Economic history of India
The economic history of India is the story of India's evolution from a largely agricultural and trading society to a mixed economy of manufacturing and services while the majority still survives on agriculture. Prior to 1947 that history encompasses the economy of the Indian subcontinent, corresponding to the modern nations of India, Pakistan and Bangladesh.
This history begins with the Indus Valley Civilization (3300–1300 BC), whose economy appears to have depended significantly on trade. Around 600 BC, the Mahajanapadas minted punch-marked silver coins. The period was marked by intensive trade activity and urban development. By 300 BC, the Maurya Empire had united most of the Indian subcontinent. The resulting political unity and military security allowed for a common economic system and enhanced trade and commerce, with increased agricultural productivity.
The Maurya Empire was followed by classical and early medieval kingdoms, including the Cholas, Guptas, Western Gangas, Harsha, Palas, Rashtrakutas and Hoysalas. During this period, India is estimated to have had the largest economy between 1 CE and 1000 CE, controlling between one-third and one-fourth of the world's wealth, though GDP was stagnant. India experienced GDP growth in the late medieval era after 1000, during the Delhi Sultanate, but was overtaken by Ming China as the largest economy by 1500. After most of the subcontinent was reunited under the Mughal Empire, India again became the largest economy by 1700, producing about a quarter of global GDP, before declining under British rule in the late 18th century. According to the Balance of Economic Power, India had the largest and most advanced economy for most of the interval between the 1st century and 18th century, the most of any country for a large part of the last two millennia.
During the Mughal Empire, India was the world leader in manufacturing, producing 25% of the world's industrial output up until the mid-18th century, prior to British rule. Due to its ancient history as a trading zone and later its colonial status, colonial India remained economically integrated with the world, with high levels of trade, investment and migration. India experienced deindustrialization under British rule, which along with fast economic and population growth in the Western World resulted in India's share of the world economy declining from 24.4% in 1700 to 4.2% in 1950, and its share of global industrial output declining from 25% in 1750 to 2% in 1900.
The Republic of India, founded in 1947, adopted central planning for most of its independent history, with extensive public ownership, regulation, red tape and trade barriers. After the 1991 economic crisis, the central government launched economic liberalisation, allowing it to emerge as one of the world's fastest growing large economies.
- 1 Indus Valley Civilization
- 2 Ancient and medieval characteristics
- 3 Mughal Empire
- 4 British rule
- 5 Republic of India
- 6 GDP post-Independence
- 7 See also
- 8 References
- 9 Bibliography
- 10 External links
Indus Valley Civilization
Indus Valley Civilisation, the first known permanent and predominantly urban settlement, flourished between 3500 BCE and 1800 BCE. It featured an advanced and thriving economic system. Its citizens practised agriculture, domesticated animals, made sharp tools and weapons from copper, bronze and tin and traded with other cities. Evidence of well-laid streets, layouts, drainage system and water supply in the valley's major cities, Harappa, Lothal, Mohenjo-daro and Rakhigarhi reveals their knowledge of urban planning.
Ancient and medieval characteristics
Though ancient India had a significant urban population, much of India's population resided in villages, whose economy was largely isolated and self-sustaining. Agriculture was the predominant occupation and satisfied a village's food requirements while providing raw materials for hand-based industries such as textile, food processing and crafts. Besides farmers, people worked as barbers, carpenters, doctors (Ayurvedic practitioners), goldsmiths and weavers.
Religion played an influential role in shaping economic activities.
Pilgrimage towns like Allahabad, Benares, Nasik and Puri, mostly centred around rivers, developed into centres of trade and commerce. Religious functions, festivals and the practice of taking a pilgrimage resulted in an early version of the hospitality industry.
Economics in Jainism is influenced by Mahavira and his philosophy. He was the last of the 24 Tirthankars, who spread Jainism. Relating to economics he explained the importance of the concept of 'anekanta' (non-absolutism).
In the joint family system, members of a family pooled their resources to maintain the family and invest in business ventures. The system ensured younger members were trained and employed and that older and disabled persons would be supported by their families. The system prevented agricultural land from splitting with each generation, aiding yield from the benefits of scale. Such sanctions curbed the spirit of rivality in junior members and instilled a sense of obedience.
Along with the family- and individually-owned businesses, ancient India possessed other forms of engaging in collective activity, including the gana, pani, puga, vrata, sangha, nigama and sreni. Nigama, pani and sreni refer most often to economic organisations of merchants, craftspeople and artisans, and perhaps even para-military entities. In particular, the sreni shared many similarities with modern corporations, which were used in India from around the 8th century BCE until around the 10th century CE. The use of such entities in ancient India was widespread, including in virtually every kind of business, political and municipal activity.
The sreni was a separate legal entity that had the ability to hold property separately from its owners, construct its own rules for governing the behaviour of its members and for it to contract, sue and be sued in its own name. Ancient sources such as Laws of Manu VIII and Chanakya's Arthashastra provided rules for lawsuits between two or more sreni and some sources make reference to a government official (Bhandagarika) who worked as an arbitrator for disputes amongst sreni from at least the 6th century BCE onwards. Between 18 and 150 sreni at various times in ancient India covered both trading and craft activities. This level of specialisation is indicative of a developed economy in which the sreni played a critical role. Some sreni had over 1,000 members.
The sreni had a considerable degree of centralised management. The headman of the sreni represented the interests of the sreni in the king's court and in many business matters. The headman could bind the sreni in contracts, set work conditions, often received higher compensation and was the administrative authority. The headman was often selected via an election by the members of the sreni, and could also be removed from power by the general assembly. The headman often ran the enterprise with two to five executive officers, also elected by the assembly.
Punch marked silver ingots were in circulation around the 5th century BCE. They were the first metallic coins minted around the 6th century BCE by the Mahajanapadas of the Gangetic plains and were India's earliest traces of coinage. While India's many kingdoms and rulers issued coins, barter was still widely prevalent.[not in citation given] Villages paid a portion of their crops as revenue while its craftsmen received a stipend out of the crops for their services. Each village was mostly self-sufficient.
During the Maurya Empire (c. 321–185 BCE), important changes and developments affected the Indian economy. It was the first time most of India was unified under one ruler. With an empire in place, trade routes became more secure. The empire spent considerable resources building and maintaining roads. The improved infrastructure, combined with increased security, greater uniformity in measurements, and increasing usage of coins as currency, enhanced trade.
Before and during the Delhi Sultanate (1206–1526 CE), Islam underlay a cosmopolitan civilization. It offered wide-ranging international networks, including social and economic networks. They spanned large parts of Afro-Eurasia, leading to escalating circulation of goods, peoples, technologies and ideas. While initially disruptive, the Delhi Sultanate was responsible for integrating the Indian subcontinent into a growing world system.
India's GDP per capita was lower than the Middle East from 1 CE (16% lower) to 1000 CE (about 40% lower), but by the late Delhi Sultanate era in 1500, India's GDP per capita approached that of the Middle East.
According to economic historian Angus Maddison in Contours of the world economy, 1–2030 CE: essays in macro-economic history, India had the world's largest economy from 1 CE to 1000 CE. However, the economy did not grow during the period. Between 1000 and 1500, in the late medieval era (during the Delhi Sultanate), India began to experience GDP growth, but more slowly than China, which overtook India to become the world's largest economy. Ming China and India remained the largest economies through 1600. India experienced its fastest economic growth under the Mughal Empire during the 16th–18th centuries, boosting India above Qing China by 1700.
|GDP per capita
|Annual GDP growth||% of world GDP||Population||% of world population||Period|
|1000||33,750,000,000||450||0.0%||28.0||72,500,000||27.15||Early medieval era|
|1500||60,500,000,000||550||0.117%||24.35||79,000,000||18.0||Late medieval era|
|1600||74,250,000,000||550 / 792||0.205%||22.39||100,000,000||17.98||Early modern era
|1700||90,750,000,000||550 / 728||0.201%||24.43||165,000,000||27.36|
The Mughal India's (1526–1858) economy was prosperous into the early 18th century. Parthasarathi estimated that 28,000 tonnes of bullion (mainly from the New World) flowed into the Indian subcontinent between 1600 and 1800, equating to 20% of the world's production in the period.
An estimate of the annual income of Emperor Akbar the Great's treasury, in 1600, is £17.5 million (in contrast to the tax take of Great Britain two hundred years later, in 1800, totaled £16 million). The South Asia region, in 1600, was estimated to be the second largest in the world, behind China's.
By the late 17th century, the Mughal Empire was at its peak and had expanded to include almost 90 per cent of South Asia. It enforced a uniform customs and tax-administration system. In 1700, the exchequer of the Emperor Aurangzeb reported an annual revenue of more than £100 million, or $450 million, more than ten times that of his contemporary Louis XIV of France.
By 1700, Mughal India had become the world's largest economy, ahead of Qing China and Western Europe, producing about a quarter of world output. Mughal India produced about 25% of global industrial output into the early 18th century. India's GDP growth increased under the Mughal Empire, exceeding growth in the prior 1,500 years. The Mughals were responsible for building an extensive road system, creating a uniform currency, and the unification of the country. The empire built an extensive road network, using a public works department that designed, constructed and maintained roads. The Mughals adopted and standardized the rupee currency introduced by Sur Emperor Sher Shah Suri. The Mughals minted tens of millions of coins, with purity of at least 96%, without debasement until the 1720s. The empire met global demand for Indian agricultural and industrial products.
Cities and towns boomed under the Mughal Empire, which had a relatively high degree of urbanization (15% of its population lived in urban centres), more urban than Europe at the time and British India in the 19th century. Multiple cities had a population between a quarter-million and half-million people, while some including Agra (in Agra Subah) hosted up to 800,000 people and Dhaka (in Bengal Subah) with over 1 million. 64% of the workforce were in the primary sector (including agriculture), while 36% were in the secondary and tertiary sectors. The workforce had a higher percentage in non-primary sectors than Europe at the time; in 1700, 65–90% of Europe's workforce were in agriculture, and in 1750, 65–75% were in agriculture.
Indian agricultural production increased. Food crops included wheat, rice, and barley, while non-food cash crops included cotton, indigo and opium. By the mid-17th century, Indian cultivators had begun to extensively grow two crops from the Americas, maize and tobacco. Bengali peasants learned techniques of mulberry cultivation and sericulture, establishing Bengal Subah as a major silk-producing region. Agriculture was advanced compared to Europe, exemplified by the earlier common use of the seed drill. The Mughal administration emphasized agrarian reform, which began under the non-Mughal emperor Sher Shah Suri. Akbar adopted this and added more reforms. The Mughal government funded the building of irrigation systems, which produced much higher crop yields and harvests.
One reform introduced by Akbar was a new land revenue system called zabt. He replaced the tribute system with a monetary tax system based on a uniform currency. The revenue system was biased in favour of higher value cash crops such as cotton, indigo, sugar cane, tree-crops, and opium, providing state incentives to grow cash crops, adding to rising market demand. Under the zabt system, the Mughals conducted extensive cadastral surveying to assess the cultivated area. The Mughal state encouraged greater land cultivation by offering tax-free periods to those who brought new land under cultivation.
According to evidence cited by economic historians Immanuel Wallerstein, Irfan Habib, Percival Spear, and Ashok Desai, per-capita agricultural output and standards of consumption in 17th-century Mughal India was higher than in 17th-century Europe and early 20th-century British India.
Until the 18th century, Mughal India was the most important manufacturing center for international trade. Key industries included textiles, shipbuilding and steel. Processed products included cotton textiles, yarns, thread, silk, jute products, metalware, and foods such as sugar, oils and butter. This growth of manufacturing has been referred to as a form of proto-industrialization, similar to 18th-century Western Europe prior to the Industrial Revolution.
Early modern Europe imported products from Mughal India, particularly cotton textiles, spices, peppers, indigo, silks and saltpeter (for use in munitions). European fashion, for example, became increasingly dependent on Indian textiles and silks. From the late 17th century to the early 18th century, Mughal India accounted for 95% of British imports from Asia, and the Bengal Subah province alone accounted for 40% of Dutch imports from Asia. In contrast, demand for European goods in Mughal India was light. Exports were limited to some woolens, unprocessed metals and a few luxury items. The trade imbalance caused Europeans to export large quantities of gold and silver to Mughal India to pay for South Asian imports. Indian goods, especially those from Bengal, were also exported in large quantities to other Asian markets, such as Indonesia and Japan.
The largest manufacturing industry was cotton textile manufacturing, which included the production of piece goods, calicos and muslins, available unbleached in a variety of colours. The cotton textile industry was responsible for a large part of the empire's international trade. The most important center of cotton production was the Bengal Subah province, particularly around Dhaka. Bengal alone accounted for more than 50% of textiles and around 80% of silks imported by the Dutch. Bengali silk and cotton textiles were exported in large quantities to Europe, Indonesia and Japan.
Mughal India had a large shipbuilding industry, particularly in the Bengal Subah province. The annual shipbuilding output of Bengal alone totaled around 2,232,500 tons, larger than the output of the Dutch (450,000–550,000 tons), the British (340,000 tons), and North America (23,061 tons).
Bengal Subah was the Mughal's wealthiest province, generating 50% of the empire's GDP and 12% of the world's GDP. It was globally dominant in industries such as textile manufacturing and shipbuilding. Bengal's capital city Dhaka was the empire's financial capital, with a population exceeding one million. It was an exporter of silk and cotton textiles, steel, saltpeter and agricultural and industrial products.
Mughal India had a higher per-capita income in the late 16th century than British India had in the early 20th century, and the secondary sector contributed a higher percentage to the Mughal economy (18.2%) than it did to the economy of early 20th-century British India (11.2%).
In the early half of the 18th century, Mughal Empire fell into decline, with Delhi sacked in Nader Shah's invasion of the Mughal Empire, the treasury emptied, tens of thousands killed, and many thousands more carried off, with their livestock, as slaves, weakening the empire and leading to the emergence of post-Mughal states. The Mughals were replaced by the Marathas as the dominant military power in much of India, while the other smaller regional kingdoms who were mostly late Mughal tributaries, such as the Nawabs in the north and the Nizams in the south, declared autonomy. However, the efficient Mughal tax administration system was left largely intact, with Tapan Raychaudhuri estimating revenue assessment actually increased to 50 per cent or more, in contrast to China’s 5 to 6 per cent, to cover the cost of the wars. Similarly in the same period, Maddison gives the following estimates for the late Mughal economy's income distribution:
|Social group||% of population||% of total income||Income in terms of per-capita mean|
|Merchants to Sweapers||17||37||2.2|
Among the post-Mughal states that emerged in the 18th century, the dominant economic powers were Bengal Subah (under the Nawabs of Bengal) and the South Indian Kingdom of Mysore (under Hyder Ali and Tipu Sultan). The former was devastated by the Maratha invasions of Bengal, which experienced six invasions, over a decade, claimed to have killed hundreds of thousands, and weakened the territory's economy to the point the Nawab of Bengal agreed a peace treaty with the Marathas. The agreement made Bengal Subah a tributary to the Marathas, agreeing to pay Rs. 1.2 million in tribute annually, as the Chauth of Bengal and Bihar. The Nawab of Bengal also paid Rs. 3.2 million to the Marathas, towards the arrears of chauth for the preceding years. The chauth was paid annually by the Nawab of Bengal, up to his defeat at the Battle of Plassey by the East India Company in 1757.
Sivramkrishna states that the economy of the Kingdom of Mysore then overtook that of Bengal, with real income five times higher than subsistence level, i.e. five times higher than $400 (1990 international dollars), or $2,000 per capita. In comparison, Maddison estimates the 1820 GDP per-capita (PPP 1990 $) of the Netherlands at $1,838, and $1,706 for Britain.
Jeffrey G. Williamson argued that India went through a period of deindustrialization in the latter half of the 18th century as an indirect outcome of the collapse of the Mughal Empire, and that British rule later caused further deindustrialization. According to Williamson, the Mughal Empire's decline reduced agricultural productivity, which drove up food prices, then nominal wages, and then textile prices, which cost India textile market share to Britain even before the latter developed factory technology, though Indian textiles maintained a competitive advantage over British textiles until the 19th century. Prasannan Parthasarathi countered that several post-Mughal states did not decline, notably Bengal and Mysore, which were comparable to Britain into the late 18th century.
The British East India Company conquered Bengal Subah at the Battle of Plassey in 1757. After gaining the right to collect revenue in Bengal in 1765, the East India Company largely ceased importing gold and silver, which it had hitherto used to pay for goods shipped back to Britain. In addition, as under Mughal rule, land revenue collected in the Bengal Presidency helped finance the Company's wars in other parts of India. Consequently, in the period 1760–1800, Bengal's money supply was greatly diminished. The closing of some local mints and close supervision of the rest, the fixing of exchange rates and the standardization of coinage added to the economic downturn.
During the period 1780–1860 India changed from an exporter of processed goods paid for in bullion to an exporter of raw materials and a buyer of manufactured goods. In the 1750s fine cotton and silk was exported from India to markets in Europe, Asia and Africa, while by the second quarter of the 19th century, raw materials, which chiefly consisted of raw cotton, opium, and indigo, accounted for most of India's exports. From the late 18th century the British cotton mill industry began to lobby their government to tax Indian imports and allow them access to markets in India. Starting in the 1830s, British textiles began to appear in—and then inundate—Indian markets, with the value of the textile imports growing from £5.2 million in 1850 to £18.4 million in 1896. The abolition of slavery encouraged Caribbean plantations to organize the import of South Asian labor.
British colonial rule created an institutional environment that stabilized Indian society, while they stifled trade with the rest of the world. They created a well-developed system of railways, telegraphs and a modern legal system. This infrastructure was mainly geared towards the exploitation of resources, leaving industrial development stalled and agriculture unable to feed a rapidly accelerating population. Indians were subject to frequent famines, had one of the world's lowest life expectancies, suffered from pervasive malnutrition and were largely illiterate.
Relative decline in productivity
India accounted for 25% of the world's industrial output in 1750, declining to 2% of the world's industrial output in 1900. Britain replaced India as the world's largest textile manufacturer in the 19th century. In terms of urbanization, Mughal India had a higher percentage of its population (15%) living in urban centers in 1600 than British India did in the 19th century.
Several economic historians claimed that in the 18th century real wages were falling in India, and were "far below European levels". This has been disputed by others, who argued that real wage decline occurred in the early 19th century, or possibly beginning in the late 18th century, largely as a result of "globalization forces".
Clingingsmith and Williamson argue India deindustrialized, in the period between 1750 and 1860, due to two very different causes, before reindustrialization. Between 1750 and 1810, they suggest the loss of Mughal hegemony allowed new despotic rulers to revenue farm their conquered populations, seeing tax and rent demands increase to 50% of production, compared to the 5–6% extracted in China during the period, and levied largely to fund regional warfare. Combined with the use of labour and livestock for martial purposes, grain and textile prices were driven up, along with nominal wages, as the populus attempted to meet the demands, reducing the competitiveness of Indian handicrafts, and impacting the regional textile trade. Then from 1810 to 1860, the expansion of the British factory system drove down the relative price of textiles worldwide, through productivity advances, a trend that was magnified in India as the concurrent transport revolution dramatically reduced transportation costs, and in a sub-continent that had not seen metalled roads, the introduction of mechanical transport exposed once protected markets to global competition, hitting artisanal manufacture, but stabilizing the agricultural sector.
Angus Maddison states:
... This was a shattering blow to manufacturers of fine muslins, jewellery, luxury clothing and footwear, decorative swords and weapons. My own guess would be that the home market for these goods was about 5 per cent of Moghul national income and the export market for textiles probably another 1.5 per cent.
Amiya Bagchi estimates:
|Spinners / Weavers||2.3||1.3|
British East India Company rule (1764–1857)
During this period, the East India Company began tax administration reforms in a fast expanding empire spread over 250 million acres (1,000,000 km2), or 35 per cent of Indian domain. Indirect rule was established on protectorates and buffer states.
Ray (2009) raises three basic questions about the 19th-century cotton textile industry in Bengal: when did the industry begin to decay, what was the extent of its decay during the early 19th century, and what were the factors that led to this? Since no data exist on production, Ray uses the industry's market performance and its consumption of raw materials. Ray challenges the prevailing belief that the industry's permanent decline started in the late 18th century or the early 19th century. The decline actually started in the mid-1820s. The pace of its decline was, however, slow though steady at the beginning, but reached a crisis by 1860, when 563,000 workers lost their jobs. Ray estimates that the industry shrank by about 28% by 1850. However, it survived in the high-end and low-end domestic markets. Ray agrees that British discriminatory policies undoubtedly depressed the industry's exports, but suggests its decay is better explained by technological innovations in Britain.
Other historians point to colonization as a major factor in both India's deindustrialization and Britain's Industrial Revolution. The capital amassed from Bengal following its 1757 conquest supported investment in British industries such as textile manufacture during the Industrial Revolution as well as increasing British wealth, while contributing to deindustrialization and famines in Bengal; following the British conquest, a devastating famine broke out in Bengal in the early 1770s, killing a third of the Bengali population and 5 percent of the national population. Colonization forced the large Indian market to open to British goods, which could be sold in India without tariffs or duties, compared to heavily taxed local Indian producers. In Britain protectionist policies such as high tariffs restricted Indian textile sales. By contrast, raw cotton was imported without tariffs to British factories which manufactured textiles and sold them back to India. British economic policies gave them a monopoly over India's large market and cotton resources. India served as both a significant supplier of raw goods to British manufacturers and a large captive market for British manufactured goods.
Indian textiles had maintained a competitive advantage over British textiles up until the 19th century, when Britain eventually overtook India as the world's largest cotton textile manufacturer. In 1811, Bengal was still a major exporter of cotton cloth to the Americas and the Indian Ocean. However, Bengali exports declined over the course of the early 19th century, as British imports to Bengal increased, from 25% in 1811 to 93% in 1840. By 1820, India had fallen from the top rank to become the second-largest economy in the world, behind China.
Absence of industrialisation
Historians have questioned why India failed to industrialise in the 19th century. As the Global cotton industry underwent a technological revolution in the 18th century, while Indian industry stagnated after adopting the Flying shuttle, and industrialisation began only in the late 19th century. Several historians have suggested that this was because India was still a largely agricultural nation with low Commodity money wage levels, arguing that nominal wages were high in Britain so cotton producers had the incentive to invent and purchase expensive new labour-saving technologies, and that wages levels were low in India so producers preferred to increase output by hiring more workers rather than investing in technology.
Economic historians such as Prasannan Parthasarathi have criticized this argument, pointing to earnings data that show Real wages in 18th-century Bengal and Mysore were higher than in Britain. Instead, Parthasarathi argues that Indian textile prices were lower because of India's lower food prices, which was the result of higher agricultural productivity. Compared to Britain, the silver coin prices of grain were about one-half in Mysore and one-third in Bengal, resulting in lower silver coin prices for Indian textiles, giving them a price advantage in global markets. According to evidence cited by Immanuel Wallerstein, Irfan Habib, Percival Spear and Ashok Desai, per-capita agricultural output and standards of consumption in 17th-century Mughal India was higher than in 17th-century Europe and early 20th-century British India.
|Year||India ($)||UK ($)||Ratio (%)||India population (m)||UK population (m)|
However, Parthasarathi criticised the per-capita GDP estimates from Broadberry and Gupta. Workers in the textile industry, for example, earned more in Bengal and Mysore than they did in Britain, while agricultural labour in Britain had to work longer hours to earn the same amount as in Mysore. Others such as Andre Gunder Frank, Robert A. Denemark, Kenneth Pomeranz and Amiya Kumar Bagchi also criticised estimates that showed low per-capita income and GDP growth rates in Asia (especially China and India) prior to the 19th century, pointing to later research that found significantly higher per-capita income and growth rates in China and India during that period.
Economic historian Sashi Sivramkrishna estimates Mysore's average per-capita income in the late 18th century to be five times higher than subsistence, i.e. five times higher than $400 (1990 international dollars), or $2,000 per capita. In comparison, the highest national per-capita incomes in 1820 were $1,838 for the Netherlands and $1,706 for Britain. According to economic historian Paul Bairoch, India as well as China had a higher GDP per capita than Europe in 1750. For 1750, Bairoch estimated the GNP per capita for the Western world to be $182 in 1960 US dollars ($804 in 1990 dollars) and for the non-Western world to be $188 in 1960 dollars ($830 in 1990 dollars), exceeded by both China and India. Other estimates he gives include $150–190 for England in 1700 and $160–210 for India in 1800. Bairoch estimated that it was only after 1800 that Western European per-capita income pulled ahead.
British Raj (1858–1947)
The formal dissolution of the Mughal Dynasty heralded a change in British treatment of Indian subjects. During the British Raj, massive railway projects were begun in earnest and government jobs and guaranteed pensions attracted a large number of upper caste Hindus into the civil service for the first time. British cotton exports absorbed 55 per cent of the Indian market by 1875. In the 1850s the first cotton mills opened in Bombay, posing a challenge to the cottage-based home production system based on family labour.
The Great Depression of 1929 had a small direct impact on traditional India, with relatively little impact on the modern secondary sector. The government did little to alleviate distress, and was focused mostly on shipping gold to Britain. The worst consequences involved deflation, which increased the burden of the debt on villagers. Total economic output did not decline between 1929 and 1934. The worst-hit sector was jute, based in Bengal, which was an important element in overseas trade; it had prospered in the 1920s but prices dropped in the 1930s. Employment also decline, while agriculture and small-scale industry exhibited gains. The most successful new industry was sugar, which had meteoric growth in the 1930s.
The newly independent but weak Union government's treasury reported annual revenue of £334 million in 1950. In contrast, Nizam Asaf Jah VII of south India was widely reported to have a fortune of almost £668 million then. About one-sixth of the national population were urban by 1950. A US Dollar was exchanged at 4.79 Rupees.
Fall of the Rupee
|Period||Price of Silver (in pence per Troy ounce)||Rupee exchange rate (in pence)|
|Source: B.E. Dadachanji. History of Indian Currency and Exchange, 3rd enlarged ed.
(Bombay: D.B. Taraporevala Sons & Co, 1934), p. 15
After its victory in the Franco-Prussian War (1870–71), Germany extracted a huge indemnity from France of £200,000,000, and then moved to join Britain on a gold monetary standard. France, the US and other industrialising countries followed Germany in adopting gold in the 1870s. Countries such as Japan that did not have the necessary access to gold or those, such as India, that were subject to imperial policies remained mostly on a silver standard. Silver-based and gold-based economies then diverged dramatically. The worst affected were silver economies that traded mainly with gold economies. Silver reserves increased in size, causing gold to rise in relative value. The impact on silver-based India was profound, given that most of its trade was with Britain and other gold-based countries. As the price of silver fell, so too did the exchange value of the rupee, when measured against sterling.
Agriculture and industry
The Indian economy grew at about 1% per year from 1880 to 1920, matching population growth. The result was no change in income levels. Agriculture was still dominant, with most peasants at the subsistence level. Extensive irrigation systems were built, providing an impetus for growing cash crops for export and for raw materials for Indian industry, especially jute, cotton, sugarcane, coffee and tea.
Entrepreneur Jamsetji Tata (1839–1904) began his industrial career in 1877 with the Central India Spinning, Weaving, and Manufacturing Company in Bombay. While other Indian mills produced cheap coarse yarn (and later cloth) using local short-staple cotton and simple machinery imported from Britain, Tata did much better by importing expensive longer-stapled cotton from Egypt and buying more complex ring-spindle machinery from the United States to spin finer yarn that could compete with imports from Britain.
In the 1890s, Tata launched plans to expand into heavy industry using Indian funding. The Raj did not provide capital, but aware of Britain's declining position against the U.S. and Germany in the steel industry, it wanted steel mills in India so it promised to purchase any surplus steel Tata could not otherwise sell. The Tata Iron and Steel Company (TISCO), headed by his son Dorabji Tata (1859–1932), opened its plant at Jamshedpur in Bihar in 1908. It became the leading iron and steel producer in India, with 120,000 employees in 1945. TISCO became an India's symbol of technical skill, managerial competence, entrepreneurial flair, and high pay for industrial workers.
British investors built a modern railway system in the late 19th century—it became the then fourth-largest in the world and was renowned for quality of construction and service. The government was supportive, realising its value for military use and for economic growth. The railways at first were privately owned and operated, and run by British administrators, engineers and skilled craftsmen. At first, only the unskilled workers were Indians.
A plan for a rail system was first advanced in 1832. The first train ran from Red Hills to Chintadripet bridge in Madras, inaugurated in 1837. It was called Red Hill Railway. It was used for freight transport. A few more short lines were built in the 1830s and 1840s. They did not interconnect and were used for freight transport. The East India Company (and later the colonial government) encouraged new railway companies backed by private investors under a scheme that would provide land and guarantee an annual return of up to five percent during the initial years of operation. The companies were to build and operate the lines under a 99-year lease, with the government retaining the option to buy them earlier. In 1854 Governor-General Lord Dalhousie formulated a plan to construct a network of trunk lines connecting the principal regions. A series of new rail companies were established, leading to rapid expansion.
In 1853, the first passenger train service was inaugurated between Bori Bunder in Bombay and Thane, covering a distance of 34 km (21 mi). The route mileage of this network increased from 1,349 km (838 mi) in 1860 to 25,495 km (15,842 mi) in 1880 – mostly radiating inland from the port cities of Bombay, Madras and Calcutta. Most of the railway construction was done by Indian companies supervised by British engineers. The system was sturdily built. Several large princely states built their own rail systems and the network spread across India. By 1900 India had a full range of rail services with diverse ownership and management, operating on broad, metre and narrow gauge networks.
In the First World War, the railways were used to transport troops and grains to Bombay and Karachi en route to Britain, Mesopotamia and East Africa. With shipments of equipment and parts from Britain curtailed, maintenance became much more difficult; critical workers entered the army; workshops were converted to make artillery; some locomotives and cars were shipped to the Middle East. The railways could barely keep up with the increased demand. By the end of the war, the railways had deteriorated badly. In the Second World War the railways' rolling stock was diverted to the Middle East, and the railway workshops were again converted into munitions workshops. This severely crippled the railways.
Headrick argues that both the Raj lines and the private companies hired only European supervisors, civil engineers and even operating personnel, such as locomotive engineers. The government's Stores Policy required that bids on railway contracts be submitted to the India Office in London, shutting out most Indian firms. The railway companies purchased most of their hardware and parts in Britain. Railway maintenance workshops existed in India, but were rarely allowed to manufacture or repair locomotives. TISCO first won orders for rails only in the 1920s. Christensen (1996) looked at colonial purpose, local needs, capital, service and private-versus-public interests. He concluded that making the railways dependent on the state hindered success, because railway expenses had to go through the same bureaucratic budgeting process as did all other state expenses. Railway costs could therefore not respond to needs of the railways or their passengers.
In 1951, forty-two separate railway systems, including thirty-two lines owned by the former Indian princely states, were amalgamated to form a single unit named the Indian Railways. The existing rail systems were abandoned in favor of zones in 1951 and a total of six zones came into being in 1952.
Economic impact of imperialism
Debate continues about the economic impact of British imperialism on India. The issue was first raised by Edmund Burke who in the 1780s vehemently attacked the East India Company, claiming that Warren Hastings and other top officials had ruined the Indian economy and society. Indian historian Rajat Kanta Ray (1998) continued this line of reasoning, saying that British rule in the 18th century took the form of plunder and was a catastrophe for the traditional economy. According to the economic drain theory, supported by Ray, the British depleted food and money stocks and imposed high taxes that helped cause the terrible famine of 1770, which killed a third of the people of Bengal.
British historian P. J. Marshall reinterpreted the view that the prosperity of the Mughal era gave way to poverty and anarchy, arguing that the British takeover was not a sharp break with the past. British control was delegated largely through regional rulers and was sustained by a generally prosperous economy through the 18th century, except for the frequent, deadly famines. Marshall notes the British raised revenue through local tax administrators and kept the old Mughal tax rates. Instead of the Indian nationalist account of the British as alien aggressors, seizing power by brute force and impoverishing the region, Marshall presents a British nationalist interpretation in which the British were not in full control, but instead were controllers in what was primarily an Indian-run society and in which their ability to keep power depended upon cooperation with Indian elites. Marshall admitted that much of his interpretation is rejected by many historians.
The Bank of England records the Indian reserve Bank held a positive balance of £1160 million, with it, on 14 July 1947, and that British India maintained a trade surplus, with the United Kingdom, for the duration of the British Raj eg.
|Period||Balance of trade and net invisibles||War expenditure||Other sources||Total|
|September 1939 – March 1940||65||2||13||80|
Source: Indian sterling balances, p. 2, 15 Jan.1.1947, Bank of England (BoE), OV56/55.
British Raj's impact on productivity
Modern economic historians have blamed the colonial rule for the dismal state of India's economy, with investment in Indian industries limited since it was a colony. Under British rule, India's native manufacturing industries shrank. During the British East India Company's rule in India, production of food crops declined, mass impoverishment and destitution of farmers and numerous famines. The economic policies of the British Raj caused a severe decline in the handicrafts and handloom sectors, with reduced demand and dipping employment; the yarn output of the handloom industry, for example, declined from 419 million pounds in 1850 to 240 million pounds in 1900. The result was a significant transfer of capital from India to England, which led to a massive drain of revenue rather than any systematic effort at modernisation of the Indian economy.
There is no doubt that our grievances against the British Empire had a sound basis. As the painstaking statistical work of the Cambridge historian Angus Maddison has shown, India's share of world income collapsed from 22.6% in 1700, almost equal to Europe's share of 23.3% at that time, to as low as 3.8% in 1952. Indeed, at the beginning of the 20th century, "the brightest jewel in the British Crown" was the poorest country in the world in terms of per capita income.
Republic of India
After independence India adopted a socialism-inspired economic model with elements of capitalism. India adopted a USSR-like centralized and nationalized approach called Five-Year Plans. This policy hindered economic growth for decades.
Socialist rate of growth
The phrase "Nehruvian Socialist rate of growth" is used to refer to the low annual growth rate of the economy of India before 1991. It remained around 3.5% from the 1950s to 1980s, while per capita income growth averaged 1.3% a year. During the same period, South Korea grew by 10% and Taiwan by 12%.
Socialist reforms (1950–1975)
In 1975 India's GDP (in 1990 US dollars) was $545 billion, $1,561 billion in the USSR, $1,266 billion in Japan, and $3,517 billion in the US.
Before independence a large share of tax revenue was generated by the land tax. Thereafter land taxes steadily declined as a share of revenues.
The economic problems inherited at independence were exacerbated by the costs associated with the partition, which had resulted in about 2 to 4 million refugees fleeing past each other across the new borders between India and Pakistan. Refugee settlement was a considerable economic strain. Partition divided India into complementary economic zones. Under the British, jute and cotton were grown in the eastern part of Bengal (East Pakistan, after 1971, Bangladesh), but processing took place mostly in the western part of Bengal, which became the Indian state of West Bengal. As a result, after independence India had to convert land previously used for food production to cultivate cotton and jute.
Growth continued in the 1950s, the rate of growth wasa less positive than India's politicians expected.
Toward the end of Nehru's term as prime minister, India experienced serious food shortages.
Beginning in 1950, India faced trade deficits that increased in the 1960s. The Government of India had a major budget deficit and therefore could not borrow money internationally or privately. As a result, the government issued bonds to the Reserve Bank of India, which increased the money supply, leading to inflation. The Indo-Pakistani War of 1965 led the US and other countries friendly towards Pakistan to withdraw foreign aid to India, which necessitated devaluation. India was told it had to liberalise trade before aid would resume. The response was the politically unpopular step of devaluation accompanied by liberalisation. Defence spending in 1965/1966 was 24.06% of expenditure, the highest in the period from 1965 to 1989. Exacerbated by the drought of 1965/1966, the devaluation was severe. GDP per capita grew 33% in the 1960s, reaching a peak growth of 142% in the 1970s, before decelerating to 41% in the 1980s and 20% in the 1990s.
From FY 1951 to FY 1979, the economy grew at an average rate of about 3.1 percent a year, or at an annual rate of 1.0 percent per capita. During this period, industry grew at an average rate of 4.5 percent a year, compared with 3.0 percent for agriculture.
|Year||Gross Domestic Product
|₹ per USD||Per Capita Income
(as % of US)
Prime Minister Nehru was a believer in socialism and decided that India needed maximum steel production. He, therefore, formed a government-owned company, Hindustan Steel Limited (HSL) and set up three steel plants in the 1950s.
Economic liberalisation in India in the 1990s and first decade of the 21st century led to large economic changes.
|Year||Gross Domestic Product||Exports||Imports||₹ per USD||Inflation Index (2000=100)||Per Capita Income
(as % of US)
About one-fourth of the national population was urban by 2000.
The Indian steel industry began expanding into Europe in the 21st century. In January 2007 India's Tata bought European steel maker Corus Group for $11.3 billion. In 2006 Mittal Steel (based in London but with Indian management) acquired Arcelor for $34.3 billion to become the world's biggest steel maker, ArcelorMittal, with 10% of world output.
The GDP of India in 2007 was estimated at about 8 per cent that of the US. The government started the Golden Quadrilateral road network connecting Delhi, Chennai, Mumbai and Kolkata with various Indian regions. The project, completed in January 2012, was the most ambitious infrastructure project of independent India.
The top 3% of the population still earn 50% of GDP. Education was made a fundamental right by amending the constitution.[when?]
Economic activity remains limited by poor infrastructure such as dilapidated roads, electricity shortages and a cumbersome justice system.
|Year||GDP||Exports||Imports||₹ per USD||Inflation Index
|Per Capita Income
(as % of US)
For purchasing power parity comparisons, the US dollar is converted at 9.46 rupees. Despite steady growth and continuous reforms since the 1990s, the Indian economy is mired in bureaucratic hurdles. This was confirmed by a World Bank report published in late 2006 ranking Pakistan (at 74th) well ahead of India (at 134th) based on ease of doing business.
|Year||India's GDP at Current Prices
(in crores INR)
|India's GDP at Constant 2004–2005 Prices
(in crores INR)
|Real Growth Rate|
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