Two crucial choices were made early in the years after Independence. One was to be socially conservative and not use the State apparatus to abolish the caste system with its inegalitarian logic of hierarchy and status. Primary education and adult literacy were state subjects and thus left to stagnate in those conservative states in the Hindi heartland where literacy, especially female and dalit literacy, were seen to be threats to the social order. Although untouchability was made illegal in the Constitution, the attendant evils of caste were left undisturbed. Muslim society was even more deli­cately handled. As far as Hindu society was concerned an attempt was made mainly at Nehru’s behest to codify and systematise Hindu Family Law, though he met with resistance in his desire to modernise it from the then President Dr Rajendra Prasad. But Muslim Law was out of bounds even for Nehru. Thus political independence and the revolutionary decision to adopt democracy did not result in any state-led political programme of social reform. Indian society was allowed to reform itself in a laissez faire way.

In the economic sphere, on the other hand, radicalism was the order of the day. India had, by 1947, one of the oldest modern industries in the Third World (though it was not so called till later). It had the largest group of native modern capitalist entrepreneurs, the largest jute industry, a cotton textile industry which was globally competitive and was the seventh largest industrial country in terms of volume of industrial output. But the perception of the nationalist movement was that India had been deindustrialised by British rule and that industrialisation was the first priority. Free trade and foreign capital imports were to be shunned. India would become a self-sufficient industrialised country by relying on planning led by the State.

This was not particularly surprising both in terms of the thinking of the Congress as moulded by Nehru and the climate of the times. Free market ideology was on the retreat and many thought that capitalism too was on its way out. India had been much taken by the Soviet example and indeed even by the German example of planning in a mixed economy. What was not necessary, however, to this strategy was to neglect if not punish the Indus­tries already established, especially the cotton textile industry and shifting resources to machine building. There was rampant export pessimism, unjustified as subsequent investigations showed (see articles in Ahluwalia and Little (1997) by Bhagwati, Desai and Sen). The strategy failed to take advantage of India’s early start in modern industry and reinvented many of the things which were there but were tarred with foreign brush.

Thus India created a dependent entrepreneurial class in place of one that had survived foreign rule, depressed modern consumer goods industries and fostered small scale ones which were capital wasting and inefficient, built at an enormous expense a basic goods sector with a long lead time before it could bring better consumer goods to the people and failed to generate industrial employment. The public sector, mainly in services, became the biggest provider of employment in the modern sector. Jointly the private and public organised industrial sector became a stagnant and highly privileged pool of a limited number of employees. Together the public services and the organized industrial sector employed 15 per cent of the labour force. This was called socialism (Desai 1993).

The strategy was wasteful of scarce capital and quite perverse in its determined neglect of the rules of efficient allocation. It is one thing not to get prices right but quite another to deliberately get them wrong. Restrictions on interest rates, multiple exchange rates, subsidies to inefficient industries, taxation on movement of agricultural commodities which constituted a tax on agriculture, perks to labour in the organized sector and de facto taxation of the informal sector by a lack of subsidies etc. All this was done by an elite fully economically educated but determined to flout the rules of western economics.

The results were predictable — slow growth of output and employment and persistence of poverty and inequality through the first phase of thirty years. With slow growth of jobs in the private sector, government jobs at all levels became much sought after and the democratic electoral system was harnessed to provide patronage. The first task of government became provision of jobs through the public fisc and then the sale of permits and licenses.