Broader perspective

A fresh evaluation of the relationship between the state and capital since Independence.

THE economic transformation of India since Independence has formed the theme of many publications of late, some of which have been reviewed in these columns. While most of them have concentrated on economic growth, others have taken a broader political economy perspective. Chirashree Das Gupta’s State and Capital in Independent India , as the title suggests, belongs to the second category. It has many distinct features—the emphasis on the process of capital accumulation, the manner in which state policies have influenced it, the contributions of different groups of capitalists, and accumulation through agriculture, industry, trade and finance. In terms of method, it is a judicious combination of micro and macro perspectives appropriately designated as “analytical description”.

While the work concentrates on the post-Independence period up to 1990, it is a necessary prelude to the understanding of the neoliberal era initiated with the “reforms” of that year. Although it has become quite common to describe the period up to 1990 as one where the economy was essentially under state domination (which is also considered to have been one of “socialistic pattern” of development) and the quarter of century since then as capital-led rapid growth, Chirashree Das Gupta’s position is that throughout the period since Independence accumulation of capital encompassed both zones of intervention and non-intervention by the state. Hence the work may be claimed to be a fresh evaluation of the relationship between the state and capital since Independence, reinterpreting the political economy of the “crisis period” between 1965 and 1980, which, in turn, led to the “new economic policy” of the 1980s paving the way for the reforms of 1990. The emphasis, thus, is on the continuity of the capitalist economic transformation, rather than on any abrupt break. “The primary aim of the book,” says the author, “is to add to the understanding of the specific relationship between state and capital in forging the dynamic role of the institutions of the state and the market that form the basis of capital accumulation in economies undergoing transition….”

Capital formation

The connection between the Indian capitalist class and the freedom movement has a long history, but became close after the Congress took office in the Provinces in 1937. The plan for economic development of the country drawn up by the National Planning Committee under the leadership of Jawaharlal Nehru was one of state-directed capitalism. The mixed economy envisaged immediately after Independence recognised the role of the public sector under the state as also of the private sector. The Industrial Policy Resolution of 1948 gave assurance to the classes owning business and industry that no existing enterprise would be nationalised. The First Five Year Plan (1951-56) did not have any overt strategy of growth but emphasised the importance of capital formation for growth.

Formal planning started with the Second Plan (1956-61) on the basis of the Mahalanobis model of the economy, which assigned to the state the task of building up the capital goods industries and raising the level of savings, while consumer goods industries, owned by private enterprises, were allowed to continue, although their expansion was to be subject to the government’s licensing policy. Domestic production, in general, was to be protected by the import substituting industrialisation, which private industries supported. The state extended support to small-scale industries, which was also accepted by the private sector, although the corollary of restrictions on capacity expansion faced some opposition. But from the point of view of the capitalist class, the most reassuring factor was that no major change was under consideration to alter the existing property relations. Everything else was a matter of negotiations.

Maintaining the status quo in property relations (contrary to “the land to the tiller” slogan of the freedom movement) meant that the basis of the capitalist system was guaranteed. It left the gate wide open for capitalist development in agriculture, although that would be a slow process because of the need of the small owner-cultivators to hold on to land for sheer survival. But it ensured the steady flow of the landless to urban areas in search of jobs and livelihood, while the encouragement to small-scale production units and factory laws ensured that the bulk of them would remain in the “informal” sector without security of jobs or much legal protection. Thus, an environment of “unlimited supply of labour” was provided for capitalist expansion. Says the author: “The specific task of nation-building in independent India thus assigned major role to the state in building up infrastructure, expanding and strengthening the productive base of the economy, setting up new financial institutions and regulating and coordinating economic activity. Big capital, however, was in a political position to reap the advantage of an independent Indian state as a site of primary accumulation.”

Concentration of wealth

Another institutional support for capitalist expansion came rather unnoticed though the codification of Hindu Personal Laws in the first decade after Independence and the subsequent institutionalisation of the Hindu Undivided Family (HUF) as a legal basis of a “business group”. A Hindu was defined as anyone who was not a Muslim, Christian, Parsi or Jew, and gave legal sanction to male lineage descent as the natural inheritors of property. It was also made legal for any Hindu married male to break away from the “joint family” and start a new HUF. Further, HUFs as legal entities were exempted for purposes of taxation from company laws. They were subjected to the more favourable personal laws, which ensured that a member was not taxable for any sum that he received from the HUF, thus enabling a significant section of family-based business groups to accumulate wealth more easily than others. These provisions also enabled family control over a much larger segment of business through the common practice of inter-locking directorships. The family firm became the characteristic business unit. The capitalist class took full advantage of all avenues that became available to it and already by the middle of the 1960s a study brought out the immense concentration of wealth among the top business houses, while the official claim was that state policy was still in favour of the “small man”.

In the meanwhile, public investment in development, principally of transport, communications and irrigation, led to a visible spurt in domestic capital formation. A domestic market was rapidly developing for widely used consumer durables and so their production and trade began to pick up, too.

However, it was not all smooth sailing. A major contribution of the book is the crisis of development planning of the period from 1965 to 1980. The period from the death of Nehru in 1964 was characterised by an industrial recession starting in the mid 1960s, pre-emptive capacity build-up in large industries, and domestic demand constraint arising largely from the poor performance of agriculture, especially during the Third Plan period (1961-66). Soon after Indira Gandhi came to power (after the short regime of Lal Bahadur Shastri), a devaluation of the rupee became necessary because of acute balance of payments problem. Because of the acute foodgrains problem, the economic policies of the state had to be substantially altered. Import of wheat under PL 480 became unavoidable. This was followed by the Green Revolution, the introduction of high-yielding varieties initially of wheat, with the state assisting large farmers who could take up the cultivation of the new varieties, which called for easy access to water and the use of commercial fertilizers and pesticides. Public investment and assistance, therefore, shifted to agriculture and rural areas. Increase in food production appeared to be essentially a matter of technology, which seemed to make it possible to de-emphasise the need for institutional reforms. The Green Revolution package provided a fillip to trade and market in rural areas.

Industrial capitalists, especially the big family-based business groups, in the meanwhile, made use of the state’s non-intervention to expand their business, establish contacts with foreign firms and thus open up a new industrial regime. New capitalist enterprises emerged in different parts of the country. At the same time, legislation to curb monopoly power and nationalisation of major private sector banks gave the appearance of a renewed socialist commitment of the state. The spilt in the ruling Congress gave out signals of political instability. There was a great deal of popular discontent, which culminated in the JP (Jayaprakash Narayan) movement, which started in Bihar in the mid 1970s, but soon became a country-wide agitation.

The initial response of the establishment was an attempt to shift the planning strategy and to make eradication of poverty ( garibi hatao ) the focus of its economic policy, which also became the political slogan of the ruling Congress party during the parliamentary elections in 1971, which was held a year ahead of schedule. The massive majority that Indira Gandhi obtained and the declaration of internal Emergency in 1975 led to a shift of state expenditure from investment for growth to a variety of subsidies to selected groups. Poverty eradication programmes, which were taken up by the Janata alliance that came to power after the general election of 1977, had the same thrust during the short period that it was in power.

Thus, the Indian economy and polity in the early 1980s, when Indira Gandhi came back to power, were different from what they were in the mid 1950s when a state-led industrial growth and transformation of the economy was the agenda accepted even by the capitalist class. That strategy ran into difficulties even before the term of the Second Five Year Plan (1956-61) was over, although the Third Plan claimed to be a continuation of the same. The strategy, the main thrust of which was an import-substituting industrialisation, was not formally given up until the early 1990s, but it had been undergoing a quiet burial from around 1965 with the capitalist class making use of the interventions and non-interventions of the state to accelerate the accumulation process.

The New Economic Policy (NEP) of an overt shift to the capitalist path of growth was not a sudden break with the past of alleged “socialist” policies (it was ironic, though, that it happened so soon after the Constitution was amended in 1976 to declare that the Republic would be a socialist one), but a shifting of gear to give further impetus to the capitalist pattern that was going on from the very early days. In 1991, India declared to the rest of the world that she was joining the “successful” capitalist regime. The distinction between the public and private sectors would continue, but the latter would be in command determining the pattern of accumulation, with the state assigned the crucial role as campaigner and “risk absorber”.

The book deserves attention for the theme it deals with, the method it uses, the data it has marshalled and the conclusion it leads to.