§HOCK§ AND INSTABILITIES IN AN AGRICULTURE-CONSTRAINED ECONOMY 2^ 1979. It is not entirely surprising, therefore, that for much of the period since the mid-sixties, government policy has been concerned more with immediate crisis management and with measures for post-shock stabilisation than with planning for long run growth. Given this, and the fact that different stabilisation episodes have involved different policies and led to different lessons, it is important to examine these in some detail. The Shock of 1965-67 As is by now well known, the unprecedently severe droughts of 1965-66 and 1966-67 were not the only cause of suspension and dilution of the policy of planned industrialisation. This was accompanied by a serious external shock. The strategy of import substitution of the first Three Five Year Plans was to a large extent dependent on increasing inflows of foreign-aid. But ideological positions had hardened in the West, which had never approved of the Indian attempt at independent capitalist development, and there were increasing pressures on I^idia to modify her economic philosophy. The final blow came in 1965, when a war was fought between-India and Pakistan. The aid-donors reacted by cutting off aid to both the warring states. In 1966, in the midst of a famine, the Aid India Consortium (AIC), led by the multilateral aid agencies, offered to resume aid to India, but there was a price—India had to open its economy to the rest of the world. The AIC demanded, and got, a substantial devaluation of the Indian rupee (of 57.5 percent) and considerable liberalisation of imports. Despite a drought of unprecedented proportions for a period of two years (1965-67), the rest of the economy fared not too badly in the face of it: Real GDP and consumption grew at 2.7 percent and 5.8 percent respectively, while the balance of trade improved by over 11 percent. These facts have been cited in the literature as providing strong support for the soundness of orthodox stabilisation policy.1 But the seeming orthodoxy was accompanied by some home-grown heterodoxy as well. In particular, there was no effort at clamping on the fiscal and monetary brakes for bringing down the rate of inflation, which stood at 14-15 percent per annum. Although public fixed investment was cut sharply and govern-mgnt consumption reduced somewhat, these were more than offset by increased transfers to the private sector, and both the interest rate and the rate of growth of money supply were maintained at the earlier levels. This was the first major external shock that India had to face, and the psychological repercussions were considerably greater than the economic. The crucial lesson learnt during this traumatic period was that foreign aid could no longer be counted on and that greater efforts would be needed to overcome the investible resources, food and foreign exchange constraints from internal sources. Also, the political consequences of ih^ ^