Milton Friedman’s memo to Indian Government in 1955

Came across this historical gem.

Friedman wrote a memo to Indian govt. in 1955:

A 5 percent per annum rate of increase in real national income, seems entirely feasible, on the basis of both the experience of other countries and of India’s own recent past. The great untapped resource of technical and scientific knowledge available to India for the taking is the economic equivalent of the untapped continent available to the United States 150 years ago. The basic question is one of method, of the social and economic arrangements that will best promote the conversion of these potentialities into realities while at the same time maintaining freedom and democracy and giving ever-widening opportunities to the mass of the Indian people.

The belief that underlies these notes is that the basic requisites are a steady and moderately expansionary monetary. framework, greatly widened opportunities for education and training, improved facilities for transportation and communication to promote the mobility not only of goods but even more important of people, and an environment that gives maximum scope to the initiative and energy of farmers, businessmen, and traders. The conquest of the technical frontier like the conquest of the geographical frontier requires a varied initiative by millions of individuals, flexibility of outlook and organization, and willingness to venture.

The Government of India is doing much, and much that is highly effective, to bring these requisites into being. There is much more to do that at least in Indian conditions can be done only by the Government. But the Government also is following some: policies and proposing others that are likely to hinder rather than promote economic development. The following comments, which are mainly restricted to such policies, deal with investment policy; policy toward the private sector; monetary policy; resources available to the public sector; and foreign exchange policy.

Quite a bit is still relevant and still applies. Check this on mon pol:

A stable monetary climate is a basic prerequisite for healthy economic growth. Yet over the past five years, monetary policy has been highly erratic. It first permitted and facilitated substantial price rises, then reacted too far in the opposite direction. More recently, monetary policy has again reversed direction and again threatens to go too far, this time in an inflationary direction. This erratic policy is recorded directly in the behaviour of the stock of money and of wholesale and retail prices, and indirectly, in a less rapid rate of economic advance than would have been feasible.

Most would smile at this.. Well, in the recent phase I don’t think RBI reacted too far to control inflation but did not like the recent policy reversal.  RBI cut the policy rates by 50 bps but its policy statement was full of information why there should not be a rate hike at all!

Then this bit on capital output ratio:

There is a tendency not only in India but in most of the literature on economic development to regard the ratio of investment national income as almost the only key to the rate of development to take it for granted that there is a rigid and mechanical ratio between the amount of investment and additions to output. In the opinion of this writer, this seems a serious mistake. At the one extreme, output can increase even without investment; at the other, too high a ratio of investment may actually produce a lower rate of increase in income. 

In the United States, for example, only about one-fifth of the total income is return to physical capital, fourfifths to human capital. By this writer’s estimate similarly, only about one fifth of the annual rate of growth in the United States can be attributed to the direct effects of investment in the usual sense; four-fifths must be attributed to the growth in the productivity of human beings. Annual expenditures on improving the quality and quantity of human resources are at least as large as and perhaps much larger than investment as usually defined.

We still hear this emphasis on capital output ratio. Policymakers often say with the capital output ratio at 4 and investments at around 35% of GDP, 9% growth rate in GDP is a given. Yes, we have shifted emphasis on human capital but it basically on quant side. Qualitatively, we are still far off.

We have allowed the private sector to invest much more now thanks to the 1991 crisis. Even exchange controls he mentions have been eased quite a bit over the years. Some may still complain but in econ it is all about  relative..

In the end:

If these comments have concentrated largely on the financial machinery of economic organization, it is not because that is the only or even the most important problem facing India but rather because, on the one hand, it is more within this writer’s special competence, and on the other, it seems to be the area in which current policy can be improved most.

The present writer is convinced that the fundamental problem for India is the improvement of the physical and technical quality of her people, the awakening off sense of hope, the weakening of rigid social and economic arrangements, the introduction of flexibility of institutions and mobility people, the opening tip of the social and economic ladder people of all kinds and classes.

And what gives an outsider like this writer a feeling of optimism and hope about the future of India makes one feel that India is on the move and will continue move, is that so much is being done and such a good beginning has been made on this fundamental problem of creating the human and social basis for a dynamic and progressive economy.

If Friedman was to write this again, I am sure he would have been happy to note that a lot has changed. But still critical issues he highlighted then are still present. He would still be disappointed with the potential and actual achievement of the Indian economy.



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