Economic Planning and India’s Economic Performance: A Re-Examination

0:00Very good morning to everyone. The title of my paper is Economic Planning and India's Economic Performance, a Re-examination. Well, that's the tentative title, anyway. Before I begin, just a little bit of background regarding Indian history, to just put what I'm saying in perspective. For nearly more than a hundred years, or maybe 150 years, India was a colony of the British. In 1947, you know, she got independent from the British. and in 1950 they put in place a Central Economically Planned Economy, went down the road of development planning, whichever way you want to say it. In 91 there were a set of like pro-market reforms introduced, so that's where we stand today. Well, at independence India was a very underdeveloped economy, more than 70% of the workforce made its living off the land, The production processes were very short, there was not many capital goods, nearly 80-85% of total commodity consumption were of agriculture or manufactures based on agricultural materials, which means very short processes of production.

1:11Now, all economists who have analyzed the Indian economy all have concluded that prior to independence, the GDP growth rate of India was in the 1 to 1.5% per annum range, but post-independence and the introduction of economic planning, it went up to about the 4% per annum range and they conclude from this that the introduction of economic planning caused a huge improvement in India's Economic Performance. What is surprising here is that this view is held by economists regardless of their political beliefs. So you have, I mean, of course, India is famous for a, I mean, vast horde of economists who are pro-planning, but there are few who do, who are supposedly free market.

2:01For example, the most famous being Jagdish Bhagwati, who is at Columbia University. ividers. I mean, he's a renegade planner. He was a planner before, but he's now more, he's moving more towards, he's moved towards free market over his career. More recently, there is his student who also teaches at Columbia University, Arvind Panagariya. But what's surprising is that these economists too, even though they support the pro-market movement of the Indian economy post-1991, they all agree that, yeah, you know, the introduction of economic planning did boost India's GDP growth rate. They hedge that. They say that the growth rate wasn't as high as it should have been to eradicate India's poverty. It wasn't as high as other countries' growth rates were, who also gained independence around the same time and didn't introduce economic planning.

2:50But they do, nevertheless, concede that there was this huge boost to India's GDP growth rate. So we can't say that economic performance did not improve. So, I mean, that seemed like surprising to me when I was reading this because I was like, how can you support, like, oppose planning and support the market when you can't, you know, when you're saying that, yeah, the introduction of economic planning did lead to an increase in improved economic performance. I mean, so this is very, I mean, all the leftists, I mean, the Indian leftists, the pro planners, they all generally, you know, they always say that, oh, if only planning had been done If only we had got the bureaucracy right, if only we had actually kicked out all the private producers, if only this growth rate would have been 10%, 12%, but you get my point.

3:44My paper attempts to critique this view that the introduction of planning and the causation between that and GDP. My basic point is that given the nature of the Indian economy and given the nature of production in a centrally planned command economy, that GDP figures can no longer be interpreted as indicators of economic progress. That's my basic thesis. Before I get into a few words about the Indian economy and the planning, I just want to briefly What is the vision of the Indian planners? When we analyze a market-based economy, we are never asked this question because entrepreneurs are producing thousands of different commodities.

4:34Nobody has any one vision which they want to take the economy towards. But in any case where there is a centrally planned economy, the vision of the planners becomes very important. In India's case, the economic planner was Jawaharlal Nehru. I mean, until his death in 1964, and my paper really deals with the first 15 to 20 years of India's post-independence economic history. He was the economic planner and all plans went through him. He was the Prime Minister as well as the head of the Planning Commission. So, even a superficial perusal of his writings will show you that his basic vision for India was to make it an industrial superpower.

5:24So, rapid industrialization, but also not only just rapid industrialization, but rapid industrialization within Indian borders. So we have to produce these heavy machinery, power and all these capital goods, but we have to do it in India, we cannot be dependent on other countries. So I'm quoting from one of his many speeches, he says, the real strength that is for a country comes from industrialization, from modern techniques. The test of real strength is how much steel you produce, how much power you produce and use. And he goes on to say, you cannot advance or industrialize this country without an industrial base. And he says that if you do not establish that industrial base, you not only do not advance fast enough, but you are tied up to other countries who are economically dominant over You are not economically free completely.

6:19So you know, it's like socialism in one country kind of. But I mean, what were the means that the Indian planners used to achieve these ends? They did build up a huge public sector. I mean, under the first three, five-year plans, more than 50% of allocated investment was towards the public sector. And the public sector was built up in specifically these so-called, what Nehru called, mother industries or heavy industries, you know, machine tools, power, iron and steel, things like that. But at the same time, all private firms were not nationalized, I mean, it wasn't like the in the Soviet Union. It wasn't what Mises has called post-office socialism, where every form is nationalized and resembles the post-office. Instead, there was an extensive public sector and it co-existed with this private sector. I mean, I guess you could say India in some ways resembled more a command economy, what Mises would have called a zwangswehrschaft, Okay, but what the government did was it assumed vast powers of control over the private sector

7:33and the key, the most important power of control it had was it introduced this industrial licensing system under the Industries Development and Regulation Act. So under the Act, all private industrial undertakings had to register with the central government. Furthermore, no new industrial undertaking could be set up and no existing undertaking could be expanded without obtaining a license from the government. All licenses minimally specified the product and its maximum quantity. In addition, they could, I mean, the Act gave the central government the right to specify the minimum scale of the plant and the location of production. Over and above this, you had import and export licensing so that the central government could allocate scarce foreign exchange, you had capital issues control under the Companies Act of 1956, which is largely to do with how the private sector can raise capital from the markets and things like that, then there was price and distribution control, a whole Vast set of controls. Now, what is important to understand, and this is sometimes we missed

8:50in when people have dealt with India's economic issue under planning, was that these interventions and controls weren't ad hoc. They were all tools used by the planners to direct private production and investment. So, in a sense, the Indian planners were really smart. They realized that it's a poor country. We're not going to be able to do everything through The State had ultimate control over production and that the private sector was private you could say only In fact, the Ministry of Commerce and Industry of India, when it was describing the criteria on which these industrial licenses were issued, stated that the schemes submitted by the entrepreneurs under the Act are carefully examined, taking into consideration not only the technical feasibility of the schemes, but also certain factors such as the present and future demand vis-a-vis plan targets, availability of raw materials, appropriate location and the importance The importance of the item in the light of the priorities fixed in the plan.

10:13Well, just a short word now about GDP figures. Well, GDP figures measure the value of final goods and services produced in an economy over a given time period. And they therefore necessarily make use of data on prices and goods and services produced. Well, they are historical in nature. So when you look at a GDP figure, it's something which happened at a particular point of time. Those goods were produced at a particular point of time in a certain country. Now when they're used as indicators of economic progress, you implicitly assume, the analyst implicitly assumes that production aims to satisfy consumer desires or consumer preferences because I mean production is never an end in itself, it's only a means to an end. So when you say that the GDP, you know, of a country went up over a certain period of time And that's a good thing, you're saying that, yeah, those goods which are produced aim to satisfy consumer preferences.

11:11Well, so the question that then arises is, does the nature of economic activity, the nature of an economy, I mean, does that affect whether production is geared towards consumer preferences or not? I mean, can you say that a market-based economy as well as a centrally planned economy both cater to consumer preferences?

12:01The revenues that he can generate from that production plan will more than cover the cost that he has to incur on the factors of production. And then of course, if an entrepreneur succeeds in this, he is basically, and if he does make a profit, that means he has allocated resources to areas which satisfy consumer preferences. If he makes a loss, he hasn't and he's out of the market, another entrepreneur stepping. But Mises also pointed out that there are certain institutional preconditions which are required for this process to take place, for this profit loss system to be in place, for there to be what he called monetary calculation, which the entrepreneur uses. Now those institutional preconditions, the institutional precondition is the private property ownership of the means of production.

12:52Mises' second point was that when there is common ownership or when there is socialized means of production that there would be no way the planner would be groping in the dark. There is no cost accounting, there is no way for him to engage in cost accounting, there is no profit-loss system, he cannot calculate. Now I understand that these arguments apply to pure socialism, a socialist world economy where all economies of the whole world are socialist. When you apply it to countries such as India, you have to hedge the argument. I understand that. So, for example, India was just one country in the world economy. Even within India, as Murray Rothbard pointed out in Man Economy State, he said that you You generally tend to overestimate the socialization in, for example, a socialist country like the Soviet Union.

13:47There's black markets, there's the unorganized or the indigenous sectors in these economies which you're not able to take over. But you can say that to the extent that the state allocates scarce resources and capital, that there is huge irrationalities in the factor markets, especially in the market for capital goods, because while you have a black market or while you have an indigenous, they are all engaging in short processes of production, but definitely in the longer process of production in the capital goods, especially when a poor country like India is taking on rapid industrialization, the argument holds especially for those industries.

14:35But we have to remember that Mises' argument, I mean you could in that argument assume that planners are trying to satisfy consumer preferences. In fact that was a strength, I mean in my view of Mises' argument, he said even if planners are there saying look we want to satisfy consumer preferences, even then they wouldn't be able to do it because they don't have factor markets, you know, there is no cost accounting, there is no profit-loss system. But we see that in the case of, for example, India, that planners weren't even trying to be economic. They weren't, they were blatantly uneconomic. I mean, they were basically, they weren't saying that, yeah, we know there are consumer preferences, we know we have to produce and cater to them. The market is irrational, it's anarchic, we'll do our best.

15:22No, they were saying, what we need to do is to rapidly industrialize. We need to take a poor country which prior to independence was importing most of its capital goods and we need to convert it into this industrial superpower. So they are being blatantly uneconomic. I mean they are blatantly not even trying to satisfy consumer preferences. So I mean as a result you can see that in a command economy such as India's, the state makes production decisions, prices if they exist are mere parameters, profit-loss systems Breakdown, and most importantly, production becomes an end in itself, like it's no longer a means to an end, an economy is more like a machine. So that has implications for what we can say about GDP figures and whether we can interpret GDP figures to be indicators of economic progress or not. So, I mean, that's my basic thesis, that given the nature of the Indian economy, given that it was highly, more or less a command economy, given that

16:24There were planners of blatantly uneconomic in their proposed allocation of resources that you can no longer say that just because the GDP growth rate went up that it was good or it was a signified economic progress. I mean, in conclusion, what I'd like to say is, I mean, this is something I've not worked on enough, but that, okay, if you don't look at GDP, you need to try to look at something

17:22It's called India Progress or Poverty. It's a monograph issued by the IEA in 1971. I mean, it's a short book, but her breadth of historical knowledge about India is phenomenal. And in that she actually does a bit of what I'm hinting at. Hinting at, she looks at things like the food grain consumption per capita and the extent of cotton textiles or cotton yarn per capita and she looks at things like that and finds that through that period, they stayed more or less the same and there was no true development.

18:08Thank you for your time. applause

18:27Sorry, I couldn't get a question.

18:39and India means that the challenge is out of the realm of planning.

19:09or what they call the tier 2 or the tier 3 cities, not only the basic 4 or 5 metropolitans. It's because of the reduction in economic planning, because now more and more allocation of capital is in the hands of the private entrepreneurs. I believe that, yeah, I mean, you def without and that was the greater the extent of planning, the greater the extent of restriction of factor markets, the tougher you're going to have It's not that there's no planning, it's a question of who's to do the planning, politicians or participants in the market. There's an American law and economics scholar named Bernard Sagan, the late Bernard Sagan, who wrote a book called Land Use Without Planning, and a part of it is a case study of Houston, about 100 decades without any zoning laws, and they didn't find that Houston was still there, and so on.

20:05So it's still not known yet. So it's a myth that government planning for urbanization. Bring in the previous talk. One of the things that happen in India is that they allow capital to come in. Is that correct? Now there's people on capital, you can buy stocks in India. Yes, yes, much, much, yeah. Sure. How transparent is this thing? Do we need these international accounting things to help reassure investors in the United States about this one?

21:01I'm paraphrasing here, he said that he asked Mises this question, that if you line up all economies from the most market based, the most socialist, what is the one feature which swings it one way or the other, and Mises replied the existence of a capital market. So in that sense, the Indian stock market is alive and kicking post-91 as compared to pre-91, so in that sense I guess you have a lot more transparency that comes with greater trade. Just to tie that comment also, the idea that many people have that, let's say there's an Indian firm seeking capital on foreign capital markets, there are outside investors who might be willing to make that investment, if only they receive pieces of information A, B and C, the idea that the Indian firm would be unwilling to provide that information in the absence of a state mandated disclosure system implies that these firms and investors are leaving huge amounts of money on the table.

22:00but are there obvious incentives for private planning, so to speak, or for the degree on standards of information disclosure that will be mutually beneficial? My question is, to what extent are you aware of literature or have you looked yourself at the actual compilation of GDP statistics in India, which obviously is done by a bureau which has incentives to supply the information that the planners want and also to what extent are they able to gain the historical numbers from pre-planning funds?

22:54My argument, basically, what I feel is that I don't need to get into that. Even if the figures are right, it doesn't matter. Even if all the figures were collected, you know, honestly by all government officials and there's nothing you can, you know, you can't raise a finger about that, it still doesn't mean anything. You still can't interpret it as, you know, as indicators of economic progress. And that's why I didn't get into that. That's why I didn't get into that. I'm aware of it. I'm just curious, I'm just wondering if India used to have an inter-application between the producer and the company, and whether they might actually consider __________

23:50They still come out with five-year plans. I think we're on the 11th or the 12th right now. They do come out with it, and it's more now towards social welfare programs, such as poverty alleviation and things like that. But while that's there, I don't think that those input-output, the state is not allocating capital on the basis of those input-output, on the basis of the cyber plans anymore because they have basically reduced the extent of control over the private sector.

24:28Okay, thank you very much.