All Commentary
Thursday, December 1, 1966

The Coming Serfdom in India

Miss Shenoy, recently graduated from the London School of Economics, B.Sc. (Eco­nomics), hopes to enter university teaching in India.

The major issue that divides lib­erals (advocates of liberty) from “liberals” (statists) is the ques­tion of the importance of eco­nomic freedom. As the statist sees it, economic freedom is the “free­dom” of the few to exploit the many. The right to vote, on the other hand, is common to all men. Hence, for statists, the dividing line between democracies and dic­tatorships is drawn in answer to the question: Are elections free or not? But it will be noticed that totalitarianism is the implicit cri­terion here: any situation which is not yet totalitarian would be described as “free” by the statist.

As the true liberal sees it, free­dom is indivisible. Hence, meas­ures ostensibly aimed at the weak political minority of businessmen will in fact only prevent the mar­ket process from functioning as well as it might have done, and will confer on some people — i.e., politicians and administrators —a power over their fellow men oth­erwise exercised by no one; a power deriving from this group’s ability to determine, de facto though not de jure, the uses to which resources may be put. This power, the liberal affirms, is of en­tirely another nature from the “power” alleged to be exercised by businessmen operating in a market context. Control over re­sources by businessmen is not only scattered among a much larg­er group of individuals; these businessmen themselves are in ef­fect simply the agents of their fellow men in determining the use of these resources, via the market process of profit and loss. But where economic power is concen­trated in the hands of a politically selected group, the chances for the emergence and establishment of a political opposition are precarious, to say the least. The statist over­looks the necessity for independent sources of material support for a political opposition; even though some opposition may seem to be present, the real criterion is the range of different views that would have emerged if economic power had not been so concen­trated. In other words, freedom is more than one value among others; it is rather the foundation for a whole social order. Intervention embodies a principle that is dia­metrically opposed and must lead to the destruction of this social order (where it exists) and the establishment of an order founded on the principle of political exploi­tation: the politically strong ex­ploiting the politically weak. In short, intervention leads to the suppression of potential political opposition and thus ends in totali­tarianism.

India as an Oligarchy

This abstract and theoretical argument is vividly illustrated by the experience of India. Most stat­ists regard India as an excellent example of economic planning combined with democracy. It would perhaps be more accurate to de­scribe India as an oligarchy — in the Aristotelian sense of govern­ment of, for, and by the rich. These rich, however, unlike those who earn high incomes in a free market by supplying their fellow men’s needs, have obtained their wealth via the very instruments of planning — permits, licenses, quotas, concessions, and contracts. In the first place, virtually all in­vestible resources — i.e., savings and foreign aid — are forcibly drawn (via capital controls and taxation) into the preferred “in­dustrial” sectors, both private and public. The industrial output thus artificially produced adds nothing to the flow of goods and services for the starving, ill-clothed, and unsheltered Indian masses — but those businessmen, civil servants, and others sharing in this forced expansion obtain high incomes (legal and illegal). Hence, we see that the output of coarse cotton bought by the masses has ex­panded the least, while the output of rayon — a luxury in India — has multiplied by twenty-one times over the last 15 years and three five-year plans.1

In the second place, even this private industrial sector is very closely controlled by a minutely detailed network of regulations: government sanction is required to start, expand, or close down an undertaking; permits are required for virtually all raw materials and certainly all imported machinery and components. Government reg­ulations extend to such points as the manner of conducting board meetings and the width of sari borders in the case of mill-made saris. In effect all these controls and regulations have created and protected private monopolies in virtually all fields of nonagricul­tural production.

Thirdly, there is import and ex­change control. No imports of any kind are permitted without a li­cense, and imports of a wide range of commodities are banned altogether. Prohibitive tariffs have been imposed on a large number of other goods. All this means that Indian producers of import substitutes have a highly-protected sellers’ market. To rein­force import control, all exchange earnings have to be surrendered to the Reserve Bank at the official price — which is well below the true market price. It is, of course, forbidden to send exchange or ru­pees out of the country in any form.

Fourthly, the government sector has continually expanded over the last 15 years — even though this sector provides the least employ­ment and adds nothing to the real national income. The driving force here is public contracts; the larger the public sector, the larger are its contracts, and the larger, therefore, the rake-offs for the contractors and civil servants in­volved. (Where 100 rupees are ac­counted to be spent on a project, they never are. Some say 60 ru­pees are spent and 40 distributed; others would reverse the propor­tions — but no Indian would agree that the full amount was spent.)

Fifthly, there are innumerable other controls over the internal economic life of the country, rang­ing from controls over the move­ment of food grains between states, to those over the establish­ment of bus routes. All of these serve to increase the powers of officials over their fellow men.²

A Limited Private Sector

From all this, it will be clear how small is the sector of the In­dian economy from which a politi­cal opposition can draw material support, and how minute a por­tion of even this sector is inde­pendent of the government.3 The industrial sector in India owes its establishment and continued ex­istence to the government. In the absence of the forced draft of re­sources into it, and of exchange and import controls and tariffs, this sector’s artificiality and unvi­ability would be quickly and un­mistakably revealed. It follows that though Indian businessmen tech­nically may be independent of gov­ernment and even complain of some types of intervention, in fact they must be included as part of the government sector.

It is, therefore, hardly surpris­ing that the opposition in India should be so small and that oppo­sition parties should complain of a dearth of funds while the ruling party has no complaint in this re­gard. Naturally, virtually all busi­nessmen are ardent supporters of the government. Again, a lead­ing South Indian newspaper charged that government had used Journalists’ Wages Boards and newsprint controls to penalize papers consistently opposing it; charges have also been heard that government departments have threatened to withhold valuable advertising from the opposition press.4 And more recently, opposi­tion M.P.’s have protested in Par­liament against Criminal Investi­gation Department harassment —their telephones, they say, are tapped, their letters (even letters from their wives) are censored, and they are shadowed by C.I.D. plain-clothesmen.5 When M.P.’s are treated thus, the ordinary citi­zen can hardly feel aggrieved when he finds that letters abroad — even registered letters — are opened in order to ferret out violations of the Exchange Control Regulations.

Finally, the Essential Commodi­ties (Amendment) Bill of 1966 is yet another straw showing the di­rection in which the political wind in India is blowing. As mentioned, food grains movement is con­trolled. Hitherto, the government could only impound food grains suspected of being moved illegally. But now the government can summarily confiscate both food grains and vehicles suspected of being involved in illegal move­ments; it is up to the poor mer­chant to prove his innocence.6

Perhaps the most ironic element in this whole situation is the role of foreign aid. Given in order to “feed starving orphans in Orissa” (as Milton Mayer would have it) or to “keep India from going com­munist” (as many Americans be­lieve), it is in fact one major cause why orphans in Orissa are starving and why India is now so firmly set down the road to serf­dom. This is because in India for­eign aid provides the major por­tion of the finance for the Plans: for every rupee of internal re­sources, almost 2 rupees worth of resources comes from foreign aid. If aid is calculated at the official exchange rate for the rupee, its economic value is understated — even allowing for the recent de­valuation. It is only if aid is cal­culated at the free market ex­change rate that its true signifi­cance emerges. Planning in India, as has already been pointed out, involves essentially a forced trans­fer of resources out of the uses where they would benefit the masses — i.e., the agricultural sec­tor — into an artificially created and propped up “industrial” sec­tor. It follows that agricultural output has lagged far behind all industrial outputs; consequently, the Indian people are hungrier after three Plans than they were before. Per capita availability of food grains has fluctuated down­ward over the last 15 years, and stands today at about 14 ounces per day. Meanwhile, since plan­ning implies the concentration of economic and political power in the hands of the ruling clique, it has effectively smothered a wide range of potential political opposi­tion. It would not be too much to describe India as a one-party state.

Democratic forms in themselves are meaningless. The right to vote can be effective only in the context of a whole network of other free­doms. Elections can be free only in the framework of a free market and the Rule of Law.                         



1 The growth of the agricultural sector (from which 50 per cent of the national income is derived and which provides 70 per cent of total employment) is held down by yet another piece of interven­tionism: moneylenders’ legislation. This forbids the pledging of land, though this is virtually the only pledgeable asset of the farmer, sets ceilings on the interest rates legally chargeable, and otherwise circumscribes rural moneylending.

2 As if all this were not enough, after the Chinese incursion of October 1962, the government passed the Defence of India Regulations (DIR) empowering it to arrest and detain without trial per­sons suspected of being dangerous to the public safety. Significantly, the DIR have been used virtually against persons known to be associated with the opposi­tion: see Swarajya (Madras), passim., for 1963, 1964, 1965. Although four years have passed, the DIR continue to be in force.

3 The Fourth Five-Year Plan (1966­71) proposes, in effect, to reduce even further this minute independent sector: the government will extend its trading activities, especially in food grains; and taxes on income and wealth—already the highest in the world (see N. A. Palkhi­vala, The Highest Taxed Nation in the World (Bombay, 1965) — will be raised even further.

4 See the editorial in The Hindu (Ma­dras) 10 October 1959: “There are also certain considerations that the Prime Minister might have remembered while calling the Press to account, such as the power the State has deemed fit to take to restrict the supply of newsprint, to control imports of machinery, to fix wages and salaries and working condi­tions in newspaper offices. These are cal­culated to make it extremely difficult for newspapers to be as free from extraneous influence as the Prime Minister would presumably want them to be. If there is any single strong inducement for news­papers to adopt a particular line on any matter, it comes from the Government. If, in spite of this, a number of news­papers look with a critical eye on the formulation and implementation of va­rious policies by the Governments at the Centre and in the States, the reason must be found in the policies themselves and not in any extraneous considerations..” (italics added).

5 See the report in The Times of India (Bombay) 6 September 1966.

6 Public speech by Mr. Minoo Masani, M.P., at Ahmedabad on 21 August 1966.  

  • Sudha Shenoy, PhD (1943–2008) was an economist and economic historian. From 1986 to 2004, she worked as a lecturer in economics at the University of Newcastle in Australia. She was an Honorary Associate in Economic History at the School of Policy and an adjunct scholar at the Ludwig von Mises Institute. Shenoy’s father was Professor Bellikoth Raghunath Shenoy, an eminent Indian economist who studied under Friedrich Hayek at the London School of Economics.