to close the gap between promise and performance.

M Narasimham, Chairman ASCI and former Governor RBI