Colonial and Post Colonial Economy

by Ajit Karnik

My class notes

Summary from the Program

The Indian Economy has had two major turning points in its economic history since Independence. The first was in 1955, when the Second Five Year Plan was launched. The Indian economy was launched on a path of socialistic pattern of development coupled with non-alignment. The second turning point, which occurred relatively recently, was the initiation of economic reforms in 1991. My lecture will cover the historical ground from 1955 till the late 1980s. I shall then look at some of the immediate causes of the crisis of 1991 which led to economic reforms. Developments of the last ten years will be discussed and some conjectures for India's economic future will be put forward.

The following areas will be covered in the presentation, some during the course of the lecture and some during the discussion following the lecture.

  1. Major features of the Second Five Year Plan including a discussion of the Nehru-Mahalonobis approach (so-called after India's first Prime Minister and his economic advisor)
  2. Coverage of the Nehru-Mahalanobis approach: domination of the public sector, bureaucratic control of the private sector, import-substitution, tariff barriers to control imports and licensing system for domestic industry.
  3. Emasculation of major institutions - such as the Reserve Bank of India and the Planning Commission - after the death of Nehru, especially under the rule of Prime Minister Indira Gandhi.
  4. State of the Indian economy in 1980s:
    • The agricultural sector still prone to weather-related shocks.
    • Industry was performing under a mountain of bureaucratic regulation. Unhealthy nexus, rent-seeking and corruption between the regulated and the regulators.
    • High levels of import tariffs with average tariff rates on capital goods at 95% and peak tariffs as high as 200%; tariffs on consumer goods as high as 140% often coupled with quantity restrictions.
    • The banking system including the Reserve Bank completely subservient to the government.
    • Overstaffed and inefficient public sector. A large part of the public sector consisting of loss-making units from the private sector which could not be closed down and were eventually taken over by the government.
    • Persistent problem of poverty.
  5. Liberalisation attempts of Prime Minister Rajiv Gandhi.
  6. Political turmoil around 1990-91.
  7. Government in India as a Leviathan indicative of excessive state intervention. Characterising the Indian State as a "Client" state open to pressures, inducements, corruption from competing interest groups.
  8. Comparing India to selected countries such as China, Korea, Thailand, Brazil and Mexico.
  9. Prelude to Economic Reforms
    • The Fiscal Imbalance
    • Balance of Payments Problems
    • Low rates of growth
    • Widespread poverty
    • Unemployment
    • Low levels of literacy
    • Inflation
  10. The Reforms Package of Prime Minister Narasimha Rao and his Finance Minister Manmohan Singh
    • Correcting Fiscal Imbalances
    • Trade and Exchange Rate Policies
    • Reforms in Industrial Policy
    • Foreign Investment Policy
    • Tax Reforms
    • Financial Sector Reforms
    • Insurance Sector Reforms
    • Public Sector Reforms
  11. Evaluation of Economic Reforms
    • Economic Growth: Industry and Agriculture
    • External Sector
    • Inflation
    • Government Finances
    • Poverty
    • Foreign Investment
    • Financial Sector: Banks, Stock markets
  12. Looking Ahead
    • What can trigger off a new crises?
    • Fears of Globalisation
    • Privatisation
    • Political Economy of Reforms

My Notes

Colonial and Post-Colonial Economy - Prof. Ajit Karnik

- 1955, 1991 - two shifts in economy
- same political party both times, policies are about 180 degrees apart
- 1955 started second Five Year Plan (first in 1951)
- Plans influenced by the Soviets
- Nehru trying for socialism without Stalinism
- he was a true democrat - democratic socialism
- plan - strong intervention in public sector
	- suspicion of private sector
	- stronger suspicion of foreign investment
- severe regulation of private sector
- very high tariffs imposed on imports
- "we'll make everything here"
- results in high cost for goods cheaper elsewhere
- killed exports because of costs
- Nehru died in 1964
- Nehru's daughter ran the country after 1966(?) (Indira Gandhi?)
- destruction of private institutions
- banks first
- slogans instead of policy, ie. "Remove Policy"
- mines nationalized, and more
- Indian economy remained dependent on agriculture
- weather affects that greatly
- agriculture a smaller part of economy now
- limits on production were placed, to prevent monopolization
- these limits were usually below point where "economies of scale"
- bribery became common
- companies would buy all licenses in their field, creating monopolies anyway
- charge others to produce in their field, "rent-seeking"
- government implicitly (by acceptance of bribes) promoted this behaviour
- average airline employment:  70 people/plane, government run
- Air India has 700 employees/plane
- over-employment very common
- very hard to get rid of employees, because of courts and unions
- until mid-80s, unemployment as high as 40%
- mid-80s, Rajeev Gandhi became prime minister
- outsider, Air India pilot!
- wanted to dismantle regulations
- government made cars, no competition, so cars didn't change from 1950 to 1980
- the government suppressed much of Rajeev's desire to change
- despite that, import liberalization started 1985
- bigger growth for several years
- but gross federal deficits created by encouraging that growth
- so growth not sustainable
- exports didn't keep up with imports
- Rajeev Gandhi out in 1989, Singh (his finance minister) became prime 
  minister, but didn't last long
- 21 May 1991, Rajeev Gandhi assassinated
- government owes a _lot_ of money, it was borrowing just to continue operating
- reforms began
- prime minister Rao - expected to die soon, but didn't
- was a good P.M.
- never in the public eye, but his finance minister was!
- finance minister was there for five years (a record)
- meant consistency
- licensing system was drastically reduced, tariffs reduced
- rupee was devalued (was Rs 17 = $1 U.S.) although unofficially 
  Rs 30 = $1, now Rs 46 = $1
- government spending reduced
- 5% growth of economy now considered slow!
- poverty has been substantially reduced
- India not a member of WTO (World Trade Org?) 
by giles