Indians inclined towards free enterprise

This month 20 years ago, India embarked on the path of economic liberalisation. Since then, despite change of governments with parties of different ideologies ruling, the country has not swerved from liberalisation. In this eight-part series, the authors explore the contemporary history of the Indian economy, starting from the discussions of the 1940s to what economic system the country should follow to the present. In this, the first part, the authors describe the economic debates during the 1940s.

The subsequent parts will be published every fortnight.
One of the great myths about India is that it chose the path of socialism because that was the prevailing thought in the years after the British left India. In those days, a vigorous debate raged in India about the merits of private enterprises and the demerits of a state-controlled economy. Those in favour of the free enterprise system vastly outnumbered their opponents.

This should surprise no one as Indians had demonstrated remarkable wisdom in consistently opposing state-controls imposed by the British. Indians had protested the regulation of industries such as the textile industry, opposed taxes on salt and other goods, opposed the setting up of the Reserve Bank of India, and also objected to linking the rupee to the British currency that was not backed by gold.

The Congress party could be divided into three distinct factions based on their views on the economy: Members of the first group who formed the majority were called the capitalists and included leaders like Rajendra Prasad, Sardar Patel and C Rajagopalachari. The second group consisted of the socialists like Ram Manohar Lohiya, Jai Prakash Narayan and Acharya Kripalani. The third group, the Marxists, consisted of just Jawaharlal Nehru and a couple of minor politicians. Although Nehru later called himself a socialist, he was labelled as a ‘radical’ and a ‘Marxist’ by the press.

Although the term ‘socialist’ is a euphemism for ‘communist’ or ‘state-control’, the socialist wing of the Congress was harmless and limited itself to wearing khadi and dreaming of eliminating all misery by serving the poor. In their world, the economy would not be state-controlled, but would contain cottage industries run by cooperative societies. This group vehemently opposed the communists and revolted against Nehru when he attempted to define the economic policy of the Congress.

During this period, India had industries that had been developed by Indians despite the British virtually destroying the Indian economy. Walchand Hirachand had started an aircraft-manufacturing factory that supplied state-of-the-art aircraft to the British during World War II. Other industrialists had built dams to generate power. Earlier, back in the 19th century, the Indian tea industry held an edge over the Chinese industry as Indians used steam-based technology in the manufacturing process.

It was thus natural that Indians were in favour of a free-enterprise system and found the word ‘socialism’ to be anathema. Rajkumari Amrit Kaur, who was the health minister, called for supporting the “existing or future private enterprise which has nothing but service to our people as its goal” and stated that “any other attitude would be both narrow and unwise”.

The debates were not limited to the fields of business and politics: An editorial in ‘The Hindu’ in the early ‘50s quoted Friedrich Hayek when it described “the progressive socialisation of industry as the road to serfdom”. A strong proponent of the free enterprise system was the celebrated physicist, Sir CV Raman, who argued, “We must largely build upon the intelligence, energy and enterprise of individuals, which can only be forthcoming if they can hope to reap the results of their personal efforts. I do not think state enterprise as such is likely to be very
successful in Indian conditions.” When he visited
the United States, he attributed the prosperity and efficiency of the country to the system of “free and unfettered private enterprise”.

The first test of how the debates would translate into action came with the Industrial Policy Resolution Act of 1948, which set the tone for India’s economic policy. Much of this act was drafted by the economic committee of the All India Congress Committee (AICC) and the few proponents of nationalisation managed to push their agenda. When the fight came back, it merely resulted in a feeble compromise with a few sectors being marked for nationalisation and a few others being granted a breathing time of 10 years before they were taken over by the government. The proponents of nationalisation called the 10-year breather as a sell-out to the capitalists.

However, the events that panned out over the next few years showed that the compromise was really a case of allowing the proverbial camel to get into the tent. The freedoms of Indians were gradually chipped away over the next decade. As the state put itself on the path to wielding total control over the people, it breached its promise of gaining freedom for India from the British.

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