Some 25 years ago, I had the privilege of being part of a group of persons who had a candid conversation with the late LK Jha, former RBI Governor. Some of us were complaining about the licence-permit raj, the closed economy, lost opportunities and the silly Indian commitment to socialism, which was not helping India?s poor?in fact, prolonging their poverty. In his quiet, understated way, Jha asked us if we really wanted to know how India became the most-controlled and lowest-performing economy in Asia. As an observer and a participant, he was intimately acquainted with the historical and epigenetic processes that had resulted in our miserable state.
Jha told us that the common assumption that draconian import controls, foreign exchange restrictions and industrial licensing were due to an overarching ideological commitment to socialism was quite wrong. He wondered aloud whether there ever was a commitment to any ideology.
By the mid-1950s, a serious balance of payments problem had developed. There was criticism of the government for having ?frittered away? the large sterling balances of a decade earlier by importing ?frivolous and unnecessary? goods. There was concern that the country may end up in external default.
It was this practical problem, rather than any ideological consideration, Jha opined, that led to import restrictions and foreign exchange controls. Since setting up industries involved the import of capital equipment, industrial licensing became a logical corollary. Incidentally, export pessimism was so deep-rooted that nobody wondered whether the rupee was overvalued. In fact, India became one of the few countries in the world to impose export duties on items like tea which were then a very important part of our export basket, thus indirectly encouraging countries like Kenya to become tea-exporters?an outcome clearly detrimental to our own tea industry.
As one reads the newspapers today, one feels that we are back in the 1950s as described by Jha. We have a rising current account deficit. And what are we planning to do about it? We are planning to introduce high duties on the import of ?frivolous and unnecessary luxury goods? so that we do not ?fritter? away our foreign exchange. We are increasing duties on the import of gold. And as a betting person, one can easily look forward to the return of industrial licensing.
Opposition to luxury goods and gold sounds socialistic?the same pattern of paying lip-service to an ideology that prevailed in the 1950s. But let us look at the political economy of the situation. Who benefited from barriers on import of watches, for instance, which in those days were considered luxury goods?
The Hindu reported on April 26, 1963, that while discussing matters pertaining to the public sector jewel, HMT, MS Gurupadaswamy asked in the Rajya Sabha, ?Why the watches which were sold for R40 in Japan were sold here for R100.? In other words, Indians, who were much poorer than the Japanese, were paying two-and-a-half times as much for watches as their richer Japanese counterparts. In fact, all Indian manufacturers of shoddy, low-quality, high-priced goods benefited as long as they could convince a mandarin in Delhi that their products were luxury goods. Consumers, citizens, did not make decisions. The ?controllers? in Delhi, after all, knew what was best for them. And now for the denouement?is it just accidental that in recent days the stock prices of those companies which make goods where import duty hikes are expected have seen an upward spurt, even if overall sentiment is dull? Dear reader, who benefits?
Let us talk about gold. Our government has, in the last few months, repeatedly increased duties on gold. The common unpatriotic, ?unmatriotic? (sic) citizens need to be arm-twisted into not buying gold. It is besides the point that gold has been a far better investment in the last decade than the government of India bonds. It is besides the point that gold is bought by the poorer and middle classes, because it is the most flexible, portable form of savings. Just look at the customers of our numerous gold loan companies?that tells you the story. Gold, being of great importance in Indian culture, requires special controls. So, in 1963, the government of India imposed a special ?Gold Control Order?. (Dear Reader, please do note the linguistic choice of the word ?order?. The government of India is one of the few democratic republics that ?orders? its citizens?then and now). This ridiculous, tyrannical law rendered lakhs of goldsmiths unemployed. The goldsmiths, whose forefathers had clung to their occupation even during the reigns of capricious rajas, sultans and governor-generals, were summarily deprived of their livelihoods by the stroke of a democratic, republican and presumably socialist pen. Those were the pre-Mandal days. Otherwise, goldsmiths might have gotten themselves classified as OBCs. Instead, they took to the path of peaceful protest.
The venerable Hindu reported on May 21, 1963, that 3,000 goldsmiths protested outside the residence of Prime Minister Jawaharlal Nehru. Prime ministers, then, were not given to sphinx-like silence. Nehru came out and spoke with the goldsmiths, offering them some dignity, although not conceding to their demands. The Hindu further reported on July 3, 1963, that the Gold Control Board set up a fund of R10 crore for a National Rehabilitation Programme for Unemployed Goldsmiths. This is so typical of the patronage politics of our government: first, make them unemployed, and then, spend money to help them, or at least help those in the group who acknowledge their gratitude to their patrons as slavishly as possible.
Smugglers were the beneficiaries then. Smugglers will be the beneficiaries now. Swiss companies like Favre-Leuba and Henri Sandoz knew that most of the watches they exported to Singapore ended up in India. And, of course, smuggling of gold to India laid the foundation for modern Dubai. Up there in the skies, a certain Haji Mastan must be buying up shares in Dubai Dhows Corporation anticipating a boom in the months to come.
Plus ca change?
The author is a Mumbai-based entrepreneur
