India's Journey from Socialism to Capitalism
By Amit Dingare JGSM '11
Issue date: 11/2/09 Section: Perspectives
India was one of the several countries that won its freedom after WWII. As the country finalized its constitution, the immediate challenge was to adopt an economic model. The task was daunting for a country as large as India with no administrative experience in the last 150 years. Capitalism embraced by the western world and Socialism adopted by the USSR and Eastern Europe were the two obvious choices.
Since the 1940s were not representative for economic comparison, Indian leadership looked at the 1930s for a benchmark. Countries with a capitalistic economic model had suffered a greatly during the Great Depression whereas the USSR had not only managed to stay out of trouble but also achieve impressive economic growth because of its five year plans. While unemployment lingered at about 10% and inflation had skyrocketed in the capitalist countries, little inflation and no unemployment existed in the Soviet Union. Socialist schemes had brought scientific and technological advancements in the USSR. The success of the socialist experiment was pretty evident during that decade.
The timing of India's freedom also conflicted with the priorities of the United States. As India was making a "tryst with destiny" in the words of Prime Minister Nehru, the U.S. was pouring money and resources into the rebuilding of Western Europe under the Marshall Plan. The Soviet Union, on the other hand, in its effort to spread its values was eager to offer resources and monetary aid to India. Also, the Indian psyche was antagonistic of capital values which it perceived to be an integral part of British colonialism. Because of all these reasons, Nehru accepted the Soviet style economic reform system, and Indian bureaucracy started implementing its own five year plans. The success of the first two plans bolstered India's belief in the merits of socialism and the country began nationalizing all its businesses ranging from banking to steel to water to electricity. The government imposed import tariffs to discourage international trade and mandated government licenses for new businesses. Other Asian economies such as Japan and Korea grew in multiples of India's growth rate, while India found pride in maintaining a tight control on the private sector.
However, the inefficient bureaucracy was never sustainable in the long run. India's budget deficit started increasing and finally in 1991 India's foreign exchange reserve fell to such low levels that India could barely afford three weeks worth of imports. India's grossly devalued currency played a vital role in this crisis. The country had to airlift its gold with the IMF to take out a loan. This prompted India's economic liberalism and a move towards capitalism. The liberalized policies prompted an inflow of direct foreign investments in the country and the private sector flourished. The current dynamic India is the result of those changes. (Source: Age of Extremes by Eric Hobsbawm, The World is Flat by Thomas Friedman)
Since the 1940s were not representative for economic comparison, Indian leadership looked at the 1930s for a benchmark. Countries with a capitalistic economic model had suffered a greatly during the Great Depression whereas the USSR had not only managed to stay out of trouble but also achieve impressive economic growth because of its five year plans. While unemployment lingered at about 10% and inflation had skyrocketed in the capitalist countries, little inflation and no unemployment existed in the Soviet Union. Socialist schemes had brought scientific and technological advancements in the USSR. The success of the socialist experiment was pretty evident during that decade.
The timing of India's freedom also conflicted with the priorities of the United States. As India was making a "tryst with destiny" in the words of Prime Minister Nehru, the U.S. was pouring money and resources into the rebuilding of Western Europe under the Marshall Plan. The Soviet Union, on the other hand, in its effort to spread its values was eager to offer resources and monetary aid to India. Also, the Indian psyche was antagonistic of capital values which it perceived to be an integral part of British colonialism. Because of all these reasons, Nehru accepted the Soviet style economic reform system, and Indian bureaucracy started implementing its own five year plans. The success of the first two plans bolstered India's belief in the merits of socialism and the country began nationalizing all its businesses ranging from banking to steel to water to electricity. The government imposed import tariffs to discourage international trade and mandated government licenses for new businesses. Other Asian economies such as Japan and Korea grew in multiples of India's growth rate, while India found pride in maintaining a tight control on the private sector.
However, the inefficient bureaucracy was never sustainable in the long run. India's budget deficit started increasing and finally in 1991 India's foreign exchange reserve fell to such low levels that India could barely afford three weeks worth of imports. India's grossly devalued currency played a vital role in this crisis. The country had to airlift its gold with the IMF to take out a loan. This prompted India's economic liberalism and a move towards capitalism. The liberalized policies prompted an inflow of direct foreign investments in the country and the private sector flourished. The current dynamic India is the result of those changes. (Source: Age of Extremes by Eric Hobsbawm, The World is Flat by Thomas Friedman)
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