India and the License Raj

India

• Are we blind to India?– Foreign policy is about Iraq, Iran, Israel, Mexico

and these are important countries, but they are small compared to India

– Of the big country, we spend most of out time on China

– One of the reasons India exploded a nuclear bomb in 1998 was so that they could be taken seriously, to get attention, and to be treated equally important as China and Russia

India: The Basics• More than 1 billion people– 1/6 of the global population

• Huge country in land mass– 1/3 the size of the US

• Interesting mix for a low income country with many ethnic and religious divisions– Proud and fierce attachment to democracy

• Since the 1980s, they have been implementing far reaching econ policy—reorientation to market policy

The Economic Philosophy of India’s Independence

• This can be traced to India’s declaration of independence from Britain in 1947– The leader at the time was Mahatma Gandhi (1869-

1948)• What was Gandhi’s economics like?– They were an extension of his moral beliefs– Nonviolence and more than just do not whack

someone in the head, but a harmony with community– Small skill craft production is the start

Example of Gandhi• Now I have no historical proof, but I believe there was

a time in India when village economics were organized on the basis of such non-violent occupations, not on the basis of rights of man, but on duties of man those who engaged themselves in such occupations did earn their living, but their labor contributed to the good of the community…. Body labor was at the core of these occupations and industries, and there was no large-scale machinery. For when a man is content to own only so much land as he can till with his own labor, he cannot exploit others. Handicrafts exclude exploitation and slavery

Overall Philosophy• This go provides some key insights of Gandhi’s

overall philosophy– The concept of a nonviolent occupation means

working out your since of duties contributing to community which is more than an individualistic view of right and what you should get

– Focus on body labor not large scale machinery– No farms larger than what you could farm with your

own physical labor– Handicrafts avoid the exploitation

• That indicates to me that he believe working for other is exploitation

Exploitation and Slavery

• it is easy to understand why he has this philosophy give the exploitation of colonialism

• But it is also odd that he would extent it to all jobs and employment– It is not clear that an economy could develop

without employment• The trouble with India is that there are too

many exploited and too few exploiters—Michael Kalecki (a famous socialist)

India’s Politicians

• Right from the start India’s politicians took a more pragmatic approach– Even though they followed a slightly different

view, there was a real collective feeling of Gandhi’s ideas that living with personal self-reliance even if looks like poverty to the rest of the world has great dignity and value• I can see many today that would appreciate his view—

the small homes, off the grid, modern homesteaders

After Independence

• First prime minister—Jawaharlal Nehru (1889-1964)– Nehru had visited the Soviet Union in the 1920s

and was a big fan of socialism and communism• I know that today we look back on communism as a

failure, but remember that this was a period of fear of world issues with the war and over capitalism because of the depression• The attitude, even today, is that maybe the Soviets had

problems, but fundamentally government ownership was more fair and socially just

The Post-Independence Economy

• Had a very large government sector and included large government monopolies

• Lots of government controls and rules preventing anyone from entering markets

• In addition Chakravarthi Rajagopalachari (1879-1972), coined the term the license raj– Raj comes from the word reign as in Britain

reigning over India

The License Raj

• They went from British rule to the rule of licenses. Red tape galore– Tons of rules and regulations

• Rajagopalachari was more for the market rule

Rajagopalachari

• I want the corruption of the permit/license raj to go… I want the officials appointed to administer laws and policies to be free from pressures of the bosses of the ruling party, and gradually restored back to the standards of fearless honesty which once maintained… I want real equal opportunities for all and no private monopolies created by the permit/license raj

Think About This For A Moment

• This statement has several interlocking parts– The intrusive system of licenses and permits was

blocking opportunities and creating monopolies– By creating monopolies and the high monopoly

profits it was feeding corruption• Bribes to get monopolies (this has also been a problem

in China)

India’s Economy in Practice:The First Four Decades

• After 150 years of feeling exploited in trade with Britain, India had a very inward looking philosophy

• Self-sufficiency– Discouraged foreign trade– Essentially became a closed economy

• Policy of import substitution—try to make goods domestically instead of importing

Import Substitution

• Always try to produce goods rather than import

• Had vey high tariffs• Anyone that wants to import needs a special

license to show the goods are being imported for the right reasons

• Lack of trade means that it is very hard to trade the currency and very hard for foreign firms to invest in India

Before the Reforms

• If you looked at cars on the road in 1990, there was basically one type of car– Hindustan Ambassador– Almost all cream colored– All made in India– And nobody wanted one

Example

• Imagine that there is one country “exploiting” another country through trade

• Would the exploiting country have a trade surplus or deficit?– In modern times it is common to hear people say that

Japan or China is exploiting the US because they have trade surpluses

• India is the British days ran trade surpluses– Maybe we need to reexamine our relationship with

China

What is a Trade Surplus

• India was sending Britain more goods and was sending capital abroad to invest in Britain

• This was thought of in India as a ploy to stifle India’s manufacturing and make it dependent on commodities

• 1948—2.5% of global trade (right after independence)

• 1980s—less than .5% of global trade

1950 and the Public Sector

• In the 1950s it was determine that 17 key industries would be reserved for the public sector– Iron and steel, mining, machine tool manufacturing,

heavy electrical plants• In the 1960s another batch of industries were

taken over– Cement, textiles, plastics, electronics, drugs, steel,

copper, aluminum, motor scooters, refrigerators, fertilizers, batteries, bread, soda, paper, telecommunications, rail, air, banking, insurance

Investment in India• By the 1980s, over half of the investment in India is in

these nationalized firms– And they produce about ¼ the GDP

• Starting in the 1950s, to preserve these monopolies, India created the series of licenses and rules– Companies needed approval from the government to

invent a new product—did not want any company to get too large

– Licenses controlled prices, quantities, wages paid. Size of the labor force, sources of supply, and even limited variety

Licenses

• This license process started with low-level engineers reviewing 1000s of application every year– After months of review, it might be sent up to the

ministry or cabinet level where the same info would be review again for months and months

– Then up to a inter-ministerial council where it was reviewed for more months

– Then up to a cabinet member for final approval

Blah Blah Blah• If you wanted to import foreign equipment, you had to start with a new

set of requests for licenses– and then go through the chain

• If you had a foreign partner, you had to start a request for foreign partners

• If you wanted a loan from the bank, you started a request for licenses to get a loan

• No rules—all ad hoc• Worry was that in the view of the bureaucrat does my proposal fit with

the national plan– Remember that the national plan though stuff like steel was important, but

consumer goods were not• Would my request preserve a regional balance• Would I compete too much with existing small companies• In the 1980s, it could take years to get a phone or a scooter

Trick

• In big towns there were large lobby groups formed around these large businesses to help push or bribe these business licenses along

• A famous trick was to submit many application to expand your business—the bureaucrats would assume that you were planning to expand and then all other licenses– But if everyone else is denied you do not need to

expand

Another Set of Rules for Labor• In the late 1980s and into the 1990s, only 3% of the

economy was officially in private firms of more than 10 employees

• Why?– Crazy labor rules– Even in the late 1990s, there were 45 to 50 separate major

labor laws• Laws about pensions, healthcare, insurance, subsidized

lunchrooms, must notify gov about changes in job content, must notify gov about changes in employee status, employees had to agree to all changes

• If you had more than 25 employees you must hire all workers from a gov approved list

• If you had more than 100 workers, you had to get permission from the gov to fire anyone

• The public sector had lifetime employment and even beyond the grave because you job could be inherited by a son or relative

Rules Rules Rules• There were even rules that you were not allow to

go broke

• Many firms played games to hide their employees (and their output) so that they could follow their own rules

• Many public workers felt their salary was just an entitlement and if they showed up and worked at all, they requested overtime

Goal: To Maintain Democracy

• While this is not economic, we should remember that India is a very diverse country with difference in ethnic, religions, languages, cultures

• There is a real need to unify the country (IMHO we have the same issue and I believe that our politicians are trying to divide to get votes rather than unite to get growth)

• Britain only controlled 2/3—1/3 was small kingdoms with different rulers and different languages

Languages in India

• 1600 languages are spoken in India– Yes I know that China has different languages, but

the written word is all the same• 400 are spoken by more than 200,000 people• 24 languages are spoken by more than 1

million people• English is the language of business• These licenses were to help unite the country

by directing more to local projects

Changing Expectations and a Crisis

• India’s economy grew moderately from the 1950s up until the 1980s– Averaged about 3.5% per year

• But changing economic conditions including widespread poverty all encouraged pressure for change

• Still in the 1970s and early 1980s, many in US had optimistic views about India (and that they would become more democratic)

High and Rising Saving Rates

• India had high and rising saving rates– 1950s—10% of GDP– Mid-1980s—20% to 25% of GDP– Higher than the US– We also have the image that India has a large number

of hard working entrepreneurs as well as a number educated engineers and computer scientists

• They had a Hindu Rate of Growth at 3.5% per year

Hindu Rate of Growth• The economic literature often referred to India’s rate

of growth as the Hindu rate of growth in a dismissive even patronizing way– They are doing the best they can given there troubles

• There were changes in the 1980s– Indira Gandhi—first elected in 1966– Voted out in 1977 after declaring martial law– Reelected in 1980– Killed in 1984

• 70s she was a socialist and not religious• 80s she was elected as a Hindu that was friends with business

Gandhi’s Changes

• 80s– She reduced taxes– Made it easier to get licenses– Made it easier to get foreign help– Made it easier for firms to expand production

• After she was murdered—Rajiv Gandhi (1944-1991) took over as prime minister– He continued to release the constraints and

growth increased

By the 1990s the Socialist Model Had Lost Favor

• If you remember, one reason for following this path was to help the poor– In the 1990s. 40% of the population was malnourished

and below the poverty line of less than $1/day– More than ½ of the adults and 2/3 of all women were

illiterate– Average level of schooling for an adult worker was 2.4

years– 427 women died in childbirth for every 100,000 births

(China – 115, US – less tan 20)– Infant mortality was 68 deaths per 1000 births– Serious discrimination against women

What Happened

• They tried to abolish poverty with– Nationalizing industries and banks– Squeezing foreign investment– Having many price and trade controls

• It did not work! The 80s and 90s saw growth because more freedom was given to business

I have Not Talked About Deficits

• The 80s and 90s were also a period of government budget deficits– 80s were about 9% of GDP– Inflation was starting to rise– They were facing a possible financial crash

– This help force a change