India Closed Economy

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CHAPTER 1 INDIA’S TRANSITION FROM A CLOSED TO AN OPEN ECONOMY

A moment comes, which comes but rarely in history, when we step out from the old to the new, when an age ends, and when the soul of a nation, long suppressed, finds utterance. 1.1 These are the words of Pandit Jawaharlal Nehru, the first Prime Minister of India, in his speech marking the Independence of India on 14 August 1947. These words still hold true today as India moves onto the global scene and is making its presence felt as an emerging economic power.

History Since Independence
1.2 When India achieved its independence in 1947, it was 'the beginning - not the end - of a period of nation-building'.1 India was determined to definitively break away from the imperialist influences of its former coloniser, the United Kingdom. 1.3 Prime Minister Nehru, 'armed with socialist faith in an interventionist state and an aristocratic disdain for consumerism, tried to transform India into a giant of heavy industry'.2 India embarked on a program, combining a non-aligned movement and a socialist, centrally planned economy. This program was seen as a compromise between the extremes of capitalism and communism, combining the better elements of the West's democratic framework with the economic planning of China and the USSR. The resulting doctrine was broadly regarded as 'economic socialism'.3 Non-Aligned Movement (NAM) 1.4 During the Cold War, the globe was separated into two main trading blocs or superpowers. The non-aligned movement (NAM) was supported by nations not willing to commit wholly to one power or the other. India sought to identify a 'third way' in which to pursue relations with the rest of the world.4 An Asian-African Conference (representatives from 29 Asian and African countries) at Bandung, Indonesia, in April 1955 eventually led to the First NAM Summit in Belgrade in 1961. The majority of countries involved in the NAM shared a desire to escape colonial domination. 1.5 India was a co-founder of the NAM and has played an influential role since then. Involvement with the NAM was a recognition that India needed good relations with as many nations as possible. Relationships solely with either East or West did not serve India's national interest. With the establishment of the NAM, India did not have to face the ideological battles with the West, as presented by the threat of Americanisation of culture,

1 2 3 4

DFAT Submission, p. S 721. Thakur, R. 'India in the World: Neither Rich, Powerful nor Principled' in Foreign Affairs v.76 (4), July 1997, p. 15. DFAT Submission, op. cit. ibid.

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nor did it have to rely solely on the economic stability of the USSR, which was becoming increasingly isolated from the West during the Cold War period. 1.6 Nehru's strategy to keep India non-aligned helped accelerate economic development, as India received substantial aid from both sides during the Cold War; the USSR and Eastern Europe contributed almost as much in capital goods and technical assistance as did the United States, Great Britain and West Germany. Centrally Planned Economy 1.7 Under economic socialism, India (like China and the USSR) identified industrialisation as the key to economic growth. The implementation of socialist-styled five year plans and the centralisation of industry began. India's first Five Year Plan began in 1951; the eighth ran from 1992-1997.5 The early five year plans followed policies of promoting import substitution, extensive state ownership of production and complex controls and regulations governing the private sector.6 The Department of Foreign Affairs and Trade (DFAT) commented that: The size of the Indian economy, and the philosophical underpinnings of the industrial policy that there was a significant role for State intervention in ensuring a fair distribution of wealth, meant that the process was government-driven and controlled.7 1.8 Despite the regulatory constraints on local business, a negligible level of foreign...
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