The following text was originally delivered as a presidential address at the Annual General Meeting of the Employers’ Federation of India in Calcutta by Homi Mody in February 1957. The text was published by the Forum of Free Enterprise.
In my speech last year, I had commented at some length on the Second Five-Year Plan, examined its targets and the resources available and had pressed for a little more gradualness in the process of transforming our age-old economy. I had also expressed my apprehensions with regard to the imposition of penal taxation, widening controls and consumption curbs, which were calculated to cause considerable hardship to every section of the people. Mr. K.C. Neogy, a member of the Planning Commission, subsequently voiced similar apprehensions and uttered a warning that inflation, progressively heavy taxation and rigid controls might well set in motion forces of reaction and demoralization at different levels of society. Mr. John Strachey, a British labour leader and economist who had visited India recently, also expressed the view that the danger of serious inflation developing, was real. Similarly, the World Bank, after an investigation by its representatives on the spot, arrived at the conclusion that the Plan was too ambitious and that, insofar as the public sector was concerned, the targets were too high to be completed within the time limit of five years.
Recent developments have lent point to these observations. The problem of foreign exchange, particularly, has become very acute. The total requirements of the Plan had been estimated at Rs. 1,100 crores. It was recognised that, without a liberal measure of assistance from the U.S.A. and under the Colombo Plan, it would be difficult to meet these requirements. The experience of the last nine months shows that the planners have underestimated the foreign exchange component of the large investment programme which they wanted to undertake. It was intended to spend, over the five years, Rs. 200 crores from the exchange reserves of the country, consisting mainly of sterling balances. This amount has, however, been spent during the first nine months of the Plan. Foreign exchange resources can only be obtained by stepping up the export trade of the country and by securing foreign aid and investment and it is hoped that, as a result of the recent visit of our Prime Minister to the U.S.A., American aid will be forthcoming in a larger measure than might otherwise have been the case. It is not likely, however, to cover the entire gap in India’s foreign exchange requirements, and it is to be seen to what extent the measures which the Government have adopted will relieve the situation. So far as the development of the industry in the private sector is concerned, they are bound to have adverse effects. The action taken to restrict import licenses for capital goods to those cases only which would not involve large foreign exchange commitments, or in which assurances of long-term credit or deferred payment on the part of foreign manufacturers have been obtained is an instance in point.
In consequence of the stepping up of the investment in the State sector from Rs. 4,800 to Rs. 5,300 crores, the difficulties pointed out last year have been further aggravated. As deficit financing of the order of Rs. 1,200 crores is in itself likely to give rise to dangerous inflationary pressures, the higher investment would obviously have to be sought to be met chiefly by means of additional taxation, as an upward revision of the resources to be obtained through loans and small savings, rai1way receipts, provident funds and other deposits would add up to a small amount. Taking into account the uncovered gap of Rs. 400 crores, which cannot be bridged by any other means except by fresh impositions, the total additional taxation which may have to be resorted to would reach an alarming figure. Even after implementing all the proposals of the Taxation Enquiry Commission, additional revenue of such proportions would be impossible to secure without disrupting the entire economy.
It is unnecessary to emphasize that the objectives of the Plan command wide-spread support and, if there are differences, they relate to the manner and method of implementing them. I have no doubt whatever that, in a matter of a couple of decades, India is bound to become one of the most important industrial nations of the world. The real issue is whether, in the process of achieving such a position, policies are to be pursued which would strain the economy of the country to breaking point and whether the fundamental liberties and democratic institutions which are ours today would remain intact and inviolate. Since liberty is never lost at one stroke, but by a gradual and step by step abridgement, it is necessary that the closest scrutiny should be applied to Governmental measures purported to be taken in the general interest. Equally necessary it is to ensure that the steady and progressive development of the country’s resources is not jeopardized by any hastily conceived measures to force the pace.
The revised Industrial Policy Statement issues in April 1956, was welcomed by some of us, as at least a clear enunciation of future policy and as affording a promise of co-existence to the private sector in a defined sphere. However much we may deplore the fact that the policy which was announced displaced the private sector from a number of industries which are its legitimate sphere of activity, we felt it embodied some valuable assurances which we had sought. We had the promise of adequate assistance in fulfilling the role assigned to free enterprise, and we had the assurance that there would be no precipitate encroachments on the private sector of the economy. We were, therefore, greatly surprised by the announcement that the Government had decided to take over, by executive fiat, the internal trade in cement and other commodities. No valid reason was advanced in support of this drastic action. We were vaguely told that State trading had become necessary for facilitating trade with communist countries. Whatever the validity of this argument, the subsequent extension of the limits of State trading afford another example of the snow-balling effect of power in the hands of the Government. Commerce and trade are so essentially the province of individual enterprise and so little suited to bureaucratic handling that we cannot but look upon this action as the severest encroachment, to date, on the functions of private enterprise.
Measures have also been taken to curtail the resources available to the free sector of industry to carry out its allotted tasks. The recent imposition of fresh taxation of an unusual character and the proposal for compulsory deposit of reserves announced by the Finance Minister have created a crisis of confidence at a moment when all available resources need to be employed in utilizing, to the fullest extent possible, the productive capacity of the country.
In the present political climate, it may appear an academic exercise to assess the proper role of the State in economic matters. But all over the world, thought is being given to the question, and even socialist thinkers are deprecating the arrogation of unlimited power by the State. In this connection, it may be profitable to recall a dictum of Abraham Lincoln:
“The legitimate object of Government is to do for a community of people whatever they’ need to have done, but cannot do at all, or cannot so well do for themselves in their separate and individual capacities. And in all that the people can individually do as well themselves, Government ought not to interfere.”
Previous musing: CONSUMER SOVEREIGNTY LEADS TO RAPID ECONOMIC DEVELOPMENT
