During World War II, the British impose controls over prices, production, and the use of foreign exchange. The war sparks inflation, corruption, shortages, and black markets. Disruptions in international trade and famine in Eastern and Southern India lead the government to initiate its "Grow More Food" campaign.
Nehru combines a mixed-economy approach with central planning and rapid industrialization under the newly established Planning Commission. The government takes on a significant role in the economy, granting itself a monopoly in several defense and infrastructure industries. A complex system of controls and licenses comes to dominate production, investment, and trade.
India's First Five-Year Plan prioritizes agriculture, irrigation, and power projects in an attempt to increase self-sufficiency. Two acts provide the legal framework for the government's extension of its intervention and price controls in dozens of industries. Pervasive controls give rise to the complex bureaucratic processes of the "Permit Raj." Industrial and agricultural production rise.
The Second Five-Year Plan emphasizes social goals and industrialization in a protected environment. The Industrial Policy Resolution extends the grasp of the government in the areas of capital and intermediate goods. Industrial production rises an average of 6 percent per year. Land reform is geared toward removing basic socioeconomic constraints for rural populations.
The Third Five-Year Plan focuses on raising national and per capita income levels and expanding the industrial base. Private investment falls as a result of corruption, extensive controls, and an inefficient and bloated bureaucracy. Continuing food shortages reinforce the importance of self-sufficiency in food grain production and the need for government procurement of an adequate buffer stock.
Inefficiency arising from protected industrialization leads to a decline in India's industrial growth rates. Skyrocketing world oil prices deeply affect the country, a large importer of oil. In agriculture, India ushers in the Green Revolution, emphasizing irrigation, hybrid seed development, and widespread use of fertilizers. The resulting agricultural growth helps offset the industrial slowdown.
The Fifth Five-Year Plan rapidly becomes obsolete as government changes its priorities to respond to rising oil prices. The dramatic increase in world oil prices, which increases India's oil bill threefold, attracts a large number of Indian workers to the Gulf countries and brings in the flow of foreign exchange.
Public-sector spending focuses on social services, agriculture, transportation, and mining. Mounting losses in state-owned companies increase deficits, which the state tries to stem by borrowing heavily. A substantial IMF loan comes with structural adjustment requirements. Rajiv Gandhi emphasizes economic liberalization and pushes for development of the technology sector.
The government introduces economic reforms, including reduced quantitative restrictions on imports, decreased subsidies, fewer licensing requirements, the sale of shares in select public enterprises, and tax reforms. Corruption is rampant, with officials often bending the rules. India continues to rely on foreign loans to finance development. Economic growth averages 6.6 percent per year.
Policymakers question state ownership, trade protectionism, and limits on foreign capital. Doubling oil prices and violence at home bring the economy near crisis. India borrows from the IMF, agreeing to speed liberalization. The government sells off shares in its companies and opens the door to foreign investment. Bangalore becomes a hub for the high-technology industry.
Reform efforts show positive results. GDP growth rises to 7 percent, and inflation falls. A new private sector emerges, especially in technology services, side by side with government-sponsored Research and Development efforts in Bangalore. India becomes a major exporter of software. Yet economic growth is constrained by inadequate infrastructure, Byzantine bureaucracy, and high interest rates.
The government favors foreign investment in infrastructure and high technology over consumer products. Deregulation and decentralization of the economy continue. Growth falls slightly to 6 percent in 2000 because of an erratic monsoon, a global slowdown, and inefficient industrial capacity. Prime Minister Vajpayee announces an ambitious goal of 9 percent annual growth.
Amid a global slowdown, India manages growth around 5 percent, but industrial production is down. The foreign and finance ministers swap jobs. Major tax reforms are in the works to simplify and streamline revenue; India's states agree to a common sales-tax policy, ending interstate competition and undercutting. Privatization revives with sales agreed to or scheduled in energy and industrial firms.
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