Big Govt is a Huge Negative for Economic Growth


These days, Jawaharlal Nehru, gets blamed for a lot of what is wrong with India. This includes the fact that many countries which attained independence around the same time as India did, grew much faster than India has.

The trouble is that this argument is not totally correct. These days Nehru tends to get blamed even for the economic mess created by his daughter Indira Gandhi. Between 1950-1965, the economic growth of India was 4.1% per year, on an average. Nehru was the prime minister between 1947 and 1964.

Between 1965 and 1981, the economic growth was 3.2% per year on an average. For most of this period, Indira Gandhi was the prime minister. As Arvind Panagariya writes in India—The Emerging Giant: “She [i.e. Indira Gandhi] nationalized the major banks, oil companies, and coal mines. She imposed tight restrictions on operations of foreign companies…She introduced tight ceilings on urban landholdings and effectively outlawed layoffs of workers…Many of the restrictions introduced during this era proved politically difficult to undo later, and some of them continue to harm growth today.”

All these things slowed down Indian economic growth considerably. As Rakesh Mohan and Muneesh Kapoor write in an IMF working paper titled Pressing the Indian Growth Accelerator: Policy Imperatives: “The slowdown in growth during the 1965-81 period, ‘the darkest in the post independence economic history of India’, can be attributed to the various restrictive policy actions put in place during this period that effectively closed the Indian economy and slowed down Indian economic growth, just when various East Asian countries were opening up and accelerating their growth.”

Long story short—as the government grew bigger, the economic growth of the country slowed down majorly. In fact, while the economic growth between 1965 and 1981, slowed down to 3.2% per year, the growth between 1965-1966 and 1974-1975 had been even slower at just 2.6%. This when the population growth was at 2.3%.

As Panagariya writes: “While the government understandably did not publicly acknowledge that it had gone too far in restricting industrial activity, it quietly began to ease up controls through administrative measures. These measures included capacity expansion, increase in the threshold level of investment below which no license was required, delicensing in selected sectors, and permission to change the product mix within existing authorised capacity.”

These changes started to happen in the mid-1970s and were expanded on between 1979 and 1984. The economic growth averaged at 4.8% per year between 1981-1982 and 1987-1988. Over the ten-year period of 1981-1990 it averaged at 5.4%.

The trouble was that in the second half of the 1980s, a good portion of the economic growth was financed by borrowing from abroad. This ultimately led to the economic crisis of 1991 and which finally led to economic reforms being initiated by the Narsimha Rao government with Manmohan Singh as the finance minister.

In fact, economic growth since then has been higher than 5% in almost all years. Next month, it will be 25 years since India saw the first wave of economic reforms. And 25 years after economic reforms were first initiated one lesson that we can draw is that big government hurts economic growth.

As the National Manufacturing Policy of 2011 pointed out: “On an average, a manufacturing unit needs to comply with nearly 70 laws and regulations. Apart from facing multiple inspections, these units have to file sometime as many as 100 returns in a year. This kind of compliance burden puts-off young entrepreneurs and they are not willing to take up an entrepreneurial role. As a result, a large number of people who could have been self employed and would contribute to further employment and enhance economic activity, end up accepting jobs much below their potential.”

This is something that needs to be corrected. The Modi government has taken a few steps on this front, but a lot more needs to be done to unravel the big government that India inherited from Indira Gandhi. This is necessary for job-creating economic growth to happen.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared on Bangalore Mirror on June 15, 2016