Promise and Performance: The Trials and Trails of India’s Industrialization

The 1960s and early 1970s in India are vital for understanding patterns of growth and structural tendencies of the national economy at large because in many ways they mark certain fundamental transitions that were, in fact, already observable by then. Agricultural growth rate fell sharply form 3.64 percent in the 50s to a mere 1.68 percent in the 60s and ‘non-foodgrain output growth was uniformly lower than foodgrain growth’. (Mohan Rao 1997: 7) Similarly, despite a fourfold increase in industrial production between 1950-1975, it can be seen that the average level of industrial production fell from 7.7 percent between 1951-65 to a sluggish 3.6 percent per annum during the decade 1965-75. (Nayyar, 1978) - Table 1. There was also a general slowdown in the heavy industry, with growth in metal production falling from a healthy 12.5 per cent per annum in the first period to a mere 2.5 per cent per annum in the second. (McCartney, 2009) Further, there have also been studies which pointed out the increased emergence of unutilized manufacturing capacity and a concomitant decline in the rate of industrial growth, as already noted. (KN Raj, 1976) Therefore, it is illuminating to see what this clear conjecture of declining growth rates in both industry and agriculture during the 60s imply in regards to the sustainability of the economic models of growth and productivity implemented primarily through the influential Second Plan.

Nehru and Mahalanobis (Source)

In this essay, I argue that, although there had been exogenous factors such as poor harvests and loss of foreign demand and aid leading to foreign exchange shortages, the failure of the Mahalanobis strategy as evidenced by the economic slump from the mid-sixties, among other things, was caused by a much more fundamental failure at the heart of the strategy — namely, the incorrigible insistence on capital goods industrialization as being the primary means of national development within an overall context of income maldistribution, and demand deficiency. As India focused on real capital formation as the panacea for problems of employment and growth, the promise of perpetuation and sustainability of this model has been belied by the subsequent crises. In this context, I believe it is inevitable and imperative that one ask what it was that churned the “passions” of policy-makers and politicians to undertake heavy industrialization as the singular pathway to a certain ideal state of living. This is not to deny the diversification of economic structure, establishing of higher irrigation facilities and increased but inequitable potentials of self-sufficiency that this stress of large-scale manufacturing was able to accomplish, but it is to excavate and investigate the underlying ideologies, insecurities, inhibitions and formative powers that structured, sustained and directed the state-machinery and resource-allocative forces to take up this cause. In this essay, however, due to lack of space, I will focus only on aspects of economic promise and performance, nevertheless acknowledging the centrality of the historical question.

Table 1. (Nayyar, 1978)

Firstly, the interrelations between consumer goods, capital goods for producing capital goods, and capital goods for producing consumer goods was seen to be central to evaluating and achieving effective economic growth, as articulated in the Nehru-Mahalanobis strategy. (Chakravarty, 1987) The concomitant necessity here was also a need to increase the production of consumer goods using labour-intensive methods, (as opposed to direct capital investment by the government) and a general increase in employment in order to have the consumer demand proportionately expanding. Along with this, the overall success of the plan was also dependent on the inter-sectoral harmony. Any slowdown or insufficient performance in the agricultural sector would also lead to a dampening of the industrial growth. This would be the case if (i) agricultural supplies were limited because in India’s traditional industries such as that of jute, cotton, and sugar, were heavily dependent on agriculture for their raw material; (ii) if the ‘surplus of wage goods and investible resources are not forthcoming’, (Nayyar 1978: 5) then this could lead to slackening of output and inflationary situations, and finally, (iii) a general demand for the industrial goods will fall with rising food costs, severely hindering non-foodgrain consumption expenditure.

It should be noted here that the sources for financing and sustaining the conditions necessary for long-term productive growth was dependent as much on general public investment and the subsequent diversification of capital goods into manufactured goods, as it was on the ability of the government to procure resources for reinvestment by either taxing or incentivizing or directing the growing incomes of private players. The latter is important — for both social and political reasons as well - because a concentrated increase in the consumption of non-essentials and luxury goods at the cost of public investment and inequitable distribution of national income can only lead to an economy that is both unstable and unsustainable. Thus, it was assumed that the government would be able to socialize current income flows by financing investments through savings construed by private entities within an overall context of increased productivity of the public sector and community-held agricultural sector. Therefore, even if certain patterns of public investment can play an important role in Indian agriculture, as Chakravarty (1979) notes, ‘on demand side far more significant effects can be obtained in the long run sense by changes in agrarian relations.’ As a case for illustrating the inequitable demand, we can look at the year 1964-65, where it has been calculated that, in the rural sector, ‘the richest 10 per cent of the population was responsible for 32.2 per cent of the total consumption of industrial goods, whereas the poorest 50 per cent accounted for only 22 per cent of the total. Consumption inequalities were even more pronounced in the urban sector, where the top decile purchased 39.3 per cent of the industrial goods and the bottom five deciles absorbed just'19.9 per cent of the total.’ (Nayyar 1978: 7)

Here, it is pertinent to raise insights from Bagchi (1970) who identifies two critical problems with the strategy; namely, (i) ensuring balanced increase of supplies of different types of goods, and (ii) the inevitable discrepancies that arise between the distribution of demand and planned supplies of consumer goods. While the former may lead to loss of demand for capital goods if ‘capital-goods industries outpaces the planned rate of increase in the output of consumer-goods industries’, the latter can potentially exacerbate the problems of ‘inflation and evolution of the black market both in socialist and mixed economies’. At the core of his analysis is the plausible idea that the limited controlling powers and socio-political inhibitions of mixed economy governments cannot ensure cogency and cooperation with the more dominant economic forces, namely, the expenditure patterns of private sector. Therefore, it is important for us to acknowledge the presence of rural oligarchy in determining the course, feasibility and effectiveness of industrial growth (Mitra, 1977) because (i) it must be pointed out that export-led foreign-capital induced industrial growth cannot be sustainable as far as the domestic consumer demand is low due to unequal income distribution. This is because export-led policies will require alliances between ruling coalitions and urban industrial elite which, often, will have to come at the expense of the rural based rich peasantry. (ii) Consequently, a resolution to turn to external markets to replace the domestic demand bottleneck would entail policies that will ease licensing measures for industries and incentivizing MNCs (multinational corporations), cutting back on indirect taxes on luxury goods (because the majority demand is from urban and rural elite who indulge in such consumption), or cutting the level of income tax levied on the rich in order improve their scope for consumption and savings and so on — all of which would entail severe redirecting of resources and incentives for the welfare of the elite as opposed to more plausibly rural-poor-friendly policies such as fertilizer subsidies, public investment in irrigation and so on.

Given that, the social and political nature of elite demands should also be noted. They had to be concerned about protecting the structural benefits accruable by rigid maintenance of hierarchized divisions of land holdings, proprietary relations, tenurial conditions and caste privilege dynamics. One could claim that, in a supply constrained system, an increased role of public investment led growth could cure the demand deficiencies. But, as Chaudhuri (1998) notes, ‘even when public investment rises, what is crucial is the structure and character of investment’. If public investment is primarily utilised in accordance with political intents of decision-makers and the elite, then the issues will only be exacerbated.

Although, Nehruvian agrarian policies in the Second Plan did theoretically focus on achieving political power to the rural poor peasants while also improving agricultural productivity using labour-intensive methods, none of these ideals were substantiated or realized. Varshney (1998) insightfully shows how intra-Congress party struggles and discrepant realities on the ground, coupled with the increasingly failing overall agrarian productivity and loss of foreign exchange led to the eventual collapse of the institutional strategy employed by the Nehru-Mahalanobis strategy. One must note here that, along with the lack of local political support and mileage that was required to mobilize the resources for enabling the policy measures, the strategy made an oversight in at least two ways. Firstly, as Chakravarty (1987) notes, they treated the agrarian sector as a ‘bargain sector’ wherein it was optimistically believed that a slight capital investment and organizational restructuring through co-operatives, panchayats and indirect measures such as rural education would help increase the ever-required food supplies, thus balancing inter-sectoral costs, and cutting import costs. Thus, the government was confident enough to halve the total outlay in investment in agriculture and irrigation in the Second Plan, along with an absolute decline in irrigation expenditures.

But, more importantly, the assumption that industrial growth from well-achieving capital goods sector would rise in tandem with agrarian surplus proved to be a far cry. This was especially untenable given that there was no considerable plan delineating financial distributional mechanisms that must be at play in order to ensure equitable income distribution, even if there was, presumably, a formidable agrarian surplus. In other words, for equitable growth and increased productivity, there has to be implementational strategies concerning not only inter-sectoral relations, (questions dealing with price incentives, surplus labour, technocratic adjustments, movement of raw materials etc.) but also those of intra-agrarian forces (sub-regional variabilities, natural resource differentials, proprietary and holding relations, centre-state relations etc.) must be actively acknowledged. We see that in the Second Plan, the latter was meant to be achieved mostly through social restructuring and political programming as opposed to heavy economic investments. This proved futile in an overall scenario of a mixed economy and intra-party fractions where the government did not simply have the muscle to wrest its policy measures into fruition.

Consequently, it should be mentioned, thereby, that one of the main limitations of the Mahalanobis strategy was that it did not prioritize the ‘income distribution’ problem as it was centred on the issue of industrial productivity. This was so to such an extent that even the growth of consumption was schematized and imagined as being dependent on ‘prior increase in the capacity of the capital goods sector’. (Chakravarty 1987: 28) Thus, it is provocatively and profoundly insightful when Chakravarty compares this model as being a peculiar form of ‘trickle-down’ strategy because ‘it promised an improvement in the consumption level only as the end product of a process of accumulation’, even though it did not favour any high-income group as being necessary for accumulation. However, I think this opens up avenues to consider the three periods of planning as being a form of state-capitalism, as opposed to being strictly socialist. Additionally, it is pertinent we engage with this question about the nature of the state as well, because, as delineated by Byres (1997), theorising the nature of the post-colonial state as being either ‘instrumental/Hegelian’, ‘interventionist’, or ‘multi-class’ and so on has implications on how we approach planning, and in determining our priorities and possible blind-spots.

References:

Bagchi, Amiya. (1970) ‘Long-Term Constraints on India’s Industrial Growth, 1951-1968’ in Robinson, E.A.G. and Kidron, Michael (eds.) Economic Development in South Asia, London: McMillan and Co Ltd. pp. 170-193

Chakravarty, Sukhamoy. (1979) ‘On the Question of Home Market and Prospects of Indian Growth’. Economic and Political Weekly, Vol 14, No. 30/32. pp 1229-1242

Chakravarty, Sukhamoy. (1987) Development Planning: The Indian Experience, Oxford: Clarendon Press

Mohan Rao, J. (1997) ‘Agricultural Development under State Planning’ in Byres, J. Terence (ed.) The State, Development Planning and Liberalisation in India, New Delhi: Oxford University Press. pp. 127-172

McCartney, Matthew. (2009) India- the Political Economy of Growth, Stagnation and the State, 1951- 2007, London: Routledge

Nayyar, Deepak. (1978) ‘Industrial Development in India: Some Reflections on Growth and Stagnation’. Economic and Political Weekly, Vol 13, No. 31/33. pp. 1265-1278

Raj, KN. (1976) ‘Growth and Stagnation in Indian Industrial Development’. Economic and Political Weekly, Vol. 11, No. 5/7. pp. 223-236

Varshney, Ashutosh. (1998) Democracy, Development and the Countryside: Urban-Rural Struggles in India, Cambridge: Cambridge University Press