Economic Governance 101: India
This series of articles aims to provide a summary analysis of some of the key economic governance methodologies in application in the world today. Starting with the world’s largest economy the United States of America – characterised by its free-market orthodoxies. Onto Germany, the beating economic heart of the European Union. Through the hybrid phenomenon that is the contemporary Chinese economy and its direct democratic counterpart in India. The series will finish with an examination of “The Nordic Model” in Sweden and finally the enigma that is Post-USSR Russia.
The Economic Governance 101 series consists of 6 main articles:
Economic Governance 101: India
Economic Governance 101: Sweden
Economic Governance 101: Russia
Economic Governance 101: India
Modern India with a population of some 1.4 billion now stands as the world’s 6th largest economy and largest democratic nation (United Nations, 2022), (The World Bank, 2022). This article will focus on the economic governance methodologies employed by India in the period preceding its declaration of independence from British Colonial rule in 1947 through to the present day and beyond.
Background to Modern India
India’s status as a fully Independent Democratic nation is one that has been only relatively recently established in historical terms. Having gained independence from Britain in August 1947, India was ostensibly partitioned into two separate territories – “Hindu-majority India and Muslim-majority Pakistan” (Dalrymple, 2017). What followed was a period of intensely bloody, secular upheaval as millions migrated to and from India and Pakistan. Muslims to West and East Pakistan (now Bangladesh), Hindus and Sikhs in the opposing direction to India. The constitution of modern India was formally instituted in January 1950, defining the State in its own terms as “a Sovereign Socialist Secular Democratic Republic with a parliamentary system of government” (Constitution of India, 2022). India’s adaptation of a “mixed economy” has produced relatively underwhelming results in the time since, especially in the context of the extraordinary gains made by other developing nations such as South Korea and neighbouring China over the same timeframe (Currie, 1996).
Economic Self-Reliance through Centralised Planning
Scarred by the experience of colonial rule and the inherent dependence on foreign powers that came with it, a newly independent India was determined to carve out its own destiny characterised by economic self-reliance. This ambition is laid out with startling clarity by then acting Prime Minister Jawaharlal Nehru in a 1953 speech in which he states “One thing is clear to me that if we do not develop heavy industry here then we either eliminate all modern things such as railways, airplanes and guns, … or else import them. But to import them from abroad is to be slaves of foreign countries” (Panagariya, A., 2008 as cited in Panagariya, A., 2021).
India’s first major economic policy directive as an independent nation was to create a centralised economic planning model that would manifest through a series of five year development plans. This policy is, of course, directly reminiscent of that employed in neighbouring China by Mao Zedong’s newly instated People’s Republic of China (PRC). While the PRC was formally established in 1949, it is interesting to note that India’s introduction of a five year development plan strategy actually pre-dates China’s by two years. India’s first year five year plan was launched in 1951 under what is described by the contemporary Indian government as the “socialist influence of first Prime Minister Jawaharlal Nehru” (Government of India, 2020). Mao Zedong and the PRC’s first five year plan by comparison was first formally instituted in 1953 (Shabad, 1955).
Both governments took direct inspiration from the centralised planning model pioneered by the Soviet Union and first enacted in the 1920s, albeit with significant variation in terms of the level of planned government involvement. Mao’s newly established Chinese Communist Party sought to implement direct control over almost every element of the economy at both regional and national level, effectively erasing the concept of a private sector economy. India’s government under Nehru by comparison had set the more modest goal of aiding development through the public sector while maintaining the overall structure of a market based economy, allowing for the continued existence of private industry and property ownership (Rao, 1952). In the words of independent India’s first Planning Commission “The scope of our Planning is limited, in the first instance, to the public sector and to such developments in the private sector as follow directly from investments in the public sector, or, on the whole, are more amenable to planning and control" (Government of India, 1951).
Throughout the 1950s India prioritised “a very particular strategy of economic development: rapid industrialization by implementing centrally prepared five-year plans that involved raising a massive amount of resources and investing them in the creation of large industrial state-owned enterprises” (Adhia, 2015, p. 18). An economic directive that serves as an almost mirror image of China’s at the time under Mao Zedong. The Indian government of Nehru shared Mao’s belief that a bright economic future could only be achieved through greater industrialisation and a marked departure from both nations’ agrarian roots. Both however lacked the appropriate levels of technical expertise and resources to implement such a policy effectively at the time, and it would take major reforms much further down the line to kickstart both nations’ economic development in earnest.
Colonisation vs Independence
There is an obvious temptation in the analysis of any post-colonial society to draw a neat causal delineation between the events of the pre and post-colonial periods. As Roy points out in his oft-cited study “Economic History and Modern India: Redefining the Link” interpreting the contemporary economic history of India in such simplistic terms would be misguided. India’s pre and post-colonial economic history is as much characterised by its commonalities as it is by its differences. India has long been defined in economic terms by its climatic vulnerabilities and a lack of abundant high skilled labour. In both pre and post-colonial instances, the solution pursued has been the prioritisation of semi-skilled labour over an earnest attempt to develop the skills of India’s workforce on a mass scale, “Economic growth, both in colonial and postcolonial India, has responded to this situation by focusing on labor-intensive methods of production and by a preference for investments with safe, if low, returns.” (Roy, 2002, p. 125).
During the British Colonial era, India had borrowed heavily from abroad in order to fund public investment, racking up significant interest rate repayments in the process while simultaneously burdened with the payment of regular remittances to Britain “for costs of the administration of India”. These administrative duties in combination with its foreign debt obligations created a routine and “large net payment item in India’s foreign transactions” (Roy, 2002, p. 120). Public investment under British rule had also remained remarkably low with Indian productivity per worker having suffered as a result of “low rates of private and public investment in infrastructure, excessively low rates of schooling, social inequalities based on caste and gender and a delayed demographic transition to lower birthrates and the resultant heavy demographic burden placed on physical capital and natural resources” (Roy, 2002, p. 110). The formal declaration of Indian independence freed India from these draining financial obligations and gave it the autonomy to address this critical underinvestment in key developmental areas.
Independent India has not, however, served to confront these shortcomings with the level of urgency that may have been hoped for or anticipated, putting paid to the notion that India’s economic underdevelopment was purely a result of British rule – deeply flawed though it may have been. In a passage from a 1996 paper titled “Governance, democracy and economic adjustment in India: conceptual and empirical problems” Currie cites how many of the developmental issues facing India as a secular democracy predate British rule and have in fact now long outlived it, “India’s liberal democracy draws heavily on the political and social order preceding British rule. Ties of caste, religion and tribe provided an informal division of labour and social hierarchy and hence an uncodified system of sanctions and regulations for many centuries before the arrival of the East India Company” (Currie, 1996, p. 791).
Whilst Indian economic performance in the 40 or so years immediately following its declaration of Independence may have been underwhelming and remains the subject of much revisionist criticism, it cannot be doubted that major efforts were made to redress the shortcomings of public sector investment under previous colonial rule. Roy notes “Economic policy between 1950 and 1990 attempted much harder than had the British to raise the quality of labor and rates of investment” (Roy, 2002, p. 110). This is evidenced by the sea change in the levels of state investment in the economy in the pre and post-colonial periods, “Gross domestic capital formation rose 6-7% of GDP before 1940 to 13% in 1951, rising to 20% in the 1970s.” (Gupta, 2018, p. 24). During the British colonial era the Indian economy had remained highly reliant on private sector investment which was not forthcoming, on this note it is argued by Roy that “A climate of high uncertainty took a toll on the desire to invest” (Roy, 2002, p. 121). The increase in public sector investment and resource mobilisation in post-colonial India would in turn inspire renewed confidence in the private sector where “Total private savings rose from 6 per cent of GDP in the early 1950s to 15 per cent of GDP in the early (p.250) 1960s, and 23 per cent by the 1980s” (De Long, 2003 as cited in Gupta and Roy, 2017). While the post-colonial economy prior to 1990 may have been riven with inefficiencies, “Compared with colonial times, when 70–80 per cent of aggregate investment was in the private sector, after 1947 the public and private sectors shared investment about equally” (Gupta and Roy, 2017).
1990’s Economic Reforms
After a period of approximately 40 years of inward focused economic policy making, a severe balance of payments crisis brought about by a sudden, sharp devaluation of the Indian Rupee in the early 1990's (Cerra and Saxena, 2002) prompted significant economic reforms which would serve as the basis for the accelerated economic development of modern India. India had already experienced a foreign exchange crisis in the 1960’s, a direct result of a stubborn adherence to a fixed exchange rate policy which removed the flexibility necessary to adapt to changing economic conditions. The prioritisation of industrialisation over agricultural development had left India’s developing economy sorely exposed in the aftermath of a severe drought and an ongoing military conflict with neighbouring Pakistan. High levels of domestic inflation had reduced the attractiveness of India’s exports resulting in a shortage of the foreign exchange (currency) necessary to purchase essential imported goods. Fortunately, assistance was on hand from the US in the form of subsidised grain imports (Adhia, 2015), heading off the worst of a potentially devastating food shortage akin to that experienced in China throughout the 1950’s (Smil, 1999). The lack of foreign exchange also served to slow India’s much heralded industrialisation programme with the inability to purchase certain key imports grinding production capabilities to a complete halt in some instances “Several new factories lay idle for want of foreign exchange to import some necessary inputs” (Adhia, 2015, p. 20)
Having already lived through this experience once, India was not going to do so again. When India’s foreign currency reserves – essential for the purchase of vital imports – depleted to a dangerously low level once more in 1991, “the government signaled a systemic shift to a more open economy with greater reliance upon market forces, a larger role for the private sector including foreign investment, and a restructuring of the role of government.” (Ahluwalia, 2002, p. 67). The Indian government immediately “slashed tax rates and import duties, removed controls on prices and entry of new firms, put up several SOEs for sale, and rolled out the welcome mat for foreign investors” (Adhia, 2015, p. 22). Specific policy adjustments included further the “elimination of investment licensing; sharp cutback in activities subject to public sector monopoly; substantial reduction of regulatory restrictions on foreign investment; opening up of domestic and foreign investments in services such as airline, telecoms, and power (areas previously under public monopoly); and privatization.” (Ahmed, 2007, p. 62). Having remained a relatively closed economy for the previous 40 years of post-colonial rule India had fully entered a new economic age, one in which “Rather than socialism, the guiding principles of policy now were liberalization, privatization, and globalization” (Adhia, 2015, p. 22).
The results were impressive and immediate with India achieving a sustained GDP growth rate of 5.9% throughout the ten years from 1992-2002, placing It “among the fastest growing developing countries in the 1990s” (Ahluwalia, 2002, p. 67). This dramatic acceleration in the speed of India’s economic development casts a poor light on the protectionist policies of the preceding 40 years, which appear an increasingly severe error in judgement. India’s determination to attain economic self-reliance led directly to its pursuit of an effective closed economic model, a stark contrast to the “strong global ties” that had existed previously under British rule. While this policy may have proven relatable on an ideological level, it also strikes as a glorious missed opportunity as “independent India turned firmly away from participation in the world economy, precisely at a time that the world economy experienced a boom” (Roy, 2002, p. 110).
The almost exclusive focus on industrial development from a public administrative perspective resulted in a severe underserving of resources in the fields of health, education and public infrastructure as a whole. “Seventy years after independence, India has still to catch up on these fronts; one-half of its children are malnourished, one-half of women are illiterate, and two thirds of its people lack basic sanitation.” (Adhia, 2015, p. 20). Beyond the failure to meet basic modern living standards and the resultant mass suffering, India’s planning failure also left its population underserved in terms of its ability to “take advantage of the opportunities opened up by the country’s recent tilt toward a market economy and globalization” (Adhia, 2015, p. 20).
What Needs to Change?
In spite of improved economic performance in the aftermath of India’s open market reforms, the Indian economy faces a myriad of issues in need of urgent addressment going forward. Low levels of investment in both the public and private spheres of the Indian economy have remained a perennial hindrance to economic development. The Indian private sector in particular has long evidenced a peculiar conservatism, or more specifically a pronounced aversion to perceived risk-taking with regard to investment at large. “Indian industrialists and business classes appeared prepared to invest in sectors which offered quick and safe profits, but were often unwilling to take on long-term investments with the possibility of low returns.” (Currie, 1996, p. 794). With the Indian private sector unwilling or uninterested in bridging the gap in the provision of key public services significantly greater state intervention is necessary in order to give India’s population the platform necessary to attain a greater level of overall economic development. While some advancements have been made there remains enormous room for improvement with regard to public service provision in the areas of “health, education, water, roads, irrigation, and electricity”. Some of the roadblocks faced with regard to the betterment of public service provision include “poor efficiency, poor services, weak accountability, and inadequate financial resources.” (Ahmed, S., 2007, p. 89).
According to the latest official publication on the subject by the Indian Government a mere 6.25 percent of the Indian population pay income tax (Income Tax Department, 2022) with many media reports alleging the total to be even lower at circa 3 percent (Jivanta and Pauli, 2016). A truly outlandish figure for any national government and one which goes a long way to explaining the extraordinary levels of public sector underinvestment in key developmental infrastructure to date. If India is to bridge this investment gap, significantly boosting the percentage of its citizens contributing to state revenue will serve as a vital building block in doing so. Some positive steps have been taken in this regard through the establishment of the Indian Goods and Services Tax (GST) in 2017 which “unifies the existing indirect taxes, such as excise, service tax, state VAT, entry tax, octroi, and other state levies across the country” (Esho, 2020, p. 15). A continued and greater openness to Foreign Direct Investment (FDI) will help to further boost available public funds, a process that is already firmly underway under current Prime Minister Narendra Modi. In the time since taking charge in 2014, Modi’s government have made significant upward adjustments to a series of established caps on FDI (Esho, 2020). This has already brought about a 65 percent increase on existing FDI rates as compared to the ten years previous (“India received 65 pc”, 2022), with FDI inflows for the year 2020-2021 at their “highest ever at USD 81.97 billion” (ANI, 2022).
Another area where India has major room for improvement is in its representation of gender in the workforce. While the principle of gender equality may be formally enshrined in the post-colonial Indian constitution, this has yet to manifest in the labour market. The post-colonial Indian government has made a number of attempts to redress the balance of women’s labour rights in country. The issue was first notably highlighted in the 5th Five Year Plan covering the years 1974-1978, again in the development of the National Perspective Plan for Women (1998–2000) and the 9th Five year plan covering 1997-2002 which “adopted the concept of a Women Component Plan (WCP) as an important strategy and directed both the Central and State Governments to ensure that ‘not less than 30 percent of the funds or benefits are earmarked for women’” (Raveendran, 2016, p.1). In spite of these efforts “ The traditional Indian perception that men are ‘breadwinners’ and women are ‘homemakers’ is one of the major reasons for the low level of participation of women in the labour force” (Raveendran, 2016, p. 5).
This inequity is further compounded by the limitation of the roles which women have historically occupied, with tradition dictating that “women’s primary role in the labor force has been in the agricultural sector” (Costagliola, 2021, p. 534) and what are described by Raveendran as “low-level occupations” (Raveendran, 2016). While the level of female labour participation initially showed notable improvement in the aftermath of the economic reforms of the 1990’s in particular, data obtained from the world bank indicates that these levels peaked in 2005 at a rate of “31.79 percent” (Costaglia, 2021), and have been in sharp decline in the time since. As of today official female participation in the workforce stands at approximately 19 percent (“Labor force participation”, World Bank, 2022). It is worth noting that the period when female labour participation was highest “coincides with the 127 percent increase in GDP between the years of 1995 and 2005, a 72 percent increase from the previous 10-year period (GDP, World Bank 2019).” (World Bank as cited in Costaglia, 2021, p. 534).
Female workers remain a majorly underserved demographic in terms of not only basic employment levels but also the actual employment opportunities faced. India has continued to demonstrate “one of the lowest female labour force participation rates in the world (21 per cent versus 53 per cent global median), according to 2019 United Nations (UN) data” (United nations, 2019, as cited in Phadnis, 2022). “In comparison with men, women in India are on average less skilled and less educated. Women also have less access to land, credit and financial capital, which may inhibit their ability to find paid work.” (Kapsos, Silberman and Bourmpoula, 2014 p. 4-5). Women also serve as a key untapped economic resource, with research indicating that “per capita income could be 10 per cent higher by 2020 and 20 per cent higher by 2030 than in the baseline scenario if India’s gender participation gap could be halved.” (Lawson, 2008 as cited in Kapsos, Silberman and Bourmpoula, 2014 p. 1).
India under Modi
According to Esho in a 2020 paper for the Journal of Interdisciplinary Economics, “The growth strategy of the Modi government is to improve business environment, remove various bottlenecks that hamper investment, and further promote industrialization and economic growth” with the explicit goal “to make India a global hub of manufacturing, design, and innovation” (Esho, 2020, p. 13). While Modi’s government have registered notable improvements in certain areas with particular reference to the significant increase in FDI, a relaxing of Indian labour laws known to be “some of the most restrictive in the world” (Adhia, 2015, p. 22) has long been cited as a key barrier to Indian economic performance (Panagariya, 2004) (Ahmed, 2007). Having served as a central anchor of Modi’s initial 2014 election campaign, labour market reform has proven painstakingly difficult to formally implement (Gupta and Batra, 2022). The failure to push through these reforms on a truly transformative scale is cited by Esho as the key reason for a failure to generate the hoped for improvements in the “international competitiveness of labour-intensive industries such as apparel or footwear industries” (Esho, 2020, p. 20).
The Indian government’s continued prioritisation of industrial development is perfectly understandable given the vast majority of India’s immense labour force remains underserved in terms of skill development. The Modi administration have made attempts to address this deficit in the form of the “Skill India” campaign, though it appears unlikely that it will achieve its targeted goal of “training 400 million people with various skills by 2022” (Esho, 2021), (NSDC, 2022). In spite of the government’s stated goal of increased industrial capacity, it is the Indian services sector which has achieved the greatest economic growth in recent years. The services sector alone is now consistently responsible for over half of India’s overall GDP. Optimism surrounding the extraordinary growth in this sector is sorely tempered however by its servicing of “less than one-third of India’s workforce” (Aggarwal and Aggarwal, 2022). The issue of jobless growth is one that has been highlighted as far back as 2004 in a paper by Gordon and Poopta on behalf of the IMF which referenced “the importance of industry and agriculture also growing rapidly” in light of the “the relatively jobless nature of growth in the Indian services sector” (Gordon and Poopta, 2004, p. 31). Rather than heralding a new era of economic equanimity the astonishing growth of India’s service sector unfortunately represents rather a continuation of the “dualistic pattern of skill development” in Inida whereby “On the one hand, most of the labor force has a low level of education and, on the other, there is a very limited but highly skilled labor force that competes effectively internationally” (Ahmed, S., 2007, p. 88).
The path to fulfilling India’s economic potential lies in a significantly improved balance between its public and private sector administration going forward. Restrictive industrial trade policies throughout the first 40 years of independence served to heavily stunt India’s economic development, while inefficient and under valued investment in key developmental infrastructure such as healthcare, education and transportation links has left it lagging behind many of its developing peers. Until India’s skill and education deficit is repaired, it will be forced to continue in the pursuit of a wider semi-skilled labour focused policy directive. An approach which has defined it as a nation in both the pre and post-colonial eras and which places a firm ceiling on its overall economic potential. The growth in India’s services sector and certain key industries holds much promise, though only if harnessed correctly. A greater investment in the people of India itself can in turn raise the nation to new heights.
Adhia, N., (2015). The History of Economic Development in India since Independence, Volume 20:3 (Winter 2015): India: Past, Present, and Future. Association for Asian Studies. Retrieved from https://www.asianstudies.org/publications/eaa/archives/the-history-of-economic-development-in-india-since-independence/ Aggarwal A. and Aggarwal, A., (2022). India’s Service Sector Is Great for GDP, but It Does Little for the Job Crisis. The Quint World. Retrieved from