Iraq and the Pathologies of Primacy
The Flawed Logic That Produced the War Is Alive and Well
ECONOMIC DEVELOPMENT: PERFORMANCE AND PROSPECTS
OF the many experiments in the purposeful promotion of economic development which the world has witnessed since the end of World War II, incomparably the most important among underdeveloped countries is India's. The population involved in this experiment constitutes a third of the people of the non-communist underdeveloped world-more human beings than are to be found in all the underdeveloped countries of Africa and Latin America put together. The development planning effort undertaken by the Indians is one of the oldest and probably the most sophisticated to be found in any of these countries. Finally, it has been conducted in the context of a genuinely democratic political system, with repeated free elections, substantial freedom of expression by opposition groups and two orderly changes of top leadership. Three five-year plans have been completed since Independence, and India is in its fourth quinquennium of serious development effort.
Two successive disastrous monsoons in the crop years 1965-66 and 1966-67 focused so much attention on an emergency food situation that the record of the preceding fifteen years and its lessons for the future have been somewhat neglected. There is now some danger that because of the concentration of both Indians and those helping India on the important problems of agricultural production, the problems of overall economic growth are not being adequately recognized. Agricultural prospects now look bright, but there is a real possibility that a severe foreign-exchange shortage will soon develop, forcing continued depression on the modern non- agricultural sectors of the economy, choking off agricultural growth and producing political consequences of unknown dimensions.
Before exploring in more detail the exact shape of this cloud on the horizon, it will be well to review India's performance to date and some of the reasons for it. The record of the first fourteen years of planned development is one of fairly steady and impressive growth, culminating in a year of good weather and record agricultural output, followed then by drought and war. But from 1951 to 1965, national income at constant prices increased in every year but one, in which there was a bad harvest, and the average increase was just short of 4 percent per year. This was well below Indian targets. The second and third plans hoped for a rate of real growth of better than 5 percent. The Indian performance was slightly below the average for the non-communist underdeveloped world, which for the decade 1955-1965 was around 4.5 percent, and it was significantly below the performance of such outstanding successes as Mexico, Taiwan, Israel and, more recently, South Korea. But the Indian growth rate of nearly 4 percent in this period represents a notable acceleration over the annual growth rate of British India for the first half of the twentieth century, which has been estimated at no more than 1 percent, and compares very favorably with the growth rates of the presently advanced countries during their earlier development history. The advent of the population explosion has of course meant that more than half of recent Indian growth has had to be devoted to supplying the expanding population, and per capita Indian incomes have grown by less than 2 percent per year. But while 2 percent sounds small, it should be remembered that this rate if sustained will double real incomes in a third of a century and multiply them eightfold in a hundred years.
While this record was good, and better than is frequently realized, it did not come up to the hopes of either the Indians or those who were helping them. In appraising the reasons for this, it is important to remember that maximizing the rate of growth of real national income, either in the aggregate or in per capita terms, was only one of the goals of Indian economic policy and that the strategy employed in the pursuit of this goal was conditioned in important ways by at least three other objectives to which Indian planners gave high priority. The first of these was to bring to an end India's dependence on foreign aid at the earliest possible moment. From the beginning there has been controversy within India as to what levels of foreign aid were required to achieve Indian growth targets and how soon India could free herself from the economic and political constraints which dependence on foreign sources of food, technology, raw materials and capital goods was believed to involve. There was a clear recognition that help from abroad in all of these matters was critical, but equally that the continuation of aid could not be counted upon and that since reliance on such help was filled with dangers to Indian independence, dignity and self-respect, it should be terminated at the earliest possible moment. Thus where there was a choice between a strategy which would raise the growth rate but prolong dependence on aid and one which might reduce growth performance but promise earlier self-sufficiency, the latter was likely to be selected. Some of the controversies over the strategies of the second and third plans revolved around whether this kind of a choice did or did not exist.
A second objective of Indian economic policy which has occasionally been in conflict with the maximization of growth has been to achieve an equitable distribution of the fruits of development. The extensive regulatory powers of the Indian Government over prices, the allocation of scarce resources and the structure of taxes have all been designed with this in mind. Finally, in India as in the United States the political requirements of a democratic system have had a major influence on the execution of development policy. The fact that India is a federal system in which administrative decisions are subject to legislative review and ultimately to the test of acceptability to the electorate has influenced the volume of saving which can be extracted from the public, the location of key new industries and the efficiency of decision-making.
Turning to characteristics of the Indian economy which condition the options open to Indian decision-makers, the first is the sheer size and diversity of the country. In population it is equivalent to about six Brazils, nine Nigerias, fifteen Egypts or more than fifty Kenyas, and there is added to the population each year the equivalent of an Australia or a Peru. If it were broken into twenty good-sized normal countries, we would expect a fairly wide range of performance among them. To hope for an average equal to that of one of the small star performers is quite unrealistic.
One corollary of India's size is that foreign trade is, as in the United States, a relatively small fraction of national income, imports amounting in the period under review to about 8 percent and exports to about 5 percent of total production. This means that for effective development the range of goods produced within India must inevitably be very wide. There can be arguments about the adequacy of Indian efforts to promote exports, but there can be no question but that the investment program of a country the size of India must be heavily focused on what is commonly referred to as import substitution-that is, on the production of a wide range of goods including capital goods for the domestic market. The notion that India could have relied for her development mainly on the promotion of exports of raw materials and light manufactures and imported all of her requirements of steel, machine tools and heavy industrial equipment was clearly ruled out by even a casual examination of the relevant numbers. The expansion of exports required by such a policy would have been many times as great as the most optimistic estimates of the possibilities.
On similar grounds it is clear that in a country the size of India there must be a rough kind of balance between agricultural and industrial production. This can and should be adjusted through international trade, but very broadly speaking India must feed herself and produce a large part of the industrial output on which modern development depends. The doctrine of balanced growth is ridiculous in Kuwait, is of only limited relevance to a normal-sized country with comparative advantage in particular exports, but sets real limits to specialization in a subcontinent the size of South Asia. Sensible men no longer argue about whether India should give priority to industry or agriculture but only about whether the balance is roughly correct or should be shifted marginally one way or the other.
A final consequence of size has been that India could not expect amounts of aid in per capita terms as large as those available to many smaller countries. Total aid, while larger absolutely than for any other country, has never amounted to more than a little over $3 per Indian per year, with the U.S. share, including food, only a little over $1 per head.
With these considerations in mind a look at the profile of Indian growth from 1951 to 1965 suggests that Indian strategy was moderately successful. On the average, agricultural production grew at 3 percent a year. Food- grain production increased some 50 percent (reaching a total of 89 million tons in 1964-65), compared with a virtually static level in greater British India during the first half of the century. Improvements in yield were disappointing and a considerable part of the increase in output was achieved by expanding acreage, the possibilities for which are now largely exhausted. But even in this period of less than optimal agricultural policy Indian agriculture reversed the pattern of the first half-century and pushed a little ahead of population growth.
The industrial performance was much more dramatic. The index of industrial production rose 150 percent in the fourteen years. Consumer goods grew much more slowly than capital and intermediate goods. Coal production doubled, steel went from 1.5 million tons to more than 6 million tons, electric power generation multiplied nearly sixfold and a flourishing machine-tool industry was established from practically nothing. In consumer goods the demand for bicycles and sewing machines, which at the beginning of the period was met in considerable part from imports, by 1965 was satisfied entirely by domestic production. All of this was accomplished with what was for an underdeveloped country a quite extraordinary degree of monetary stability. The price level actually fell substantially during the first five-year plan, which coincided with our Korean War inflation, and wholesale prices rose only some 40 percent over the whole fourteen-year period. This was in spite of the outbreak of hostilities with China in 1962 and the more than doubling of defense expenditures consequent upon that conflict. Government deficits were held to very modest levels, the tax revenues from the center, the states and the union territories rose from about 7 percent of national income at the beginning of the period to about 14 percent at the end, and savings and investment as a fraction of national income both went up by 3 or 4 percentage points.
Foreign trade is one of the weak spots in the record. During the first two plans, export earnings fluctuated around a nearly constant level, and the relatively modest increase in the third plan, averaging 5 percent a year over the four years, was due in part to a rapid expansion of exports to Eastern Europe. Under the pressures of development requirements imports increased more rapidly, and during the third plan averaged some 50 percent more than exports in value. Through the whole period export earnings were not quite enough to pay for what Indians call maintenance imports-that is, the raw materials and consumption goods needed to keep the economy operating; virtually all of the imports required for the expansion of plant and equipment were chargeable to the trade deficit. This was true in spite of the fact that India, compared to most underdeveloped countries, held luxury and nonessential consumption items to very low levels.
Import requirements were consistently underestimated by the development planners, and there was a severe foreign-exchange crisis early in the second plan which led to the establishment of a very detailed and somewhat cumbersome system of import licensing and foreign-exchange regulations. The large deficits in the balance of trade were financed in the early part of the period by drawing on the foreign-exchange reserves which India had accumulated during World War II. In the latter part of the period, after these reserves were largely exhausted, the deficit was covered by a mounting flow of foreign aid, a little over half of which came from the United States, with the balance being supplied by Western Europe, the Soviet Union, Japan and the International Bank. Much of the aid was in the form of relatively short-term loans, and by 1965 the burden of interest and amortization was already escalating to the point where the difference between gross and net aid was substantial.
Thus, in summary, India's development performance before the last few troubled years was notable in social overhead and industry, especially in capital goods and heavy industry, to which the planners had given first priority; was substantial but inadequate in agriculture; was praiseworthy in fiscal and monetary management; and was disappointing in the growing deterioration of the Indian balance of payments. The overall growth record was more impressive than is frequently realized but must none the less be characterized as disappointing both in terms of the targets the Indians set for themselves and in terms of progress toward independence from foreign aid.
Among the reasons frequently cited for this inadequacy, the first has to do with measures relating to agriculture. The problem here was not the allocation of financial resources, for agriculture, community development and irrigation were assigned about 20 percent of the public and private development resources in the second and third plans and a significantly larger percentage in the very much smaller first plan. But the first plan, in which a good deal of attention was paid to agriculture, in some ways gave too great an appearance of success. It was preceded by a year of relatively poor weather and finished with a comparatively good year, and the planned targets for agricultural output were exceeded in food grains and largely achieved in most other crops.
With the advent of the second plan the focus of attention shifted to building the heavy industrial base. The top decision-makers continued to say all the right things about the importance of agriculture and put satisfactory numbers for agricultural investment in their summary tables, but the administrative time and attention required to fit together all the complex pieces of an effective program were missing. High priority was given to community development and extension but too little attention was paid to insuring that the expanding supplies of physical inputs like fertilizer and improved seed were available at times and in places and at prices which would make it possible for farmers to use them. Relatively modest fertilizer production targets were not met, and inadequate priority was given to fertilizer imports in the face of foreign-exchange shortages which threatened favored heavy industrial projects. Funds were allocated to and substantial progress made on major irrigation works, but the constant care and attention at the local level required to clear water channels, secure effective drainage and insure the proper timing and allocation of local water distribution were not supplied. There was an understandable but unfortunate preoccupation both in the design of irrigation systems and in research into new varieties of seed with trying to provide insurance against the worst consequences of drought rather than to maximize yields in periods of reasonably good weather.
Now that very substantial progress is at last being made in promoting Indian agricultural development it is easy to say that the same things could and should have been done a decade or more ago. In fact the current promise derives partly from the recent appearance on the scene of new varieties of the major crops, and, even more, the stimulus of two bad harvests.
One of the key limitations of the agricultural program prior to the mid- sixties was a consequence of the conflict of objectives between maximum production and equity, to which we have already referred. The prices of marketable farm output and especially of food grains were held down by government procurement, which was designed to keep the prices of food low on behalf of the low-income urban consumer, while the prices of fertilizer in terms of bushels of wheat or rice were in India among the highest in the world and sufficient to deter even a rational farmer from taking the risks involved in adopting the new techniques. This defect was compounded by restrictions, which still exist, on the interstate movement of food grains. The result was to keep prices low in surplus states where there is the biggest potential for increasing yields and high in the deficit states where investment is less promising.
The policy of keeping food prices low even at the cost of discouraging farm production was made possible partly by the availability of surplus grain from the United States under PL 480. This supply, made available partly to dispose of embarrassing surpluses and partly out of a laudable impulse to help feed the hungry, may well have had the long-run effect of delaying serious Indian attention to the mounting problems of agricultural productivity.
There is no question but that the relatively sluggish growth of agriculture until 1965 even in good-weather years was one of the main factors limiting the rate of growth of the economy as a whole. This is true partly because agriculture still produces half of Indian national income and partly because slow growth in agriculture inhibits development in other branches of the economy. Fortunately, this situation has now radically altered and India is, I believe, faced with the opposite danger: that agriculture, running ahead of the rest of the economy, will stumble and fall for lack of reinforcement from other sectors.
Turning to industry, the allocation of resources in the second and third plans was quite heavily focused on capital goods and heavy industry. This was accomplished partly by setting up government plants in steel, machine tools and other related fields, and partly through the control of private investment through government licensing, foreign exchange allocation, price control and the like. Investment in heavy industry has a very high foreign- exchange component, usually involves long periods of gestation and, because of its technical complexity, may not permit fully efficient operation until some years after projects are completed. Thus the early yield in national income from a dollar's worth of investment may be quite low.
For these reasons some critics have argued that India could have gotten a quicker and bigger payoff from the amounts of savings and foreign exchange available to her if she had reduced somewhat her investment in heavy industry and given more attention to light engineering, agricultural inputs and consumer goods. The argument here among responsible observers is not whether India should have any heavy industry. As already mentioned, given her size, her inherent comparative advantage in steel and related industries and her long-run development goals, there can be no question of her need for a capital-goods sector. The only question is whether the timing has been ideal-whether, that is, a somewhat slower expansion of industries making machines to make machines might have increased the rate of growth of national income.
To answer that it would almost certainly have done so in the early years does not fully meet the point of the proponents of the strategy which has in fact been followed. Their case was based quite explicitly on the argument that, since foreign aid was compromising and uncertain, India must give top priority to those elements of the industrial structure which would give her as quickly as possible the capacity to produce everything else she needed without dependence on largesse from abroad. This should be done, so it was argued, even if it meant that India's existing plant was for a time inefficiently used. Thus, when there was a foreign-exchange pinch, major projects requiring imported equipment took precedence over the import of raw materials and spare parts to keep existing equipment utilized at capacity. If this was in fact a wrong policy-and there is room for difference of opinion on that point-the countries supplying foreign aid bear at least some of the burden of responsibility. Until recently we and other aid donors had a preference for project as opposed to program assistance, and this would have made it difficult or impossible for the Indians to implement a policy of giving priority to full use of existing capacity. Wherever one comes out on this argument, the existence of widespread excess capacity in many sectors of Indian industry in 1965 and a fortiori today means that there is a potential for a very rapid industrial expansion at least for a short time if the foreign exchange necessary to fuel it can somehow be found.
The final area of controversy is the management of India's foreign exchange. Could export growth have been increased and the allocation of foreign exchange for imports made more rational? Could improvements in the climate of private investment have attracted dramatically larger amounts of foreign capital than the net flow of a little better than $100 million a year which had been achieved by 1965?
There is no question but that India was slow to recognize its export problem. Little was done prior to the foreign-exchange crisis of 1957-58 and, while a good many measures to promote exports were subsequently adopted, their results have been limited. Some Indians believe that this was almost inevitable. They contend that world markets for the traditional exports like jute, tea, cotton textiles and the like are saturated, that these markets are not very responsive to price adjustments, and that India's long-term export prospects lie elsewhere, in engineering and industry. These are, however, precisely the sectors in which import substitution has been taking place and is not yet completed, and there is no advantage in diverting essential goods from domestic to foreign markets if equivalent imports are then required. According to this view, a really major expansion of Indian exports must await a slightly later stage of development in which India can supply a larger fraction of its own domestic demand for industrial products.
Supporters of this position were against devaluation of the rupee on the ground that this would reduce the foreign-exchange earnings of the traditional industries and that the newer industries were not yet sufficiently advanced to take advantage of it. Those on the other side pointed out that even in traditional exports India's share of world markets has been declining, that there are some raw materials like iron ore which India has only begun to exploit for their export potential, that other countries have done very well by being competitive in textiles, that some of the new industries are beginning to exhibit a strong export performance, and that proper policies could bring out a good many more. There are many intangibles in the argument and about all that one can conclude with some assurance is that the trade deficit induced by development during the first three plans was of such a magnitude that no reorientation of export policy or alteration in the exchange rate, however desirable, could have eliminated it.
On the import side, controls have had one clearly desirable effect. Scarce foreign exchange has not gone, as it has in large amounts in many underdeveloped countries, into luxury and nonessential consumption. There is little doubt in my mind but that when the demand for and supply of foreign exchange are as far out of balance as they are likely to be when Indian development is prospering, a government dedicated to a priority for investment and committed to a concern for equity cannot permit the allocation of foreign exchange to be determined entirely by market forces. As we discovered in wartime in the United States, the more severe the shortage, the more direct controls commend themselves. The question in the Indian case was whether by an appropriate combination of measures, including earlier devaluation, some of the heat could have been taken off the control system so that it could have operated more effectively and with less injustice to the little man, who has the most trouble mastering its complexities. In the early years of the period we are discussing, the effectiveness of the control system in preventing gross misuse was shown by the very limited extent of the black market in foreign exchange. As the period progressed and pressures on the rupee became more intense, evidences of evasion and illicit transactions multiplied. My own judgment is that improvements in the handling of foreign exchange could have resulted in somewhat better export performance and somewhat more efficient use of available imports, but that this would not have made a crucial difference in the overall growth record.
Much the same can, I think, be said of the treatment of private foreign investment. Many American businessmen who have had extended dealings with the Indian bureaucracy have come away profoundly irritated by the delays and frustrations to which they have been subjected. These are unfortunate, but it is hard for me to believe that had they been wholly absent the prospects of profits from investment in India would have been sufficient to increase private foreign investment more than marginally from its very low level.
The troublesome years of 1965-67 brought major structural changes in the Indian economy-changes which have altered rather profoundly the problem of achieving and sustaining a high rate of growth. The key event here was bad weather, the worst two-year period in India in a century. Production of food grain dropped from 89 million tons in 1964-65 to 72 million tons in 1965-66, a decline of nearly 19 percent. The following year was almost as bad, producing only 75 million tons, though the disaster was somewhat differently distributed in the second year. Since agriculture amounts to about half of all Indian production, this drastic decline would have meant a substantial drop in national income even if the non-agricultural sectors of the economy had continued to grow at their old rate. This happened for a time, but gradually the agricultural shortage spread its effects through the rest of the economy, contributing to an industrial recession which became quite severe by the middle of 1967.
There were a number of ways in which the agricultural shortage came to affect the industrial sector. The most important was probably its influence on fiscal and monetary policy. The food shortage produced a sharp increase in the prices of agricultural commodities, and since these prices, together with those of agriculture-based industries like textiles, have very heavy weight in the overall price index, the result was a sharp spurt of inflation. The Government, unable to do anything about the real cause of the inflation-the bad weather-took the steps normally prescribed for inflation control, namely the tightening of credit by the central bank and heavy cuts in government spending, especially for industry and development. By a kind of classic Keynesian multiplier process, these reductions in investment, both public and private, expanded urban unemployment, reduced non-agricultural incomes and lowered the demand for a wide range of commodities. In addition, because of the sharp rise in food prices a larger fraction of urban incomes had to go for food purchases, further depressing the markets for other commodities. On the supply side, the agriculture- based industries, which account for more than half of industrial production, found their needed raw materials less available.
This sequence of events, upsetting as it was in interrupting India's record of growth, was not an unmixed disaster. It had consequences for agriculture and foreign exchange which are of very great long-run importance. The drought had a tonic effect on government agricultural programs, from the Central Government in Delhi through most of the states right down to the district and even village level. The Ministry of Agriculture developed a new and very promising plan for stimulating agricultural production, fertilizer targets were revised sharply upward, the introduction of high- yield varieties was greatly accelerated in wheat, rice and coarse grains, and the irrigation program was pushed with new vigor. The increase in the profitability of commercial farming which resulted from the relative rise in the prices of agricultural products gave a boost to the farming community and the demands for fertilizer pushed well ahead of even the rapidly expanding supplies. As a result there is now every prospect that agricultural production can be increased at an annual rate of 5 percent a year or more from the base not of the drought years but of the very favorable year 1967-68.
As for foreign exchange in this recent period, the industrial recession reduced the demand, and thus concealed a problem that threatens to become very critical in the future. The outbreak of hostilities between India and Pakistan in 1965 resulted in an extended interruption of U.S. aid commitments. This was slow in showing itself in economic performance since the utilization of aid already committed had lagged for a variety of reasons and there was a good deal in the pipeline. By the time the situation might have been serious the industrial recession had cut the demand for imports to the point where foreign exchange was not for the time being the limiting factor on Indian recovery. The interruption, however, combined with the delays in 1965 and 1966 in American commitments of surplus grain to meet the food shortage, had a political and psychological effect in India of lasting significance. It greatly reinforced the view that India must find a way of freeing herself from dependence on foreign sources of aid capital by a policy of austerity and the reëstablishment of tight central controls. This view has not yet become very powerful because the industrial recession has prevented the emergence of a foreign-exchange crisis, but it is latent in the background and could be revived by a foreign-exchange shortage.
The other important development of the year 1966 was the devaluation of the rupee. This was accompanied by some liberalization of import controls and both measures were undertaken at the strong urging of the International Bank and the U.S. Government. The decision to adopt these measures was supported strongly by one wing of Indian opinion, and it is not clear how much urging from abroad had in fact to do with it. But opponents were convinced that these steps represented a concession to foreign pressures. Whatever the facts, there was a widespread view in India that these measures could be effective only if they were combined with a substantial increase in the availability of foreign exchange through foreign aid. There were at least implicit promises from the United States and other sources that, if these measures were in fact adopted, a higher level of aid would be forthcoming. In fact, the aid flow was first interrupted and then, apart from food, resumed at a significantly lower level.
In the light of these developments and the structural changes of the last two or three years, what can we say about the prospects? With respect to agriculture the answer is already fairly clear. For the year 1967-68 the outlook is for a record in food-grain production of better than 95 million tons. More important than the figure is what lies behind it. Favorable weather is only partly responsible. The program initiated in 1966 of intensive concentration on 33 million acres of irrigated crop land, about 10 percent of India's total, is already beginning to bear fruit. The introduction of new varieties is proceeding ahead of schedule and, where irrigation and fertilization have been adequate, the yields have been fully up to expectations. Fifteen million acres of new high-yielding varieties of rice, wheat, maize, jowar and bajra were expected to be planted in the current crop year and by 1970-71 supplies of seed should be sufficient to more than double this acreage. This season and last, the supply of nitrogen has been doubled, phosphates raised 150 percent and potash substantially increased; programs for continued expansion of fertilizer production and high priority for fertilizer imports have been established. Measures have been taken in irrigation-especially tube wells-in plant protection, in improvement of transport, in the availability of credit and in agricultural research and education-all of which are beginning to show results and should continue to do so. With decent weather the momentum already apparent in agriculture should be maintained, and in so far as the advance is occurring mainly on irrigated land which is being rapidly extended the dependence on weather is markedly reduced.
What this means is that agriculture as a bottleneck to overall Indian development is in the process of being eliminated. A 5 percent growth in agricultural production should permit a 6 or 7 percent growth in overall national income, and in addition the building up of some stocks and a slowing down or cessation of the rate of inflation of the last two or three years. Agricultural prices have already begun to recede and this should make possible the removal of the fiscal and monetary restraints on the performance of the rest of the economy. The finance minister has already indicated that he proposes to move in a somewhat expansionist direction.
The cloud on the horizon in this otherwise rosy picture is foreign exchange. The tentative commitment of the consortium of countries aiding India under World Bank leadership is $900 million in the current year, no higher than it has been in recent years. It is true that this is all for non-project aid, but the prospects for project loans over and above this amount are very slim. Indeed, in light of the fate of the President's aid bill for fiscal 1968, it seems almost certain that America's share of the consortium commitment will not be met. If the U.S. aid appropriation emerges this year in the same range as for fiscal 1968, the contributions of other consortium members are likely to fall off, and the total figure may fall substantially. If the resources of IDA, which are about exhausted, are replenished by additional U.S. and other contributions, this will help, but the prospect is uncertain at best. Some expansion in Indian exports can be hoped for over the coming years, but this is likely to compensate for only a portion of the decline in foreign aid.
Agriculture and the imported resources to sustain it, such as fertilizer and the plant and equipment for fertilizer production, are now given such a high priority by both the Indian Government and the suppliers of aid that a foreign-exchange pinch is unlikely to restrict agricultural inputs seriously. On the other hand, if as seems likely, and is indeed already beginning to happen, soaring agricultural output removes the main source of inflationary pressure and fiscal and monetary policy eases accordingly, there is the prospect of a boom in the nonagricultural sector as presently unutilized capacity is put back to work. That will generate a very large increase in the demand for imports.
The shape of the cloud on the horizon is now becoming clearer. The danger is that continued depression and the persistence of excess industrial capacity will be enforced by a shortage of foreign exchange to procure the imports of raw materials, spare parts and the like which are required to fuel a major industrial expansion. If this occurs, a series of additional disturbing economic and political consequences are likely. There will certainly be a revival of the old dilemma of whether to use scarce foreign exchange to keep existing capacity occupied or to push ahead with the expansion of new capacity in the capital and intermediate-goods industries, and permit current output to suffer. Either way this dilemma is resolved, unemployment in the industrial labor force will continue and urban incomes will fail to resume even their earlier advance.
This, in turn, will result in sluggish urban demand for the rising surplus of agricultural produce and heavy downward pressure on agricultural prices. While some reversal of the upward trend in agricultural prices would be healthy, there is a danger that if this reversal goes too far the agricultural expansion which now looks so promising may be halted in its tracks by a deterioration of profit incentives for farmers. The Indian Government has now recognized the importance of price incentives and has established floor prices for agricultural commodities, but these floors are still very low and it is doubtful whether the Government would be able to maintain higher ones in the face of low demand for marketable agricultural surpluses.
Beyond this, continued depression in the nonagricultural sectors would have very serious fiscal consequences, for it is here that both state and federal revenues are primarily obtained. Land taxes have been abolished in most of the states, and agricultural income taxes, which are reserved to the states by the Constitution, have not been adopted. State commitments and expenditures have been rising rapidly and can be supported only by a combination of rising state revenues and grants-in-aid from the center; and both depend heavily on the prosperity of the modern sector. Central government revenues have been markedly assisted during the past two years by the sale of U.S. grain and, though some continuation of PL 480 shipments is justified to rebuild stocks, this source of revenue will surely soon decline sharply.
It is not easy to predict what would be the political consequences of this economic state of affairs, if it develops, beyond saying that they would be disruptive. There would certainly be some exacerbation of the conflicts between the states and the center. In addition, tensions between rural and urban communities would inevitably be heightened. The agricultural community is much more likely to generate political trouble when agricultural output is high and prices low because of weak demand than when, as in the recent past, food supplies are inadequate. A rise in the educated unemployed in the large urban centers would certainly strengthen the extremist tendencies already observable in places like West Bengal. The problem of how the costs and benefits of development are to be shared has not been a seriously divisive one in Indian politics up to the present, but in the face of industrial depression and fiscal troubles it could rapidly become explosive. And though the democratic tradition in India is too strongly embedded to be abruptly abandoned, pressure for more authoritarian solutions would surely mount.
Perhaps more important, those who have been arguing successfully for liberalization of the control machinery, for a more sympathetic attitude toward foreign private investment, and for economies in the allocation of scarce administrative and managerial resources (which somewhat greater reliance on market forces makes possible) would suffer a serious setback. Those who have been arguing, on the other hand, that the Western countries cannot be trusted, that reliance on foreign aid is both too risky and too prejudicial to Indian independence, would have a more responsive audience. With industrial prosperity, both the economic and political prospects for significant expansion of private foreign investment in India are favorable. With industrial recession and a foreign-exchange pinch, whatever prospects there are now would rapidly disappear for both economic and political reasons.
There is, of course, no guarantee that if the Western countries make a few hundred million dollars more aid available per year, the Indian economy and polity will have clear sailing. If we have learned nothing else in the past decade, we should have learned that the relations between economic and political performance in the developing world are a great deal more complex than some of us at one time assumed. But the possibility at least now exists for a very impressive performance by the Indian economy over the next five or ten years, if that economy is fed by some additional aid. The Indian case is one of the clearest where poor economic performance will have predictably destabilizing consequences. Now that India, largely through her own efforts, has made very promising progress toward cracking what has been the most critical bottleneck-agriculture-it will be too bad if today's high promise of accelerated economic growth cannot be fulfilled because the Western countries permit what is for them a relatively small shortage of foreign exchange to stall the whole process.