The Commanding Heights
The consequence of all this was an economic system that had three self-defeating characteristics. The first was the 'Permit Raj'—a complex, irrational, almost incomprehensible system of controls and licenses that held sway over every step in production, investment, and foreign trade. The control system had begun as an emergency improvisation during World War II, but after independence it became far more, with much greater ambitions. What was meant to be the embodiment of the all-knowing allocators and balancer of the economic national interest turned into an endlessly arbitrary bureaucracy. Everything needed approval and a stamp. If a businessman wanted to shift from making plastic shovels to plastic pails, he had to get approval. A company had to get approval before it could increase output. Indeed, any company worth over $20 million had to submit all major decisions, including the membership of its board of directors, for government assent. Even trivial decisions required stamps. All of this meant hanging around interminably in government offices and seeking to curry the favor of a myriad of officials. But if you had the licence and the stamp, there was a consolation—protection against competition from those who did not have the necessary approvals. The result was a host of interests that did not encourage economic growth—'the politicians who profit from the corruption, the bureaucrats who enjoy the power, the businesses and the workers who like the sheltered markets and squatters' rights.'
The second characteristic was a strong bias toward state ownership, reflecting what has been described as the Fabians' 'measured and slow-paced ascent up the Marxist mountain.' The public sector rose from 8 percent of GDP in 1960 to 26 percent by 1991. The central government owned about 240 enterprises, excluding traditional state industries like railways and utilities. Their importance can be seen in their scale. By the end of the 1980s, 70 percent of the jobs in the large 'organized' sector of the economy were in state-owned companies. Moreover, it was estimated that half of the 240 firms were in fact terminally bankrupt. Rather than letting 'sick' companies fail, the government took them over and ran them. Workers assumed that salaries were the guaranteed 'rewards' for being employed while overtime was their pay Even when their enterprises were closed down, they still expected to be paid the overtime. State-owned companies generally operated in totally sheltered markets, with no discipline from competition The result was a state-owned sector that had no incentive to be efficient, that did not respond to customers, and that racked up ever-growing losses.
The Hindustan Fertilizer Corporation made for a truly brilliant example. In 1991, at the time of the economic crisis, its twelve hundred employees were clocking in every day, as they had since the plant had officially opened a dozen years earlier. The only problem was that the plant had yet to produce any fertilizer for sale. It had been built between 1971 and 1979, using considerable public funds, with machinery from Germany, Czechoslovakia, Poland, and a half-dozen other countries. The equipment had looked like a great bargain to the civil servants who made the basic decisions, because it could be financed with export credits. Alas, the machinery did not fit together and the plant could not operate. Everyone just pretended that it was operating.
The third self-defeating characteristic was a rejection of international commerce. What has been described as 'export pessimism' settled over decision makers. India adopted the inward-looking drive for self-sufficiency that had been so fashionable in the developing world in the 1950s and 1960s. By rejecting foreign trade and foreign investment, it excluded itself from the world economy. India developed a very large cadre of highly talented scientists and engineers, but, as in the Soviet Union, there were major obstacles to deploying new technologies in the marketplace. The hostility toward foreign investment, the severe limits on international trade, and the constraints on competition all closed down the avenues by which innovation moves into nations. India fell behind technologically. Often, technology was frozen at the level at which it had been in the 1950s or 1960s.