In the fifth of their eight-part series on the contemporary history of the Indian economy, the authors focus on the excessive spending of the 1980s that eventually led to a balance of payment crisis.
By the 1980s, the Indian government had become dependent on foreign aid and loans. If it was not the US, UK or the former USSR that the government approached, it was the World Bank or the International Monetary Fund.
These loans made it worse for the economy as the Bretton Woods system had set up the World Bank and the IMF in such a manner that the former colonial powers would benefit from the resources of the developing countries.
Aid was always “tied aid” and was contingent upon purchasing goods and services at arbitrarily high prices from specific American and European corporations and non-profit groups. Many times, these goods and services were of little use and even frivolous in nature.
Thus the corporations and non-profit groups in the West received the money from aid programmes while the recipient nations received only goods and services. However, the recipient nations had to repay these loans in cash to the IMF despite IMF not being the source of the money. This was an onerous task since the nation never received any money that could be used to invest and grow the economy.
In addition, the IMF always violated the principles of the free-market system and forced the recipient nations to hold their interest rates and exchange rates at artificial levels that stifled economic growth but ensured that the interest paid to the IMF had a high value.
The conditions removed all risks for the corporations benefiting from the programmes and at times even forced the recipient government to use public funds to guarantee profits for the corporations. These measures typically devastated the economies of the countries that received IMF loans.
Many times, American politicians pressured the unwilling leaders of developing countries to sign up for IMF loans as they viewed the loans as opportunities to transfer American taxpayer money to certain corporations.
Thus the Bretton Woods system merely legitimised the 18th century ‘mercantilism’ with the addition that the American taxpayers as the major donors to the aid programmes were also victims of the system.
The economists who advised the IMF and the World Bank claimed that excessive spending on imported consumer goods would make India a wealthy country and that India should spend beyond its means. Professors from Harvard University and Columbia University claimed that spending sprees, inflation, being in debt and running up deficits were the keys to economic prosperity.
The Planning Commission followed these prescriptions during the periods of the Sixth and Seventh Five Year Plans and India saw high inflation and an influx of consumer goods. Manmohan Singh, who as the governor of the Reserve Bank of India was responsible for the inflation, was the secretary of the Sixth Plan and headed the Seventh Plan.
The Sixth Plan promised to tax, ban, control and regulate a number of economic activities and asserted that “the commanding heights of the economy must continue to remain with the public sector”. In the document containing the Seventh Plan, Manmohan Singh called the planning process a “precious gift of Pandit Jawaharlal Nehru to the people of India”. Predictably, the socialist system combined with the binge spending led to a balance of payment crisis.
The first signs of the crisis were visible when India’s current account went into deficit after the the Sixth Plan. By the end of the Seventh Plan in 1990, a desperate India sought yet another IMF loan.
It would be wrong to blame only the Bretton Woods organisations and their partners for preying on conditions favourable to them.
The conditions in India had been created by politicians who were willing parties to the transactions with the IMF and who pursued socialism with a great zeal. Rajiv Gandhi as prime minister continued the socialist policies of his mother and his grandfather and stated at the Qinghua University, “The focus of our socialism is the uplift of the poor, succour to the weak, justice to the oppressed and balanced regional development. To attain these ends, we believe the State must control the commanding heights of the economy...”
As the 1991 elections approached, the manifesto of Rajiv Gandhi’s Congress party promised another heavy dose of socialism. As India resigned itself to its plight, an unexpected sequence of events would propel Narasimha Rao to power and he would then set in motion the changes in the country’s economy.
Arvind Kumar is an energy trader and can be reached at firstname.lastname@example.org.
Arun Narendhranath is a political researcher and can be reached at email@example.com.