The socialist takeover of India’s economic policy

In the third of an eight-part series on the contemporary history of the Indian economy, the authors take the readers from the end of the 1950s through the decade of the 1960s.

The government policies of the 1950s and 1960s transformed India into a socialist country in which all the flaws of socialism took root. The focus of the Second Five Year Plan on heavy industries effectively transferred wealth from the agriculture sector to the industrial sector.

Additionally, the policy of selling imported American food grains at low prices meant that the governments of India and the United States together subsidized American farmers who competed against Indian farmers. As a result, India’s agricultural output suffered.

Other laws made it difficult for farmers to make a living.

Transporting food grains between states became a crime and ceilings on the amount of agricultural land one could own led to the fragmentation of land. The situation was so bad that India’s production of food grains in 1966 fell to an eight-year low. Finally, after the government raised the procurement prices of food grains, India’s production increased. The increase was also aided by new hybrid varieties of grains.

However, the procurement prices were higher than the market prices and this created a new problem. Apart from subsidizing the producers, the government pushed up the market prices by removing a significant portion of the food grains from the open market.

This in turn provided incentives for the government authorized distributors to create artificial shortages and sell the grains in the black market. The problem had now shifted from the production of food grains to their distribution.

Other sectors too suffered from the government’s interference in the dynamics of the market. The limits on land holdings prevented the home rental industry from taking off. The nationalisation of several sectors cut off the income stream of many people as the size of the private sector was reduced.

Another action of the government was to seize control of gold.

When China invaded India, Jawaharlal Nehru used it as an excuse to sell gold bonds hoping that people would turn in their gold. When that effort failed, the government passed the Gold Control Act, which made it a crime to possess gold bars and coins.

This abolition of real money combined with the limits on the ownership of real estate forced the people to save in units of government issued currency. This continuously depleted the real value of their savings.

The socialist measures of the government did not go unchallenged. In 1959, when Nehru attempted to imitate Red China by introducing collective farming, Rajagopalachari with a few others formed the Swatantra Party that advocated laissez-faire economic policies. Rajagopalachari termed the economic controls as the license-permit-quota-raj.

Nehru’s other opponent, the Jana Sangh, defended the property rights of farmers and also argued that ceilings on land holdings would cause inefficiencies in farming. Jana Sangh’s arguments on taxation and its objections to the barriers on small businesses won it the reputation of representing the interests of the Banias.

Jana Sangh called for an end to indirect taxation and demanded the replacement of sales tax with excise duty. It urged lower taxes in general. The party’s leader, Deen Dayal Upadhyay, stated in 1961, ‘The taxes today have become unbearable because while on the one hand they imbed and discourage investment, on the other, they impinge upon the consumption of the common man.

Like a bad businessman, the government is trying to eke out greater amounts per unit rather than increasing profits by greater turn over.’

Thirteen years later, American economist Arthur Laffer would make an identical argument to President Gerald Ford’s administration resulting in the concept being named the Laffer Curve.

After the Jana Sangh and the Swatantra Party made electoral gains, Indira Gandhi, who had become the prime minister, ended the debate on economic issues. She nationalized banks and used the shrill rhetoric that nationalization was the panacea for eradicating poverty. She successfully branded the opponents of nationalization as anti-poor, and when she nationalized the mines, the opposition had become muted.

The industrialist JRD Tata described the socialist policies as “economic totalitarianism” and accurately described the economy when he said, “During the past twenty years, freedom of action and the scope of operation of the private sector have been subjected to a gradual but continuous process of erosion in the course of which government has achieved a measure of control and ownership of the means of production and distribution, which would have been inconceivable to any of us if introduced all at once at the start and which is unprecedented in any country other than those under totalitarian rule.”

Arvind Kumar is an energy trader and can be reached at arvind@classical-liberal.net. Arun Narendhranath is a political researcher and can be reached at narenarun@gmail.com