Tentative Rollback of License-Permit-Quota (LPQ) Raj: Indira 2-Rajiv

Introduction

     An earlier article, "Nehru-Indira Socialist Economics Failed," showed that the welfare of the average Indian declined relative to that of the average citizen of the world between 1950 and 1980.  Towards the end of the 1970s a number of analysts began to realize that the Socialist ideological – Statist - Bureaucratic approach to economic policy was leaving India further behind the dynamic developing countries.  The Janata Party was in the forefront of efforts to reverse the most egregious features of this regime, but it could not change much because of political instability within its ranks. Mrs. Indira Gandhi had three years, post 1977 election defeat to hear newly emboldened critics of her economic policy failures.  When she returned to Power in January 1980, she started reversing some of the most oppressive controls she had instituted, controls never seen before or since in a non-communist country. The rollback of the LPQ raj was continued by Rajiv Gandhi, who succeeded her on her death in 1984. V P Singh became PM after the 1989 elections and Chander Shekhar who succeeded him, were more like book ends to this phase of Economic development, given the political turmoil and dissensions unleashed by them. The roll back of the Nehru-Indira1 LPQ raj by Indira2–Rajiv resulted in an acceleration of the rate of growth of India’s per capita rate GDP during 1980 to 1991 and began the Welfare catch-up of India with the rest of the World.

 Welfare Catch-Up

     The World Data Indicators, the standard series of data for World economy has data on Per capita GDP at purchasing power parity from 1980.  It is therefore the preferred source for comparing Welfare relative to the rest of the World from 1980 onwards.  According to this source India’s per capita GDP at PPP was 0.15 of world average in 1980 and had increased to 0.18 of the World average by 1991. In other words the Welfare of the average Indian, improved by 19.3% relative to that of the average World inhabitant between 1980 and 1991.  17.2% points or 9/10^th of this improvement came during the Indira 2- Rajiv regime.

   The average per capita growth rate of GDP in India during 1980 to 1991 was 3.0% per annum compared to an average per capita growth rate of 1.1% per annum for the World.  Thus India’s per capita GDP grew an average 1.9% faster than the World economy during this period.  This was almost a complete reversal of the relative per capita growth rates in the previous two decades.  Though the average Indian was still pathetically poor relative to the average world inhabitant in 1991, the process of “welfare catch-up” with the rest of the World had finally begun.

Tentative Change

   At the end of the 1970s every aspect of production, pricing, investment, import and export was controlled by the Central Government. In the 1980s only the most glaring distortions were corrected. The scope for diversification (production of related items) and expansion of capacity for the industries under investment licensing (up to 25% above licensed from 0) was expanded. The definition of small-scale industry (SSI) was raised by increasing the size limit (value of output/sales) abd 40 industries de-reserved. The cement and aluminum industries, and others with assets below 5 (15) crore de-licensed in in 1985(1988) subject to conditions. The limit below which MRTP clearance was not required for investment by “laege industrial houses” was gradually raised to Rs. 100 crore. There was virtually no reform in other production sectors such as mining and agriculture.

   Imports of capital goods were made procedurally easier through licensing of imports for modernization and export industries. Intermediate imports were gradually moved from licensing to tariff protection and made available for export production at lower duty.   Tax rates declined slowly from the absurd highs they had reached in 1970s e.g. 100% marginal rate on income from assets, inclusive of wealth tax) and modified value-added tax (MODVAT) credit was introduced into the excise tax.

The control regime, however, continued to be extended in exchange management and import tariffs continued to rise.  The fiscal deficit also expanded from around 6% in the early 1980s to 9% in 1991 while the revenue surplus became a deficit of 4% over the same period. This was one of the reasons for the Balance of Payments crisis in 1990-1991 that concluded this phase of economic development. By 1991-92 the share of the Public sector in total GDP had risen to 25.9% from 22.1% in 1979-80. The public sector share of Gross Capital Formation was still high at 38.4% of total [Virmani (2004)].[i]    Leaving aside small scale sectors like Agriculture, Trade, Hotels and Restaurants and unregistered manufacturing the presence of Government was much higher.  Government thus still controlled the commanding heights of the economy besides retaining much of the institutional structure of the stifling LPQ Raj

Conclusion

      The LPQ raj started to change during 1980s and its enforcement slackened due to deterioration in governance.  Though individual policy reforms were incremental (‘tinkeization’), remaining controls and restrictions started to be evaded thus resulting in greater de-facto de-control.  They were also politically credible signals of the intent to reform failed policies. This had an impact on the investment environment leading to more private investment and a shift from building of structures towards machinery and equipment. The opening of the economy to capital goods imports reduced their relative price and magnified the impact on investment efficiency. An increase in the fiscal deficit, stimulated government consumption and raised production in the presence of an output gap.  Consequently the massive gap between the welfare of the average Indian and that of the average World citizen began to close for the first time in modern Indian history.

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[i] Arvind Virmani, “India’s Economic Growth: From Socialist Rate of Growth to Bharatiya Rate of Growth,” Working Paper No. 122, ICRIER, February 2004. http://www.icrier.org/page.asp?MenuID=24&SubCatId=175&SubSubCatId=233 and

Arvind Virmani, “Sources of India’s Economic Growth: Trends in Total Factor Productivity,” Working Paper No. 131, ICRIER, May 2004. http://www.icrier.org/page.asp?MenuID=24&SubCatId=175&SubSubCatId=233.

Nehru-Indira Socialist Economics Failed

Introduction

    How can we judge the performance of the Nehru-Indira socialist, mixed economy that prevailed from 1950 to 1979? This approach is also characterized as the “License Quota Permit (LPQ) Raj.” First note that Shri Jawaharlal Nehru(JN) was PM from 1947 to his death in May 1964, while Mrs. Indira Gandhi (IG1) was PM from January 1966 to March 1977.  Thus father and daughter led the country for 25 out of the 30 years. Though there were other PMs in 1966-67 (Shastri) and 1977-9 (Morarji, Charan Singh) they didn’t have time to change the fundamental development approach.  The reason for using a cut-off date of 1979 is because the Indira Gandhi (IG2) that returned as PM for a second tenure in 1980, initiated a clear reversal of her own failed policies of the Socialist Era.

Methodology & Benchmark

     Next we need a performance measure and a comparator. Growth and Poverty reduction have often been used (including by the author) to compare performance across time periods.   But in this note we use a much more effective summary measure of Welfare, the per capita GDP at purchasing power parity, to show how the average Indian fared relative to the rest of the World. This helps us to compare the effectiveness of the Nehru-Indira socialist development strategy relative to the effectiveness of development strategies prevailing in the rest of the World during the same period.  

Many writers argue that Socialist policies were fine as growth was faster than under colonial rule. The problem is that the whole world did better after 1950, so the fact that India also did better tells nothing about the effectiveness of our policies compared to alternatives that were not only available but were actually adopted in other countries.  Other writers take specific countries such as S. Korea and argue that we performed abysmally relative to them. Though this is true it is subject to criticism of selection bias - picking the best performing countries as comparators would obviously make India look bad! Such criticism cannot be leveled when the comparator is the whole world.  A development model that leaves the relative welfare of the average Indian worse off than that of the average World inhabitant surely needs to be ostracized (not praised, as it still often is in India)!

Results

   So how did the JN-IG1 socialist approach fare? In 1950 the welfare of the average Indian was 29% of that of the average World inhabitant.  By 1979 it had been reduced to 20% (1/5^th) of that of the average world citizen.  This means that the rest of the World on average was progressing faster than India; Not just S. Korea, not just E & SE Asia, but Africa, Latin America and the developed countries (all) taken together!  During PM Nehru’s tenure, India’s per capita GDP at PPP as a proportion of average world per capita GDP at PPP, was reduced by 3 per cent points ( or -11%).  It declined further during the 1965 war and was 23% in 1966 at the start of Indira Gandhi’s 1^st spell as PM. During this first  tenure of PM Indira Gandhi (IG1) the welfare of the average Indian relative to that of the average World inhabitant declined by 2 per cent points (-8%) to 21% in 1976. It was at the same relative level in 1980.

Per capita income growth data from a different source confirms that Indian economic growth was slower than that of the rest of the World.  Between 1960 and 1979 India’s per capita GDP grew at an average rate of 1.1 per cent per annum compared to an average growth of per capita World GDP of 2.7 per cent per annum.  Thus the average Indian’s per capita income was falling behind the World by 1.6 per cent per year during this period.

Winds of Change

The Janata government formed in 1977 with Shri Morarji Desai as PM did try to change the direction of economic policy. It appointed a “Committee on controls and subsidies (Dagli),” and the “Alexander Committee on Import-Export Policy,” to analyze the LPQ Raj and suggest a new approach.  I still remember that my first foray into practical policy advise was to give a memorandum to the Dagli committee arguing that tax policy was more efficient than ‘controls’ in achieving desired objective and recommending industrial decontrol and to depose before P C Alexander on import decontrol. The Morarji government fell before the Dagli or Alexander committee recommendations could be implemented.  The Charan Singh government that replaced it barely had time to settle down before it fell in 1979.  It was only after the arrival of the second Indira Gandhi (IG2) government in 1980 that import decontrol started in earnest with surprisingly positive results.

Lessons

The Nehru-Indira version of socialism was a failure compared to other market based models being used in other parts of the World after World War II.  The main negative elements of this approach were:

(1) Nationalization of large industry and financial institutions, their consequent monopolization & suppression of competition. (2) Suppression of private entrepreneurship (including non-profits)  through oppressive controls on every sphere of economic activity and their conversions into “rent seekers”.  (3) Obsession with heavy industry to the detriment of both labor intensive light industry (rendered uncompetitive through rigid labor laws) and of agriculture. (4) Gross neglect of basic education and literacy(3 R s). (5) Creation of a large, unspecialized, overextended and oppressive bureaucracy that behaved like the inheritor of the colonial/princely rulers.   

It was only with the gradual abandonment of this model by one of its architects (IG2) that Indian growth accelerated and the Welfare gap between Indians and the rest of the World started closing.

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A version of this article appeared on the Editorial page of the Times of India on November 21, 2013, under the title, “The God That Failed: Nehru-Gandhi socialist Model placed India in precipitous decline relative to the World.” 
 http://timesofindia.indiatimes.com/home/opinion/edit-page/The-god-that-failed-Nehru-Indira-socialist-model-placed-India-in-precipitous-decline-relative-to-the-world/articleshow/26112532.cms

India-Pakistan Relations: Speak softly but carry a big stick

  

Strong passions are raised whenever Pakistan is in the news. Some argue against any talks with Pakistan. Others argue for strong retaliation after every violent incident. Still others say that talks are not a favor to anyone; they are an essential part of diplomacy.  Neither the use of force nor diplomacy can serve if we are confused about our Strategy and Objectives.  The basis of ‘strategy’ is an unsentimental understanding of the opponent and his strategy and objectives.

     After the formation of Bangladesh in 1971, the Pakistan Military, supported by the entire Pakistan establishment, developed a two pronged strategy of dealing with India: Acquire nuclear weapons and use these as a shield to carry out Jihad against India.[i]  Pakistan’s international policy and much of its internal policy was driven by this obsession of revenge against India and was fully supported by and implemented by the elites of Pakistan. 

       So the first question we have to answer is whether there is any change in this dual policy towards India?  The Al Qaida attack on the USA (9/11) has clearly set in motion a process of learning among the US, UK and other Western analysts and policy makers. The erosion of the international carte blanche for Pakistan, forced a rethink by the globalized English speaking elites of Pakistan. But Inside Pakistan they are a shrinking minority. With the coming of democracy, the leaders of the major Pakistani political parties (PPP, PML-N) have realized that their own and their parties interests are not identical to those of the Pakistan Military and appear to be willing to consider changing the anti-India policy.  However, in a democracy policy changes when there is support for change.

      Unfortunately, as the old (English educated) elite has begun to realize that the Frankenstein terrorists they have created may destroy Pakistan itself by taking it back into a medieval age, the new Urdu speaking (Sunni) elites appear to be fully behind the terrorists. General Zia ul Haq (1977-98), imposed a policy of state-led Islamization, by bringing in his concept of Sharia, including the infamous blasphemy law. Under his regime, the extreme Ahl-e-Hadith version of (Sunni) Islam, was introduced in (all) school curricula as a result of which, “An entire generation of Pakistanis studying in public (and secular) schools has grown up viewing not only non-Muslim minorities but also Muslim minorities as “the other,” as “unpatriotic,” and as ‘not Muslim enough’.”  This is manifested in the murder of anyone daring to challenge the extreme views of the Sunni fundamentalists, who also believe that US, Israel and India are their main external enemies

   In this context, the Indian Governments strategy to deal with Pakistan should have two prongs:

(1) Increase the costs to the Pakistan Military of its anti-India Jihad.  This includes, (i) a diplomatic effort to impede the flow of financial aid and sophisticated equipment & technology to the Military, (ii) a semi-automatic & forceful military response to cease fire violations, (iii) targeted attacks on valuable (but not iconic/symbolic) assets by a small super-specialized commando force, in response to terrorist incidents and (iv) taking the fight to anti-India Jehadi organizations across S Asia, by developing covert assets, in retaliation for their training & nurturing of terrorists in India.

(2)  Identify, discuss and implement economic, cultural and other policies that are good for the people of both India and Pakistan.  For instance, theory and empirical evidence points to the fact that normal trade, transit, investment backed by good trans-border and trans-Asian (from C. Asia/Iran to Myanmar) infrastructure would be in the interests of both countries and their people.  Asymmetric concessions are unnecessary. Similarly, genuinely open and symmetric social and cultural policies would be mutually beneficial and can and should be pursued without interruption.
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A version of this article appeared in the Hindustan Times Editorial page on November 17, 2013, under the title, “Speak Softly but carry a big stick.”

 http://www.hindustantimes.com/comment/columns/speak-softly-but-carry-a-big-stick/article1-1152545.aspx

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[i] Trilateral Nuclear Proliferation: Pakistan’s Euro-Chinese Bomb, IDSA Monograph Series No. 1, Institute of Defence Studies and Analysis, New Delhi, December 2006. http://www.idsa.in/monograph/TrilateralNuclearProliferationPakistansEuro-ChineseBomb_avirmani_2006 .