The Indian Fiscal Commission began its work in November 1921, and submitted its report the following year. Its chairman was Ibrahim Rahimtoolah, while John Maynard Keynes was vice- president. Keynes could not come over to India to make any meaningful contribution.
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There were seven Indians and five Englishmen in the commission. Rahimtoolah, in the company of others such as Gopal Krishna Gokhale and Madan Mohan Malaviya, had fought a hard battle over the previous decade to get the colonial government to support Indian industrialization as well as fiscal autonomy.
There were two major reasons why the British gave in to their demands. First, they were trying to neutralize the growing opposition to their rule by accepting the nationalist argument that industrialization led by the state was needed for India to break out of the colonial division of labour. Second, there was a dollop of self-interest as well, as the recent world war had shown how the most important colony in the British Empire did not have the strategic depth to deal with economic disruptions.
The report of the Indian Fiscal Commission is still worth reading. It called for the protection of select industries based on three criteria. First, India should have natural advantages in the industry that was to be protected. Second, that industry would not develop rapidly enough or even not at all without such protection. Third, it should eventually be ready to face global competition once protection was removed.
There were some other principles as well. Protection should not impose a heavy burden on domestic consumers through higher prices. Raw materials and capital goods should be imported free of any protective duties. Semi-manufactured goods used in Indian industry—or intermediate goods in modern parlance—should be taxed as lightly as possible. There should be no tax on exports. Most importantly, a permanent Tariff Board should be set up to advise the legislature on the claims of various industries for protection.
The Commission looked at the issue of import tariffs from two angles—protecting infant industries and diversifying the Indian industrial structure. However, despite its overall support for protection, the Commission also took a detailed look at related issues such as its impact on productivity, wages, inflation, monopoly profits, government revenues, foreign capital and imperial preferences (like free trade agreements within the British Empire). Protection was to be temporary, since it would impose economic costs over the long term.
Five of the seven Indian members added a long dissent note to the main report, arguing that its arguments for protection are too tentative. The overall recommendations were very much in tune with the mainstream nationalist view that countries such as India which were late in the industrialization process would need some government intervention to provide an initial push. The examples of countries such as Germany, Russia and Japan were studied by Indian nationalists.
The Indian mainstream had few free traders at that time. One of the rare exceptions was the historian Jadunath Sarkar. In History Men: Jadunath Sarkar, G. S. Sardesai and Raghubir Sinh, a fine book on three brilliant historians, T.C.A. Raghavan writes how Sarkar held a contrarian position. “Protection would be a premium on inefficiency and would foster a fatal indolence,” wrote Sarkar in his 1911 book on the economics of British India.
The Indian Fiscal Commission was one of the three milestones in Indian industrial policy at that time. In 1918, the Indian Industrial Commission had a report on how to accelerate industrialization. In 1927, the Royal Commission on Indian Currency and Finance submitted its recommendations on the rupee’s exchange rate as well as the need to set up a central bank in India.
The circumstances that led to the formation of the Indian Fiscal Commission are no longer relevant today. However, the report is still valuable, not just as a source of Indian economic history, but also of how to think about the advantages and disadvantages of protection, identify industries to be supported, assess broader economic consequences, and consider differential treatment for raw materials, capital goods, intermediate goods and consumer goods. The structure of global production is also very different now, with trade in intermediate goods dominating trade in consumer goods, thanks to an intricate web of global supply chains.
These are lessons worth remembering at a time when the Indian government has increased import tariffs on nearly 3,500 items since 2014 in a clear push towards protectionism.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.