India in transition : Jagdish Bhagwati

Not review but some points which I noted when I was reading the book long back.

• Morris Cohen – American philosopher
• Peetamber Pant – Planning commission member
• Adam Smith – The theory of moral sentiments
• James mill – History of British India
• Sidney morganbesser – when asked about Mao’s statement that a proposition may be both true and false he said I know and I do not know
• Henri bergson – great advantage of time is that prevents everything from happening at once
• Childhood was discovered in Europe in 13th centur but it became more significant in 16th-17th century. Children were transformed from valuable wage earners to economically useless but emotionally priceless objects
• Herbert Spencer – the ultimate result of shielding men from the effects of follies has been to fill the world with fools
• The worst psychological state to be in is to have a superiority complex and an inferior status – India before 1990
• J lewis – Quiet crisis in India
• Moore – Social origins of democracy and dictatorship
• Selig Harrison – India the most dangerous decades
• Raj Krishna – Hindu rate o growth – 3.5 %
• Reform by stealth – Mrs. Gandhi
• Reform with reluctance – Rajiv Gandhi
• Reform by storm – Narsimharao
• US view
o 1960 – If china succeeds and India does not, other countries will follow that path.
o Honey attracts flies, gold attract diggers and India attracted economists.
• Harrod domar model talks about rate of investment and productivity of capital. For policy purposes productivity of capital was assumed and thus complete emphasis was on accumulation.
• People thought democracies can’t extract savings which totalitarian countries can garner and were thus at inherent disadvantage.
• India did well on rate of saving and investment but productivity of capital was low.
• In late 70s and 80s perceptions were running ahead of the realities both in cas of china and to a limited extent in case of India.
• Perceptions were driven not by remarkable economic performance but by whether the policy framework was changing in the direction of market oriented reforms.
• Rajiv Gandhi’s reforms were aimed at changing the nature of intervention but not at eliminating them.
• There is no simple relationship between democracy and growth rates if cross country regressions are run.
• Authoritarianism seems to be neither a necessary nor a sufficient condition for rapid growth, on such evidence.
• Weak excuse for India’s low growth
• Growth now may at expense of growth later – latin America
• More compared to pre independence
• India is special , eastern economies were small
• India is democratic
• Lack of growth was the reason for India’s failure to eradicate poverty
• There are two routes to ameliorate property : direct help or through growth
o Both should be used unless one is dominant
o Even if direct route helps second is required because it will enable state to take second route
o Till 80’s poverty and growth were treated In isolation and often in opposition
• He does not agree with the claim that economists ignored poverty at the cost of growth I n1950 and 1960 rather he argues they chose a path of growth to ameliorate pverty
• Indian strategy was of active intervention by government and has author calls it “pull up”
• Poverty persisted in India not because there was wrong emphasis on growth but rather because there was little growth
• Poverty goes down in years of good harvest
• Growth may not be not only slow but also distorted if one has autarkic inward looking strategy thus favoring capital intensive industries on labor intensive one
• Did we get satisfactory growth from our investments?
• Low growth resulted from low productivity as savings were always adequate



• Why productivity was low
• India’s productivity suffered from both the oppressive framework above and illiteracy below
o Saving overestimated? –relative prices and quality of capital good
o Income underestimated? –Black economy – it may be more efficient as it escapes inefficiency of formal economy
o Capital directed towards low productive industries
• Agriculture became more capital intensive with green revolution – but even if you expand land diminishing utility comes in picture. Further growth in productivity would compensate for this
• In industrial sector shift towards capital intensive industry – almost all industries had low productivity . A broad based and prolonged phase of total factor product stagnation in Indian industry between 196-70
o Bureaucratic control
• Control on import export product diversification capacity expansion allocation of imported inputs
• If no industrial licensing we will spend resources in producing lipsticks
• This originated from lack of trust in market when scarcities are acute and tasks are challenging and failure to understand that markets in general work better than central planning as resource allocating device
• The argument was that central planning will calculate costs better but they forgot that central planning will not have access to information
• There were theories supporting identifying and guiding the investments to be coordinated
• Indian planners assumed export pessimism and putty clay technology
• India’s misfortune was brilliant economists who could rationalize everything , far east was spared of them
• One purpose was to prevent monopoly or prevention of economic control in few hands but there could be better ways than licensing as licensing inherently helps haves not have nots
• Small scale sector protection - textile was sacrificed for handlooms
• But the attitude to think that growth of large industry will crowd out small industry was misplaced
• Indian industry could neither become competitive worldwide not could it harness domestic market
• Further regional balance approach – further dividing small capcities that were allowed thus losing economies of scale
o Inward looking trade and foreign investment policy
• Manmohan Singh wrote his thesis that Indian export pessimism was unjustified
• Protection in domestic market made it attractive while restrictions disabled Indian firms from competing globally
• This export driven could have broken the limits imposed on industrial demand from natural limits of agricultural growth
• Import control promoted expanding inefficiently as imports were allotted on capacity basis
• Closed foreign trade and high saving made Indian manufacturing capital intensive rather than labor intensive. Thus wage and employment did not benfit from labor intensive export industry
• Restriction on foreign capital impeded absorption of new technology or their incubation
o Large public sector going beyond what is convention and public utilities and infrastructure
• Fabianism supported gradualism than outright nationalization
• Even electricity , telephone , steel , transport were put in public sector i.e. infrastructure thus they also made private sector inefficient
• Overstaffing and workers being paid for overtime
• Policy of taking over sick private units to respond to public pressure
• High wage and salary bill cut down investment on capital goods crating infrastructure bottlenecks further declining productivity of many user industries
• Payment crisis and subsequent conditions imposed by IMF were not alien but were very much required
• Now question was not whether reforms but in what speed with what sequence and with what chance of success
o Failure to spread primary education and literacy
• Protestant asked everyone to read bible ,thus spreading literacy
• Industrial revolution and child labor law
• Caste system in India has made education useless






• What is to be done
• Macroeconomic crisis made necessary microeconomic reforms
• Multiple governments prompted large spending in small time
• Soft state had arrived by 1980 eliminating celebrated macroeconomic discipline
• Civil service failed miserably in raising the alarm
• Low credit rating – so no private borrowing
• Remittance from gulf dried up
• NRI deposits were withdrawn
• Almost negligible FDI
• Diversion of aid from asian and African countries to erstwhile soviet union
• Increased demand in USA for spending on education and social care
• Funds were low so efficiency was demanded
• Even communist and latin American nations had left anti FDI or anti trade stance so environment was changed
o Indira Gandhi’s upbringing and her past political experience made her at best reluctant reformer
o Rajeev Gandhi was first PM to have done honest work outside politics so he knew deficiency of system
o Reforms till date
• Reforms are foreceful and explicit as opposed to earlier time
• Bicycle theory of reform – keep on reforming in different sectors continuously so as to prevent opposition from having a static target
• Both licensing and exchange control had to go as they were interlinked
• There was support for two step – first mak domestic industry used to competition and then open it but india had no choice in matter
• Rather than import tariff or export subsidy devaluation is better ???
• Promiscuity is easier than marriage and flirting with convertibility was done rather than full account convertibility
• FDI – from arm’s length technology transfer to cultivating direct equity investments
• Impostition of hard budget and competition will make PSUs efficient
• Public sector works on premise that given scarcity of jobs it is bad enough to find one job in a lifetime and to ask people to find two is nothing short of cruelt
o Why reform will stay
• Nothing succeeds like success
• It should not be growth driven by exceess borrowing like latin America
• Domestic market alone can’t attract FDI
• Play Japan card
• In gulf war Japan finance USA instead of giving money to poor Asian nations
• Rajiv Gandhi was not clear that reforms are needed to fight poverty . he seemed to be just fascinated
• Reforms are not prelude to laissez faire but move to productive intervention
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