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UMA KAPILA
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Indian Economy at Independence

The Colonial Regime

The pre-Indepe ndence period was a period of near-stagn ation for
the Indian economy. At the time of Independen ce, Indian economy was
caught up in a vicious circle of poverty characteris ed by one of the lowest
per capita consumpti on and income levels among the countries of the
world. Low income levels resulted in low levels of saving and capital
formation and therefore, low productivit y and low level of income and
this vicious circle perpetuate d poverty in the country. Further, the size
of the market being limited because of low incomes, entreprene urs
had little incentive for making investmen ts in diversified fields and
therefore, the productivit y in the economy continued to be low thereby
perpetuatin g low incomes and mass poverty.
Judged in terms of per capita incomes and standard of well-being,
the Indian economy remained more or less stagnant during the colonial
regime. Quoting from the First Five Year Plan document: "This is primarily
because the basic conditions under which an economy can continuously
·expand have been lacking. The impact of modern industrialis m in the
latter half of the 19th century was felt in this country initially through
imports of machine-m ade goods from abroad which reacted adversely
on the traditional pattern of economic life, but did not create the
impulse for developme nt along new lines. The transition that followed
was characteris ed not by expansion of industry and a diversification of
the economic structure but by a decay of India's traditional arts, crafts
and industries and by an increasing pressure of population on land.
This retrogressio n led to a decline in productivit y per person engaged in
agriculture, the adverse effects of which were perhaps softened to some
extent by the shock absorbing capacity of the old institution of the joint
 INDIAN ECONOMY SINCE INDEPEN DEN CE • UM A
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family. The ~esult was a continuo us i~crease in u~der-em ploymen t. In

such an enVIron ment there could be little economIC or social progress
Whateve r surpluse s might have been available in the system under thes~
conditio ns were directed to the purchase of imports, partly of better
finished products from abroad and partly of equipme nt for the new
transpor tation system designed primaril y in the interests of foreign
commerc e. The responsi bility for promoti ng modern commerc e and
industry came to be concentr ated in the hands of certain classes in the
urban areas, and up to the end of the nineteen th century the only major
large-scale industrie s which had taken root in the country were textiles.
Little attention was paid to improve ment of agricultu re or to the needs of
the rural areas." (First Five Year Plan, p. 28)

The India of 1947

Indian economy at the time of Independ ence was overwhelmingly
rural and agricult ural in characte r with nearly 85 per cent of the
populat ion living in villages and deriving their livelihoo d from
agricultu ral and related pursuits using tradition al, low productivity
techniqu es. The backwar dness of Indian econom y is reflected in
its unbalan ced occupati onal structur e with 70 per cent of working
populati on engaged in agricultu re. Even with this large proportio n of
populati on engaged in agricultu re, the country was not self-sufficient
in food and raw material s for industry. The average availability of food
was not only deficient in quantity and quality but also precarious as
exhibited in recurren t famines. Illiteracy was as high as 84 per cent;
majority of children (60 per cent) in the 6-11 age group did not attend
school. Mass commun icable diseases were widespre ad and in the absence
of a good public health service, mortalit y rates were very high (27 per
thousand ). An average Indian born between 1940 and 1951 could expect
to live for barely 32 years. Epidemics and diseases like small pox, plague,
cholera, malaria and other fevers carried away millions every year. Thus,
the economy was faced with the problem s of mass poverty, ignorance
and diseases which were aggrava ted by the unequal distribut ion of
resources between groups and regions.
The India of 1947, under British rule, showed all the signs of what is
today called an underdev eloped country.
The low degree of economi c developm ent can be judged from t~e
relative importan ce of various industri al activitie s in terms of their
!NDIAN ECONOMY AT INDEPENDE NCE • UMA KAPILA
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contribu tion to national income and the workforc e engaged in these

activities (Table 1.1).

Table 1.1
Distribution of National Income and Workforce Sectorwise

(Per cent)

Sector National Income Workforce

(1948-49) (1950-51)

1. Agriculture, animal husbandary ,

forestry, fisheries 49.1 72.3
2 Mines, manufactur ing
industries, small enterprises 17.1 10.7
3. Trade, transport and
communica tions 18.5 7.7

4. Other services, professions ,

administrat ion, domestic services 15.7 9.3
Total 100.0 100.0

Source: Bettlehem Charles, India Independent (p. 2).

As can be seen, agricultu ral activities contribu ted nearly 50 per

cent to India's national income. Mines, factories and small craftsmen 's
work contribut ed only one-sixth , even lower than the figure for trade,
transport and communi cations, and hardly greater than that for other
services.
Regardin g the occupatio nal distribut ion, 72 per cent of the total
working force was occupied in agricultur e. Less than 11 per cent of the
working force was employed in all the forms of industry, whereas the
organised industrie s employe d only about 2 per cent, a figure lower
than the number of administ rative workers (2.7 per cent). Less than 8
per cent was employed in trade and transport s, less than 10 per cent in
other services. These statistics speak for low level of industrial isation.

The Agrarian Scene

Stagnating Agriculture
Colonialism became a fetter on India's agricultu ral and industria l
developm ent. Agricultu re stagnate d and even deteriora ted over the
years, especially during the first half of the 20th century when the full
 --
INDIAN ECONO MY SIN CE I ND EPENDE NCE __ IJ~A KAPILA <E!J J
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impac t of colon ialism began to be felt. Per capita agricu ltural production
declin ed at a rate of 0.72 per cent per year durin g 1911 -1941 (Blyn,
1966) . The situat ion was worse insofa r as per capita foodgrain output
was concerned: durin g the same perio d, it declin ed by 29 per cent, i.e.,
at a rate of 1.14 per cent per year. Even thoug h the per capita non-
foodg rain outpu t grew by 14 per cent, it failed to make up for the decline
in foodg rain outpu t (Blyn, 1966) .
What ever the absol ute grow th in agricu ltural outpu t, it occurred
mainl y becau se of the increa se in crop-acrea ge. The rate of increase in all-
crop yield per acre was near- zero durin g 1911- 1941. While all-crop and
food grain yields declin ed by 0.02 and 0.44 per cent per year, non-food
grain yield went up by 1.15 per cent per year (Blyn, 1966) . The increase
in yield of non-f ood grains was basically at the cost of food grain yields,
as cultiv ators shifte d bette r and irriga ted land and capita l resources to
commercial crops in order to earn cash.

Causes
(i) Regressive Agrar ian Struc ture: The stagn ation in agricu lture is
basically expla ined by the fact that colon ialism trans forme d the agrarian
struc ture in India and made it extre mely regre ssive. As is well-known,
the zamin dars in zami ndari areas failed to inves t in land and relied
on rack-r enting , while the peasa nt propr ietors fell into the clutches of
the mone ylend ers and lost contr ol over their lands . Sub-i nfeud ation,
tenan cy and share cropp ing increa singly domi nated both the zamindari
and ryotw ari areas. 1
(ii) Intern al Drain of Capital: Furth er Agric ultura l su rplus es were
sipho ned from agricu lture witho ut any quid pro quo, there by subjecting
it to an inter nal drain of capit al. Thro ugho ut the 1 8th and 19th
centu ries, high land reven ue dema nd ate into the peasa nt's surplu s and
even his subsis tence . But the gover nmen t spent very little on improving
agricu lture as was done, for instan ce, in Japan . The landl ords, old or new,
took no intere st in agricu lture beyon d collec ting rent. They found rack-

1. By 1947, nearly 70 per cent of the total cultivat ed land in British

India was owned by
Famine Inquiry
zamindars and landlords. According to Nanavati ("Minu te of Dissent ·, in the
ri areas between
Commission- Final Report, Govern ment of India, Calcutta, 1945), in ryotwa
3 o to SO per cent of the land was in the hands of the landlords and most of the rest was
ed of peasant
heavily under debt. In 1951, 27.8 per cent of rural agricultural families consist
ing families .
proprietors while tenants , sharecroppers and laboure rs made up the remain
(Chandra, Bipan, 1979).
INDIAN ECONOMY AT INDEPEN DENCE • UMA KAPILA
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rent and usury far more profita ble than making produc tive investm ent
in land. The money lenders and mercha nts used their increas ing share of
agricultural surplus to intensi fy usury or to take possess ion of land to
become landlor ds.
(iii) Poor Technology: Anothe r reason for the stagna tion of produc tivity
in agriculture was the near absenc e of change in its technol ogical basis
or its produc tive techniq ue and inputs. As Blyn points out, the type of
equipm ent used change d very little till 1941. Moder n machin ery was
conspicuous by its absenc e. Improv ed seeds covered about 1.9 per cent
of all crop-acreage in 1922-2 3 and 11.1 per cent in 1938-3 9, these being
·largely confine d to non-fo od cash crops.
It is also to be noted that comme rcialisa tion did not change the unit
or organis ation of produc tive activity (e.g. capital ist farming ) or lead to
improv ed techno logy-o nly better soil and available water and other
resources were diverte d from food crops to commercial crops.

The State of Indian Industry and its Structure

Anothe r aspect of India's econom ic backwa rdness was the state of
its industr y in spite of her vast industr ial resourc es. India's iron ore
deposit s estima ted at 21 thousa nd million are a quarte r of the total
world deposit s, manga nese deposit s are the third largest in the world.
India also posses ses deposi ts of chromi um, gold, bauxite and various
non-fe rrous metals , which are impor tant raw materi als for atomic
industries. Finally, gypsum also exists, as does mica, the latter deposit
being one of the largest in the world. India is equally rich in her energy
potential. India's resourc es as a whole would give her a leading positio n
in world industr y, in particu lar the steel and engine ering industr ies and
the chemical industr ies based on coal (Bettle heim, 1968).
Given this potent ial, we may now examin e the state of India's
industrial develo pment immed iately after Indepe ndence .
India's industr ial situatio n in 1948 was the result of a long period of
change in which modern industr y replace d the traditio nal crafts.
Foreign trade statisti cs best show the effects of 'deindu strialis ation'.
India, still an export er of manuf acture d produc ts at the end of the
l8th century, become s an import er. From 1815 to 1832, India's cotton
exports droppe d by 92 per cent. In 1850, India was buying one quarter
of Britain's cotton exports . All industr ial produc ts shared this fate.
 INDIAN ECONOMY S I NCE I NDEPENDENCE • UMA KAPILA (ED
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The ruin of the traditional trades and crafts was the result of the
British commercial policy. Restrictions were imposed upon Indians
exporting to the West, while favours were granted to British exporters,
who flooded the Indian markets.
Modern industries began to develop during the second half of the
19th century but their progress was exceedingly slow and stunted. Up to
the very end of the colonial period, the level of industry and technology
remained low. During the 19th century, industrial development
was confined to cotton and jute textiles. The iron and steel industry
developed after 1907 while the sugar, cement and paper industries and a
few engineering firms came up in the 1930s.
Still, as late as 1946, cotton and jute textiles accounted for nearly 30
per cent of all workers employed in factories (Kumar, 1984).
According to the Census of Manufacturing in 1951, which covered
the larger enterprises, of the total value added in manufacturing, 56.8
per cent originated in cotton and jute textiles, 6.6 in sugar, 8.4 in
engineering, 7.6 in steel, 4.1 in chemicals and 2.1 in cement.
Consequently, even though modern industry developed quite fast
after 1918-its rate of growth being 3.8 per cent per annum-it had
little impact on the overall economic situation for its share in the
national income at the end of British rule at 7.5 per cent was quite
insignificant. In 1913, it was 3.8 per cent (CEHI, 1984) . Modern
industry perhaps barely compensated for the displacement of traditional
handicrafts (Chaudhuri, 1979).
In 1951, only about 2.3 per cent of the labour force was employed in
modern industries. According to the Planning Commission, the number
of persons engaged in processing and manufacturing (including artisanal
industries) fell from 10.3 million in 1901 to 8.8 million in 1951, even
though the population increased by nearly 40 per cent. Moreover, in
1951, of the total industrial output, at least 60 per cent was by the
unorganised, small enterprises (Jalan, 1972).
An important index of India's industrial backwardness was the
virtual absence of capital goods and machine industries. In 1950, India
met 90 per cent of its needs of machine tools through imports. Lopsided
industrial development was yet another striking feature. Industries
were concentrated only in a few regions and cities of the country
resulting in wide regional disparities in income. But there were some
major changes in the Indian economy especially during the thirties and
INDIAN ECONOMY AT INDEPENDE N CE • UMA KAPJLA
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forties that did impart a certain strength to it and provided a basis for
post-inde pendence economi c developm ent. One positive feature was the
growth of the means of transpor t and commun ication. The developm ent
of roads and railways unified the country and made rapid transit of
goods and persons possible. However in the absence of a simultan eous
industri al revoluti on only a commer cial revoluti on was produce d
which further colonise d the Indian economy -railway lines being laid
primarily to link India's inland raw material producin g areas with the
ports for exports and to send imported manufac tures from the ports to
the interior. Another positive feature was the developm ent of the small
but Indian owned industria l base consistin g of several consume r goods
industrie s such as cotton, jute textiles, sugar, soap, paper and matches.
There was also after 1914, rise of a strong indigene ous capitalis t class
with an indepen dent economi c and financial base. However , these
positive features of Indian economy have to be seen in a wider historial
context. The developm ent of Indian industry and capitalis m was still
relatively stunted and severly limited occurring within the framewo rk
of a colonial economy . This industria lisation took place without India
undergoi ng an industria l revolutio n as Britain did.
Similarly , modern banking and insuranc e were grossly under-
developed. In 1946, class A and B banks had 4,644 offices or one office
for 90,000 inhabita nts. Underde veloped banking and insuranc e meant
that the Indian entrepre neurs could not mobilise the available capital.
Also, British-c ontrolled banks starved Indian industry of funds and
favoured British-o wned and controlle d enterpris es.
The growth of foreign trade and the rapid construc tion of railways
which could have been the positive factors, unfortun ately became
instrume nts for the underdev elopmen t of the Indian economy. Under
conditio ns of free trade, imports displace d indigeno us handicra fts
and artisanal industrie s and prevente d the rise of new industrie s. In
the absence of a simultan eous industria l revolutio n, railways had only
introduce d a commerc ial revolutio n and further colonialised the Indian
economy. The layout of railway lines and the railway freight rates policy
promote d the export of raw material s and distribut ion of imported
goods for they encourag ed traffic with ports as against traffic between
inland centres. The railways also did not have any forward or backwa~d
I'inka ges. They had encourag ed the steel and mach"1ne in · d us try' not m
. . They had serve d as a sooa
· Bnta1n.
Ind·1a b ut 1n · 1 overhead not for Indian
 INDIAN ECONOM Y SINCE INDEPE NDENCE • UMA KAPILA (ED)
. . ' . .... .. . . . .
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40 · ·· ·· ·· ····

but British indust ry and their extern al econo mies were expor ted back to
Britain .
Till the late 1930s , foreig n capita l domin ated the indust rial and
financial fields and contro lled the foreig n trade netwo rk as also part of
the intern al trade that fed into expor ts.
It is impo rtant to keep in view, in this respe ct, that foreign
invest ment rarely marke d a transf er of capita l to India from abroad. It
was far less than the unilat eral transf er of capita l or the 'drain' from
India. Three other charac teristi cs of foreig n invest ment were import ant.
(i) It contri buted to 'the guide d under d evelop ment' of India by
conce ntratin g on the produ ction and expor t of raw materials
and foodstuff.
(ii) It went into sector s which catere d to foreig n marke ts and not to
India's home marke t.
(iii) "The multip lier effects in terms of income, emplo yment , capital,
techni cal knowl edge, and growt h of extern al econo mies of
these invest ments were largely expor ted back to the developed
countries." (Jalan , 1992) .
We may sum up India's econo mic profile at the time of Independence
as: stagna ting per capita nation al incom e, abysm al standa rd of living,
stunte d indus trial devel opme nt and the bulk of the popul ation
depen dent on stagna ting, low-p roduc tivity semi- feuda l agricu lture
(Jalan , 1992) .
The end result of coloni al under develo pment was the pauperisation
of the people especi ally the peasa ntry and the small artisan . Extreme
povert y, diseas e, hunge r and starva tion were the lot of the ordinary
people. The freque nt famin es in some part or the other in the country
was the order of the day. The last major famin e in 1943 carrie d away
nearly 3 millio n people in Bengal.
When India attain ed its indep enden ce in 194 7 , many sceptics
doubt ed that such a count ry marke d by crushi ng povert y, bewildering
divers ities and weak institu tions could long endur e. Much before the
British Raj ended in the subco ntinen t, Winst on Churc hill had remarked
~hat India was little other than an "abstr action ... a geogr aphical term- It
is no more a united nation than the Equat or" (Tellis, 2014: 3).
India:s first prime minist er, Jawah arlal Nehru and m any others in
the _P 0st-1ndepe ndenc e leader ship
deeply believ ed that the combination
of libera l democ racy, civic nation alism and social ist econo mics was
INDIAN ECONOMY AT INDEPENDENCE • UMA KAPlLA
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essential to successfully building a modern Indian state. Given this

belief, the Indian constitution oriented the formal democratic process
towards more substantive aims: "to create social, economic and political
institutions which will ensure justice and fullness of life to every man and
woman", as Nehru framed it in his immortal "Tryst with destiny" mid-
night address on the eve of India's independence (Ibid.: 5). The Indian
constitution's preamble aimed "to secure to all its citizens JUSTICE ,
social, economic and political; LIBERTY of thought, expression , belief,
faith and worship; EQUALITY of status and of opportunity and to
promote among them all, FRATERNITY assuring the dignity of the
individual, and the unity and integrity of the Nation" (Ibid.: 8).
Immediately after the attainment of Independence, Government's
main concern in economic policy was to control persistent and severe
inflationary pressures and to alleviate shortages of essential food items
which had been aggravated by the partition of the country in 194 7. The
Industrial Policy Resolution of 1948 marked a fundamental departure
from the earlier policy of laissez-faire. According to the new Policy
Resolution, the government was to have a major role in initiating and
regulating development in one of the key sectors of the economy. The
Directive Principles of State Policy, incorporated in the Constitution,
defined the broad objectives of socio-economic policy. They mentioned
the right of citizens to an adequate means of livelihood, regulation
of ownership and control of the material resources of the country to
subserve the common good and the avoidance of concentration of
wealth and means of production. Finally, the concept of co-ordinated
planning of development programmes under the auspices of the Central
government, was accepted and the Planning Commission was set up in
March 1950 to make an assessment of the material, capital and human
resources of the country and to formulate a Plan for the most effective
and balanced utilisation of the country's resources.

The Planning Era

With the formulation of the First Five Year Plan, India embarked
upon the programme of planned economic development of the country.
The First Five Year Plan covered the period 1951-1956 followed by
th e Second Plan (1956-1961) and the Third Plan (1961-1966). After a
Plan Holiday following the severe impact of exogenous shocks such as
ho stilities with Pakistan and unprecedented drought for two successive
 1
I NDIAN ECON OMY
42 · ·· ······ . . . .. . . . . . . . . . . . . . . SIN. .CE INDEP EN DE NCE •
. . . . . . . .. . .. . .
UMA KAPILA (ED )
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year s 1965 -66 and 1966 -67, the coun try resu med the F~ur
th_ Plan in
1969 cove ring the perio d 1969 -197 4 . The n cam e the Fifth
Five Year
Plan (197 4-19 79) whic h did not com plete its five year s beca
use of the
chan ge of party in power. With the com ing into pow er of the
Jant a Party
Gov ernm ent, the Sixth Five Year Plan was laun ched in
1978 covering
the perio d 1978 -198 3. Again, with the chan ge in Gove rnm
ent in 1980,
the new Sixth Five Year Plan was start ed, cove ring the perio
d 1980 -198 5
and followed by the Seve nth Plan (198 5-19 90) which was
comp leted by
March-end, 1990 . The Eigh th Five Year Plan , to begi n from
April 1990
covering the perio d 1990 -199 5 coul d not be final ised an d
again , we had
two year s of annu al plan s. Afte r a gap of two year s, t he
Eigh th Plan
was laun ched in April 1992 , cove ring the perio d 1992 -1 997
followed by
the Nint h Plan in April 1997 (199 7 to 2002 ), the Tenth
Five Year Plan
(200 2-20 07), the Elev enth Five Year Plan (200 7-20 12) and
now we are in
the mids t the Twe lfth Five Year Plan laun ched in Apri l 2012
cove ring the
perio d 2012 to 2017 .

References
Bettlehei.m, Charles (1968). India Indep enden t, ch.3. pp.46 -47.
Blyn, G. (1966). Agricultural Trend s in India, 1891- 1947.
Philad elphia: Penns ylvania University
Press.
Cambridge Economic Histor y of India (CEHI) (1984). Volum
e 2, Dh anna Kuma r (ed.), Indian
Reprint. Delhi: Orien t Longman.
Chandra, Bipin (1979). Nationalism and Colonialism in Mode
m India. Delhi: Orien t Longman.
Chandra, Bipin, Mridula Muketjee and Aditya Muke rjee (1999
). India After Indep enden ce, Viking.
Chaud huri, P. (1979). The Indian Economy: Pover ty and Devel
House. opme nt. Delhi : Vik.as Publishing

Gover nmen t of India, Plann ing Comm ission, First Five Year
Plan (1951 -1956 ).
Jalan, Birnal (1992). The Indian Economy: Proble ms and Prosp ects.
New Delhi: Viking. p.8.
Tellis, ~hley J. <2014). · comp leting Unfin ished Busin ess:
From the Long View to the Short", in
Bibek Debray, Ashley J. Tellis and Reece Trevo r (eds.), Getting India
Agenda for Reform . Rando m House India. Back on Track: An Action