History of Indian Economy

Introduction:

“India was once known as the ‘golden bird,’ its prosperity envied by the world. From the thriving trade routes of the Indus Valley Civilization to the economic policies of the Mauryas and Guptas, from the flourishing textile industries of medieval India to the colonial exploitation that drained its wealth—India’s economic history is a saga of rise, decline, and resurgence. Understanding this journey is crucial to appreciating how the past has shaped modern India’s economic policies and aspirations.”

Indian Economy Before Independence

• According to Angus Maddison, British economic historian and the author of ‘Contours of the World Economy’(1000 AD) China and India together contributed 50.5% of world GDP.
• By 1600, that share had gone up to 51.4%, with China accounting for 29% and India 22.4% of world GDP.
• By 1850 dropped to 5-10% and was estimated at about 40% that of China.
• In 1876, Dadabhai Naoroji prepared estimates of national income and per capita income for the year 1867-68. Dadabhai Naoroji estimated national income at Rs 340 crore and per capita income of Rs 20. He also formulated the drain of wealth theory, in which he accused British of draining the wealth out of India without proper material returns.
• William Digby calculated the Per Capita National Income of India as Rs. 18 for the year 1899.
• British never accepted this calculation. Lord Ripon’s finance secretary calculated Per Capita Income as Rs. 27, while Lord Curzon calculated it to be Rs. 30 in 1901.
• By 1900, under the British Empire, India’s share of manufacturing declined to 2% of global industrial output.
• Indian economy during British rule witnessed many changes such as commercialization of agriculture, famines and food shortage, decline of cottage industries and de-industrialization etc. British made India a source of raw materials and destination of finished goods.

Indian Economy After Independence

• Partition caused many economic problems for India. Many major centres of jute production and centres of wheat and cotton production were located in Pakistan. But India retained the majority share of cotton and jute mills. India lost one-third of its irrigated land to Pakistan.

India’s economic model: the state’s primacy over individual enterprise

• Prime minister Jawaharlal Nehru’s development model envisaged a dominant role of the state as an all-pervasive entrepreneur and financier of private businesses.
• The Industrial Policy Resolution of 1948 proposed a mixed economy.
• Earlier, the Bombay Plan, proposed by eight influential industrialists including J.R.D Tata and G.D. Birla, envisaged a substantial public sector with state interventions and regulations in order to protect indigenous industries.
• India’s share in the world economy was just 4.2% of World GDP in 1950.

Planning, commissioning, executing the programme to hasten growth

• India set up the Planning Commission in 1950 with Gulzarilal Nanda as Deputy Chairperson to oversee the entire range of planning, including resource allocation, implementation and appraisal of five-year plans.
• India adopted the system of Planning, which proved successful in Soviet Union. The first Five-year Plan was launched in 1951 with emphasis on agriculture and irrigation.

The man who gave India modern statistics and the swadeshi spirit

• The second Five-year Plan was launched in 1956 based on Mahalanobis Model that advocated rapid industrialization with a focus on heavy industries and capital goods. It was believed that rapid industrialization driven by the state was the most effective way to abolish mass poverty.

Licence Raj begins

• The establishment of a socialist pattern of society and categorized industries into three groups. Industries of basic and strategic importance were to be exclusively in the public sector. The second group comprised industries that were to be state-owned. The third, comprising mostly consumer industries, was left for private sector. The private sector was kept on a system of licences.
• The early phase of Indian economic planning, led by Jawaharlal Nehru was moderately successful in raising growth. Government followed a restrictive economic policy, which gave private players little space to grow. But the license-permit raj gained in strength, leading to corruption, and cramping economic growth.

Onset of economic troubles

• The quest to quickly industrialize had caused a large reallocation of funds away from the farm sector. Agriculture outlay was nearly halved to 14% in the second Plan. Food shortages worsened, and inflation spiked. Imports of food grains depleted precious foreign exchange reserves. Chakravarti “Rajaji” Rajagopalachari, fell out with Nehru on the question of excessive state involvement in the economy.

Shift towards an Evergreen Revolution

• Lal Bahadur Shastri’s focus on food security arose from the fact that in the 1960s, India was on the verge of a mass famine. That was when geneticist M.S. Swaminathan, along with Norman Borlaug and other scientists, stepped in with high-yield variety seeds of wheat, setting off what came to be known as the Green Revolution. Swaminathan calls this an “evergreen revolution”.

Dairy business

• Following the success of the Green Revolution, Shastri turned his attention to the dairy sector, particularly the cooperative movement in Gujarat’s Anand, led by Verghese Kurien. He helped Kaira District Co-operative Milk Producers’ Union Ltd expand its work, ushering in the White Revolution. In the years that followed, the government’s Operation Flood led to a rapid increase in milk production.

Nationalization of banks

• Wars and political instability had caused hardships for the masses. Indira Gandhi’s rupee devaluation had led to a general price rise. She nationalized 14 private banks on 20 July 1969.
• The main aim of the move was to accelerate bank lending to agriculture at a time when big businesses cornered large chunks of the credit flow.
• Financial savings jumped as banks were made to open branches in rural areas. Without competition, however, the lenders became complacent. Further, politically-influenced lending decisions led to crony capitalism.

New Economic Policy

• India faced a severe economic crisis in 1991 and foreign exchange reserves were insufficient to meet imports for more than two weeks, also inflation reached double digits.
• In order to bail out of this crisis, India approached IMF and World Bank for 7 billion dollar loan. India undertook a series of structural reforms outlined by IMF in exchange for this loan.
• The Narasimha Rao-led government with Manmohan Singh as finance minister took over on 21 June 1991 and launched a raft of economic reforms, including the dismantling of the licence Raj.
• India deviated from Nehruvian economic model which gave emphasis on public sector and centralised planning to a neo-liberal economic model. The economy policy adopted by Government of India since 1991 is termed as New Economic Policy. These reforms are also known as Rao-Manmohan Reforms.
• Reforms included opening for foreign capital, trade and investment, deregulation of industrial sector, initiation of privatization and tax reforms.
• New Industrial Policy was adopted as a part of these reforms in 1991. The number of industries that required compulsory license reduced to 6. The interest rate ceilings were removed and trade and FDI regimes were also liberalized. Government also initiated disinvestment policy as a part of New Economic Policy of 1991.

The Objectives of NEP were:

• Release industrial sector from unnecessary bureaucratic control.
• Integrate India with world economy by deregulating exports and imports
• Encourage foreign investment
• Reduce fiscal deficit
• Encourage foreign trade
• Control inflation
• Reduction in poverty and inequality
• Improve employment opportunities
• GDP BEFORE AND AFTER NEP
  • 1980-81 - GDP was 7.2%.
  • 1990-91 - GDP was 5.1%.
  • 2001-02 - GDP was 5.8%
  • 2010-11 - GDP was 8.8%

Amartya Sen: new measures for problems of inequality and welfare

• Known for his work on welfare economics, Amartya Sen has been working in India, the US and the UK since the 1970s. In 1998, he received the Nobel Prize in Economic Sciences.
• He’s long been a critic of India’s model of development that tends to ignore the needs of the bottom of the pyramid. His book such as The Argumentative Indian made economics accessible to the ordinary reader.
• He proved that gross national product was not enough to assess the standard of living, a finding that led to the creation of the UN Human Development Index, now the most authoritative source to compare welfare of countries.

Conclusion:

“The history of the Indian economy is a testament to resilience, adaptation, and transformation. Despite centuries of colonial drain and economic stagnation, India has emerged as one of the fastest-growing economies in the world. With a strong foundation in agriculture, industry, and services, combined with progressive policies and technological advancements, India is reclaiming its historical status as a global economic powerhouse. As the nation moves forward, lessons from the past will continue to guide its journey towards inclusive and sustainable development.”

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Subject: Economics

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