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