India: Experience of economic reforms

In adopting in the early 1970s the “Growth with Equity” strategy as a guide to action, Indian Prime Minister Indira Gandhi and her Indian National Congress (INC) colleagues were aware of at least two facts. First, that the crisis of the country’s political system stemmed directly from diversification of the national economy and differentiation of interests in society and second, that the mass of the population to which the political elite had appealed for a quarter century was emerging from a state of passivity to acquire a new quality of political activity.

The wish to placate the more impatient segments of the population, in particular small and medium-sized business, prompted the nationalization of 14 major private banks in 1969. These measures were hardly “socialist,” but they made India’s political system more effective and resilient and strengthened the social and economic foundations of stability.

A salient feature of the Indian experience of reforms has always been the inextricable link between the economic and socio-political aspects of development. The development philosophy – since the times of Mahatma Gandhi and Jawaharlal Nehru – has emphasized mass participation of Indians in modern (industrial) economic and political processes and their maximum openness and transparency. This was seen as the necessary prerequisite for liberating man from the oppressive force of traditional social institutions, transforming him into an individual capable of making independent decisions. Such cultural and political socialization implied the creation of conditions to form a modern society that comprises both its economic and spiritual-intellectual aspects. Mass participation in socio-political life stimulated the interest of millions of Indians in a decentralized system of managing the economy and social processes.

Thus, the development philosophy included:

·        deconcentration of economic power through increased access of the mass social strata to the results of economic growth and production assets (public sector);

·        diversification of sources of political power by exposing the lower, traditionally downtrodden and socially disadvantaged strata to the ideas and values of economic/social and political democracy, a process stimulated by the state;

·        creation of additional incentives for greater economic efficiency of small producers (through cheap credits, sponsored by the state in one form or another);

·        improvement of productive forces in the lower segments of the traditional caste-hierarchic society by improving food rations, raising educational standards and developing necessary professional capabilities and skills.

The main thrust of the government’s actions, at least since the late 1950s, has been to create optimal socio-cultural conditions for rapid integration of the Indian economic space.

The main goals were as follows: overcoming development disparities between traditional and modern economic sectors, non-violent dismantling of the traditional system of social stratification and hierarchies, inculcating in the rural and urban poor (i.e. the overwhelming majority) the ideas and values of a qualitative transformation of society in order to turn these groups into genuine actors of development, etc.

Thus, in tackling the problem of socio-economic transformations, the state deliberately stimulated the development of civil relations in society. This strategy, known as the “Nehru course,” called for the reorganization of the power structure at all levels of the political system. The socio-political regrouping initiated in the late 1960s through early 1970s by the INC, led by Indira Gandhi, marked the start of a meaningful transformation of the economic and political systems.

Some economists claim that many of India’s problems, including the imbalances of its economic growth, derive from the inability of the authorities to create a developmental state, the driving force of rapid transformation. They argue that the main obstacle to the country’s modernization is the heterogeneous structure of society, the existence of a multitude of religious, linguistic, caste and other divisions. Indeed, there are profound dissimilarities between the social structures of India and, for example, Far Eastern societies that provided a “classic” environment for the appearance of a developmental state.

However, in my opinion, the main difference between South Asia and the Far East is the compactness of societies in East Asia, which enables them to promptly respond to external challenges and to translate that response into concrete socio-economic initiatives.

In that sense timely and effective regroupings serve the function of partial compensation for the lack of an adequate environment for the functioning of a developmental state. India is a striking example. The traditional classification of the history of India’s economic growth is divided into two sub-periods: 1) 1947 to 1975 (1980) and 2) 1975 (1980) to the present day. During the first stage, the growth rate did not exceed 3.5% per annum, while during the following stage it topped 5%. The underlying logic of that classification is simple: the increased rate of growth was a function of a change in the socio-economic course.

In my opinion, that is a simplistic approach because it underestimates the factor of the internal political situation in the country in the first decades of independence. India’s first Prime Minister Jawaharlal Nehru repeatedly stressed that unless adjustments are made to the economic development model, the logic of capitalist development would lead to further social and material polarization of society and threaten both political stability and the entire development strategy. Therefore, the Indian authorities initially opted for the tactic of “freezing” economic growth in order to emphasize the policy of development (including the provision of the maximum number of jobs and a relatively equal distribution of the national income), which prepared society for a “leap” in the 1980s–1990s.

American scholar Francine Frankel describes independent India’s development strategy as a “gradual revolution.” She believes that the success of economic transformations in India can be attributed to the fact that the authorities constantly adjusted their actions to the balance of social and political forces, including the mindset of the broad masses of the people. If the reform initiatives of the elite conflicted with the interests of the latter, the authorities did not hesitate to “take a step backwards.”

A vivid example of such political prudence was the attitude of the Indian government toward the liberalization of the economy, i.e. liberating it from excessive state control.

Strictly speaking, the economic reform of which liberalization was a part succeeded only… on the third try. The first attempt in the second half of the 1960s (shortly after Nehru’s death) was motivated by the low growth rate and India’s increasing lag behind the “advanced” powers. However, that initiative was stopped by the setback the INC suffered in the 1967 parliamentary elections. These elections demonstrated open resentment of the lower and middle segments of the business class with disregard on the part of the country’s political leadership. Indira Gandhi and her supporters promptly responded to these sentiments by partially nationalizing the country’s banking system. At the same time big business, realizing the inherent dangers of the situation, reconciled itself to the deferment of “free market” reforms and indeed offered powerful financial support to Indira Gandhi and her party in the 1971 general election.

The second attempt at liberalization of the economy dates back to the mid-1980s after Rajiv Gandhi came to power. The main motivation was to prepare the economy for “entering the 21st century.” A strategy was being developed of public-private partnership, of making the economy more flexible, “innovative” and perceptive to trends in the development of the world’s forces of production. The philosophy of the new economic model was accepted by most of the political elite, including the political left. However, the deterioration of the internal situation in the country against the background of increased Islamist activity in neighbouring regions, China’s vigorous economic growth and the disintegration of the Soviet Union again put macro-transformations of India’s economy on hold.

The third attempt at reforming the Indian economy was decisive; according to scholar Deepak Nayyar, changes in the early 1990s were so significant that they can be regarded as a shift of the development paradigm. The main goals of the Manmohan Singh reform were:

·        matching economic growth with economic efficiency, which was to improve the material conditions of the mass of the people;

·        reduced interference of the state in economic development and the transfer of key functions to the “forces of supply and demand.” At the same time the state retained key strategic economic management mechanisms (mainly through India’s Planning Commission), especially since the domestic crisis was coupled with a number of unfavourable external factors: the collapse of the “world socialist system” and disintegration of the USSR, China’s vigorous economic growth (thought by many to be capable of geopolitical expansion), the growing international activity of political Islam, etc.;

·        the opening up of the Indian economy to external influences by changing the strategic paradigm as prompted by the crisis, a change from “import-substitution industrialization” to “integration into the global economy.” However, even there the INC followed the principle of looking before leaping because, in spite of the broad social and political consensus on economic reform, the party was afraid that society would revert to the state of chronic instability in 1989–1991.

In my opinion, the most significant part of the “Manmohan Singh reform” was the successful systemic transformation of Indian society that turned horizontal economic and political ties into genuine underpinnings of society and, as a consequence, strengthened the country’s unity and territorial integrity.

In the sphere of political relations, the success of the reform manifested itself in the transition from unitarism (which was inevitable at a certain stage because it compensated for the defects of a poorly integrated society) to meaningful federalism that promotes the interests of states and union territories and strengthens state institutions from the very foundations of the social pyramid.

Diversification of the economy and India’s growing economic potential enabled it to reverse the unfavourable trends in international relations and claim the role of a potential “gravitational field” of the polycentric world order being formed “in real time.”

The growth rate in the first five years after the inception of reform reached 6.7%, though in the following five-year period it dropped back to 5.4%. The country failed to meet the target and accelerate economic growth to 7.5% by the end of the 1990s. Nor was there a dramatic change in the country’s share of world trade, despite the government’s efforts to shift the economy to the “export-led growth” development paradigm.

However, the absence of immediate results did not unduly perturb the ruling elite, which realized that a correctly chosen economic strategy would sooner or later put the country on course to development. An increased rate of growth should not polarize society and the preservation of a national consensus on the goals and tasks of the country’s development was seen as an absolute political priority. The results were not long in coming: by 2006 India enjoyed an 8% growth rate, which it sustained over the next three years.

Undoubtedly, the reform unleashed the creative energy of society, especially its younger cohorts. Accelerated development of the scientific-technical cluster in the economy, most notably information technologies, was a specific manifestation of the new creative spirit.

India’s economic growth, which has lasted for a decade and a half now, turned it into a leader of the world economy and enabled the country to improve the geopolitical situation for itself. It is actively developing relationships with the “traditional” world economic centres (the USA, Western Europe and Japan), its “look- East policy” (i.e. links with ASEAN, East Asia and Australia) is on an upward trajectory, its interaction with China (in spite of the unsettled “territorial problem”) has acquired features of a “strategic partnership,” and its time-tested relations with Russia are quickly recovering, etc.

The positive results of development have been reflected in the political and psychological tenor of Indian society, especially among its elite. There is growing confidence in an “eventual economic victory over China” by 2025–2030. However, the realists at the top of Indian society attribute such sentiments to the euphoria generated by success and the strengthening of the “strategic alliance” with the USA. Reality, however, dictates a more balanced approach.

On the one hand, the country – largely due to economic reform – is witnessing a rapid growth of the middle class (which now numbers about 300 million); experts, like Anatole Kaletsky, believe that this social group in major countries (China, India, Brazil, Indonesia, etc.) is capable of “reinvigorating” economic growth in the world economy through constantly and rapidly growing consumer demand.

On the other hand, India’s development remains polarized, reproducing social and wealth disparities on an increased scale. Of approximately 700 million economically active citizens, only about 400 million are employed in the formal and informal sectors (social protection institutions and labour laws are not available to the latter). More than 20% of the world’s poor (i.e. people who live on one dollar a day) live in India, 75% of them in rural areas, and their social activism is growing, judging from the results of the general elections in 2004 and 2009. The city-country dichotomy remains the key obstacle to India’s advance into the 21st century. Finally, the historically established economic structure (most notably its labour- surplus nature) prevents the country from switching from an extensive to an intensive development model.

Nevertheless, India’s experience shows that there is a way out of any socio-economic situation. During the years of reform, a significant margin of economic strength has been built up, which has allowed India to cope with the aftermath of the world financial crises of 1997–1998 and 2008–2009 with relative ease. By consciously opting in 1947 for the import-substitution industrialization model (“the Nehru course”), Indian authorities systematically expanded the space of market relations, securing society against the impact of world and regional crises. The domestic political situation was stabilized as a result of the 2009 parliamentary elections. The Manmohan Singh government has already proved its ability to pursue a policy of development (that is, to combine economic growth with a relatively equal distribution of the national income) on a broad social basis and Indian voters have chosen continuity (embodied by Singh) above all other political options.

However, the country is facing some pressing problems. They include growing unemployment, as well as a budget deficit that may exceed 10% of the GDP soon. There are urgent problems in national security stemming from both internal and external factors. The prevailing opinion in the country is that India must work out its own “security culture” that goes beyond the framework of protecting the country’s top leaders.

The population is quickly growing younger (currently 70% of Indians are people under 35); demographic shifts indicate that there is no alternative to qualitative improvement of state management. Life dictates the replacement of the “client” type of politician with politicians in the new mould with systematic education, a broad political outlook and professional competence, capable of tackling the problems of a “continent country.”

Deepak Nayyar described the 1991 economic reform as “an unfinished journey,” referring perhaps to its only serious setback, the inability to solve the employment problem. India is struggling to solve this eternal problem. A kind of Ariadne’s thread is provided by the concept of development as freedom, put forward by 1998 Nobel Prize Laureate Amartya Sen. He interprets development as the continuous process of man gaining ever more freedom, which gives effect to the social self-assertion of the individual in the main spheres of activity: economics, politics, social practices. Amartya Sen’s ideas, in my opinion, represent a new edition of the views of Jawaharlal Nehru, albeit this time in the context of mass politicization of the Indian people and a major regrouping of forces on the global scale. Development, according to Sen, is a process of interaction and mutual reinforcement of various types of freedom: political emancipation enables an individual to uphold his economic security and protect his position in society and vice versa. The aim of development, if one were to sum up Amartya Sen’s views, is to form a sustainable environment capable of meeting the spiritual-intellectual and material needs of the people while not infringing upon the interests of other members of society.

Amartya Sen’s political and economic ideas have echoes of Gandhi’s theory of non-violence and class harmony while the ideal type mechanism for managing social relations is one of eternal progress. Attempts to introduce elements of Gandhi’s ethics in the development of Indian capitalism, as noted by scholars and experts, are becoming an indispensable component of governance, all the more so because reference to “traditional” moral foundations of society has been an organic part of the political style of Manmohan Singh, Sonia Gandhi and their closest colleagues.

India’s economic success is attributable to a combination of moral imperatives and a tendency toward large-scale, long-term thinking that is particularly apparent in three spheres of government activity: 1) assessment of the reform potential of the state; 2) development of human resources, including instruments of science and education; 3) fostering of the creative potential of the individuals on whom India’s position in the world economy hinges (management, the ability to assimilate foreign scientific and technical experience quickly and critically). In turn, economic efficiency is underpinned by a system of political representation that ensures governance in accordance with the interests of the people.

Andrei Volodin, Dr. Sc. (History), is Chief Research Fellow with the Russian Academy of Sciences’ (RAS) Institute of World Economy and International Relations.

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