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Possible Factors Responsible for Continuation of Inward looking Policies in India till 1991

Nehru Period:
Apart from the command Nehru had on nation’s affairs, the Congress party had long been
committed to the ‘socialist pattern of society’ since the mid-1950s under the charismatic leadership
of Nehru. In fact, this was the major electoral plank of the Congress Party in the general elections to
the central parliament in 1957. In fact, during the Nehru era there were efforts to depart from
socialist agenda. In 1959, C. Rajagopalachari, or Rajaji, founded the Swatantry Party. One of its goals
was a more market-friendly approach; starting with a drastic trimming of the Licence Raj. But the
party ideology failed to inspire the masses. Nehruvian socialism with its promise of a more equitable
society, still captured our imagination”

By R.K. Lakshman (1951)


Indira Gandhi’s Period:
The first reform attempt, though in a piecemeal manner, was made in the year 1966 by
Indira Gandhi. It consisted of devaluation of Indian rupee1 (on June 6 1966) when Indian currency
was indeed overvalued, liberalization of import licensing to some extent, selective import tariff
reductions and domestic investment liberalization. Devaluation became embroiled in political
controversy, with the measure being seen as having been taken under IMF (read USA) pressure,
and became inextricably linked to the loss of national prestige and sovereignty. It was criticized
politically and in the press as a blow to India’s sovereignty. According to eminent economist T N
Srinivasan “devaluation was seen as capitulation to external pressure which made liberalisation
politically suspect. By 1968, intense domestic reaction to the devaluation led India to turn inward
with vengeance.
Why this change? Under Gandhi’s regime from 1966 to 1977, populist radicalization became
a substitute for reforms. Few interrelated factors might have been the reason. The first is a cultural
factor namely the long-established and well-entrenched suspicion of markets in a society where a
high moral stance was preferred to a pragmatic one, self-interest was wrongly identified with

1
Two additional factors played a role in the 1966 devaluation. The first was India’s war with
Pakistan. The large amount of deficit spending required by Indo-Pak war accelerated inflation and led
to a further disparity between Indian and international prices thereby adversely affecting exports. The
second factor is the drought of 1965/1966. The sharp rise in prices in this period, which led to
devaluation, is often blamed on the drought.
narrow selfishness, and profit-making from productive activities with speculative profiteering and
greed so that capitalism was regarded as an immoral rather than ethically neutral amoral economic
system. The second factor was the tendency among policymakers intellectuals and bureaucracy to
treat the Indian case as unique in an effort to find ‘Indian’ solutions to ‘Indian’ problems rather
learning from other economies which were deemed to be ‘too small’ to hold any lessons for a ‘large’
economy like India. Only very few economists such as Jagdish Bhagwati and Padma Desai and T.N.
Srinivasan questioned inward looking policies at that time. The third factor was the power struggle
within the Congress Party. Ever since she became the Prime Minister, Mrs. Gandhi was constantly
challenged by her rivals, popularly known as the Syndicate, led by Mr. Moraji Desai who questioned
here socialist credentials. Surrounded by the Syndicate, and threatened by Desai, Mrs. Gandhi
sought to mark out her own identity after 1967 election by presenting herself as a socialist.
Interestingly, she had rarely invoked the word ‘socialist’ before 1967, although it was one of the four
pillars of her father’s political philosophy. As noted by Ramachandra Guha, Mrs. Gandhi was
apparently told by P.N. Haksar (her key adviser and principal secretary) the best way to vanquish the
Syndicate would be to convert the struggle for personal power into an ideological one. In her
speeches after the historic bank nationalization initiatives she said that her rivals were promoting
capitalism in economics.
When Indira returned to power in 1980 after a 3 year rule by Janata Party, she again
attempted to realign herself politically with the organized private sector and dropped her previous
rhetoric about socialism and pro-poor policies. Her government’s attitude towards business went
from being outright hostile to supportive. However, the attitudinal change had pro-business
orientation rather than pro-market. True liberalization was by and large anathema to organized
business at the time. Indira was far less interested in opening up the economy and removing
impediments to competition than in garnering political support from existing business groups.
A pro-business orientation is one that focuses on raising the profitability of the established
industrial and commercial establishments. It tends to favour incumbents and producers. Easing
restrictions on capacity expansion for incumbents, removing price controls, reducing corporate taxes
(which took place during her tenure) are examples of pro-business policies.
A pro-market orientation is one that focuses on removing impediments to markets and aims
at achieving this through economic liberalization. It favours entrants and consumers. An example of
pro-market policy is trade liberalization, which did not take place in any significant form until the
1990s.
Rajiv Gandhi’s Period:
Rajiv after assuming power openly criticized the earlier strategy and expressed desire to take
the modernized technology-driven India into the 21st century. In fact, Indira’s pro-business attitude
was further reinforced, in a more explicit manner, by Rajiv following his rise to power in 1984.
Though he was somewhat more prone to liberalise the Indian economy through his mild economic
liberalization programme, he had to step back due to the following reasons.
(i) He attempted to scale down subsidies (though roolback the decision later) on kerosene,
foodgrains, fertilizers and diesel and provided opportunities for mass mobilizations against his
government.
(ii) Corruption (Bofors) charges against his government
These two factors made him vulnerable to attack from radical and anti-reform ideologues.
By R.K. Lakshman (1987)

Attitude of organized business: Majority of organised business of that time has disfavoured
openness or preferred status quo and hence did not lobby for a change in economic policies. Under
the Lice-Quota raj there were able to meet their business requirements through their connections in
government. Only the novice in business and budding entrepreneurs suffered.
Source: Suresh D. Tendulkar and T.A. Bhavani (2007): “Understanding Reforms – Post 1991 India”, Oxford
University Press; Y.V. Reddy (2017): Advice and Dissent: My Life in Public Service (Harper Business) and
Ramachandra Guha (2012): India after Gandhi: The History of the World’s Largest Democracy (Picador India).