India in a trance

Now IIPM's World-Class Education... for everybody!!

Struck by back to back wars and a terrible food crisis, India had a golden opportunity back in 1966 to alter its destiny. Unfortunately, we let it pass...

Just a year before the UK devalued its pound, India, too, had done a devaluation of its currency. The magnitude of that devaluation (by 37.5% from Rs.4.75 per dollar to Rs.7.50 per dollar) and a series of policy moves before and after the devaluation present the incident as a unique case in India’s economic history.

As an evolving economy throughout the 1950s, India experienced deficits in trade and the government budget, which the government tried to cover up with foreign aids. Though the foreign aid was never greater than the total trade deficit of India (except for 1958) during the period of 1950 through 1966, it was substantial enough. But an abrupt discontinuation of aid by US and other western countries after India’s war with Pakistan in 1965 forced India to literally bend in front of the World Bank, which had been shouting for liberalisation and rupee devaluation for some time.

Apart from the foreign exchange crisis, two additional factors also played a major role in the 1966 devaluation. Firstly, there was an accelerated inflation (due to huge deficit spending required by the war) that led to a disparity between Indian and international prices. India’s defence spending was at 24.06% of total expenditure in 1965-66 (as per the book ‘Foundations of India’s Political Economy’). Second, the drought of 1965/66 caused a sharp rise in prices in this period. Severe droughts and stagnant agricultural production started to build up pressure on the government.

Subsequently, food-grain production dropped by 17% and wholesale prices of food-grain shot up by 14%. By November 1965, all buffer stocks had been exhausted. When the then finance minister Sachindra Choudhuri was asked why the government did not wait another six months to see whether a good monsoon might make the devaluation unnecessary, he replied, “If we had waited another six months, we would have had absence of imports in India… action could not be postponed because all further aid negotiation hinged on it.” This shows how critical the dependence on US and World Bank was at that time. Dr. Subrat Kumar Mandal, Senior Economist, Public Finance and Policy avers, “The food crisis is the major reason that drove the government for devaluation and export promotion measures.”

Being promised assistance, the Indian Government, then led by Indira Gandhi, devalued the currency. This was associated with dismantling of the plethora of import controls and export subsidies as asked by the World Bank. It was perhaps India’s first step towards liberalisation; but unfortunately, it was done under pressure and by a team of policy makers who never believed that growth can also be achieved by liberalising the economy. As a result, when the World Bank failed to provide assistance as promised and the government was criticised by statements like, “You sold the country and have not even got the price,” it backtracked. Thus India gave up on growth opportunities provided by international trade that Europe, Japan, Taiwan and Korea exploited so effectively. Not only that, India also gave license raj a new breath of life by reverting back to an ever more stringent form of import substitution after 1969.

If policy makers then would have carried forward with what was forced upon the country, perhaps India might have been be 10 years ahead of China instead of 15 years behind. But there’s a parallel school of thought too. Mandal says, “India was not mature enough at that time for liberalisation.”

By deepak ranjan patra

For more articles, Click on IIPM Article.

Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles.
IIPM INTERNATIONAL - NEW DELHI, GURGAON & NOIDA
IIPM - Admission Procedure
IIPM, GURGAON
IIPM : EXECUTIVE EDUCATION
IIPM’s 36th Glorious Year of Academic Excellence
IIPM Ranked No. 1 B-School In Global Exposre - Zee...
4Ps Power Brand Awards 2007
When IIPM comes to education, never compromise
IIPM is A World of Career
Why Study Abroad When IIPM Gives You 3 global Advantages!
IIPM Ranked No. 1 B-School In Global Exposre - Zee...