ABSTRACT
This chapter is divided into four main parts. The first briefly summarises the key data surrounding the episode of stagnation between 1965/66 and 1979/80 then reviews and critiques the existing set of causal explanations. Each of the other three parts focuses on one particular role that the state has in promoting economic development. The Indian state between 1965 and 1980 had three principal roleswith regard to the domestic financial system. Theseweremobilising domestic savings, creating institutions to mobilise private sector savings, and allocating resources to projects essential for development. Contrary to suggestions by many authors the Indian state was very successful in mobilising resources. The pattern was very different, though, to that prevailing between 1951/52 and 1964/65. Between 1965/66 and 1979/80 tax revenue and household savings increased while private corporate sector savings and the net inflow of savings from abroad declined. The second important financial role of the state was in allocating resources to projects essential for development. After the mid1960s the share of total investment was dragged down by a decline in public investment. Private investment by contrast remained stable or even increased slightly after the mid-1960s. The second economic role of the state is in achieving a productive use of the surplus, in both public and private sectors. In terms of industrial growth and diversification, resource mobilisation and its productive allocation, the period 1950-65 was successful. It is only after 1965 that the economy suffered a dramatic decline in performance. A close look at more disaggregated figures shows there was quite rapid aggregate productivity growth between 1950 and 1965, then stagnation until 1980. The final section focuses on institutions that allowed the state to overcome the inherent conflicts associated with (rapid) economic development. Exogenous shocks that hit the Indian economy in the mid-1960s caused a dramatic decline in the Congress Party in the 1967 elections. There was a sharp structural break in indicators of conflict after the mid-1960s and a rise of a new political economy of agriculturalism. This undermined the state’s ability to allocate resources towards projects essential for development and to ensure that the resources allocated were used productively. As a result of growing political conflict from the mid-1960s
needed to be accommodated for the sake of political stability. Industrial policy became increasingly a means of containing conflict rather than of economic planning. There is also evidence that extensive growth by replication became less efficient after the mid-1960s. Finally, this section shows that there was an increase in pressure from demand groups (including trade unions) after the mid1960s. There was a structural break in the distribution of factor incomes in the organised sector after 1965/66. This was caused both by increasing wages and also by a slowdown in productivity growth. This had a material impact on the ability of firms to finance private corporate-sector investment or more specifically investment in machinery.
