This article is an excerpt from the judgment of Justice Nagarathna in Property Owner Association v. State of Maharashtra (2024).
Much like many countries finding liberation from colonial rule, the immediate task before independent India was to alleviate its population out of poverty and systematically organize its economy. To that end, India adopted a mixed economy model wherein both public and private sectors could coexist. Turning to command economies, the Indian State sought to triumph over inter-regional disparities in resources and development through economic planning, an approach that had proven successful in command economies to bring sustained transformation of resources and implementation of plans in national interests rather than inefficient allocation of resources.
Buttressed by the Bombay Plan, proposed by influential industrialists, the Industrial Policy Resolution of 1948 and the over-expansive vision of the State shared by nearly every political party, the early years of the Indian Government had it play a dominant role in the setting up of heavy enterprises and being a controller of the economy and resources. Consequently, the market was not merely strongly regulated but also led by the public sector manifesting as state interventions and regulations with the aim of protecting indigenous industries.
Five Years Plan
With that in sight, the Planning Commission was set up in 1950 to oversee the entire range of planning, including resource allocation, implementation and appraisal of five-year plans under the leadership of the first Prime Minister Jawaharlal Nehru. In 1951, deterred by significant loss of foreign reserves on food import, India’s First five-year plan focused on agriculture and irrigation to boost farm output. Some scholars tout this as a success as the economy grew at 3.6%, instead of the target of 2.1%.
Soon thereafter, the Second Plan, launched in 1956, saw deficit financing as an acceptable tool for much needed rapid industrialization and self-reliance focusing on heavy industries and capital goods. Coupled with the Industrial Policy Resolution 1956, the Second Plan initiated the development of public sector and ushered in the licence Raj. The resolution, adopted by the Parliament in 1956, enumerated as a national objective the establishment of a socialist pattern of society and categorized industries into three groups: –
-Schedule A: Industries which were to be exclusively in the public sector. These were industries of basic and strategic importance;
– Schedule B: Industries that were to be progressively state owned and the State would generally set up new enterprises but in which private enterprise would be expected only to supplement the state effort; and
– Schedule C: All the remaining industries, and their future development was, in general, left to the initiative and development of private sector. Though, it was left open to the State and the private sector was still subject to the licence Raj.
This over-expansion State control enabled it to undertake large scale projects without either reliance on or negotiations with or even competition from the private sector. The construction of the Bhakra-Nangal Dam, Hirakund Dam etc. as well as steel plants in Rourkela, Bhillai and Durgapur were deified by the State as new “temples of a modern India”.
However, the substantial peril of curbing the invisible hand of the economy and enterprising spirit of the private sector was that the economic policy stuck reserved and restricted India to the earmarked industries and ignored new technologies, innovations and domains that, though transforming, were not in the horizons of bureaucracy. On the other hand, funds were also substantially reallocated away from agriculture, thereby, causing food shortages and a spike in inflation. Furthermore, the State was forced to import food grains which depleted foreign exchange reserves.
Under the leadership of Prime Minister Lal Bahadur Shastri, the Indian Government was convinced that in the domain of agriculture it needed to loosen its tight strings on centralized planning and price controls and instead focus on technological development. With India transforming into a food-sufficient and self-reliant entity after the Green Revolution and introduction of the Minimum Support Price regime, the role of the Planning Commission was trimmed.
In the second half of 1960s, the severe drought of 1965 increased food grain imports and consequently, exacerbated the balance of payments crisis. To counter the same, on June, 1966, the Indian Government devalued the Indian rupee by a sharp 57%, thereby accelerating inflation while it was actually aimed at boosting exports.
Monumentally, to expand the sources of credit and monitor the banking system as per the control of the Government’s planning and economic policy, the Government nationalized fourteen private banks on 20th July 1969. It was thought that the aim of financial inclusion and ready access to credit for small agriculturalists could be achieved by State control of the banking system. Agnostic of immediate profit motive and creditworthiness, Banks operated and expanded to the “un-banked.” However, in due course, it has been observed that limited competition and poor credit assessment severely hampered the efficiency and health of the banking system.
Around the 1980s, there had been a rising realization of the cons of protectionist policies and the merits of a market-led economy. Therefore, the sixth five-year plan marked the beginning of economic liberalization in India and outlined a series of measures aimed at boosting the economy’s competitiveness. Notable steps included removal of large-scale price controls, reductions in import duties and the beginning of the end of licence Raj. A significant deviation from the policy of 1956, a joint venture between the Government of India and Suzuki – a Japanese automaker – rolled off the assembly line in 1983, the first Maruti car.
In the following years, large-scale efforts were undertaken to usher in information technology and telecom revolutions in the country along with promoting exports and the utility of foreign investment and capital goods.
The political economy of the country from 1950s till the late 1980s had made apparent that the underlying political current and rhetoric of an idyllic but industrial society based on a socialistic pattern had been failing to deliver on the hopes of a modern lifestyle and Indians’ entrepreneurial spirit. This is despite the five technological missions initiated in mid-1980s. It is not uncertain that the deficit spending of the 80s led by high external debt, double-digit inflation, short-term debt reaching 147% of foreign exchange reserves, etc. shine a light on macroeconomic crisis that India found itself in at the end of the 1980s.
1991 Reforms
In this backdrop, amidst a series of negotiations and policy reforms, Prime Minister P.V. Narasimha Rao spoke to the nation on July 9, 1991 of the impending need to bring in farreaching changes and reforms that would bolster the economy and take it to a modern globalized world. Recounting the difficulties, he said:
“…For the last eighteen months, there has been paralysis on the economic front. The last two governments postponed taking vital decisions. The fiscal position was allowed to deteriorate. The balance-ofpayment crisis became unmanageable. Non-resident Indians and foreign leaders became more and more reluctant to lend money to India. Consequently, India’s external reserves declined steeply, and we had no foreign exchange to import even such essential commodities as diesel, kerosene, edible oil, and fertiliser. The net result was that when we came to power, we found the financial position of the country in a terrible mess. …”
The New Industrial Policy of 1991 put an end to the shackles that bound the Indian industry into inefficiency and non-competitiveness. While the opening up of the economy was gradual, the Monopolies and Restrictive Trade Practices was diluted allowing market players to scale up without government approval and automatic approvals for Foreign Direct Investment (FDI) with majority holding and qualifiable foreign technological agreements were assured along with many other solutions. One of the many recognizable inflection points in India is the Budget Speech of 1991 delivered by India’s then Finance Minister, Dr. Manmohan Singh, July 24th, 1991, who whilst paraphrasing Victor Hugo said, “No power on earth can stop an idea whose time has come.”
The reforms that were to follow have been colloquially termed as Liberalisation, Privatisation and Globalisation. In practice, the country saw the dismantling of licence Raj, some years later an active disinvestment framework and quite openly, an expression of willingness to let globalized market forces signal directions to the economy. Much need not be laboured on this aspect. Having seen India’s potential and political commitment to a modern market economy, the International Monetary Fund (IMF) provided assistance leading to macroeconomic stabilization.
In the years since, several policies such as import liberalization, unrestricted FDI inflows in some sectors, tax exemptions, promotion of exports, etc. have been adopted which would have seemed antithetical to the very idea and core of Indian economy and societal structure to the most earnest well-wishers of India only some decades ago.
While the status of health or inequity indicators is not being used as an aid for constitutional interpretation, I must also note that the “LPG policy” of 1991 can also be credited for providing the much needed impetus to the Central and State Governments for fulfilling several goals set out in the Directive Principles of State Policy which had been earlier difficult to achieve.
The golden thread throughout India’s economic history post-independence has been to focus on a transformative socioeconomic growth of the people of India by way of experimentation through various plans, projects and pipe dreams. The mid-1980s was a turning point when the need for innovation, modernisation and concomitant avenues for development ushered in the Reforms of 1991 as the country faced shortages in foreign exchange reserves and foreign debts were mounting and there was a crisis of balance of payments. There has been no looking back since then except to usher in various schemes/programmes for the welfare of the people which earlier had not really percolated to the deserving and eligible citizens for reasons which are well known.
It is in the period between the late 1960s and early 1980s that this Court gleaned the thrust to economic policies of the State and sought to provide a judicial imprimatur for the success of the economic policies. Thus, bank nationalisation, road transport nationalisation, amendments to Land Reforms laws, urban land ceiling laws, acquisition of lands, abolition of land tenures etc. were upheld by this Court while at the same time tightening the powers of amendment of the Constitution. This was by the evolution of the basic structure doctrine which found its strong voice in Kesavananda Bharati and perpetrated in Minerva Mills and Waman Rao vs. Union of India, AIR 1981 SC 271 (“Waman Rao”) in the year 1980 and in subsequent decades.
One cannot lose sight of the precarious condition India was in when it gained Independence in the August, 1947 and at the dawn of the Republic in January, 1950. The provisions of the Constitution have hence sought to achieve a transformation in the socio-economic conditions of the people of India given the situation as it emerged in the colonial period. The transition of the Indian economy towards privatization and liberalization is ultimately for the welfare of the people of India.
Heavy capital investment in the public sector in the early decades after Independence and its failure to yield good results in the subsequent decades and the move towards disinvestment and privatization are all experiments in achieving the constitutional goals which are static but the path to achieve them may vary with the passage of time. It is in the above backdrop that the judgments of this Court must be viewed rather than viewing the Judges who authored the judgments as doing a disservice to the Constitution of India.