9 - From Trade to Aid, 1950–1980

Summary

In the years after colonial rule ended (1947), the Indian state recast the international element in its economy. India steadily withdrew from foreign trade and investment. Labor migration flows slowed for about twenty years, before reviving from the 1970s. India also emerged as one of the world’s largest recipients of foreign aid, and this aid had a well-defined role in the nation’s strategy of development.

Before independence, a main current of intellectual thought within the Indian National Congress stressed the need for state control of productive resources to ensure a more equal distribution of income and wealth. This socialist strand was inspired by the Soviet developmental model. The accent was on state ownership, redistribution, and planning. Between the 1950s and the 1980s, these ideas became part of an informal consensus among Indian intellectuals. In this way, the communists and the mainstream came to a compromise. The country’s first prime minister, Jawaharlal Nehru, represented this conjunction of two political traditions of interwar India.

The state established industries and nationalized some of them. Expansion in steel and heavy machinery was almost entirely in the state sector, whereas civil aviation was nationalized. The government retained for itself privileged access to imported capital goods. The government also became the main vehicle for bilateral technical collaboration agreements. Much foreign aid came in as capital goods and as an adjunct to these agreements. The private sector accepted the arrangement. In the division of labor between the state and the market, the market was allocated the task of supplying consumer goods. The restrictions imposed on foreign trade and foreign capital were an incentive. In return, employers had to swallow a legal regime that protected manufacturing jobs. Once again, a compromise was reached between the leftist and the centrist traditions in nationalism.