The Indian Economy Overview

The World Bank and India

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The Bank and 1966 Forex Crisis

Due to heavy dependence on external aid, imports and the growing burden of outward remittance of profits of foreign companies, the next great foreign exchange crisis came. This crisis coincided with the succession crisis caused by Nehru's death. At this time, the World Bank became more critical of the direction of Indian economic policy. A World Bank mission headed by Bernard Bell visited India in 1964 and issued a report calling for the devaluation of the rupee and abolition of many of the foreign trade controls then in effect. It said "There is no particular evidence that the licensing system has in fact served any positive economic purposes. It has, like the Import control system, protected and preserved inefficiency by, in effect, allocating market shares and restraining the growth of more efficient enterprises." India's first answer to Bell's recommendation was defiance. T.T. Krishnamachari, who had sparred with Eugene Black in 1956, was again the Minister of Finance who picked up the gauntlet thrown down by the Bank by insisting that devaluation was not the answer. However, the Indo-Pakistan war in 1965 led to an abrupt suspension of American aid to India. In early 1965 Nehru's successor, Lal Bahadur Shastri died abruptly in Tashkent, USSR.

The Bank and Devaluation

Mrs. Indira Gandhi was chosen the new Prime Minister of India. The new government immediately softened the hard-line towards the Bank and its western creditors. Mr Krishnamachari was removed from the Finance Ministry for his opposition to the Bank's insistence on devaluation. The Planning Minister, Ashok Mehta, with some socialist leanings, paradoxically, became an active supporter of the Bank. The following year, the Prime Minister, Planning Minister and the new Finance Minister visited Washington. When Mrs.Gandhi went to Washington she was informed that resumption of Aid—which was cut off as a result of war with Pakistan—was dependent on India coming to terms with the World Bank. The United States made the bank its intermediary and arbiter with respect to aid to both India and Pakistan. From its past role as fund raising organizer and chairman of AIC, the Bank moved into a more active role in evaluating Indian and Pakistani economic plans and advocating, economic reforms a al the United States.

The Bank's recommendations, echoing the Bell Mission report, were for a devaluation of the rupee accompanied by dismantling of the plethora of import controls and export subsidies. The government announced devaluation of rupee by 37.5% (from Rs4.75 to Rs 7.50 to a dollar) and the associated import liberalization measures in June 1966. When the Finance Minister was asked why the government had not waited another six months to see whether a good monsoon might make the devaluation unnecessary. He replied, "If we had waited another six months, we would have had absence of imports in India". The implication was that aid was made conditional on the devaluation. According to him "action could not be postponed because all further aid negotiation hinged on it."

However, the devaluation package did not yield results. The expected boost to exports did not materialize, instead they declined. The reasons were obvious. The previous structure of import tariffs and export subsidies had amounted to a de facto devaluation by raising the prices of imports and lowering the prices of exports. A Post-mortem declining exports decline confirmed suspicion that exports suffered due to abolition of subsidies and gained little from the devaluation.

Two days after the devaluation was announced, the World Bank called an urgent meeting of the AIC in order to raise $900 million in non-project aid which was promised. But failed, as the consortium members failed to pledge the necessary amounts. Even five months after devaluation, India had received only $465 million of the promised amount. The project and non-project aid fell from $1.6 billion in 1966-67 to $0.64 billion in 1967-68 and $0.76 billion in 1968-69, as against $1.7 billion per year promised by the World Bank. This led to sharp criticism of Government's policies by many political groups in India. "You sold the country and have not even got the price" a parliamentarian accused the government. Thus, the devaluation became very unpopular in India. The unpopularity of the devaluation was believed to be a reason of defeat of the Congress Party in 1967 general election. In response to public criticism and on aid disappointment, Mrs Gandhi took a sharp swing to the left by abolishing privy purse and nationalization of banking and insurance sectors. She also signed Indo-USSR treaty to show her displeasure with the western world. This created a very popular image of Mrs Gandhi.

Subsequently, she fought and won a battle for control of the Indian National Congress in 1969 and opted for hard-line against the World Bank and US pressures. The slogan of self-reliance, almost forgotten in the decade—1956-66 had become a favorite phrase once again.

The Post-1966 Period

India's dependence on the Bank and other creditors reached a high in 1966 when the Fourth Five Year Plan, supposed to begin in 1966, had to be postponed for 3 years for obvious reasons. The plan was dependent on uncertain external aid to allow the execution. As a result of this dependency, the Bank sent a second Bell Mission in 1967. Its recommendations were supportive of the Green Revolution which was already underway in India. This strategy aimed at the creation of a stratum of prosperous capitalist farmers and use of expensive commercial inputs such as chemical fertilizers. The Bank exerted direct pressure during the 1966 exchange crisis for obtaining favorable conditions for foreign investment in India's fertilizer industry.

With the nationalization of coal and oil industry in the 1970s, this option for private foreign capital was foreclosed. But this move did not affect the area of influence of foreign capital. In the post-independence period, foreign companies were moving away from their traditional sectors of investment, i.e., extractive and trading activities. The manufacturing sector gained prominence during this period and adopted priorities set by developed countries. Thus foreign private capital was taken as inescapable by the policy makers.

The table on page 18 shows that over the last 45 years, certain sectors have been the focus of the Bank's abiding concern. Progressively over the years, it has therefore been pumping aid into these sectors which are power, mining and exploration, irrigation, agriculture and, to some extent, telecommunications and railways. The table not only shows a secular increase in World Bank funding to these sectors, but also during 1980s—the beginning of India's "dance to freedom".

All the Bank's Men
In the recent years, most of the key positions in the economic policy establishment in India has passed into the hands of ex-World Bank officials. The list includes the present Finance Secretary, Mr. Montek Singh Auliwalia; Economic Advisor to the Finance Ministry, Mr. Percy Mistry; Chief Economic Advisory Council to Prime Minister, Dr. Bimal Jalan who loined as India's Executive Director in the World Bank; Economic Advisor in Ministry of Industry, Mr. Rakesh Mohan; and Economic Advisor , Ministry of Commerce, Mr. Jayanto Roy.

It is evident that the increase of Bank loans is phenomenal by any count ranging from 200% to over 2500%. More so in the case of agriculture, irrigation and power where even the preceding period shows a phenomenal increase.

In Irrigation and Agriculture, a closer look at the desegregated project list shows minimal Bank loans till 1960s, with the solitary exception of one IBRD loan of $10 million in 1949 towards agricultural machinery.

It is not too far fetched to see the post-1980 period of the Bank's loans and aid was one of preparation for the grand and royal entry of foreign capital. By building up infrastructure—power generation, mining and exploration of new reserves, proper roads and rail facilities, trained technical manpower, etc. In fact, the Bank and the IMF inspired policies have facilitated a new phase of the operation of foreign capital in India. This phase of economic liberalization began in 1980 with the SDR 5 billion loan from the IMF. It weakened the real economy, created the preconditions for export orientation and facilitated the recomposition of the industrial sector in subordination to world capital. This was followed up by another wave of liberalization which included devaluation, lifting of trade barriers and greater impetus to foreign capital and market forces in India.


For further details contact:PIRG (Public Interest Research Group) 142, Maitri Apt, Plot No 28, Indraprastha Ext. Delhi 110092. India. Ph: 2432054 Fax: 2224233 email: kaval@pirg.unv.ernet.in


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