INDIRA GANDHI'S ECONOMIC POLICIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700050020-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 18
• Document Creation Date: December 20, 2016
• Document Release Date: March 10, 2006
• Sequence Number: 20
• Publication Date: February 1, 1973
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Indira Gandhi's Economic Policies
Confidential
ER IM 73-22
February 1973
Cop No.
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
February 1973
INTELLIGENCE MEMORANDUM
INDIRA GANDHI'S ECONOMIC POLICIES
SUMMARY
1. Indira Gandhi in her seven years as Prime Minister of India has
pushed for detailed government control over large-scale industry, for greatly
increased production of foodgrains, and for diminution of private foreign
investment. Her economic policies are essentially modifications and
extensions of earlier Indian policies and do not represent bold new
departures in the direction of the economy. Because Mrs. Gandhi is
primarily a politician, her economic policies tend to be piecemeal and
lacking in consistency and depth.
2. Control over industry takes the form of a growing web of licensing
requirements designed to regulate the direction, scope, and ownership of
new plant facilities above a certain size. For example, investment proposals
by firms with more than 200 million rupees (Rs)1 of assets (or Rs 10
million if the firm controls more than one-third of the market for a
particular product) must be cleared by government committees. The system
is complicated by exclusions for technologically advanced goods and export
goods and by discrimination against foreign-owned businesses.
3. From the beginning of her term as Prime Minister, Mrs. Gandhi
has given more weight to agriculture in the allocation of resources than
did her predecessors, who emphasized industrial expansion. In an effort
to make India self-sufficient in grains and to build up emergency stocks,
Mrs. Gandhi has embraced the "Green Revolution." Under her general
direction, the strategy has included (a) concentrating the new technology
1. The Indian rupee was valued at approximately US $0.13 at the foreign exchange rate that
prevailed prior to 13 February 1973, which greatly overstated the real value of the rupee.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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on areas of assured water supply; (b) giving priority to the increased supply
of chemical fertilizer, pesticides, and up-to-date equipment; and (c) fixing
grain prices at levels that encourage increased output. Until the disastrous
1972 monsoon, this policy was crowned with success - wheat output alone
had doubled in four years.
4. A long-time partisan of socialism through democratic means,
Mrs. Gandhi has not concealed her antipathy toward private foreign
investment and her wish to be free of foreign aid. In addition to the stringent
screening of new investment proposals sponsored by foreign firms, the
Indian government harasses existing foreign firms, throwing in occasional
threats of nationalization. The US oil companies Exxon and Caltex and
US pharmaceutical companies are favorite targets. Net foreign aid has
declined from an annual rate of $1 billion when Mrs. Gandhi took office
in 1966 to perhaps $130 million in fiscal year (FY) 1972.2 Even if
Mrs. Gandhi had not wished to reduce India's dependence on foreign
assistance, the rising level of debt repayments and the weariness of foreign
donors would have caused a substantial decline in net aid.
5. Important political and economic constraints reduce
Mrs. Gandhi's freedom of movement. Three of these are:
? The burgeoning defense budget now takes 4% of
India's gross national product (GNP) and absorbs much of its
dearly bought technological skills.
? The desperately poor Indian masses are reproducing
at a rate that eats up much of the gain in agricultural output.
? The political issues stemming from poverty,
unemployment, and regionalism limit the extent to which
modern methods and incentives can be introduced into
agriculture and industry.
6. At the beginning of 1973, Mrs. Gandhi surveys an economy that
is in disarray. Industry is stagnating because of overcontrol by government
bureaus, shortages of agricultural raw materials and imported industrial
materials, and inadequate foreign technical support. The agricultural crisis
stemming from the erratic 1972 monsoon is leading to a drain on foreign
exchange reserves, serious shortages of grain, and renewed dependence on
imports of grain from foreign nations, including the United States. The
population growth rate remains high, and increased hunger and disease are
the grim prospect for at least the next few months. In this bleak and
deteriorating economic situation, Mrs. Gandhi is making adjustments to the
necessities of the moment without abandoning her basic economic goals.
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7. The political entity known as India is an amalgam of hundreds
of small societies with widely different social, religious, and linguistic
traditions, but bound by a widely felt spirit of nationalism. Similarly,
economic activity exhibits extreme variations - from the most primitive
agricultural and handicraft operations to the modern practices of the Green
Revolution and the manufacture of jet military aircraft. Among the
noteworthy characteristics of economic life in India are:
? The prevalence of traditional ;solated village life in
vast rural areas;
? The Malthusian pressures of a huge population of
more than one-half billion operating with inadequate land,
equipment, and technology;
? The enormous disparities in income caused by the
caste system, the unequal ownership of land, and the restriction
of major entrepreneurial opportunities to a privileged elite;
? The bureaucratization of economic activity,
particularly in urban areas, with the resultant tangle of red-tape
and foot-dragging; and
? The key role in economic development of the small
class of Western-influenced English-speaking scientists,
engineers, politicians, and planners.
8. The dominant political and economic characteristics of India make
economic development an extremely difficult process. The development
strategist must face not only the problems of how to mobilize a portion
of India's scant resources for investment and modernization but also the
problems of introducing change into a lassitudinous and tradition-bound
society. Mrs. Indira Gandhi, who began her eighth year as India's Prime
Minister in Janur ry 1973, came to power dedicated to the concept of a
centrally planneu economy. She committed herself during the 1971 election
campaign to the slogan garibi hatao (banish poverty) and, in addition to
the goals of economic development, is pledged to such social measures as
land reform, income redistribution, and fuller employment. Mrs. Gandhi
has faced serious political and economic constraints in moving toward these
goals, such as the defense requirements stemming from continuing hostility
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between India and Pakistan and an uneasiness about relations with the
People's Republic of China (PRC) since the 1962 border war. This
memorandum assesses Mrs. Gandhi's economic policies and the direction
in which India's economy is moving under her leadership. An Appendix
presents major economic indicators for 1964-72.
9. In the 1950s, India's planned economic development was
considered by many to be a model for other developing nations. India was
rapidly acquiring an impressive layer of modern industry and technology
which was being superimposed on the largely agrarian economy. In the 15
years following India's constitutional formation as an independent republic
in 1950, a national Planning Commission was pre-eminent in articulating
and leading this national economic advance. Prime Minister Nehru was the
first chairman of the Commission, which contained some of the country's
most promising executive talent. The Commission also tapped the talents
of top economists. For example, Professor P.C. Mahalanobis, a noted Indian
statistician and economist and one-time head of the Indian Statistical
Institute, played a decisive role in formulating the Second Plan (1956-60).
In addition, many foreign economists such as Oskar Lange and Paul
Rosentein-Rodan made important contributions to the planning process.
Failures under the Third Plan (1961-65), however, permanently reduced
the Commission's prestige and power.
10. From the beginning, India's industrialization has been constrained
by concurrent social welfare goals, such as the alleviation of poverty, the
reduction of unemployment, and the achievement of a more equitable
distribution of income. In the early years, a maze of industrial controls
was initiated to forward these goals, including measures to promote
small-scale and cottage industries, to develop backward regions, to stabilize
prices of consumer goods, and to maximize industrial employment. The
Industrial Development and Regulation Act of 1951 called for government
licenses for practically any new industrial project. The 1956 Industrial Policy
Resolution went much further in providing for increased public participation
in the country's development. The Resolution authorized the government
co undertake any industrial activity and reserved basic heavy industries such
as coal, petroleum, and iron and steel exclusively for the public sector.
The private sector could continue to participate in any other industry, under
government licensing procedures.
11. The industrialization drive that began in the mid-1950s
concentrated on increasing the capacity and output of industries that
produced goods then being imported - i.e., it stressed a policy of "import
substitution." Imports were tightly controlled. The result was high costs
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for a protected home market. At the same time, India's import needs were
badly underestimated because the industrial expansion continued to raise
requirements for imported machinery and industrial materials. The trade
deficit increased steadily. Private foreign investment was prohibited in this
period except in industries, such as petroleum and chemicals, that required
huge chunks of investment and/or large doses of foreign technology.
12. The principal export industries, such as cotton textiles and jute
manufactures, remained predominantly in private hands and received
practically no government policy support. On the contrary, they were taxed
heavily to help pay for investment in heavy industry. In addition to the
tax burden, India's exports were adversely affected by an overvalued
exchange rate. Third, when a large domestic market existed for an export
product, the government frequently imposed export quotas. Finally,
industrial profits were squeezed by liberal labor legislation and by union
pressures against the installation of modern labor-saving equipment.
13. During 1956-64, national income gains averaged about 4% per
year - industry moving ahead at 8% and agriculture at 3%,' or roughly
abreast of population. This period of reasonable progress came to an end,
however, in 1965:
? Drought caused agricultural output to fall so sharply
that widespread famine was threatened.
? Industrial operations dropped to 60% of capacity
because of a combination of reduced demand, shortages of
agricultural inputs, difficulties in obtaining imported machinery
and materials, and growing governmental red tape.
? Exports continued to falter, and the cumulative
effects of balance-of-payments deficits became serious.
? War with Pakistan brought higher prices and new
problems in government finance and allocation of resources.
When Mrs. Gandhi came on the scene in 1966, the earlier emphasis on
building up the heavy industrial sector was already being abandoned and
new emphasis was being placed on agricultural production, particularly
foodgrains.
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14. When Indira Gandhi assumed the post of Prime Minister of India
in January 1966, she thus faced a sticky economic situation with no easy
solutions in sight. Because her main interests -- by temperament and
training - are political rather than economic, she is reluctant to concentrate
on economic problems. Even if she were so inclined, she has neither the
expertise nor the determination to push forward with bold new economic
approaches such as radical land reforms, which conflict with the vested
interests of important blocs of political support. The following discussion
of he,- economic policies deals principally with her policies toward the
control of industry, the stimulation of agriculture, and the achievement
of independence from foreign investment and technology.
Policies Toward Industry
15. In 1966, Mrs. Gandhi's first year in office, a number of industrial
regulations were relaxed in an effort to stimulate production. The
government exempted 42 industries - including several industries of
importance to agriculture and exports -- from the licensing provisions of
the 1951 Industrial Development and Regulation Act. Regulations regarding
the diversification of industrial production were further liberalized in
October 1966. In order to permit quick adjustment to technological
developments and to the changing requirements of foreign and domestic
consumers, new articles could be manufactured for the first time without
a license. In typical fashion, however, there were detailed qualifications on
the new freedom: no new foreign exchange expenditure could be used;
no additional plant and machinery could be installed; and output of the
new article could not exceed 25% of total production. Mrs. Gandhi also
announced it 1966 that industrial firms could increase output up to 25%
beyond licensed capacity without 2 new license. This privilege was denied
to the so-called "larger firms,"3 foreign firms, and others with assets of
more than Rs 50 million.
16. In spite of these more liberal industrial policies, industrial
production was lower in 1966 and 1967 than in 1965. Inadequate supplies
of inputs, especially raw cotton, steel, nonferrous metals, and oil seeds,
hobbled several important branches of industry. Supply shortages arose in
part from New Delhi's inability to arrange for adequate imports and in
part from ag'?icultural policies that downplayed industrial crops. Related
factors in the industrial decline were spot shortages in capacity and sluggish
demand for certain projects. All these difficulties were compounded by the
3. A total of 1,005 firms, which are interconnected with 20 industrial groups, had assets of more
than Rs 350 million in 1964.
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ponderous bureaucratic controls over industry. in 1968-70, however,
industry pulled out of the recession and production increased about WX
annually. The recovery is attributable to increased supplies of agricultural
raw materials, higher agricultural incomes, and, with the fall in food prices,
increased demand for such products as cotton textiles.
17. Mrs. Gandhi's industrial policies, under increasing attack from
leftists even within her party as being "soft" on big business, hardened
in 1970. A new industrial licensing policy reduced controls over smaller
investments, while further tightening controls over the direction and scope
of investment by the larger industrial firms. For example, new undertakings
for the expansion of existing units requiring an investment of less than
Rs 10 million were generally exempted from the licensing requirements.
New investments in 128 new product lines also were reserved for the
small-scale sector. Investments from Rs 10 million to Rs 50 million in
certain industries were assigned licenses liberally, except if proposed by the
larger industrial enterprises or by foreign-owned firms.4 The policy
ostensibly allows larger firms to expand only into strategic industries where
large-scale investment and advanced technology are essential. Nevertheless,
the policy is not rigidly enforced against export-oriented industries and
industries established in backward areas. Investments in these latter sectors
of more than Rs 50 million have been open to the larger industrial houses
and foreign firms, subject to the reservation made in favor of the public
sector in the 1956 Industrial Policy Resolution.
18. Also in 1970, the Monopolies and Restrictive Trade Practices Act
became law, supplementing the controls administered through the industrial
licensing system. Under this law, most investments by firms with more than
Rs 200 million of assets, or by firms with assets of more than Rs 10 million
that control more than one-third of the market for a particular projcct,
must be approved by the government. Proposals by the larger firms have
to be sanctioned by a newly created cabinet-level Committee on Economic
Coordination headed by Mrs. Gandhi.
19. In a further turnabout, the 1970 Industrial Licensing Policy was
relaxed in January 1972 in an effort to ensure fuller use of installed
capacity. The relaxation did not apply automatically to companies in which
foreigners own a majority of the equity or to companies belonging to the
larger industrial houses. Certain industries, including agricultural tractors and
machinery, fertilizer, basic metals, and iron and steel, are allowed to increase
4. In 1970, private foreign investors held about one-fifth of India's industrial capital assets. The
United States alone accounted for about 151% of total private foreign investment in India. US
investment is concentrated in the petroleum refining, pharmaceutical, and othe? manufacturing
industries.
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their output up to 100% above the production levels specified under their
licenses provided they do not require additional investment to do so.
20. In addition to licenses and other direct controls, Mrs. Gandhi's
policies have included a number of financial measures which provide even
further government control of private industry. An eouity conversion clause
is normally included in loans of more than Rs 5 million from public
financial institutions; this clause can be used as an arbitrary way of
increasing control over the borrowing firm. In addition, shares pledged to
secure bank loans of more than Rs 50,000 must be transferred to the
lending bank along with voting rights.
21. Prime Minister Gandhi has continued in her efforts to maximize
employment by promoting small-scale endeavors. This objective is partly
in conflict with the objective of modernizing large-scale industry. The
protection of inefficient, labor-intensive techniques in village industries
retards the development of the organized industrial sector, reduces the
volume of savings available for investment elsewhere, and thereby slows
the overall pace of development. Similar consequences have emerged from
Mrs. Gandhi's continuation of policies that freeze levels of employment
in organized industry and discourage the introduction of modern equipment.
Restrictions on the dismissal of workers contribute to managerial rigidity
and inefficiency. Mrs. Gandhi's restrictive policies were largely responsible
for a slowdown in the growth of industrial output -- from an average of
6% in 1968-70 to 3% in 1971 and about 4% in 1972.
Agricultural Policies
22. Until 1972's disappointing monsoon, Mrs,. Gandhi could point
with pride to the performance of the agricultural sector, especially in
foodgrains. After her accession to power, agricultural production rebounded
sharply from the drought and continued to progress under her policies.
The average annual rate of growth in output was 6% between crop years
1966/67 and 1971/725; foodgrains alone rose 7%. This track record
probably was a critical factor in Mrs. Gandhi's resounding election victory
in March 1971.
23. Preceding administrations had emphasized growth in industrial
production, particularly for "import substitution." Mrs. Gandhi's policy was
to shift resources toward agriculture, not only to boost current production
and consumption of food but also to build up stocks so that periods of
bad weather could be suffered without recourse to foreign supplies of food.
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To this end, agriculture and related activities received 43Jo of government
development funds in 1966-71, compared with 35% in the previous five-year
period.
24. The Green Revolution provided the technology needed for rapid
progress. Mrs. Gandhi's strategy consisted of (a) directing this new
technology to areas of assured water supply; (b) providing increasing
quantities of chemical fertilizer, pesticides, and other modern inputs; and
(c) guaranteeing grain prices at levels that encouraged additional production.
Mrs. Gandhi's policies did not change the private ownership of agricultural
production. Also, wholesale trading of agricultural production was left
essentially in private hands. Mrs. Gandhi, however, greatly expanded the
government's grain procurement programs in order to build stocks for
emergencies and to provide for distribution, at subsidized prices, through
a nationwide network of government-controlled fair-price shops.
25. These agricultural policies, while stimulating foodgrain
production, helped create shortages of oilseeds, cotton, and jute mainly
because acreages of these crops stagnated or declined while the area and
yields of foodgrains increased. The resulting shortages of raw materials
contributed to the slow growth in industrial production, to the decline in
exports of traditional commodities, and to the short supplies of consumer
goods that brought rising prices.
Policy Toward Private Foreign Investment
26. A third theme in Mrs. Gandhi's economic policies has been the
attempt to diminish -- and ultimately eliminate -- the role of private foreign
investment and foreign aid. The government has moved to reduce the volume
of private foreign investment and to limit the autonomy of the remaining
investment. As to volume, New Delhi encourages only private foreign
investment that provides essential new technology or is devoted to increasing
exports. New foreign investors normally must accept a minority interest,
giving up the ultimate control and management of their invested funds.
Even old-line foreign-controlled firms have been under constant pressure
to reduce their equity to a minority position. Applications for direct
investment are rigidly screened by the government in a long drawn out
bureaucratic process that may take years. Furthermore, Mrs. Gandhi's
policies curb profits and capital repatriation. For example, in 1972 a policy
was adopted that restricted the repatriation of reserves by wholly owned
foreign companies. In addition, a 1972 policy that prohibits foreign oil
companies from marketing non-petroleum products under their brand name
reduced profits. Finally, the policy of progressive Indianization of foreign
firms requires the steady replacement of foreign with Indian managers.
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27. Mrs. Gandhi's policies originally did not discriminate against US
firms in comparison with other foreign firms -- they were all subject to
new regulations and pressures. Following the halt in US economic aid in
1971, however, the United States was given short shrift as a source of new
technology and equipment if they could be found in other countries. Two
US oil firms, Exxon and Caltex, which account for nearly 50"Io of all US
private foreign investment in India, have been special targets of the domestic
political pressure on Mrs. Gandhi's government to take over the operation
of private foreign oil companies. The large US pharmaceutical interests have
also come under close scrutiny. By early 1973, the flow of private US
capital into India had shrunk to practically nothing. Many US firms in India
have been trying to accelerate the repatriation of profits, reserves, and other
capital before the situation deteriorates further. The warming trend in
Indo-US relations in early 1973 could improve the situation, or at least
slow the pace of deterioration of US business's position in India.
Economic Aid: Going But Not Gone
28. With respect io foreign aid, Mrs. Gandhi has stated that the
reduction of dependence on foreign aid is inescapable. Even if the Indian
leaders wished to - or had to - continue acceptance of large-scale foreign
aid, there is a climate of aid weariness in donor countries. Foreign aid was
crucial during the 1960s for maintaining a higher rate of investment than
domestic resources could provide and for meeting chronic
balance-of-payment deficits. Under Prime Minister Gandhi, net foreign aid
has declined steadily from more than $1 billion per year in the mid-1960s
to about $130 million in FY 1972 (see Table 1). Net aid receipts have
been declining because of both sharply rising debt payments and a falling
off in gross aid receipts. "Food aid" amounted to one-half billion dollars
annually in the mid-1960s before dwindling almost to zero in 1972.
29. The USSR and Eastern Europe have provided little more than
10% of India's foreign economic aid, and their contribution to the country's
overall economic development has -JCen slender. Their aid has been
earmarked almost entirely for large heavy industrial projects, which in recent
years included the Bokaro Steel Mill, the Heavy Electrical Machinery Plant
at Hardwar, and the expansion of the Bhilai Steel Mill with almost nothing
for agriculture or for industrial raw materials to keep industry operating.
In contrast, the Western aid 2onsortium6 has been supplying hundreds of
millions of dollars in commodity aid each year.
6. Formed in 1958 to provide India with economic assistance when foreign exchange rose: ?,es
fell to $700 million from a record $1.9 billion in 1956. The Consortium is made up of the United
States, the United Kingdom, Austria, Belgium, Canada, Denmark, France, West Germany, Italy, Japan,
the Netherlands, Norway, Sweden, the World Bank, and the International Development Association.
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India: Foreign Econo:nic Aid Receipts and Debt Repayments
Fiscal
a
Total Aid
Debt
Net Non-
Year
Receipts
Repaymentb
Net Aid
Food Aid
Food Aid
1961
718
224
494
181
313
1962
947
235
712
255
457
1963
1,191
261
930
352
578
1964
1,473
322
1,151
482
669
1965
1,567
368
1,199
526
673
1966
1,507
387
1,120
480
640
1967
1,499
473
1,026
391
635
1968
1,135
491
644
210
434
1969
1,301
549
752
200
552
1970
1,037
599
438
50
388
1971
1,090
624
466
12
454
1972 est.
800
670
130
N.A.
N.A.
a. Beginning 1 April of the stated year.
b. Including interest payments and repayments of principal.
30. Both political and economic relations between India and the
United States cooled after the United States suspended $86.7 million of
its aid to India in December 1971. Because of rising debt service payments,
however, New Delhi's net aid receipts from the United States had already
been declining for several years. Net -conomic aid from the United States
(excluding PL 480) was about $350 million annually in the early 1960s
but little more than $150 million in 1971. In 1972, New Delhi proceeded
to seek alternative sources of supply for commodities previously financed
by US aid. Businessmen have been pressured to reduce dollar requirements
for raw materials, parts, and capital equipment, and some importers have
been informed by Indian officials that import licenses were less likely to
be approved if the United States was the source of supply. Mrs. Gandhi
herself halted the shipment of US concessionary foodgrain in late 1971,
proclaiming that India was now self-sufficient.
31. In early 1973, as New Delhi grapples with a severe drought and
threatening famine in large parts of India, the government has indicated
it is importing 2 million to 3 million tons of foodgrains on a commercial
basis and presumably will dip into its holdings of foreign exchange to make
payment. New Delhi probably will try to survive the present time of troubles
without asking for new large-scale food aid. Another poor monsoon,
however, would probably force a reappraisal of this policy.
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Resources for Defense
32. Mrs. Gandhi has been frustrated in her program for economic
growth and self-sufficiency by the necessity to provide aJditional resources
for defense. A large portion of India's dearly bought industrial assets are
tied up in the armaments industry. The consequence has been a leveling
off of economic development expenditures in spite of a 90% rise in total
government spending since 1964 (see Table 2). The rise in total
expenditures resulted principally from increased military expenditures and,
in the fiscal year (FY) 1971 budget, from economic aid to Bangladesh and
the unplanned expense of caring for 10 million refugees. In addition, states
often have not complied with Mrs. Gandhi's policy of monetary restraint
and have continued to accumulate excessive overdrafts with the Reserve
Bank. Furthermore, the government has failed to raise the operational
efficiency of public sector industry,7 which has been a steady drain on
the country's resources.
India: Financing the Budget
Billion Rupees
Fiscal
Yearn
Budget
Expendituresb
Public
Development
Expenditures
Domestic
Revenue
Deficit
Foreign
Aid
Domestic
Measuresc
1964
39.55
19.82
32.30
7.25
5.68
1.57
1965
42.23
22.93
33.31
8.92
6.95
1.97
1966
53.04
21.42
40.83
12.21
8.63
3.58
1967
50.75
22.30
39.23
11.52
8.82
2.70
1968
50.23
23.76
42.55
7.68
5.83
1.85
1969
55.81
21.82
49.49
6.32
7.18d
0
1970
61.02
26.42
53.05
7.S 7
5.38
2.59
1971
75.23
22.40
67.04
8.19
4.48
3.71
a. Beginning 1 April of the stated year.
b. The figures for budget expenditures refer to all budgetary outlays of the central government, including
food subsidies, industry subsidies, and assistance to the individual states. In FY 1971, the consolidated state
budgetary expenditures amounted to about three-fourths of central government expenditures. The central
government subsidizes about 90% of the individual states' development expenditures.
C. Drawdown of cash balances or government borrowing from the Reserve Bank.
d. Resulted in a budget surplus.
7. The main elements of public sector industry are steel, heavy machine building, and petroleum.
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33. Prime Minister Gandhi has continued to divert a large share of
the country's resources to defense. India has fought Pakistan twice and
the PRC once in the past 10 years, and Mrs. Gandhi is determined to keep
India strong militarily. In FY 1971, defense spending increased 16%,
reaching Rs 15 billion, or $2 billion converted at the official exchange rate.
In FY 1972 it remained at this level. Defense spending is now the equivalent
of almost 4% of GNP and about 20% of the central government budget.
The effect on economic development is more severe than the dry figures
indicate because of the pre-emption of the choicest resources in the
economy and the further div~raion of the leadership's energies away from
short-term and long-term economic problems. Among the "choicest
resources" are: (a) foreign exchange (India devotes about 17% of its hard
currency earnings to defense), (b) industrial equipment (the most modern
machine tools go to the aircraft and other military branches), and (c) skilled
manpower (no doubt a disproportionate share of India's engineers and
skilled technicians work in the defense sector of the economy ).
The Prime Minister as Economic Policymaker
34. Mrs. Gandhi's promises of expanded social welfare measures, her
commitments to increased public control over industry and trade, and her
political dependence on large land barons -- who are the backbone of the
ruling Congress Party in raral areas - all figured in the economic policies
described above. In many respects, Mrs. Gandhi has neither the expertise
nor the temperament to deal effectively with India's massiv,, economic
problems. She employs a number of economic advisers and has picked up
some of the jargon, but she leans more heavily on her political advisers.
She is inclined to simplistic ad hoc economic decisions that agree with her
political instincts. For this reason, her economic policies tend to be
piecemeal and tacking in consistency and depth.
Prospects
35. As the Prime Minister begins her eighth year in power, the
economy is again in serious trouble. A decline in national income is expected
in the current fiscal year (ending 31 March 1973), the first such decline
in six years. Because of erratic rainfall, the 1972/73 grain crop is likely
to decline to about 96 million metric tons, or about nine million tons less
than the previous year. Prices are rising sharply after several years of relative
stability. Industrial production continues in the doldrums, investment is
lagging, and unemployment is increasing.
36. Mrs. Gandhi's response has been to announce a reorientation of
the forthcoming Fifth Five-Year Plan (FY 1974-78) in order to emphasize
economic growth, "self-reliance," and expanded state control of the
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economy. The preliminary draft had emphasized redistribution of income
and an increase in social services. In reality, the reorientation of the earlier
draft is a change in tone more than a change in substance, Instead of
accenting a "frontal attack" on poverty, the new draft emphasizes that
a faster growth rate will itself generate fuller employment and a higher
standard of living. It envisages an avenge annual rate of growth of 5.5/o,
with agriculture and industry contributing 4.5%/% and 8% to 91,"o, respectively.
The export target is again placed at 7'%, per year. The earlier plan placed
a greater reliance on foreign assistance. The new plan still requires $4 billion
in foreign aid to finance the foreign eNchange deficit t ;,t adds a proposal
to end net foreign assistance by 1978. The size of the plan remains
unchanged - Rs 510 billion for the five-year period, inc tiding both public
and private development expenditures. Nor is there any material change
in the sectoral allocations.
37. Two resolutions adopted in October 1972 at a policy-level
Congress Party meeting may show the drift of future economic policy. One
resolution, drafted by the Minister of Industrial Development, calls for the
states to take over wholesale trade in rice and wheat and to exercise stricter
controls over the distribution of essential commodities - sugar, edible oils,
kerosene, and cloth. Tfie central government is continuing to push for early
action on these measures. The states, however, are moving slowly, and very
little has been accomplished. Tlu second resolution, drafted by the new
Planning Minister, calls for speedy self-reliance by the rapid development
of basic industries. The latter emphasizes that the country must become
self-reliant in all essential production by the fastest possible means, and
a detailed industry-by-industry program of import substitution was given
priority.
38. Mrs. Gandhi appears to be in for some tough sledding on the
economic front. Her economic policies are by political necessity directed
toward conflicting goals. First, the goal of stricter government control over
industrial investment is not consistent with a rapid self-generating
modernization of the industrial sector. Second, the goal of income
equalization is not consistent with many economic incentives needed for
growth, let alone consistent with the political necessities of retaining support
of propertied groups. Third, the goal of a strong national military
establishment is not consistent with the allocation of additional resources
to industrial modernization, agric-iltural development, and welfare services.
And, finally, the goal of financial independence from the United States
and other leading industrial nations is not consistent with rapid
modernization of the economy and with the acquisition of development
resources at the lowest possible cost.
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Appendix
India: Selected Economic Indicatorsa
1964
1965
1966
1967 1968 1969
1970
1971
1972 (est)
National income (1960 prices)
119.7
113.0
114.7
125.3 128.3 135.1
141.1
142.5
137
Industrial productionb
140.9
153.8
152.6
151.4 161.1 172.5
180.8
186.1
194
Agricultural productionc
112.1
93.6
92.6
113.0 112.1 120.9
128 1
125.8
115
Million persons, mid year
Populationd
468
480
491
502 513 524
536
547
559
Million linear meters
Cotton textilesb
7,720
7,642
7,336
7,276 7.896 7,702
7.550
7.400
7.700
Million metric tons
Foodgrain productions
89.36
72.03
74.23
95.05 94.01 99.50
108.4
104.7
96
Million US S
Exports(F.O.B.)
1,714
1,692
1,537
1.598 1.813 1,880
2,047
2,138
2.250e
Imports (C.I.F.)
2,833
2.958
2,771
2,677 2,479 2,104
2.173
2.464
2.750
Net foreign aid
1.151
1,199
1,120
1,026 644 752
438
466
130
Foreign exchange reser esf
498
600
608
662 682 926
1,066
1 206
800
a. Unless otherwise noted, these data are for the Indian fiscal year, which begins on 1 April of the stated year.
b. Calendar year.
c. Crop year, beginning I July of the stated year.
d. A tentative series based on the latest official c..sus count (547 million at niid-year t971).
c. Excluding an estimated S 150 million worth of concessionary shipments to Bangladesh.
f. End of fiscal year.
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