Deja vu: a series of economic shocks that's similar to the 1960s

Handing over control to bureaucrats in the 1960s strangled the Indian economy. The error must not be repeated, writes TCA Srinivasa-Raghavan.

Many people have compared Indira Gandhi and Narendra Modi. But such personal comparisons, though compelling and entertaining, don’t yield any lessons for economic management. 

What might yield some lessons, however, is a comparison of previous prolonged, successive and severe shocks to the economy, and how they were handled.

Viewed that way, the 1960s are a better guide and comparator to the period 2009-20. That Sixitues decade saw war, famine, political uncertainty, economic distress simultaneously. 

But there is an important difference. Unlike in the 1960s the last 10-12 years have not seen even a single political shock. We have to be grateful. 

In the 1960s, in just 20 months between May 1964 and January 1966 India lost two prime ministers, fought one near-war and one actual war, which came on top of an earlier one in 1962 that India lost. 

In these months India also grappled with two major droughts. It was, if you will, a quadruple whammy, readymade for an economic crisis.

• Thus in October 1962 India was decisively defeated by the Chinese in a short war in the Himalayas. 

• In October 1963, Nehru suffered a stroke and was half incapacitated. The regional bosses of the Congress party started running the show and the old question—after Nehru, who?—began to haunt everyone.

• In May 1964 Nehru died. 

• He was succeeded by Lal Bahadur Shastri but he too died suddenly in January 1966. 

• In 1965, Pakistan attacked India twice, once in June when it was rebuffed and once again in September when it was also defeated. 

• Both in 1965 and 1966 the monsoons failed and food ran short.

• By the summer of 1966 the treasury was almost empty. Prices were once again starting to rise, forex reserves were dwindling and there was a mood of general dis-satisfaction.

• In 1969 the Congress party split. And 14 banks were nationalised as a result. 

Between 1966 and 1969, as drought persisted and a balance of payments crisis broke, budgeting became a joke, planning was given up and politics became a nightmare as the first wave of defection politics hit. 

India despairingly turned for succour to the bureaucracy because it seemed the one national institution that stood between chaos and stability. 

The result was the injection of an overdose of bureaucratic caution in all decision-making.   It was the birth of the permit-quota-inspector raj because permission from some official or another was now needed for virtually all non-farm, formal sector economic activity. 

This response worked while the crisis lasted but by 1971 it became a millstone around the economy’s neck because rules were made to enforce rules. It continues to be so but to a lesser extent. 

Now compare this what has happened after 2008. 

• The fiscal deficit increased to over 10 percent for centre and states combined by 2013. 

• Inflation went into double digits, well over 15 percent. So the savings rate fell. 

• By the end of 2013, a foreign exchange crisis was imminent. Luckily it didn’t break. 

• The banking system went into severe distress as NPAs increased. Credit and investment both declined sharply. 

• There were two successive drought years in 2014 and 2015. 

• In 2016, 86 percent of the currency was demonetised. This was a monumental self-goal and the shock was similar to bank nationalisation in 1969. It choked the flow of funds in the economy. 

• In 2017, GST was introduced without adequate backend preparation. This delivers a major shock to the organised sector. 

• The only good thing to happen was six years of low oil prices. This will continue. 

• And now we have the corona virus which will lead to another drop in the GDP growth. 

We have seen how handing over control to the bureaucrats in the 1960s resulted in the Indian economy becoming strangulated by rules. 

It is this risk that the Modi government must avoid because during times of crisis, nothing is easier than to try and sort it out by making more rules. 

In the 1960s political direction was Left oriented. The same error must not be repeated.