Indian Economy Day 1 : Indian Economy Before and After Independence

Indian Economy Before and After Independence

The primary objective of this chapter is to familiarize the basic features of the Indian Economy and its development as it is today, in the aftermath of Independence. The structure of India’s present day economy is not just of current making; it has its roots steeped in history, particularly in the period when India was under British Rule which lasted for almost two centuries before India finally won its independence in 1947.

Status of Indian Economy at the time of Independence

The solo purpose of British colonial rule was to reduce India into a feeder economy for Britain’s rapidly growing industrial sector. As a result Indian economy at the time of independence was not in a good shape. Low income level dominated the Indian economy.

Low Level of Economic Development under the Colonial Rule 

 India had an independent economy before the advent of British Rule. Though agriculture was the main source of livelihood for many people, yet the country’s economy was characterized by various kinds of manufacturing activities. India was well-known particularly for handicraft industries in the fields of cotton and silk textiles, metals, precious stone works etc. The products enjoyed a worldwide market based on the reputation of the fine quality of material used and the high standards of craftsmanship seen in all imports of India.

Indian per capita income before independence The economic policies pursued by colonial government in India were concerned more with the protection and promotion of the economic interests of their home country than with the development of the Indian economy. Such policies brought about a fundamental change in the structure of Indian economy – transforming country into supplier of raw materials and consumer of finished industrial products from Britain. Obviously, the colonial government never made any sincere attempt to estimate India’s national and per capita income. However most studies found the country’s growth of aggregate real output during the first half of the twentieth century to be less than two per cent coupled with a meager half per cent growth in per capita output per year.

Textile Industry in Bengal Muslin is a type of cotton textile which had its origin in Bengal, particularly places in and around Dhaka (i.e. capital of Bangladesh). ‘Daccai Muslin’ had gained worldwide fame as an exquisite type of cotton textile. The finest variety of muslin was called malmal. Sometimes foreign travelers also used to refer it as malmal shahi or malmal khas implying that it was worn by, or fit for, the royalty.

Agriculture Sector

India’s economy under the British colonial rule remained fundamentally agrarian – about 85% of the country’s population lived mostly in villages and derived livelihood directly or indirectly from agriculture.

However despite being the occupation of such a large population, the agriculture sector continued to experience stagnation and, not infrequently, unusual deterioration.

IMPACT ON INDIAN AGRICULTURE

• Larger part on Indian population (nearly 85%) at the time of independence was agrarian. The land holdings were small and neither British rule nor the Indian Intelligentsia took initiatives to improve the condition prevalent at that time. Deteriorating land and low productivity were the common features of the agriculture lands.
• Lack of fertilizers, inferior quality of seeds and less use of modern technology were also responsible for the murky state of agriculture. Adding fuel on that was the commercialization of it.
• Low levels of technology, lack of irrigation facilities and negligible use of fertilizers, all added up to aggravate the plight of the farmers and contributed to the dismal level of agricultural productivity.
• The farmers were compelled to grow more and more cash crops instead of main crops. The idea was to export the raw materials that they were getting at low prices to help British industries. Since the land was heavily taxed the farmers earned no real benefits despite efforts. Even in the conditions of drought, Famine or floods there was no mercy upon farmers.
• This stagnation in the agricultural sector was caused mainly because of the various systems of land settlement that were introduced by the colonial government. Particularly, under the zamindari system which was implemented in the then Bengal Presidency, the profit accruing out of the agriculture sector went to the zamindars instead of the cultivators.

System of land revenue settlement

The system of land revenue settlement was introduced by Warren Hastings in Bengal. The settlement was made on the assumption that all land belonged to the sovereign. The land was auctioned to the highest bidders. After Robert Clive obtained the diwani rights of Bengal, the land revenue was settled annually. Warren Hastings changed it from annual to quinquennial (five-yearly) and back to annual again. Cornwallis introduces a 10 years’ (decennial) settlement was introduced and it was made permanent settlement in 1793 in Bengal, Bihar and Orissa.

Permanent Settlement or the Zamandari System

Permanent settlements are made in Bengal, Bihar, Orissa, Varanasi division of UP, and Northern Karnataka, which roughly covered 19% of the total area of British India. This system made an agreement between the East India Company and Bengali landlords to fix revenues to be raised from land.

There were two reasons behind the introduction of Permanent Settlement.

1. Cornwallis was greatly impressed by zamindari system of England and while solving the social and economic problems of India, he thought it worthwhile to establish a powerful feudal system in India also in order to keep control over the peasants and to strengthen the economic position of the country.
2. The English officers were fed up with the problem of realisation of tax every year. It made the income of the company indefinite, so he thought it essential to introduce the permanent settlement.

The Zamindars were made as owners of land in their districts. This system had different versions like Zamindari, Jagirdari, Inamdari, etc. These zamindars had to collect revenue from farmers and pay the fraction to the British. The right to the land conferred on the zamindars and revenue amount was fixed at the beginning and remained the same permanently.

Zamindars were given freedom to decide how much to demand from the cultivators and there was a provision of keeping a portion of taxes for the zamindar himself.

Zamindar’s right over land was

• Alienable: British could take it away and give it to another Zamindar, if first Zamindar did not meet the Revenue collection ‘targets’.
• Rentable: Zamindar himself could further outsource his work among more smaller zamindars
• Heritable: If Zamindar dies, his son/brother etc would get it.

Failure to collect rent regularly from the tenants sometimes compelled the Zamindars to default in payment of revenue to the Government. This caused difficulty to the Government. Lord Wellesley considered it necessary to strengthen the authority of the Zamindars. For this purpose a regulation (known as Haptam) was passed in 1799.

The weavers who had migrated towards agriculture were forced to become tenants at the will for zamindars, since they possessed no land. Heavy taxation followed by extortion added to the woes of cultivators.

Introduction of this system also led to fragmentation of farmers – a class division in Western Bengal: Farmers got divided into two categories

1. Jotedars (Rich farmers)
2. Bargadar (Sharecroppers)

Ryotwari/Raithwari System

• This system was first introduced in Tamil Nadu and later to Deccan (Bombay Province) by Thomas Munro and Captain Reed. Later it covered parts of East Bengal, Assam and Coorg (Karnataka).
• Under this system, the ryots were given the ownership and occupancy rights in land and they were individually responsible for the payment of land revenue to the state. Thus a system of present proprietorship was introduced.

This system led to perpetual struggle between the money-lenders and the cultivators. Farmers were forced to pay revenue even during drought and famines, else faced eviction. This idea replaced a large number of zamindars by one giant zamindar called East India Company. Although ryotwari system aimed for direct Revenue settlement between farmer and the government but over the years, landlordism and tenancy became widespread. Because textile weavers were unemployed; they started working as tenant farmers for other rich farmers. In many districts, more than 2/3 of farmland was leased.

The Government insisted on cash revenue and farmers resorted to growing cash crops instead of food crops. This required the farmers to invest more on inputs which led to loans and indebtedness. After end of American civil war, cotton export declined but government didn’t reduce the revenue. As a result most farmers defaulted on loans and land was transferred from farmers to moneylenders.

Mahalwari Settlement

In some parts of northern India yet another type of settlement called Mahalwari system was introduced by the Company. Under the system settlement was made with a group of villages called mahals.

That is to say, instead of individual ryot or zamindar the government entered into settlement with mahals, under the subordination of the landlords called taluqdars. Fragmentation of land over generations led to decease in land holdings, consequently less produce and finally heavy indebtedness in event of crop failures. Again the farmers had to borrow money at high interest rates from the money lenders which led to landlessness and subleasing of land.

Final blow to Indian agriculture was during partition when India lost fertile lands of Sindh and Punjab (known for wheat production) to Pakistan and Jute growing lands to East Pakistan (Present Bangladesh). The Indian Jute industry suffered heavily. In 1943 Bengal famine shook the foundation of the country. An estimated 28.8 million persons died due to famines. In the famine of 1899-1900, 2.5 million persons died of starvation.

INDUSTRY

The condition of industries was not different from that of agriculture. No importance was given for the development of industries. India was made a supplier of raw materials and a market for finished goods. The duties were framed in such manner as to benefit the home country. These unfavorable policies lead to decline in the indigenous handicraft industry. This created enormous unemployment in the country. Also, a market which was now deprived of the supply of locally made goods.

FOREIGN TRADE

The history of India’s foreign trade goes back to ancient times. It used to be one of the most important destinies for trading community. In the colonial period India’s foreign trade was restricted with Britain only. They had the monopoly over the Indian exports.

India was allowed to trade with only few neighbour countries. Still, there was the generation of large export surplus. This surplus came with heavy cost. A spurt in export didn’t bring any fortunes to India. Rather, it was used to pay for British expenditures on maintaining the army and setups.

The country had to heavily depend on imports. Armed forces of the country also depended on foreign imports. Moreover, simple consumer goods like sewing machines, medicines, oil, bicycles etc. were imported from abroad. During World War II India had supplied large quantity of goods to British. India was paid for it in terms of sterling. But due to lack of real capital, its production capacity declined.

Growth of Foreign Capital and the Rise of Modern Industries in India

• In terms of chronology, the plantation industries of indigo, tea and coffee were the first to be introduced in India.
• During the 1850s cotton textiles, jute, and coal mining industries were started in India.
• It has been estimated that before 1914 nearly 97% of British capital investments in India was diverted towards completion of government projects (railways, road transport, etc.), plantation industry (tea, coffee, rubber, etc), and development of financial houses (banks, insurance companies, etc).\
• The foreign banks in India held nearly 3/4th of the total bank deposits.

The home charges consisted of many items such as:

• Purchase of military stores.
• Expenditure on India Office Establishment
• Interest on debts.
• Interest on railway capital investment.
• Non-effective charges of the army.
• Pensions and gratuities payable in England to retired civil servants of the company.

INDIAN ECONOMY AFTER INDEPENDENCE

What is a Plan?

A plan spells out how the resources of a nation should be put to use. It should have some general goals as well as specific objectives which are to be achieved within a specified period of time; in India plans are of five years duration and are called five year plans (we borrowed this from the former Soviet Union, the pioneer in national planning).

Goals of five year plans

Growth: It refers to increase in the country’s capacity to produce the output of goods and services within the country. A good indicator of economic growth, in the language of economics, is steady increase in the Gross Domestic Product (GDP). The GDP of a country is derived from the different sectors of the economy, namely the agricultural sector, the industrial sector and the service sector. The contribution made by each of these sectors makes up the structural composition of the economy.

Modernisation: To increase the production of goods and services the producers have to adopt new technology. For example, a farmer can increase the output on the farm by using new seed varieties instead of using the old ones. Adoption of new technology is called modernisation.

Self-reliance: A nation can promote economic growth and modernisation by using its own resources or by using resources imported from other nations. The first seven five year plans gave importance to self-reliance which means avoiding imports of those goods which could be produced in India itself. This policy was considered a necessity in order to reduce our dependence on foreign countries, especially for food.

Equity: It is important to ensure that the benefits of economic prosperity reach the poor sections as well instead of being enjoyed only by the rich. So, in addition to growth, modernisation and self-reliance, equity is also important. Every Indian should be able to meet his or her basic needs such as food, a decent house, education and health care and inequality in the distribution of wealth should be reduced.

Agriculture after independence

The policy makers of independent India had to address these issues which they did through land reforms and promoting the use of High Yielding Variety (HYV) seeds which ushered in a revolution in Indian agriculture. Equity in agriculture called for land reforms which primarily refer to change in the ownership of landholdings. Just a year after independence, steps were taken to abolish intermediaries and to make the tillers the owners of land. The idea behind this move was that ownership of land would give incentives to the tillers to invest in making improvements provided sufficient capital was made available to them.

Land Ceiling

 Land ceiling was another policy to promote equity in the agricultural sector. This means fixing the maximum size of land which could be owned by an individual. The purpose of land ceiling was to reduce the concentration of land ownership in a few hands. The abolition of intermediaries meant that some 200 lakh tenants came into direct contact with the government — they were thus freed from being exploited by the zamindars. The ownership conferred on tenants gave them the incentive to increase output and this contributed to growth in agriculture.

Zamindari System

The goal of equity was not fully served by abolition of intermediaries. In some areas the former Zamindars continued to own large areas of land by making use of some loopholes in the legislation; there were cases where tenants were evicted and the landowners claimed to be self-cultivators (the actual tillers), claiming ownership of the land; and even when the tillers got ownership of land, the poorest of the agricultural labourers (such as sharecroppers and landless labourers) did not benefit from land reforms.

Problems faced by land ceiling legislation

The big landlords challenged the legislation in the courts, delaying its implementation. They used this delay to register their lands in the name of close relatives, thereby escaping from the legislation. The legislation also had a lot of loopholes which were exploited by the big landholders to retain their land. Land reforms were successful in Kerala and West Bengal because these states had governments committed to the policy of land to the tiller. Unfortunately other states did not have the same level of commitment and vast inequality in landholding continues to this day.

Need for Green Revolution 

 At independence, about 75 per cent of the country’s population was dependent on agriculture. India’s agriculture vitally depends on the monsoon and if the monsoon fell short the farmers were in trouble unless they had access to irrigation facilities which very few had. The stagnation in agriculture during the colonial rule was permanently broken by the green revolution.

High Yielding Variety (HYV) 

 Green revolution refers to the large increase in production of food grains resulting from the use of high yielding variety (HYV) seeds especially for wheat and rice. The use of these seeds required the use of fertilizer and pesticide in the correct quantities as well as regular supply of water; the application of these inputs in correct proportions is vital. The farmers who could benefit from HYV seeds required reliable irrigation facilities as well as the financial resources to purchase fertiliser and pesticide. As a result, in the first phase of the green revolution (approximately mid 1960s up to mid 1970s), the use of HYV seeds were restricted to the more affluent states such as Punjab, Andhra Pradesh and Tamil Nadu.

Positive impact of Green Revolution 

 The spread of green revolution technology enabled India to achieve self-sufficiency in food grains; Indians no longer had to be at the mercy of America, or any other nation, for meeting our nation’s food requirements. The portion of agricultural produce which is sold in the market by the farmers is called marketed surplus. A good proportion of the rice and wheat produced during the green revolution period (available as marketed surplus) was sold by the farmers in the market. As a result, the price of food grains declined relative to other items of consumption. The low income groups, who spend a large percentage of their income on food, benefited from this decline in relative prices. The green revolution enabled the government to procure sufficient amount of food grains to build a stock which could be used in times of food shortage.

Pest Attack 

 While the nation had immensely benefited from the green revolution, the technology involved was not free from risks. One such risk was the possibility that it would increase the disparities between small and big farmers—since only the big farmers could afford the required inputs, thereby reaping most of the benefits of the green revolution. Moreover, the HYV crops were also more prone to attack by pests and the small farmers who adopted this technology could lose everything in a pest attack.

The Debate Over Subsidies

Any new technology will be looked upon as being risky by farmers. Most farmers are very poor and they will not be able to afford the required inputs without subsidies. Subsidies were, therefore, needed to encourage farmers to test the new technology. Eliminating subsidies will increase the inequality between rich and poor farmers and violate the goal of equity.

Thus, by the late 1960s, Indian agricultural productivity had increased sufficiently to enable the country to be self-sufficient in food grains. On the negative side, some 65 per cent of the country’s population continued to be employed in agriculture even as late as 1990.

INDUSTRY AND TRADE

At the time of independence, Indian industrialists did not have the capital to undertake investment in industrial ventures required for the development of our economy; nor was the market big enough to encourage industrialists to undertake major projects even if they had the capital to do so.

Industrial Policy Resolution 1956 (IPR 1956)

In accordance with the goal of the state controlling the commanding heights of the economy, the Industrial Policy Resolution of 1956 was adopted. This resolution formed the basis of the Second Five

Year Plan, the plan which tried to build the basis for a socialist pattern of society. This resolution classified industries into three categories. The first category comprised industries which would be exclusively owned by the state; the second category consisted of industries in which the private sector could supplement the efforts of the state sector, with the state taking the sole responsibility for starting new units; the third category consisted of the remaining industries which were to be in the private sector.

Licensing of Private Sector Industries

Although there was a category of industries left to the private sector, the sector was kept under state control through a system of licenses. No new industry was allowed unless a license was obtained from the government. This policy was used for promoting industry in backward regions; it was easier to obtain a license if the industrial unit was established in an economically backward area. In addition, such units were given certain concessions such as tax benefits and electricity at a lower tariff. The purpose of this policy was to promote regional equality. Even an existing industry had to obtain a license for expanding output or for diversifying production (producing a new variety of goods). This was meant to ensure that the quantity of goods produced was not more than what the economy required. License to expand production was given only if the government was convinced that the economy required a larger quantity of goods.

Small-Scale Industry

In 1955, the Village and Small-Scale Industries Committee, also called the Karve Committee, noted the possibility of using small-scale industries for promoting rural development. A ‘small-scale industry’ is defined with reference to the maximum investment allowed on the assets of a unit. This limit has changed over a period of time. In 1950 a small-scale industrial unit was one which invested a maximum of rupees five lakh; at present the maximum investment allowed is rupees one crore.

Small scale industries compared to large firms

It is believed that small-scale industries are more ‘labour intensive’ i.e., they use more labour than the large-scale industries and, therefore, generate more employment. But these industries cannot compete with the big industrial firms; it is obvious that development of small-scale industry requires them to be shielded from the large firms. For this purpose, the production of a number of products was reserved for the small-scale industry; the criterion of reservation being the ability of these units to manufacture the goods. They were also given concessions such as lower excise duty and bank loans at lower interest rates.

TRADE POLICY: IMPORT SUBSTITUTION

The industrial policy that we adopted was closely related to the trade policy. In the first seven plans, trade was characterized by what is commonly called an inward looking trade strategy. Technically, this strategy is called import substitution. This policy aimed at replacing or substituting imports with domestic production. For example, instead of importing vehicles made in a foreign country, industries would be encouraged to produce them in India itself.

Tariffs and Quotas 

 In the trade policy the government protected the domestic industries from foreign competition. Protection from imports took two forms: tariffs and quotas. Tariffs are a tax on imported goods; they make imported goods more expensive and discourage their use. Quotas specify the quantity of goods which can be imported. The effect of tariffs and quotas is that they restrict imports and, therefore, protect the domestic firms from foreign competition.

Effect of Policies on Industrial Development 

 The achievements of India’s industrial sector during the first seven plans are impressive indeed. The proportion of GDP contributed by the industrial sector increased in the period from 11.8 per cent in 1950-51 to 24.6 per cent in 1990-91. The rise in the industry’s share of GDP is an important indicator of development. The six per cent annual growth rate of the industrial sector during the period is commendable. No longer was Indian industry restricted largely to cotton textiles and jute; in fact, the industrial sector became well diversified by 1990, largely due to the public sector. The promotion of small-scale industries gave opportunities to those people who did not have the capital to start large firms to get into business. Protection from foreign competition enabled the development of indigenous industries in the areas of electronics and automobile sectors which otherwise could not have developed.

CONCLUSION 

 The progress of the Indian economy during the first seven plans was impressive indeed. Our industries became far more diversified compared to the situation at independence. India became self- sufficient in food production thanks to the green revolution. Land reforms resulted in abolition of the hated zamindari system. However, many economists became dissatisfied with the performance of many public sector enterprises. Excessive government regulation prevented growth of entrepreneurship. In the name of selfreliance, our producers were protected against foreign competition and this did not give them the incentive to improve the quality of goods that they produced. Our policies were ‘inward oriented’ and so we failed to develop a strong export sector. The need for reform of economic policy was widely felt in the context of changing global economic scenario, and the new economic policy was initiated in 1991 to make our economy more efficient.

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