Acceptance of socialism was strong in India long before Indian independence. Socialism was spurred by widespread resentment against British colonialism. That was in addition to ill-feeling for the land-owning princely class called the zamindars.
The flames of resentment were fanned by the efforts of the Communist Party of India going back to 1921.
Jawaharlal Nehru adopted socialism as the controlling ideology upon becoming India’s first prime minister in 1947. Then for nearly 30 years, the Indian government adhered to a socialist line. The government was restricting imports and prohibiting foreign direct investment. The rule of law was used for protecting small companies from competition from large corporations.
The government was all in for maintaining price controls on a wide variety of industries. The protected industries include steel, cement, fertilizers, petroleum, and pharmaceuticals. Any producer exceeding their licensed capacity was facing possible imprisonment.
Indian economist Swaminathan S. Anklesaria Aiyar wrote, “India was perhaps the only country in the world where improving productivity . . . was a crime.” It was a strict application of the socialist principle. The dogma requires the market cannot be trusted to produce good economic or social outcomes. Economic inequality was regulated through taxes. The top personal income tax rate hit a stifling 97.75%.
Fourteen public banks were nationalized in 1969. Six more banks were taken over by the government in 1980. India was driven by the principle of “self-reliance.” This meant almost anything that could be produced domestically could not be imported. That was without regard to the cost.
That was the “zenith” of Indian socialism. The problem it turns out is the economy still failed to satisfy the basic needs of an ever-expanding population. In 1977–78, more than half of India was living below the poverty line.
At the same time Arvind Panagariya notes a series of external shocks shook the country. The shocks include a war with Pakistan in 1965. The war with Pakistan followed a war with China in 1962. It was followed by another war with Pakistan in 1971.
Plus there were consecutive droughts in 1971–72 and 1972–73. Then there was the oil price crisis of October 1973. The oil price crisis contributed to a 40% deterioration in India’s foreign trade.
Economic performance from 1965 to 1981 was worse than at any other post-independence period. As in Israel, economic reform became imperative. Prime Minister Indira Gandhi had pushed her policy agenda as far to the left as possible.
In 1980, the Congress party won a two-thirds majority in the Parliament. Gandhi then was forced to adopt a more pragmatic, non-ideological course. But as with everything else in India, economic reform proceeded slowly.
India adopted an industrial-policy statement. Progress toward free markets continued the piecemeal retreat from socialism. The retreat had begun in 1975. The industrial policy statement began allowing companies to expand their capacity. It supported encouraging investment in a wide variety of industries.
Soon the Indians were introducing private-sector participation in telecommunications. Then further liberalization received a major boost under Rajiv Gandhi. Rajiv succeeded his mother in 1984 after her assassination. As a result, GDP growth reached an encouraging 5.5%.
Economics continued to trump ideology under Rajiv Gandhi. He was free of the socialist baggage carried by earlier generations. His successor, P. V. Narasimha Rao, put an end to licensing except in selected sectors. Rao opened the door to much wider foreign investment. Finance minister Manmohan Singh cut the tariff rates from an astronomical 355% to 65%.
According to Arvind Panagariya, “the government had introduced enough liberalizing measures to set the economy on the course to sustaining approximately 6% growth on a long-term basis.” In fact, India’s GDP growth reached a peak of over 9% in 2005–8, followed by a dip to just under 7% in 2017–18.
A major development of the economic reforms was the remarkable expansion of India’s middle class. The Economist estimates there are 78 million Indians in the middle-middle and upper-middle-class category. By including the lower middle class, Indian economists Krishnan and Hatekar figure that India’s new middle class grew from 304.2 million in 2004–5 to 606.3 million in 2011–12; almost one-half of the entire Indian population.
The Indian wage rates are extremely low by U.S. standards. A dollar goes a long way in India. There the annual per capita income is approximately $6,500. If only half of the lower middle class makes the transition to upper-class or middle income, that would mean an Indian middle class of about 350 million Indians. That is a mid-point between The Economist and Krishnan and Hatekar estimates.
Such an enormous middle class confirms the judgment of the Heritage Foundation. In its Index of Economic Freedom, it notes India is developing into an “open-market economy.” In 2017, India overtook Germany to become the fourth-largest auto market in the world. It is expected to displace Japan in 2020.
That same year, India overtook the U.S. in smartphone sales. In doing so it became the second-largest smartphone market in the world. Usually described as an agricultural country, India is today 31% urbanized. With an annual GDP of $8.7 trillion, India ranks fifth in the world.
It is currently behind only the United States, China, Japan, and Great Britain. Never before in recorded history have so many people risen so quickly. All this has been accomplished because the political leaders of India adopted a better economic system. That’s right; free enterprise. It only took four decades under socialism to recognize the right answer when told.