The below essay written was written by Milton Friedman after he had traveled extensively across India in 1963. The essay is striking in its prescience in predicting the future of the Nehruvian planned economy. Passages on the intellectual ossification of Indian economists (apart from a handful) and the quiet acquiescence of the vast majority of the intelligentsia are a timely reminder for the need to vigorously counter the Delhi establishment.
It is now well over a decade since India embarked on a policy of “planed economic development”. The U.S. government has strongly supported this policy, contributing a total of $4 billion in foreign aid through 1962. We have rightly regarded India as a key country in the struggle for the uncommitted nations of the world, as the major counterforce to the influence being exerted in the Far East by China. We have also rightly regarded the incredible poverty of millions as a challenge to the humanitarianism of the West. Unfortunately, Indian economic policy has not been producing the results that they and we hoped for and I do not believe it can do so. That was my tentative conclusion some eight years ago after a two months visit to India. It has been greatly strengthened by observations during a recent two months visit and particularly by a comparison of the situation then and now.
On the positive side, there are clear signs of improvement since my earlier visit. The roads in the countryside are notably better, there are many more bicycles and automobiles in both city and country, beggars, though still numerous, seem somewhat less ubiquitous. There are any new buildings, some striking, and more and better hotels; new industrial plants and few rapidly expanding centers of small industry; there are new Universities and evident signs of the expansions of old Universities. Much of this and more is to the good. But unfortunately, the progress appears spotty, and some of the appearance of progress is misleading. Many of the most impressive new structures are signs not of progress but of waste, for example, factories producing items at for higher cost than that at which they can be purchased abroad. Most important of all, there is little that is evident to the naked eye in the way of improvement in the conditions of the masses of the people. On every side, there are extremes of unrelieved poverty that it is difficult to make credible to someone who has not been to India. As a friend form Britain remarked after his first visit to Calcutta where over a tenth of the population have no home other than the street: “One can adjust to a square mile of this kind of thing but when it goes on for square mile after square mile, it is more than one can bear.” These conditions seem to have shown little if any change in the past decade.
This kind of casual impression is most untrustworthy, especially when it concerns conditions at a level of living which the observer has never come close to experiencing himself. What he poor in India might regard as a major improvement, you and I might not be able to recognize. However, much objective evidence confirms these general impressions.
One bit comes from work done for a committee appointed by the Prime Minister to study changes in the distribution of income. The chairman of the Committee, Prof. P.C. Mahalanobis, is director of the Indian institute of Statistics, a member of the Indian Planning Commission, the author of the draft framework of the second five-year plan, and one of the people who has done most to shape present Indian ideas of economic planning. The report of the Committee had not yet been made public when I was in India but Prof. Mahalanobis, in private conversation, showed me some of the work he and his associates at the Indian Statistical Institute had done for the Committee. Data from sample surveys of Indian rural and urban households indicate that the poorest third or so of the populations experienced no increase whatsoever in food consumption per capita during the decade for the 50’s – which roughly coincides with the first two five – year plans. And it must be recorded that food accounts for three-quarters or more of the total consumption expenditure of the poor.
Aggregate figures on the consumption of specific items support the general impression given by household surveys. The major items of consumption for the masses of India are food and cloth. The greater part of food consumption is accounted for by food grains rice, wheat, other cereals, and pulses. Indeed, at the bottom of the income scale, food grains along account for half or more of total expenditure on all items of consumption. Per capita availability of food grains has fluctuated a good deal but with no steady upward trend: it was about the same in 1958 as in 1950, in 1960 as in 1955. The situation is not much different for cloth. The number of yards of cloth per capita is now no higher than in 1939. [CORRECT? ] In the decade from 1950 to 1960, it has varied from in 19 to in 19. The consumption items that have shown the most rapid increases have been items like bicycles, sewing machines, automobiles-not luxuries by Western standards by clearly so by Indian standards.
The official estimates of national income – that favourite magnitude of modern growth-men -give only a slightly more favourable impression. National income, corrected for price change, rose during the decade of the first two five-year plans at the rate of about 3 ½ percent per year, but population rose at the rate of 2 per cent a year, so per capita output rose by about 1 1/2 per cent per year. And even these figures overstate the progress. In the first place, the official figures probably overstate the growth in output during the second five-year plan period because they make insufficient allowance of the price rise that occurred (this overstatement is almost surely much larger than the major error in the opposite direction, which is underestimation of the growth in the output of small-scale industry). In the second place, an increasing fraction of national income has taken the form of capital investment and government expenditures. The new and elaborate office buildings in New Delhi, the elaborate luxury Ashoka hotel built by the government in New Delhi,the strikingly well-appointed and attractive guest houses, as well as all the new buildings, at the Universities newly constructed, and, of course, also the new automobile plants, fertilizer, steel, and other plants all these enter the national income at their current costs and regardless of whether they will ultimately add to the national output, as the fertilizer and steel plants my, or be a perpetual drain, as the automobile plants are and will continue to be.
For the purpose of judging progress, the increase in consumption is much more meaningful than the increase in total output, both because its measurement is less ambiguous and because the aim of development is, after all, to raise the consumption level of the populace. Even the official figures show that per capita consumption has risen at the rate of only one per cent per year.
Some growth in total output but at a disappointingly slow rate and with a widening, rather than a narrowing of the distribution of income: that is the conclusion suggested by all the evidence. I met no Indian economist who did not agree with this general verdict.
Just how disappointing the rate of growth is can be judged by measuring it against a standard that is repeatedly set forth. Time and again one will hear as an article of faith in India that the economic and political pressure for development is so urgent that India must develop at a faster rate than Western countries did. A standard cliché is that India must compress into decades what took other countries centuries. There is, of course, much merit to this position. The scope for improvement is tremendous, the desirability of improvement is unquestioned; and it should be easier and faster to imitate than to initiate. But the actually achieved rate of 4 growth to date is lower than was achieved in Britain, the United States, and the developing countries during their early stages of development. It is lower than the current rate of growth in Japan, Greece, Israel, Formosa or in Italy, France, and Germany, Even at the officially estimated 1 1/2 per cent per year growth in per capita output, it would take over a century of steady growth at that rate for India to reach the current level of per capita income in Japan, and well over three centuries to reach the current level of per capita in the U.S. The current danger is that India will stretch into centuries what took other countries decades.
And all this under circumstances that have most been very favorable for economic growth. he achievement of independence from Britain raised many real problems, particularly as a result of partition, the relocation of populations, and the bloodshed between Hindus and Moslems. But it also created real opportunities. For decades, the enthusiasm and energy of a sizable fraction of the ablest people of India had been devoted to the independence struggle. They had themselves been engaged in activities that were not merely neutral but actively hostile to economic development and they had persuaded a large of fraction their countrymen to do likewise. Independence released these energies and made them available to promote economic progress. Independence also fostered a weakening of rigid social and economic arrangements, increased flexibility in institutions, greater mobility of people, and in general an environment more suited than before to change. Finally, the years after independence saw a great inflow of resources form abroad. External assistance during the decade spanning the first two five-years plans averaged about 1 ½ per cent of national income, which means that it provided something like a fifth of net investment; and external assistance was disproportionately concentrated in the second five-year plan period, when it amounted to about 2 ½ per cent of national income or to over a fourth of net investment. One that score alone, growth should have accelerated during the second five-year plan rather than apparently slowing down a bit.
What is the reason for the disappointingly slow rate of growth? One frequently heard explanation is that it reflects the social institutions of Indians, the nature of the Indian people, the climatic conditions in which they live. Religions taboos, the caste system, a fatalistic philosophy are said to imprison the society in a strait jacket of custom and tradition. The people are said to be un-enterprising and slothful. The hot and humid climate of much of the land saps energy.
These factors may have some relevance in explaining the present low level of income in India, but I believe they have almost none in explaining the low rate of growth. Certainly the visitor to India is forcibly struck by the enormous waste of resources, in terms of his own system of values, produced by the holiness of the cow, to take the most obvious example of the economic effect of religious belief. India has one of the highest if not the highest of cows per person in the world, yet the water buffalo is the primary source of milk, and of course beef is almost unavailable as food. Cows wander freely in the streets of major cities, most of them scrawny, poorly cared for, and of little or no economic value. Yet they invariably have the right of way and, poorly as they are fed, doubtless absorb a very large aggregate amount of foodstuffs that could be made available for human consumption. The rigid assignment of tasks to specific castes often means that two or three people are required to do a job that one person, willing to turn his hand to everything, could perform.
Similarly, human qualities are certainly important. A dramatic illustration from India is the differential experience of two groups of refugees from Pakistan after partition: the Punjabis and the Bengalis. The Punjabis have doubled the average agricultural yield in the area in which they resettled, and have besides been among the most enterprising, active, and dynamic business groups in India. The Bengalis have had great difficulties in resettling, many of them are still in government resettlement camps some 15 years after partition, and they have been a drain on the country rather than a source of growth.
But none of this explains a lack of growth. Insofar as the religious and social customs make for inefficient use of resources, they will keep the Indian level of output lower that otherwise put they need not prevent it from rising at a rapid rate along that lower path. One the contrary, a change in religious and social attitudes, such as is unquestionably occurring, provides an additional reason to expect growth. There need not be a complete reversal of attitudes. A 5 to 10 per cent per year increase in total output would be a very satisfactory record need. To contribute to this, there is required only a small and gradual substitution of attitudes more favourable to the effective use of resources.
The same thing is true about human qualities. It is not necessary that every individual be an enterprising, risk-taking economic man. The history of every nation that has experienced economic growth shows that it is a tiny percentage of the community that sets the pace, undertakes the path-breaking ventures, coordinates the economic activity of the host of others. Most people everywhere are simply hewers of wood and drawers of water. But their hewing of wood and drawing of water is made far more productive by the activities of the minority of industrial and commercial innovators and the much larger but still tiny minority of imitators.
And there is no doubt that India has an adequate supply of potential entrepreneurs, both innovators and imitators. Indians who migrated to Africa to South East Asia have in country after country formed a major part of the entrepreneurial class, have seen the dynamic element initiating and promoting economic progress. It is hard to believe that those who left India are radically different from those who stayed at home. The clearest evidence that they are not is currently provided by the dramatic growth of small-scale industry in the Punjab. The most encouraging experience during my stay in India was a visit I made to Ludhiana, a medium sized town in the Punjab which is fast becoming a major centre for the production of machine tools, bicycles, sewing machines, and similar Items, and which has long been a major centre for the production of knitted goods. Here was the Industrial Revolution at its inception – I repeatedly felt that I was seeing in true life the descriptions of Manchester and Birmingham the end of the 18the century that I had read in economic histories. There are thousands of small and medium size workshops, with extraordinarily detailed specialization of function. Here was a three man shop where saddles for bicycles were being assembled from parts which in turn were made by other small enterprises. But here also was bicycle factory employing hundreds which purchased many of its parts from the smaller firms, and the output of which had been growing at the rate of 50% a year. One of the owners of the factory who showed me around was particularly proud of the part he and his associates had played in helping their employees to establish independent firms. Here was a small open cubby-hole on the main street in which with the aid of a few tools, a thirty-ton press was being constructed, but here also a firm on a substantial scale making many machine tools, mostly with tools that it has in turn made itself. There is no shortage of enterprise, or drive, or technical skill in Ludhiana. There is rather a self-confident, strident, raw capitalism bursting at the seams.