In this segment, what I'm going to be talking about is how the state-led development model was exhausted. In other words this model was not working anymore or at least not working effectively. So let's, I want to sort of look at some of the reasons for that. There are many reasons and not all of which I can cover but I'll touch upon a few important ones. First of all, of course in order to understand, you know, why the state let development models sort of failed, or had very mixed results we need to get a sense of what was going on in the Indian economy in the 1980s, and then, basically, also have an explanation about why there was a slow down in investment. And which then of course led to the slowing down of the Indian growth rate. And then there are a set of other sort of explanations for economic, slow down. So let's look at the Indian economy in the 1980s. It's sort of a looking back, if you will with the benefit of hindsight. By the 1970s, of course India had developed an elaborate system of controls over the private sector. If you recall in my previous part of the lecture I talked about that although the regulations were designed with good intent and mainly to create domestic employment, the domestic productive capacity and of course to get the economy, sort of growing in the end many of the regulations were not very well thought out and in the end became very, very unproductive and essentially discouraged business investments and therefore economic performance. So what we had then is that by the 1970s India had developed an elaborate system of controls over the private sector. And it was extremely difficult for the economy to function in an efficient sort of way, in fact by and large by that time the rest of the world had virtually ruled off or dismissed the Indian economy and instead were focusing their energies on East Asia and South East Asia. As you can see because of these regulation, every large investment required some kind of approval from the government, but it was not a single window clearance which we often refer to these days when getting a permit for an investment. But rather you are to go to multiple agencies within the government. And of course as you can very well imagine, it was a very, not only an elaborate process but also a very time consuming, tedious process. And one of the results of these regulations what we find is that the industrial growth rates in the 1970s really began to fall despite the fact that the savings and investment rate was actually quite high. In other words, normally for a high investment to take place you also need high savings. And by and large India's savings rate is actually quite respectable. But obviously savings need to be converted into investment funds. For which you need certain kinds of capital markets which may not have existed in India then. But nevertheless, what you find of course, despite the high savings rate as well as the investment rate, you find that the growth rate was not keeping up. Clearly there was structural rigidities and that was obviously something that India needed to look into before the economy could move again. Now let me just take up one sort of political and structural explanation as to why the Indian economy started performing poorly. This is a diagram based on very influential book called the Political Economy of Development which was presented as a lecture in the 1980's. Which then subsequently, was published in a book format and it's a very eloquent sort of explanation in some ways, but obviously I have bought it also to use it for other purposes, but in this case, let us just sort of look at why Indian growth rate slowed down. His argument, of course, is that the Indian growth rate slowed down marinly because of slowing down in investments, public investments. And then the question becomes then well, why did public investments slow down? Well, given the nature of Indian poverty, whereby you have various sort of constituencies who exercise certain kinds of influence over the government, such as, let's say, the rich farmers, who are relatively large land owning, farmers, who obviously have a certain clout, political clout. They have been getting certain amount of subsidies from the government. As you can see on the legend on the right hand bottom corner, you will see that S is for subsidies L is for lobbying, and P is for protection. Now, here we are talking about the state-led development model, where a lot of these regulations essentially protected various domestic sort of constituencies, including industrialists. So you have rich farmers who receive subsidies from the government, who influence the government through lobbying efforts and, of course, who also receive protection from foreign competition. The same thing, let’s say, with industrial capitalists, which you see on the left-hand side again, very, very similar, they were protected from foreign competition. They too receive various kinds of subsidies and they too lobby the government for various handouts. Organised labour, which was largely found in the public sector and although they didn't receive so called subsidies, but certainly receive protection because public sector was highly protected. And of course, one of the the strengths of the public sector vis a vis the government, or certainly the ruling party was that they could sort of vote and they did have that sort or political clout. And then on the other side you have the salaried class, the salaried class of course also was certainly protected because again, domestic competition was limited simply because of regulations but also foreign competition was absent because foreign companies were not so easily allowed into the country. But the way they benefited, of course, was that would be salary increases. Now what all of this means. Except for the poor and the low class people who really didn't have anything much to contribute other than their votes, so this v that you see here, this v actually should be right next to this over here. So they had the voting power because of sheer numbers. They could influence the government in some way, although they really didn't have the kind of power as, let's say, the industrialists, capitalists had, or the rich farmers had. Now, the net effect of this kind of a system was that all of these vested groups had a stake in the government resources. And the government in order to keep everybody happy, was essentially, either giving subsidies or transferring incomes. And as a result of which the investment quantity of course, shrunk, that is productive investment. So this is one of the main reasons why the Indian economy slowed down. There are other explanations of why the Indian economy slowed down. One of course is the micro-economic inefficiency due to unproductive regulations. And this is an this is an argument by Jagdish Bhagwati, another imminent Indian economist working out of Columbia University in the United States. And he too wrote a very interesting book which was also delivered initially as a lecture in the United Kingdom. And his argument, and he has always argued against regulations in India. In fact, he used to work for the government of India. And I think he got fed up and he basically, left for the United States to become an academic. His argument was that essentially these regulations were creating all kinds of inefficiencies. His argument was why do you want to regulate business? I mean, businesses should be free to do what they want to do in terms of manufacturing, in terms of production and so on. So that is definitely, and it is a valid argument because there are a number of unproductive kinds of regulations that have not only baffled outsiders, but certainly they have stymied domestic business as well. And this is the situation of the 1970s that we are really talking about. And then you have other kinds of arguments. Which is that India is an old civilisation, it has obviously, certain types of feudal sort of systems in place. Feudal values, what I would call feudal remnants. And there are obviously a number of authors like Amiya Kumar Bagchi and Terence Byers, etc. They do mention this, that it was this particular sort of sphere of the Indian society was holding India back because their interests are something very different. If you're talking about industrialisation, you really need entrepreneurs and capitalists who think ahead, who are looking forward, who make the investments and so on, whereas the feudal interests has largely to do with power. Power and social prestige and so on and so the argument goes that, and obviously, I am reducing a very complex argument into something very simple. But the basic argument is that the feudal remnants were holding India back. There was also technological dependence. Interestingly enough, the import substitution industrialisation model was designed to essentially create a technologically independent India. But in the end what we find is that India continued to rely on imported technology, because a technology development is not something like manufacturing where you can simply create it. It has to be a lot of R&D has to go into it, a lot of effort has to go into it, you need the skills and the training, and of course the researchers that are often involved in technological development. And the Indian incentives, the government incentives were not such that it would encourage that sort of development. As a result of which India, despite the import substitution industrialisation model, became technologically dependent. Then there was a problem of also the so called balance of payments problem. Because India was not creating its own technologies, because India was not exporting because of the import substitution model. What you find that India had a very little export revenues. But it was still importing, although it was not importing very much, in part because the government regulated it. But whatever it was importing was not, less than the exports. In other words, India was always running what we call a balance of payments deficit. So this became also a very, very serious issue, when basically the balance of payments statement tells you how much the country owes to the rest of the world versus how much the rest of the world owes to the country. And if you're running a deficit, especially a persistent deficit, that is year after, year after, year after deficit, then there is a problem because at some point you’ve got to manage your balance of payments. So this was another sort of reason why the Indian growth rate was not particularly doing well, because it was just not exporting enough. Little spillover effects. Spillover effects have to do with how one investment leads to other investments. How one technological development leads to other sort of technological developments. So there were very limited sort of spill over effects. Income on the average that is the per capita income was growing very, very slowly in India, and when you have slow growing per capita income it also means that there is a demand problem. After all, how is economic demand created? Well you have to have purchasing power. And purchasing power means you know, having you know a decent income which would then can be used in the market to buy a goods and services. So, there was a demand problem in India. Even though India has a lot of people. But because so many people are so poor, that the demand, on the demand front, there is a problem. And lastly is that public sector, despite the good intentions of the government in setting up a modern industrial infrastructure, and a bureaucracy to to go with it to transform India from a colonial economy to a modem one. The public sector, unfortunately, for various reasons both administrative and other reasons became quite inefficient and essentially, they rather than creating economic profits or economic surplus so the public sector could then lead to more investments in other sort of sectors, instead became a drain on public resources in other words, they were not making any profit. So for all of these reasons then, we find that the Indian growth rate slowed and essentially the Indian state-led in development model was exhausted.
