August 15, 2007
What if India had been liberal
Published in The Telegraph, 15 August 2007
Ashok V Desai
The story of the Independence movement is told in terms of Gandhiji and his followers who opposed colonial rule, braved bullets and sticks and spent years in jail. Gandhiji’s was a movement which mobilized lakhs of people. How did Gandhiji feed them? How did the thousands who served the Congress survive? They did not have independent means; nor did they have steady jobs. They were given modest wages by the Congress or by one of the organizations that Gandhiji set up. These, in turn, were funded by contributions from people. Much of the finance probably came from people with some means. The names of some are known. When Gandhiji set up Sabarmati Ashram and did not know how he was going to support it, Ambalal Sarabhai crossed Ellis Bridge from his Shahibaug house and gave him an anonymous contribution. Jamnalal Bajaj gave Gandhiji the land on which he set up Sevagram Ashram. Ghanshyam Das Birla also gave financial support.
The independence movement was financed to a substantial extent by industrialists and businessmen. They did so partly out of patriotism, but they also had a reason. They felt that in various ways the colonial government discriminated against them and in favour of British business. As the independence movement gathered strength after World War I, the government became sensitive to this feeling and more even-handed in its industrial policies. But unrecorded in history, there were patriotic businessmen, and they had an agenda for what was to be done with independence.
Industry in pre-independence India was concentrated around Calcutta in the east, Bombay in the west andMadras in the south. Of the three, industry in Calcutta was largely owned by the British. The Bombay and Madras presidencies were the home of Indian business, and the nationalists amongst them knew Congressmen from their provinces best. Of the latter, Vallabhbhai Patel and C. Rajagopalachari were the most prominent. By comparison, the north and the east were poor in patriotic industrialists.
Patel and Nehru were the two leaders closest to Gandhiji, most likely to succeed him. Gandhiji chose Nehru for prime ministership when the Congress was asked to join an interim government in 1946, and asked Patel to take a backseat. Patel died in 1950. In 1951, Nehru’s government introduced industrial licensing, and later used it to create government monopolies in a series of industries, including heavy machinery, fertilizer, coal, shipping and aircraft, and prevent new private entry into industries such as steel. In protest, Rajaji left the Congress in 1959 and founded the Swatantra Party. The tide of nationalization lasted into the Seventies, when banks were taken over; it ended only with the defeat of Indira Gandhi in 1977.
Suppose that instead of Nehru, Gandhiji had chosen Patel as prime minister, and that Nehru had walked out of the Congress and started a socialist party in the Fifties: how would that have changed India’s fate?
It would be wrong to think that Patel’s government in the Fifties would have been a liberal government in the modern sense. Patel, Rajaji and Nehru shared a common experience of British rule and apprenticeship with Gandhiji. The Indian economy was very different then — it was much poorer and less industrialized, and government was less important — its revenue was just 5 per cent of the gross domestic product. The government faced certain immediate problems; a liberal government would have approached them more or less as Nehru did. For instance, it would have had to tackle the problem of resettling refugees from Pakistan. There were no liberal alternatives to housing, feeding and supporting them.
The country was also chronically short of foodgrains. It was basically due to the fact that World War II had expanded urban employment and purchasing power, and that the urban demand for food exceeded supply from domestic agriculture. There was no international foodgrain market to fall back on. Only the US had a large enough surplus of wheat. After India turned down in 1950 the invitation of John Foster Dulles, Truman’s secretary of state, to join a South-east Asia Treaty Organization, one of America’s military alliances to contain the Soviet Union, it was no longer close to the US. Still, the US wheat surplus was so large that it gifted large quantities of it to India throughout the Fifties and Sixties. It was only after the Green Revolution, which began in the late Sixties, that the assistance under PL-480 was dispensed with. It is likely that a Patel government would have taken recourse to PL-480, although it might have increased domestic agricultural production more by leaving agriculture freer to market incentives. India might, for instance, have produced more cotton — that would have helped the textile industry, which then was large and competitive.
But it is fair to assume that a Patel government would have dismantled the import controls inherited from the War, and would not have introduced industrial licensing. During the War, India supplied a large volume of goods and services to Britain, which ran up a huge debt in the form of sterling balances. These were inconvertible into dollars because Britain had bought even more from the US without paying for it. But India could have used them to import anything from the Commonwealth — for instance, wheat from Australia, and machinery from Britain. India ran up an export surplus during the Korean War; it had so much foreign currency in 1950 that almost everything was on Open General Licence — that is, almost everything could be imported without a licence. So if the government had not launched the forced industrialization programme of 1956, if it had not wasted the sterling balances on building steel and heavy engineering plants, it could have maintained an open import regime throughout.
The major beneficiary of such a regime would have been industry. The control regime forced it to replace imports at exorbitant cost. Its high costs made it internationally uncompetitive and limited its exports. Its uncompetitiveness, together with the fixed-exchange-rate regime that prevailed throughout the world till 1970, made high protection necessary; the protection made industry even more uncompetitive. China made use of its labour to become the frontrunner in industrialization in the Nineties; India could have become the frontrunner in the Sixties. It would have run ahead of those little nations — South Korea, Taiwan, Thailand and Malaysia — which left it behind. In particular, it would have led the world in textiles. Textiles came in the Sixties to be dominated by synthetic fibres; and synthetic fibres became a major branch of petrochemicals. Japan came to dominate this industry; it could have been India instead.
Controls on technology imports forced industrial firms into long-term relationships with firms abroad, fear of upsetting foreign technology suppliers prevented Indian firms from developing technology, and controls on its import price made foreign suppliers reluctant to sell technology. Thus controls did much to keep Indian firms technologically backward. India would have been a technological leader earlier and in more industries but for the controls.
Industrial licensing worked throughout to limit competition. It thus made industry high-cost and uncompetitive. But, in addition, it limited entry to families — known at different times as managing agents, industrial houses and promoters — that were all rich and well enough connected to manipulate the politicians and bureaucrats who ran the licensing machinery. The capital market was small, and the main source of equity was the family. Thus, industrial licensing restricted enterprise. The impact can be gauged by the acceleration of industrial growth and its diversification that followed the relaxation of the industrial licensing in the Eighties.
Amongst the worst sufferers of state-dominated industrialization were energy industries. Coal would have been substantially cheaper — perhaps half as expensive — if it had not been produced by an overmanned monopoly. Cheaper coal would have given us cheaper electricity; and competition would have led to larger plants, using cheaper fuels, and delivering electricity to more consumers. Apart from being smaller and less efficient, government oil refineries earn roughly twice as high a margin as is internationally prevalent; and more competition in the oil industry would have made us owners of larger oil reserves abroad.
If instead of the Hindu rate of growth of 3.5 per cent, India had achieved 6 per cent in 1950-80, we would have been twice as rich as we are today. But we have lost even more in terms of distribution of growth than of growth itself. We would have been even richer in terms of consumer goods. We would have worn better and cheaper clothes, and owned more white goods that take the daily toil out of people’s lives. Our villages would have received cheaper and more widely available electricity; with that electricity and their labour, they would have produced consumer goods at a fraction of the present cost. There would have been far more non-agricultural employment in rural areas. Instead of 5 per cent, we would have generated 25 per cent of world trade; all the nations of the Indian Ocean would have been closely tied to us by trade and investment. All we have to boast about today is our democracy; if we had been liberal for sixty years, we would have been a world model for lifestyle.