What were the efforts to liberalize India’s economy in 1966 and 1985, and how did those attempts eventually fail?

economics : What-were-the-efforts-to-liberalize-Indias-economy-in-1966-and-1985-and-how-did-those-attempts-eventually-fail – balaji

Answer by Balaji Viswanathan:

Both the mom (Indira Gandhi) and the son (Rajiv Gandhi) were forced to try some liberalization in the first year of their political office, although their hearts were not at it. Soon, they caved into the more rabid socialist groups within their party.

To understand what happened, we need to differentiate between two schools of thought among the economies back then:

  1. Import substitution industrialization (ISI) – This means that a country would consciously try to cut down imports [and thereby exports] by trying to produce everything domestically. Or in other words, it would try to cut down as much trade as possible with the outside world. For instance, if you see people using Google search [a foreign brand] you would try to replicate it locally with say Rediff search and force people to use that. Government's subsidies would mostly go to those industries that would replicate an imported product.
  2. Export-oriented industrialization (EOI) – In this school of thought, the country would identify a few strong sectors and would produce a strong export-oriented economy. The government would provide most incentives to companies in this sector. Most of East Asia followed this model. For instance, Taiwan quickly became a leader in electronics. China created Special Economic Zones since 70s & became a leader in a variety of exports – such as toys and clothes & now even more advanced things.

ISI is a defensive move and sort of what tortoise does when it is attacked. It develops a formidable defense against outside attacks. This helps it get through financial crisis. EOI is an offensive move and sort of what a hawk does. It takes on a target and tears it apart. In good times, this leads to super fast growth, although there is some risk during down times.

While most of Asia was taking on EOI, our past fears and the upbringing of our leaders [most of our top leaders grew up in England at a time of a rabid socialist movement – Fabian Society] meant that we took the ISI. Even today, when most of the world has realized the perils of this path, some Indians would still use terminologies from that old method.

World econonomists ironically termed our poor growth in (1950-80) as Hindu rate of growth, while the governments in that period was anything but pro-Hindu.

India vs. South Korea – A contrasting tale.

1966 abortion

In 1965-66, India faced a truly horrific time. The wars with China (1962) and Pakistan (1965) left it quite week. 3 Prime Ministers – Nehru, Shastri, Indira – ruled in a two year period (1964-66) causing a lot of confusion. We were too dependent on foreign food from the West, a lot of which was cut  after the Pakistan war.

US promised India over 5 million tons of food if India could reform its economy. Many of its leaders saw India ending up like a basketcase and had little incentive to pour food over a failing economy.

Indian rupee was strongly fixed at $1= Rs.4.75. However, it was unrealistic given the situation back then. With a bankruptcy & famine facing, Indira Gandhi decided to devalue the rupee to $1=Rs.7.50. Usually such moves are the first step towards export orientation. Japan and various Asian countries first devalued their currencies significantly to gain an export advantage & then use that to rapidly gain advantage in exports.

However, India had no such idea. Indira was facing a political crisis and needed the left wing of the party. She had to beat the slightly more market friendly Morarji Desai out. In 1967 elections and beyond, she went completely on the left – getting her much more support in a fast left-changing environment back then [uncoincidentally, Naxalbari revolution started in 1967]. She was then thrown out of Congress, but formed a more rabidly left wing Congress-I that did a variety of things including nationalization of banks.

By 1969, India had turned far more socialist than it was in 1966. An excellent paper on this episode: India's Aborted Liberalization-1966 [you can access the full paper by registering for free].

1985 attempt

The newly elected Indian Prime Minister, Rajiv Gandhi, tried to change the course by adopting a more East Asian model of Export promotion. He relaxed licenses, provided a range of tax incentives for exporters and allowed duty-free imports on capital goods for some of the exporters.

Although Rajiv made a small step, he didn't try to go the full distance. Before that, he would get caught in a series of scandals [Shah Bano, IPKF, Bofors, Kashmir terrorism] and economic policies went out of the window.

Also read:
Page on brookings.edu
Page on imf.org

What were the efforts to liberalize India's economy in 1966 and 1985, and how did those attempts eventually fail?


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