Planned Economic Crisis

Everybody makes mistakes; but only those who learn from their mistakes, finally succeed. In the nineties, India admitted its failure with centralised planning and state control of almost all production and mainstream distribution activities and returned to the road that it deliberately rejected in the fifties. Finance minister C D Deshmukh had sought the advice of economists of all hues, from Indian experts to Kalecki, Rosenstein-Rodan, Tinburgen, Frisch, Lange and Kaldor, who had all concurred on the dirigiste system of licensing and controls. The three notable dissenters were Professor Peter Bauer of the London School of Economics, University of Chicago Professor Milton Friedman, 1975 Nobel recipient, and Professor B R Shenoy of the University of Gujarat. Were these people right, then? As the Delhi-based Centre for Civil Society, an independent think tank, has shown with this publication of two articles written by Milton Friedman on India in 1955 -- his memorandum to Deshmukh - -and in 1963, they most certainly were.

Outlook reproduces here the second article written in 1963 -- the first was really a suggested roadmap to attain an "entirely feasible" five per cent growth since "India lacks none of the basic requisites for economic growth except a proper economic policy". Friedman was critical of the focus on heavy public sector industries and traditional handicrafts at the expense of small and medium units, rigid investment and forex controls, high input taxation and excessive deficit financing. The 1963 essay is a relook at and confirmation of what he’d thought would happen in India, how it was happening and what was likely to come out of it. India had nurtured an "influence" society characterised by public affluence and private squalor, he lamented. One third of the people, the poorest, had experienced no change at all in their food consumption in 13 years of planning. "The current danger," he wrote, "is that India will stretch into centuries what took other countries only decades." We leave you to find out how prophetic he was.

Paromita Shastri, Assitant Editor, Outlook

(Reproduced with permission from: Centre for Civil Society, B12 Kailash Colony New Delhi 110048)

Preface
When India attained its independence, it was strongly socialist in its orientation, its intellectual atmosphere having been shaped largely by Harold Laski of the London School of Economics and his fellow Fabians. In the initial decade after independence, a series of left-wing advisers, including Oskar Lange and Michael Kalecki from Poland, and Nicholas Kaldorand John Strachey from Britain, visited India. American advisers financed by the Ford and Rockefeller foundations were for the most part highly sympathetic to the central planning propensities of the Indian authorities.

In 1955, the Indian government was engaged in preparing its Second Five Year Plan-a practice reflecting the strong influence of the Soviet experience. In that connection, the Indian government asked the Eisenhower administration for assistance.The administration recognized an opportunity to counter the influence of the left-wing advice by sending two strong proponents of free markets. Neil Jacoby was one of the two. I was the other one. That is how I came to visit India in the fall of1955 under the auspices of the U.S. International Cooperation Administration (as the foreign aid agency was dubbed at the time). Once I was in New Delhi, I was assigned to advise Mr C.D. Deshmukh, the Minister of Finance.

I spent a very intense month in India, at the end of which I wrote the memorandum that is the second chapter in this publication. It was given to Mr Deshmukh and to my superiors in the International Cooperation Administration, was circulated in the government, leaked in part to the press, and not heard of again until thirty-seven years later when it was published for the first time by Subroto Roy and William E.James in their record of a conference on India held at the East-West Center in Honolulu, Hawaii.'

As I reread it, I am impressed by two features: ( 1) its diplomatic tone, no doubt reflecting my status as a representative of the U.S. government; and (2) its continued relevance to the problems of India today. On the issues it covers, we know no more today about how to promote development than we did then. However, the intellectual climate of opinion is far less hostile today to the views expressed in my memorandum than it was then.

Some seven years after my first visit, my wife and I spent a bit over two months in India. This was part of a year's trip around the world that I spent studying monetary conditions in five countries: Yugoslavia, Israel, Greece, India, and Japan. This time I was in India strictly in a private capacity. We were able to travel widely; talk to many entrepreneurs, academics, economic journalists, government officials,and political activists; visit factories and universities, as well as do a good deal of touring. I gave a number of talks under various auspices and published a few letters and columns in newspapers.

After we left India, I wrote the piece that forms the first chapter in this publication 'Indian Economic Planning'. Initially, I intended to revise it for publication in an American periodical such as Fortune magazine, but for various reasons I never did so. I did, however, send it to a number of friends for criticism. The most interesting response was from Professor B.R. Shenoy who is referred to in my memorandum.

I have been in India only once since our 1963 trip. That was in 1979 when we filmed briefly in India in connection with our television programme 'Free to Choose'.2 Nevertheless, I have tried to follow from a distance the economic developments within India. I continue to be impressed by India's enormous potential and depressed by the contrast between that potential and the minimal progress that has been achieved in the forty-five years since I was first in India. The latest decade shows more signs of change. India may finally be on the way torealizing its potential. If so, it will be a blessing for the people of India and for the world as a whole.

March 29, 2000
MILTON FRIEDMAN
Stanford, California

1. 'Memorandum to the Government of India 1955', pp. 163-76 in Foundations of India's Political Economy: Towards an Agenda for the 1990s, Subroto Roy and William E. James (eds), Sage Publications, New Delhi, 1992.

2. Our several trips to India are chronicled in our memoirs, Two Lucky People (Chicago: University of Chicago Press, 1998), pp. 257-69, 305- .316, 488.

Indian Economic Planning
It is now well over a decade since India embarked on a policy of 'planned economic development'. The United States government has strongly supported this policy, contributing a total of $4 billion in foreign aid through 1962. We have rightly regarded India as a key country in the struggle for the uncommitted nations of the world, as the major counterforce to the influence being exerted in the Far East by China. We have also rightly regarded the incredible poverty of the millions as a challenge to the humanitarianism of the West. Unfortunately, Indian economic policy has not been producing the results that they, and we, hoped for and I do not believe it can do so. That was my tentative conclusion some eight years ago after a two-month visit to India. It has been greatly strengthened by observations during a recent two-month visit, and particularly by a comparison of the situation then and now.

On the positive side, there are clear signs of improvement since my earlier visit. The roads in the countryside are noticeably better, there are many more bicycles and automobiles in both city and country; beggars, though still numerous, seem somewhat less ubiquitous. There are many new buildings, some striking, and more and better hotels; new industrial plants and a few rapidly expanding centres of small industry; there are new universities and evident signs of expansion of old universities. Much of this and more is for the good. But, unfortunately, the progress appears spotty, and some of the appearance of progress is misleading. Many of the most impressive new structures are signs not of progress but of waste, for example, factories producing items at a far higher cost than that at which they can be purchased abroad. Most important of all, there is little that is evident to the naked eye in the way of improvement in the conditions of the masses of the people. On every side, there are extremes of unrelieved poverty that is difficult to make credible to someone who has not been to India. As a friend from Britain remarked, after his first visit to Calcutta where over a tenth of the population have no home other than the street:' One can adjust to a square mile of this kind of thing but when it goes on for square mile after square mile, it is more than one can bear.' These conditions seem to have shown little, if any, change in the past decade.

This kind of casual impression is most untrustworthy, especially when it concerns conditions at a level of living which the observer has never come close to experiencing himself. What the poor in India might regard as a major improvement, you and I might not be able to recognize. However, much objective evidence confirms these general impressions.

One bit comes from work done for a committee appointed by the Prime Minister to study changes in the distribution of income. The chairman of the Committee, Professor P.C. Mahalanobis, is Director of the Indian Institute of Statistics, a member of the Indian Planning Commission, the author of the draft framework of the Second Five Year Plan, and one of the people who has done most to shape present Indian ideas of economic planning. The report of the Committee had not yet been made public when I was in India but Professor Mahalanobis, in private conversation, showed me some of the work he and his associates at the Indian Statistical Institute had done for the Committee. Data from sample surveys of Indian rural and urban households indicate that the poorest third or so of the population experienced no increase what so- it ever in food consumption per capita during the decade of the 50s-which roughly coincides with the first two Five Year Plans. And it must be recorded that food accounts for three quarters or more of the total consumption expenditure of the poor.

Aggregate figures on the consumption of specific items support the general impression given by household surveys. The major items of consumption for the masses of India are food and cloth. The greater part of food consumption is accounted for by foodgrains -- rice, wheat, other cereals, and pulses. Indeed, at the bottom of the income scale, foodgrains alone account for half or more of total expenditure on all items of consumption. Per capita availability of foodgrains has fluctuated a good deal but with no steady upward trend: it was about the same in 1958 as in 1950, in1960 as in 1955. The situation is not much different for cloth. The number of yards of cloth per capita is now no higher than in 1939. The consumption items that have shown the most rapid increases have been items like bicycles, sewing machines, automobiles-not luxuries by western standards but clearly so by Indian standards.

The official estimates of national income-that favourite magnitude of modern growth-men-give only a slightly more favourable impression. National income, corrected for price change, rose during the decade of the first two Five Year Plans 67at the rate of about 3 1/2 per cent per year, but population rose at the rate of 2 per cent a year, so per capita output rose by about1 1/2 per cent per year. And even these figures over state the progress. In the first place, the official figures probably over state the growth in out put during the Second Five Year Plan period because they make insufficient allowance for the price rise that occurred (this overstatement is almost surely much larger than the major error in the opposite direction, which is an underestimation of the growth in the out put of small-scale industry). In the second place, an increasing fraction of national income has taken the form of capital investment and government expenditures. The new and elaborate office buildings in New Delhi, the elaborate luxury Ashoka Hotel built by the government in New Delhi, the strikingly well-appointed and attractive guest houses, as well as all the new buildings, at the newly constructed universities, and, of course, the new automobile plants, fertilizer, steel, and other plants, all these enter the national income at their current costs and regardless of whether they will ultimately add to the national output, as the fertilizer and steel plants may, or be a perpetual drain, as the automobile plants are and will continue to be.

For the purpose of judging progress, the increase in consumption is much. more meaningful than the increase in total out put, both because its measurement is less ambiguous and because the aim of development is, after all, to raise the consumption level of the populace. Even the official figures show that per capita consumption has risen at the rate of only one per cent per year.

Some growth in total out put but at a disappointingly slow rate and with a widening, rather than a narrowing, of the distribution of income: that is the conclusion suggested by all the evidence. I met no Indian economist who did not agree with this general verdict.

Just how disappointing the rate of growth is can be judged by measuring it against a standard that is repeatedly set forth. Time and again one will hear as an article of faith in India that the economic and political pressure for development is so urgent that India must develop at a faster rate than western countries did. A standard cliche is that India must compress into decades what took other countries centuries. There is, of course, much merit to this position. The scope for improvement is tremendous, the desirability of improvement is unquestioned; and it should be easier and faster to imitate than to initiate. But the actually achieved rate of growth to date is lower than was achieved in Britain, the United States of America, and other developing countries during their early stages of development. It is lower than the current rate of growth in Japan, Greece, Israel, Formosa or in Italy, France, and Germany. Even at the officially estimated 1 1/2 percent per year growth in per capita output, it would take over a century of steady growth at that rate for India to reach the current level of per capita income in Japan, and well over three centuries to reach the current level of per capita income in the United States. The current danger is that India will stretch into centuries what took other countries decades.

And all this under circumstances that have mostly been very favourable for economic growth. The achievement of independence from Britain in 1947 raised many real problems, particularly as a result of partition, the relocation of populations, and the bloodshed between Hindus and Muslims. But it also created real opportunities. For decades, the enthusiasm and energy of a sizable fraction of the ablest people of India had been devoted to the independence struggle. They had themselves been engaged in activities that were not merely neutral but actively hostile to economic development and they had persuaded a large fraction of their countrymen to do like wise. Independence released these energies and made them available to promote economic progress. Independence also fostered a weakening of rigid social and economic arrangements, increased flexibility in institutions, greater mobility of people, and in general an environment more suited than before to change. Finally, the years after independence saw a great inflow of resources from abroad. External assistance during the decade spanning the first two Five Year Plans averaged about 11/2 per cent of national income, which means that it provided something like a fifth of net investment; and external assistance was disproportionately concentrated in the Second Five Year Plan period, when it amounted to about 2 1/2 per cent of national income or to over a fourth of net investment. On that score alone, growth should have accelerated during the Second Five Year Plan rather than apparently slowing down a bit.

What is the reason for the disappointingly slow rate of growth? One frequently heard explanation is that it reflects the social institutions of India, the nature of the Indian people, the climatic conditions in which they live. Religious taboos, the caste system, a fatalistic philosophy are said to imprison the society in a strait jacket of custom and tradition. The people are said to be unenterprising and slothful. The hot and humid climate of much of the land saps energy.

These factors may have some relevance in explaining the present low level of income in India, but I believe they have almost none in explaining the low rate of growth.