NATURE OF INDIAN ECONOMY

The need for Economic

Development
Pre-British Period
• The Industrial Commission, 1918: “At a time
when the West of Europe, the birth place of
modern industrial system, was inhabited by
uncivilised tribes, India was famous for the
wealth of her rulers and for high artistic skill of
her craftsmen. And even at a much later period,
when the merchant adventurers from the West
made their first appearance in India. The
industrial development of this country was, at
any rate, not inferior to that of the more
advanced European nations.”
Before Independence
• India was colonial economy
• Served the purpose of development of United
Kingdom
• Drain of Wealth: Unilateral transfer of capital to
UK from India
• India provided the raw materials and other
resources for UK
• India provided market for the British
manufactured goods
Before Independence
• Before Industrial Revolution in England, the EIC
exported Indian manufactured goods to Europe
• Indian manufactured goods, textiles, spices, etc
were in great demand in Europe
• Industrial Revolution changed this
• British Industries expanded tremendously
• Demanding more raw materials and market for
finished products
Before Independence
• The social sector was a neglected by British
rulers
• India remained a continent of illiterate peasants
under British rule
• At the time of Independence, literacy – 17% and
32.5 years of life expectancy at birth
• This had a negative impact on the production
and productivity of the economy
Before Independence
• Industrialization neglected by the colonizers
• The infrastructure not built to industrialize India
• But to exploit India's raw materials (led to
commercialization of Indian Agriculture)
• Indian capitalists were highly dependent on
British commercial capital
• Many sectors of the industry dominated by
British firms
Before Independence
• The process of commercial agriculture necessitated by
the Industrial Revolution was intensified by the
development of an elaborate network of railway in India
after 1850
• The same railways which carried commercial crops from
the various parts of the country, brought back the foreign
machine-made manufactured goods to India
• Railways and link-roads connecting the hinter-land of
country with commercial and trading centres were
instrumental in intensifying commercial agriculture on
the one hand and sharpening competition of
machine-made goods with Indian handicrafts, on the
other
• These factors led to the ruin of Indian industries
Pre-independence Period
• A period of stagnation
• Aggregate real output estimated at less than 2
per cent a year
• No per capita growth in India from 1600 to 1870
• Per capita growth was a meagre 0.2 per cent
from 1870 to 1947
• The repeated famines (36+1) (1943 Bengal
Famine) and disease epidemics during the
second half of 19th & first half of 20th century
Post-Independence
• The political leaders and the industrialists both were
very much aware and conscious about the economic
inheritance
• Major strategic issues to be discussed and
considered:
▫ (i) State/governments should be given a direct
responsibility for development
▫ (ii) An ambitious and vital role to be assigned to the
public sector
▫ (iii) Necessity for the development of heavy industries
▫ (iv) Discouragement to foreign investment
▫ (v) The need for economic planning
Post-Independence
• Many important and strategic decisions were
taken only by 1956 which shaped Indian
economic journey till date—undoubtedly they
heavily dominated the pre-reform period, but
the post-reform period is also not completely
free of their impact
Agriculture VS. Industry
• The political leadership selected industry as the leading force of the
economy
• Given the available resource base, India lacked all pre-requisites for
industry to be the leading force:
▫ (i) Almost no presence of infrastructure sector, i.e., power,
transportation and communication.
▫ (ii) Negligible presence of the infrastructure industries, i.e., iron and
steel, cement, coal, crude oil, oil refining and electricity.
▫ (iii) Lack of investible capital—either by the government or the private
sector.
▫ (iv) Absence of required technology to support the process of
industrialisation and no research and development.
▫ (v) Lack of skilled manpower.
▫ (vi) Absence of entrepreneurship among the people.
▫ (vii) Absence of a market for industrial goods.
Agriculture VS. Industry
• For India, the agriculture sector would have
been the choice as the prime moving force of the
economy because:
▫ (i) The country was having the natural resource of
fertile land which was fit for cultivation.
▫ (ii) Human capital did not require any kind of
higher training.
Reasons for opting Industry as
economy’s prime moving force
• India opted to industrialise the economy as well
as modernise the traditional mode of farming
• International Organisations support
• The second World War proved the supremacy of
defence power
• Industrialisation efficacy examples of European
nations
• Socio-economic consensus among Indians on
need for modernisation
Post-Independence
• Independent India was declared to be a planned and a mixed
economy
• Given poverty of the masses, the government go for planning so that
it could play an active role in the allocation of resources and
mobilise them for equitable growth and development
• India’s decision for a planned economy was moulded by some
contemporary experiences in the world:
▫ The Great Depression of 1929 and the reconstruction challenges after the
second world War
▫ Economic planning was considered to help states to mobilise resources to
realise the prioritised objectives in a well-defined time frame
▫ Around the same time, the command economies (i.e., state economies) of
the soviet Union and the East European countries started making news
about their faster economic growth
Emphasis on Public Sector
• The reasons behind the ambitious expansion of
the PSUs were:

• 1) Infrastructural Needs:
• Every economy needs suitable levels of
infrastructure.
• These require heavy capital investment as well as
engineering and technological support
• Expansion of the infrastructure sector was not
possible by the private sector of the time as they
could not manage the following components:
Emphasis on Public Sector
▫ (i) heavy investment,
▫ (ii) technology,
▫ (iii) skilled manpower, and
▫ (iv) entrepreneurship.
• Infrastructure like-power, transportation,
communication, etc, were essential for the economy
• As the masses lacked the market-determined
purchasing capacity, they needed to be either
subsidised or supplied at nominal charges/free
• There were no alternatives, only the government
could have managed this responsibility
Emphasis on Public Sector
• 2) Industrial Needs:
• For industrialisation to take place, the presence of certain
industries is essential
• These industries have been called by different names—basic
industries, infrastructure industries, core industries, core
sector
• These industries are (percentage weights in Index of Core
Industries):
▫ (i) Refinery products (28.04)
▫ (ii) Electricity (19.85)
▫ (iii) Steel (17.92)
▫ (iv) Coal (10.33)
▫ (v) Crude Oil (8.98)
▫ (vi) Natural Gas (6.88)
▫ (vii) Cement (5.37)
▫ (viii) Fertilisers (2.63)
Emphasis on Public Sector
• The combined weight of these eight industries in the new
series of Index of Industrial Production (IIP) is 40.27
per cent
• Similar to the infrastructure sector, these basic industries
also require high level of capital & technology
• At the time of Independence, the cement industry had
some strength in the private sector
• In the iron and steel industry a lone private company was
present
• The coal industry was controlled by the private sector
(https://coal.gov.in/en/about-us/history-background)
• The crude oil and refining was just beginning
Emphasis on Public Sector
• 3) Employment Generation:
• The country was faced with the serious problem
of poverty
• Giving employment to the people is a
time-tested tool of poverty alleviation
• The poverty of a greater section of the country
was somehow connected to the age-old caste
system
• And the stronghold of the upper castes on the
ownership of land, which was the only means of
income and livelihood for almost above 80 per
cent of the population.
Emphasis on Public Sector
• Along with land reforms, the government
provided reservations to the weaker sections of
the society in government jobs
• Such reservations were considered an economic
tool for social change
• The PSUs were considered as the focus of the
‘trickle-down effect’; the benefits were supposed
to percolate to the masses
• Nehru mentioned the PSUs as the ‘temples of
modern India’
Emphasis on Public Sector
• 4) Profit and Development of the Social Sector:
• Profits from PSUs provided disposable income
to the government
• The government had a conscious policy of
spending the income generated by the PSUs to
supply ‘social goods’ or ‘public goods’
• These included education, healthcare, nutrition,
drinking water, social security, etc., in India
• PSUs were envisioned as the revenue generators
for the development of the social sector
Emphasis on Public Sector
• 5) Rise of the Private Sector:
• PSUs were to provide base (basic industries) for
Private sector industries to grow and develop
• 6) PSUs were aimed at other connected areas of
developmental concerns, such as, self-sufficiency
in production, balanced regional development,
spread of small and ancillary industries, low and
stable prices, and long-term equilibrium in
balance of payment
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