Economic history of India

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Indus Valley civilization

Pre-Colonial Characteristics

Religion, especially Hinduism, played an influential role in shaping economic activities. The system of castes and sub-castes, despite its social fallbacks, functioned much like medieval European guilds, ensuring division of labour and provided for training of apprentices. The caste system restricted people from changing one's occupation and aspiring to an upper caste's lifestyle. Thus, a barber could not become a goldsmith and even a highly skilled carpenter could not aspire to the lifestyle or privileges enjoyed by a Kshatriya (person of a warrior class). This barrier to mobility on labour restricted economic prosperity to a few castes. 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 in the family business and the older and disabled persons would be supported by the family. The system, by preventing the agricultural land from being split ensured higher yield because of the benefits of scale. The system curbed members from taking initiative because of the support system and family or work discords intertwined, leading to sub-division and fragmentation of land which lead to lower yield and productivity. Pilgrimage towns like Allahabad, Benares, Nasik, Puri, etc., mostly centred around rivers, developed into centres of trade and commerce. Religious functions, festivals and the practice of taking a pilgrimage resulted in a flourishing pilgrimage economy.

Punch marked Silver Ingots, in circulation around 5th century BC and the first metallic coins were minted around 6th century BC by the Mahajanapadas of the Gangetic plains were the earliest traces of coinage in India. While India's many kingdoms and rulers issued coins, barter was still widely prevalent. Villages paid a portion of their agricultural produce as revenue while its craftsmen received a stipend out of the crops at harvest time for their services. Each village, as an economic unit was mostly self-sufficient - Mahatma Gandhi was inspired by this fact in his vision for a ''Village Economy model.

Surplus of Indian manufactures, like the muslin of Dacca, calicos of Bengal, shawls of Kashmir, other textiles and handicrafts, agricultural products like pepper, cinnamon, opium and indigo were exported to Europe, Middle East and South East Asia in return for gold and silver. Superstitions about sea faring among Hindus meant, a greater part of India's foreign trade was carried out by foreigners.

According to economic historian Angus Maddison in his book The World Economy: A Millennial Perspective, India had the world's largest economy between the 1st century and 15th century, from a 32.9% share of world GDP in the 1st century to 24.5% in 1500, when China overtook India with a 25% share in that same year. In 1700, India had a 24.4% share of world GDP, which fell drastically to 3.8% by 1952. Another estimate of India's pre-colonial economy puts the revenue of Akbar's Mughal empire in 1600 at £17.5 million, in contrast to the entire treasury of Great Britain in 1800, which totalled £16 million.

Colonial Rule

The colonial rule brought along an institutional environment that guaranteed property rights, ensured free trade, had fixed exchange rates, uniform currency system, open capital markets, created a well developed system of railways and telegraphs, a bureaucracy free from political interferences and a modern legal system. It also coincided with major changes in the world economy - industrialisation, growth in trade and production, and new thinking on economic policies followed by states. By the end of the colonial rule, however, India inherited an economy that was one of the poorest in the world and totally stagnant, with industrial development stalled, agriculture unable to feed a rapidly accelerating population, who were subject to frequent famines, had one of the world's lowest life expectancy, suffered from pervasive malnutrition and was largely illiterate.

An estimate by Cambridge historian Angus Maddison reveals that, India's share of the world income, reduced from 24.4% in 1700, comparable to Europe's share of 23.3 %, to a low of 3.8% in 1952. While Indian leaders during the Independence struggle and left-nationalist economic historians have blamed the colonial rule for the dismal state of India's economy, a broader macroeconomic view of India during this period reveals that there were segments of both growth and decline, resulting from changes brought about by colonialism and a world that was moving towards industrialisation and economic integration.

The Fall of the Rupee

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 standard for currency. France, the U.S. and other industrialising countries followed Germany in adopting a gold standard throughout the 1870s. At the same time, other countries, such as Japan, which did not have the necessary access to gold or those, such as India, which were subject to imperial policies that determined that they did not move to a gold standard, remained mostly on a silver standard. A huge divide between silver-based and gold-based economies resulted. The worst affected were economies with silver standard that traded mainly with economies with gold standard. With discovery of more and more silver reserves, those currencies based on gold continued to rise in value and those based on silver were declining due to demonetization of silver. For India which carried out most of its trade with gold based countries, especially Britain, the impact of this shift was profound. As the price of silver continued to fall, so too did the exchange value of the rupee, when measured against sterling.

See also: The crisis of silver currency and bank notes (1750–1870)

Post-Independence to 1979

[Current GDP per capita] grew 33% in the Sixties reaching a peak growth of 142% in the Seventies, decelerating sharply back to 41% in the Eighties and 20% in the Nineties.

At independence the economy was predominantly agrarian. Most of the population was employed in agriculture, and most of those people were very poor, existing by cropping their own small plots or supplying labor to other farms. Landownership, land rental, and sharecropping rights were complex, involving layers of intermediaries. Moreover, the structural economic problems inherited at independence were exacerbated by the costs associated with the partition of British India, which had resulted in about 12 million to 14 million refugees fleeing past each other across the new borders between India and Pakistan. The settlement of refugees was a considerable financial strain. Partition also divided complementary economic zones. Under the British, jute and cotton were grown in the eastern part of Bengal, the area that became East Pakistan (after 1971, Bangladesh), but processing took place mostly in the western part of Bengal, which became the Indian state of West Bengal in 1947. As a result, after independence India had to employ land previously used for food production to cultivate cotton and jute for its mills.

India's leaders--especially the first prime minister, Jawaharlal Nehru, who introduced the five-year plans--agreed that strong economic growth and measures to increase incomes and consumption among the poorest groups were necessary goals for the new nation. Giving utmost importance to the economy, Jawaharlal appointed R. K. Shanmukham Chetty, a person who did not participate in the mainstream Indian Independence Movement as the finance minister, since he believed that more than ideology, having right person in the right job was important. Government was assigned an important role in the process of alleviating poverty, and since 1951 a series of plans have guided the country's economic development. Although there was considerable growth in the 1950s, the long-term rates of growth were less positive than India's politicians desired and less than those of many other Asian countries.

Since 1950, India ran into trade deficits that increased in magnitude in the 1960s. The Government of India had a budget deficit problem and therefore could not borrow money from abroad or from the private sector, which itself had a negative savings rate. As a result, the government issued bonds to the RBI, which increased the money supply, leading to inflation. In 1966, foreign aid, which was hitherto a key factor in preventing devaluation of the rupee was finally cut off and India was told it had to liberalise its restrictions on trade before foreign aid would again materialise. The response was the politically unpopular step of devaluation accompanied by liberalisation. The Indo-Pakistani War of 1965 led the US and other countries friendly towards Pakistan to withdraw foreign aid to India, which further necessitated devaluation. Defence spending in 1965/1966 was 24.06% of total expenditure, the highest in the period from 1965 to 1989. This accompanied by the drought of 1965/1966 lead to a severe devaluation of the rupee.

From FY 1951 to FY 1979, the economy grew at an average rate of about 3.1 percent a year in constant prices, or at an annual rate of 1.0 percent per capita (see table 16, Appendix). During this period, industry grew at an average rate of 4.5 percent a year, compared with an annual average of 3.0 percent for agriculture. Many factors contributed to the slowdown of the economy after the mid-1960s, but economists differ over the relative importance of those factors. Structural deficiencies, such as the need for institutional changes in agriculture and the inefficiency of much of the industrial sector, also contributed to economic stagnation. Wars with China in 1962 and with Pakistan in 1965 and 1971; a flood of refugees from East Pakistan in 1971; droughts in 1965, 1966, 1971, and 1972; currency devaluation in 1966; and the first world oil crisis, in 1973-1974, all jolted the economy.

Post-Liberalisation

Initial Period

As late as 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of a basket of currencies of major trading partners. India started having balance of payments problems since 1985, and by the end of 1990, it was in a serious economic crisis. The government was close to default and its foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports. The Government of India headed by P. V. Narasimha Rao decided to usher in a slew of reforms that are collectively termed as liberalisation in the Indian media. This event marked a tremendous shift in India's economy since independence - it assumed an outward-shift of encouraging exports instead of the inward focus that stressed on import substitution till then. The reforms brought changes in three broad areas, collectively known as liberalisation, privatisation and globalisation. Liberalisation did away with regulatory hurdles and minimised licensing requirements. Privatisation reduced the role of the state and public sector in business. Globalisation made it easier for the MNCs to operate in India. P. V. Narasimha Rao was ably supported by his finance minister Manmohan Singh and other officials such as C. Rangarajan, Montek Singh Ahluwalia, Shankar Acharya and Y. Venugopal Reddy. The initial period culminated in 1996 with the government getting voted out of power. This brought coalition politics to centre-stage and the pace of reforms slackened.

UF rule

The Union budget presented by United Front Finance Minister P. Chidambaram (1996 - 1998) was praised for its increase of reforms and pro-growth policies, but India's economy was hampered by the 1997 Asian Economic Crisis in Thailand, Indonesia, Singapore, Malaysia, Hong Kong, Japan and South Korea, as well as the fragile nature of the ruling UF coalition. It should be noted that despite the economic and political adversities, India's economy did not decline - it maintained a slow growth of GDP and a falling value of its currency. However, rising prices of common products like onions and slow reduction in employment created much public consternation.

NDA Rule

Macro-economic trend

Note 1: Lawrence H. Officer, "Exchange rate between the United States dollar and forty other countries, 1913 -1999." Economic History Services, EH.Net, 2002. URL: http://eh.net/hmit/exchangerates/

For purchasing power parity comparisons, the US Dollar is exchanged at 9.46 Rupees only.

See also

• Timeline of the economy of India
• List of countries by past GDP (PPP)
• List of countries by past GDP (nominal)

References

Articles

• Dr. Nupam P. Mahajan, (1999) [India's First Coinage]. Retrieved Feb. 24, 2005.

• This article contains material from the Library of Congress Country Studies, which are United States government publications in the public domain.

• Adam Smith, The Wealth of Nations.
• Jawaharlal Nehru, The Discovery of India
• Max Weber, [[Max Weber#The Religion of India: The Sociology of Hinduism and Buddhism|The Religion of India: The Sociology of Hinduism and Buddhism]]
• Micklethwait, John & Wooldridge, Adrian (2003). The Company: a short history of a revolutionary idea. Modern library chronicles. ISBN 0679642498.
• Sankaran, S (1984). Indian Economy: Problems, Policies and Development (7th ed. (1994)). Margham Publications.
• Datt, Ruddar & Sundharam, K.P.M. (1965). Indian Economy (51st Revised ed. (2005)). S.Chand. ISBN 81-219-0298-3.
• Limca Book of Records (1993). Bisleri Beverages Limited. ISBN 81-9001156-1.

Papers

• Pearce, H.Thomas (Spring 2003). [Weber's study of the Hindu ethic and the caste system].

Further reading

• Chaudhuri, K. N.Trade and Civilisation in the Indian Ocean : An Economic History from the Rise of Islam to 1750 (1985)
• Ludden, David, ed. New Cambridge History of India: An Agrarian History of South Asia (1999).
• Habib, Irfan. Atlas of the Mughal Empire: Political and Economic Maps (1982).
• Raychaudhuri, Tapan and Irfan Habib, eds. The Cambridge Economic History of India: Volume 1, c. 1200-c. 1750 (1982).
• Kumar, Dharma and Meghnad Desai, eds. The Cambridge Economic History of India: Volume 2, c.1751-c.1970 (1983).
• Tomlinson, B. R. et al.The Economy of Modern India, 1860-1970 (1996) (The New Cambridge History of India)
• Lal, Deepak. The Hindu Equilibrium: India C.1500 B.C.-2000 A.D. (2nd ed. 2005).
• Frankel, Francine R. India's Political Economy, 1947-1977: The Gradual Revolution (1978).
• Rudolph, Lloyd I. In Pursuit of Lakshmi: The Political Economy of the Indian State (1987).
• Larue, C. Steven. The India Handbook (1997) (Regional Handbooks of Economic Development).
• Das, Gurcharan. India Unbound: The Social and Economic Revolution from Independence to the Global Information Age (2002).

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