September , 2022
An island of stability in the ocean of economic turmoil
22:31 pm

T. K. Jayaraman

The Governor of the Reserve Bank of India (RBI) made an assuring observation last month. He made the statement
soon after his decision on August 5 to shift to a hawkish stance of fighting rising inflationary pressures made during a
likely third Black Swan Event (BSE) which is the brewing China-Taiwan conflict.
India, on the completion of the seventy-fifth year of its independence, is not only a stable economy, as described by the
RBI Governor, but also an economy which is full of promise. Macroeconomic indicators and the signs on the economic
horizon indicate that India is on the threshold of joining the $5-trillion club very soon. The IMF’s World Economic
Outlook (Updated Revised July 2022) puts the estimated growth rate for 2022 at 7.4% as against RBI’s conservative
rate of 7.2%. Further, the late July 2022 findings of a Bloomberg sponsored survey of economists all over the world,
reveal that stagflation, an unholy mix of inflation and stagnation would soon engulf the world and that it would be due
to fall in demand and accompanied by a decline in supply of traded commodities and prices - caused by the Covid-19
pandemic, the lockdowns, and the ongoing Ukraine-Russia war.
The next few sections of the article review the progress of India’s march towards progress and growth, reduction in
poverty and re-distributive measures for promoting a more equitable society in the midst of stunning growth.
India’s Economic Progress: 1947 - 1975
The British Labour Party, after winning the elections in 1945 decided to grant India independence - first with dominion
status in 1946 and an eventual transfer of power in 1947. There were dire predictions. The outgoing Tory Prime
Minister Churchill, had thundered, “If Independence is granted to India, power will go to the hands of rascals, rogues,
freebooters; all Indian leaders will be of low caliber and men of straw. They will have sweet tongues and silly hearts.
They will fight amongst themselves for power and India will be lost in political squabbles.”
Over the last seven decades, India’s achievements proved one thing - that India did not get lost. The credit goes to the
team led by Jawaharlal Nehru, who was the first Prime Minister of India, with Chakravarti Rajagopalachari, known as
Rajaji, who was called Gandhi’s conscience keeper, as the first and last Indian Governor General. They were not men
of straw. They were men of character. Nehru was the executive head. He is the architect of modern India, the nation’s
beloved leader of his time, an idealist, and a true democrat. He was also a man with a scientific temper, having
graduated from Cambridge with Physics. Ably supported by a pragmatist, a home-grown lawyer, Sardar Vallabhbhai
Patel who integrated the numerous princely states with the newly emerging nation, Nehru and his team had to steer
clear of the partition created problems highlighted by the world’s biggest refugee movements between two nations,
before embarking on a coherent economic policy for growth and development. India’s GDP then was 2.7 lakh crore as
against a close 147 lakh crore today (Table 1). It has also graduated to become the sixth largest economy in terms of
GDP in the world only behind the US, China, Germany, and the UK pushing France to seventh place.
Nehru was not an economist. But, he was advised of the existence of a 15-year economic plan prepared in 1944 by a
group of seven industrialists namely J.R.D. Tata, Ghanshyam Das Birla, Ardeshir Dalal, Lala Shri Ram, Kasturbhai
Lalbhai, Ardeshir Darabshaw Shroff, Sir Purshottamdas Thakurdas and one economist Dr. John Mathai, who joined
Nehru’s cabinet later as finance minister in 1948. It came to be known as the Bombay Plan, prepared in the wake of the
decision by the Labour Party to grant independence to India after World War II.
The objectives of Bombay Plan were (i) doubling the output of the agricultural sector and a five-fold growth in the
industrial sector, both within the framework of a 100 billion Rupee (£72b, $18b) investment (of which 44.8% was
slated for industry) over 15 years. The Bombay Plan believed that the economy needed “a government to protect

indigenous industries against foreign competition in local markets and playing an active role by government in deficit
financing and planning equitable growth, a transition from an agrarian (Table 2) to an industrialized society, and—in
the event that the private sector could not immediately do so—the establishment of critical industries as public sector
enterprises while simultaneously ensuring a market for the output through planned purchases”.
None of the eight authors, including JRD Tata or GD Birla could be branded as communists by any stretch of
imagination. That is the spirit of the time, when democratic socialism of the British Labour party was taking roots in the
free world while Soviet Union based on the theory of communism of Karl Marx-Vladimir Lenin had already
established itself as a major power and fought along with the Allies against the tyranny of Hitler’s Nazi Germany.
Democratic socialism was built on the thoughts of Professor Sydney and Beatrice Webb, nurtured and nourished by
celebrated authors such as GDH and Margaret Cole, with the notion that the government, as a friend and “an hindrance
to all hindrances” should produce and supply public goods such as education and health, roads and bridges and
electricity and water in a mixed economy where the private sector would continue to function and meet the needs of
consumer goods besides thousands of farmers in the rural sector. It was called ‘gas and water socialism’ as opposed to
communism which was defined by Lenin as ‘electricity with socialism.’
The Industrial Policy of 1948 and the First Five Year Plan (1951) reflected the Bombay Plan. The Planning
Commission was set up in 1950 for planning, including resource allocation, implementation, and appraisal of the five-
year plans. The first five-year plan, launched in 1951, focused on agriculture and irrigation to boost farm output as
India was losing foreign reserves on food grain imports. The second five-year plan launched in 1956 for laying the
foundation for economic modernisation to better serve India’s long-term growth imperatives. It advocated rapid
industrialisation with a focus on heavy industries and capital goods. The second five-year plan was modeled along the
lines forwarded by Soviet Union experts.
Under the first five year plan (1951-56) multipurpose irrigation, flood control and hydro power projects including
(Damodar Valley, Bhakra Nangal and Hirakud) and under the second five year plan (1956-61) capital intensive steel
projects (Bhilai and Durgapur, and Bhilai) were completed. During this period, national institutions of importance in
areas such as science and technology were established like the National Physical Laboratory and the Atomic Energy
Commission. Nehru called them the temples of modern India.
In the international arena, Nehru became a symbol of non-alignment in the bi-polar world. In the process, he incurred
the wrath of the powerful US Secretary of State John Foster Dulles in the Cold War years who criticised India by
saying, “Neutrality amounts to immorality.” As we all know, when the war broke out between Ukraine and Russia in
February this year, India abstained but none branded India. They needed India to restrain Russia and bring about peace.
Neutrality also helped to evacuate not only the stranded Indian students in Ukraine but also students from other
With the passing away of Nehru in 1964, an era ended. President Radhakrishnan’s eulogy summed up Nehru’s
contribution: “Jawaharlal Nehru was one of the greatest figures of our generation, an outstanding statesman whose
service to the cause of human freedom is unforgettable. As a fighter for freedom, he was illustrious, as a maker of
modern India his services were unparalleled. His life and work have had a profound influence on our mental make-up,
social structure, and intellectual development. It will be difficult to reconcile ourselves to the image of India without
Nehru’s active and all-pervasive leadership.”
Growing Public Sector and Nationalisation
The second five-year plan borrowed from the Soviet Union’s two-sector model which created problems for a poor
country, where savings had to come each year from the consumer goods sector to keep up the high rate of investment in
the industrial sector. The Soviet Union could do it through a totalitarian way of forced savings by restriction on
consumption. India could not afford to do it as it had adopted a democratic system. A balance of payment crisis
ensued. The third five-year plan (1961-66) was interrupted by the Chinese Aggression in 1962, Nehru’s demise in 1964
and India-Pakistan War in the Kutch. All these led to a plan holiday from 1966-69.
With Lal Bahadur Shastri in power, the stress was no longer on heavy industries. The slogan was ‘Jai Jawan, Jai Kisan’
- bringing agriculture to the forefront along with emphasis on war preparedness. Because of a large reallocation of

funds away from the farm sector, food shortages had developed and inflation spiked. Shastri’s focus on food security
arose from the fact that in the 1960s, India was on the verge of a mass famine, and free wheat imports under USD
Public Law (PL) from the US were beginning to suppress farm prices, with no support to the farm sector. India then
was a pure agrarian economy.
Professor M S Swaminathan and his team along with Dr. Norman Borlaug and other scientists, developed high-yield
variety seeds of wheat, ushering in the Green Revolution. Almost around the same time, a young metallurgist, Verghese
Kurien after his higher education in metallurgy in the US set up a factory in Gujarat in his area of specialization. He
soon got interested in the cooperative movement in the dairy sector. His efforts blossomed into AMUL (Anand Milk
Union Limited), ushering in another revolution, the White Revolution.
In the meanwhile, the nation witnessed expansion of the public sector. Several companies in civil aviation had already
been nationalised by the government. The earliest was under the Air Corporations Act, which came into force on May
28, 1953. Under it, nine airlines—Air India, Air Services of India, Airways (India), Bharat Airways, Deccan Airways,
Himalayan Aviation, Indian National Airways, Kalinga Airlines and Air India International were nationalised. That was
the beginning of nationalisation.The next prominent nationalisation happened in 1969, when 14 leading banks were
A New Party against the license-permit Raj
The Forum of Free Enterprise (FFE) was set up in 1956 by A D Shroff, who was one of the eight authors of the
Bombay Plan (1944). The idea was to counter the anti-private sector campaign and nationalization. Its objective was of
an educative character by publishing pamphlets and arranging speeches by prominent liberals.
In June 1959, the Swatantra Party was launched. Its members included N.G. Ranga, K. M. Munshi, Field Marshal K.
M. Cariappa and the Maharaja of Patiala. In an article, Rajaji observed “Since... the Congress Party has swung to the
Left, what is wanted is a strong and articulate Right.”
The Swatantra party stood for equality and opposed government control over the private sector. Rajaji used the term
‘license’, which became popular among the masses for describing the government’s cumbersome system of permissions
and licenses required for an individual to set up a private enterprise as the 1956 industrial policy restricted free
A later study was more pin-pointed. It said that public sector corporations served as the “personal fiefdoms of
politicians and bureaucrats in power — the state thus became the private property of the privileged few.” A few select
private corporate groups took advantage of a generous infusion of funds from the nationalised banks and financial
institutions under government control, resulting in the losses of the public sector duly translated into profits of the
chosen few. The chosen few were described as the New Class. That was the title of the book by Milovan Dijilas, a
dissident, once touted as a successor by President Marshall Tito of Yugoslavia himself.
Dijilas wrote, “Our system was built only for Tito to manage. Now that Tito is gone and our economic situation
becomes critical, there will be a natural tendency for greater centralisation of power. But this centralisation will not
succeed because it will run up against the ethnic-political power bases in the republics. This is not classical nationalism
but a more dangerous, bureaucratic nationalism built on economic self-interest. This is how the Yugoslav system will
begin to collapse.”
Nehru was a true democrat. He was not a dictator. He had admiration for his erstwhile colleagues and he treated them
with respect. He tolerated their critical views. The most unexpected Chinese aggression in 1962 shattered the nation and
his health. It was reported he had a stroke in 1963 and he never got back to his old self. He passed away in 1964. Had
he been alive, history would have been different. He would have listened to sober advice and seen the writing on the
wall. That was not to be.
The next prime minister Shastri who started well but could not continue for long. He was succeeded by Indira Gandhi.
She believed in state capitalism. To her the goal was rightly - Garibi Hatao. The means adopted were not new - same
old nationalisation and expansion of the public sector and centralisation of power. The 1969 nationalization was soon

an economic nightmare. Access to credit alone would not enable the poor without other inputs and infrastructure which
were in short supply. The Garibi Hatao programmes were a failure.
The 1971 Bangladesh Liberation War was a personal triumph for Indira Gandhi. Her popularity soared, which fetched
her another victory. However, a legal battle in 1975 on the grounds of violation of a campaign rule proved to be a
defeat for her. The 1975 judgment by Allahabad High Court rendered Indira Gandhi’s election win as null and void.
An ill-advised imposition of emergency by her as a tool to hold on to power was a turning point in the economic history
of the nation besides being a watershed event in the country’s political history. She arrested her political enemies and
put them in prison. The nation voted her out of power in 1976. In-fighting in the ruling Janata Party enabled her to get
back to power. A sobered Indira Gandhi did not last long. She was assassinated and her rule was ended.
Part II would deal with economic reforms towards liberalization of the economy in the New Millennium.

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