One Step Forward, Five Steps Back

Alternate history is a genre is underrated. I should say at the outset that I haven’t read as much as I would have liked to in this genre, but have thoroughly enjoyed what little I have read (or seen, in terms of movies).

Why begin with this? Because Niranjan raises, as he puts it, a tantalizing question:

The short period when Lal Bahadur Shastri was prime minister offered hope of change. Shastri wanted more investment in agriculture to control rising food inflation. He saw that physical controls were creating artificial shortages and black markets; he preferred financial controls. And the failures of the public sector convinced him that the private sector should have a bigger role in the economy. One of the tantalizing questions in Indian economic history is whether India would have embraced liberal economic reforms 25 years before 1991, if Shastri’s tenure had not been cut short by his premature death.

But if there is somebody reading this whose interests lie at the intersection of writing fiction and studying economics, boy do I have a project for your consideration. What if agriculture had become more productive and efficient back in 1965? What if we had moved away from the License Raj, rather than embracing it wholeheartedly? What if – the most ‘if only’ question of them all – 1991 had instead been 1965?

Please, somebody, write this book.

But alas, we went in a whole other direction. It all began promisingly enough, but things soon went awry:

Indira Gandhi began with a relatively liberal economic agenda, including devaluing the rupee as well as easing trade restrictions in response to balance of payments pressures. However, in response to the international geopolitical situation as well as domestic political calculations, she swung to the Left after 1969. The economy was choked with stringent licensing, credit rationing, import controls, as well as draconian laws such as the Monopolies and Restrictive Trade Practices Act and the Foreign Exchange Regulation Act. A series of exogenous shocks between 1965 and 1980 — wars, droughts and oil prices — further battered the economy.

I would strongly encourage young readers and folks new to economic theory to go over the presentation linked to in this blogpost. Why do I recommend this presentation? Because it is one thing for Niranjan to say that Indira Gandhi ‘swung to the Left after 1969’ because of domestic political calculations, and it is quite another to model why this was inevitable. Economics, remember, is the study of how to get the most out of life, and Indira Gandhi chose to get the most votes. This presentation explains why.

Economics is also the study of opportunity costs, and this presentation explains to us the cost of her choices. India fell behind when compared to some of her Asian peers in this period, and any student of Indian economics must almost heave a wistful sigh when studying this era of India’s economic history.

But the other reason I ask you to go over that presentation is because it helps you understand decisions made by all political leaders in all electoral democracies everywhere in the world. And as students of economics, it helps to understand how politicians respond to their incentives. This helps you become a better analyst of both economics and politics, and therefore of public policy.

The 1970s were a lost decade, with low growth and high inflation. However, there were two significant structural breakthroughs. First, the Green Revolution that began in the late 1960s helped India make a big dent in the food constraint. Second, the domestic savings constraint eased, perhaps helped by the spread of bank branches after nationalization. There were also the first signs of introspection on the nature of Indian economic policy in several official committee reports, though actual policy reforms were not yet on the horizon. The underrated budget speech by H M Patel in 1978, as finance minister of the short-lived Janata party government led by Morarji Desai, deserves more attention.

To me, what is most interesting in this paragraph is what Niranjan doesn’t say in it. In my personal opinion, this decade is worth studying not for its datasets or its metrics, but for the weakening of India’s institutions. The Solow Model is a great way to think about the growth trajectories of nations, and what students often miss out in the Solow Model are the underlying assumptions. Well defined property rights, a strong and independent judiciary, free and well-functioning markets, and a legislature that doesn’t indulge in over-reach are crucial for reasonably rapid long-term growth, and I would argue that all of these were missing either in parts or wholly for much of the 1970’s.

Niranjan hints at part of this in the paragraph that precedes the one I have extracted above, but there is much more going on in that unfortunate decade. If you wish to learn more about this decade and the impact that it has had on our growth trajectory, come to the economic data and its analysis last. Begin with biographies of the more important public personalities of those times, read about landmark judgments passed in and around that decade, and speak to journalists and political scientists who were around back then, or have studied that era well. Once you get a sense of the politics and the culture (political, social) of that decade, then start upon the economic analysis. That would be good advice in general, I suppose, but it is particularly applicable to the 1970’s. Oh, and watch the movies that were being made back then!

There is far too much going on in this decade for us to speak meaningfully about it in a single blogpost, and I hope to come back and write/speak about this topic later. But for the moment, I wish to leave you with my own sense of utter regret and wistfulness regarding the 1970’s. There was some progress, of course, but there was, in my opinion, much that was wrong, and too little that was right.

Growth always matters, but it really and truly mattered back then, and we failed to optimize for it.

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