Economics notes

02 September 2023 18:41

India during pre colonial period

1. Stable economy, self sufficient agriculture and flourishing trade and rich handicrafts.
Agriculture
1. Limited trade in agriculture
2. The farmer raised only those crops which he needed for his own use and shared the same with the village artisan who
supplied him with simple manufacture that he needed for his domestic consumption.
3. . The farmer usually raised enough produce to feed himself and the non-agricultural members of the village community. If his
crop yielded more than the consumption needs, due to favourable climatic conditions, he stored that surplus for use in the
lean years. Storage of food grains was a common practice among the pre-colonial agriculturists and constituted, under these
conditions, the only remedy against famines.
4. This pattern continued till 18th century and then village communities began to breakup under pressure of new economic
practices imparted because of two reasons change in the property relations and development of active export trade.
Trade
1. Even after being a self sufficient economy and means of communication was primitive indian economy maintained a balance
of trade, items imported to india were pearls, wools, dates and dried fruits and rosewater coffee gold drugs honey from arabia
and sugar silk from china and copper iron lead and paper from europe the main item exported raw silk indigo cotton rice
wheat sugar and dairy products.
2. Major feature of indian economy during pre colonial india was
1. a favourable balance of trade of imports and exports, a fav balance of trade means exports over imports india exported
more than it imported since india was a self sufficient economy it was based on handicrafts and agriculture india did not need
foreign imports on a large scale and continued to enjoy healthy trade and india exported the items it specialized in imported
the items it needed.

Handicrafts
1. . Indian artisans were famous for their skills the world over. In fact the reason for India's favourable foreign trade was its
excellence in indigenous production.

2. . India indulged in a large scale manufacture of cotton and silk fabrics, sugar, jute, dyestuffs, mineral and metallic products like
arms, metalwares and oil. Towns like Dacca and Mmhidabad in Bengal; Patna in Bihar; Surat and Ahmedabad in Gujarat;
Jaunpur, Varanasi, Lucknow and Agra in U.P.; Multan and Lahore in the Punjab; Masulipatnam and Visakhapatnam in Andhra;
Bangalore in h4ysore and Coimbatore and Madurai in Madras were flourishing centres of textile industry. Kashmir specialized
in woollen manufactures. Maharashtra, Andhra and Bengal were prominent centres of ship building industry. India's ships
were bought by many European companies for India towards the end of the 18th century was. undoubtedly one of the main
centres of world trade and industry

Overview of colonial rule in india

Western view point

1. Sharp difference between the indian view point and western view point in evaluation of impact of british in india
2. the British rule provided political unity and stability of governance to India. It has been maintained by the Western scholars
that the British rescued India from chaos and provided political stability
3. Indian political unity was a myth due to which india had very low levels of commerce and capital accumulation
4. Very low level of agricultural productivity because lack of technology and the absence of any worthwhile technology kept a
large portion of india as virgin land, potato, tobacco and peanut was introduced by british india.
5. India could not claim any great achievements in manufacturing because it lacked technology. Although India had some
excellent craftsmen and produced textiles and a few other manufactured goods but they were the result of hard work and not
of any developed technology
6. On the basis of such evidence, Morris D. Morris observes that: ". . .. The Indian subcontinent was a region in which per capita
income was relatively low in the centuries before 1800. Given the lack of political stability, low agricultural and non-
agricultural productivity, and insignificant commerce no other conclusion is supportable".
7. Society more developed benefits the less developed
The British provided political unity and stability to India. The British developed a system of roads and rail transport which had
a positive impact on the economic development of India. The British developed irrigation and other public works which
facilitated th growth of agriculture, commerce and manufacturing activities in India.

Indian point of view

Quick Notes Page 1

1. The drain theory, as formulated by the nationalists, referred to the process by which, a significant part of India's national
wealth, was being exported to England for which India got no economic returns.
2. This drained happened In form of salaries to british officer and home charges and profits made on british capital in india and
remittance.
3. Heavy taxation and unfavourable trade practices.
4. British made textile products greatly harmed the indigenous industries of india, british imports in india grew at a large scale
and captured the clothing market of india as they were cheap because heavy taxes were imposed on indian industries.
• After the Charter Act of 1813, which allowed one-way free trade for British citizens,
cheap and machine-made imports flooded the Indian market.
• The newly established rail network aided European products in reaching the most
remote parts of the country. India went from being a net exporter to a net importer.
• The Indian market was inundated with low-cost British-made clothing.
• After 1820, Indian exports were virtually barred from European markets.
• Tariffs of nearly 80% were imposed on Indian textiles, making Indian cloth no longer
affordable.
• On the other hand, Indian products found it increasingly difficult to enter European
markets.
From <https://prepp.in/news/e-492-deindustrialisation-of-colonial-india-modern-india-history-notes#Features>

5. Ruralisation
1. Many artisans abandoned there profession and moved to villages and took agriculture as a result there was more pressure on
land
• During British rule, an overburdened agriculture sector was a major source of
poverty, upsetting the village's economic structure.
From <https://prepp.in/news/e-492-deindustrialisation-of-colonial-india-modern-india-history-notes#Features>

tariffs of nearly 80 percent were imposed on Indian textiles so that Indian cloth could no longer be cheap. After 1820,
European markets were virtually closed to Indian exports.

From <https://prepp.in/news/e-492-deindustrialisation-of-colonial-india-modern-india-history-notes#Features>

2. Deindustralisation
State of agriculture and land relations during british empire.

1. Permanent settlement of lord cornwallis in 1793 for bengal, orrisa and later extend to part of madras, the act created a class
of zamindars who used to collect taxes from the peasant they became a intermediary between the landlords and the rulers.
• Under the Zamindari system, the land revenue was collected from the farmers by the
intermediaries known as Zamindars.
• The share of the government in the total land revenue collected by the zamindars was
kept at 10/11th, and the remainder going to zamindars.

From <https://www.drishtiias.com/to-the-points/paper1/land-revenue-systems-in-british-india>
• The Zamindars had to issue written agreements called Patta to each cultivator which should
specify the amount the tenant had to pay.

From <https://pwonlyias.com/upsc-notes/permanent-settlement-system-1793/>

• Unreasonable assessment: The land revenue was fixed arbitrarily. The unproductive and
productive both sets of lands were taxed heavily and equally.
• Oppression of tenants: British fixed a high rate of revenue for lands. Such oppressive taxes
made zamindars resort to oppressive methods of collection. Thus Zamindars often resorted to
illegal methods to extract taxes from tenants.
• Absentee Landlordism: The wealthy Zamindars mostly lived in the cities and collected
revenue through armed local men called Lathiyals. They were interested only in maximization
of revenue and did nothing to improve the productivity of the land.

Quick Notes Page 2

 of revenue and did nothing to improve the productivity of the land.
From <https://pwonlyias.com/upsc-notes/permanent-settlement-system-1793/>

2. Royatwari system

It was developed by Captain Alexander Read and Sir Thomas Munro

From <https://pwonlyias.com/upsc-notes/ryotwari-system-1820/>

• nder Ryotwari System a direct settlement was made between the government and the
individual cultivator called Ryot for payment of land revenue.
• Unlike the Permanent Settlement system, the Peasants were established as the land owners.
They had full rights regarding the sale, transfer, and mortgage of land.
• This system was implemented in Madras, Bombay, Assam, and Coorg provinces. It roughly
covered 51% of the British territory.
• The revenue was fixed based on the quality of the soil and the nature of the crop for a
period not exceeding more than 30 years.
• The peasant can not be evicted from the land so long as he pays his share of revenue to the
government.
From <https://pwonlyias.com/upsc-notes/ryotwari-system-1820/>

• DEFaulty Assessment: The revenue was not based on the actual production on the land but
based on the soil’s potential.
• High tax rate: The government charged high taxes up to 50%-55% of the produce. This left
peasants with a meagre amount for survival.
• Peasant’s Exploitation: The cultivators borrowed from local moneylenders or Mahajans to
pay the state share in case of low yield. The moneylenders exploited peasants and evicted
them from land in case of default in repayment.

From <https://pwonlyias.com/upsc-notes/ryotwari-system-1820/>
Commercialisation of agriculture
1. The new land relations brought a significant change in the agriculture, there was commercialisation of agriculture which
means the agriculture produce was oriented towards market, agriculture became a marketable commodity during the british
era.
2. . rapid development of railway network the length of railways network increased from 288 miles to 30567 miles in between
1857 to 1908. the expansion facilitated the commercialisation of agriculture
3. Opening up of suez canal in 1879 provided a short route between india and england and brought both countries together for
easy trade.
4. Certain tech innovations in england replaced the sailing vessels with modern steam ships which reduced the cost of
transportation and stimulated the growth of exports from india to england.
5. The Civil war in North America diverted, for the time being, the British demand for raw cotton from the United States to India.
Consequently there was a sudden increase in the export of raw cotton from India after 1862. From 5.6 crore in 1859-60, it rose
to 37.5 crore in 1864-65.
6. The result of all this was a phenomenal increase in the export of agricultural goods from India. The total value of export went
up by more than five hundred per cent from 1859-60 to 1906-07.
Impact of commercialisation
1. Scarcity of food this happened because the increasing demand for cash crops like raw cotton, jute, indigo and opium etc, was
met by substitution of commercial crops for traditional crops this was done to increase the profit.
2. It was reported that one major cause of the famine of 1866 in Bengal and Orissa was that the best land was cultivating indigo
instead of rice.
3. Small section of farmers who had resources and the required land shifted to cultivation of cash crops whereas poor farmers
were dependent on market for there requirements of food and suffered great loss.
4. There were aspects too, the villages lost its isolation and got linked with the world market but indian agriculture failed to take
full advantage of commercialisation of agriculture because of constraint imposed by colonialism.
5. To sum up the commercialisation of agriculture and land reform policy created a stagnant agriculture and indebted peasantry
and large number of landless labours and death through malnutrition epidemic and famine.
6. The sole perspective of britishers was to maximise the land revenue whether peasantry could pay it or not Thus revenue
collections went up, the prices of foodgrain declined, the rural indebtedness increased and the rural economy was depressed.

Indian economy at the time of independence

Quick Notes Page 3

 Indian economy at the time of independence
1. Underdeveloped economy
- Low per capita income, rs 230 people were poor not able to able 2 meals for the day
- No shelter or clothing large scale unemployment among working population.
- Theeconomywasalsohavingpoorinfrastructure.Infrastructuraldevelopmentwhichcomprisedofcommunicationandtransportande
lectricityetc.wasverypoor
- Power generation capacity 2100 MW, Length of railways 53596 kms
- Heavily dependent on imports goods like sweing machine, medicines oil and bicycles were imported.
- Widespread poverty in the country illiteracy was both cause and effect of poverty
- Due to illiteracy people were unable to adapt new technology in agriculture which reduced the aspect of potential growth.
- The vicious circle of poverty was incidental leading to underdevelopment in the country.
- Due to this viscous circle of poverty it resulted in low supply and low demand because of low income low savings and low
investments.
- Level of capital formation was very low
2. Backward economy
- Level of economic development was very low
- Majority of population was living in rural areas where there was no prospects of growth
- High birth and high death rates
- Level of literacy was very low
- Population was low but standard of living was also very low
- Agriculture was the main source of employment and which was overburdened due to the abolition of handicrafts industries
and was backwards in terms of technology
- India was made the exporter of the raw material and consumer for the finished goods.
- Level of urbanisation was very low and lacked health and medical facilities.
3. Stagnant economy
- Growth rate around 1% per anum
- Per capita output around less than half percent.
- Causes of stagnation
-neglect of irrigation
- Destruction of cottage and handicraft and economic drainage and discriminatory tariff policy
- Economic drainage resulted in no capital formation resulting stagnation of national and per capita income.
- The high population growth rate made it difficult to maintain even the proposed growth rate.
4. Agricultural economy
5. Semi feudal economy
- Explain first destruction of handicraft and indigenous industries
- Bonded labour force prevalent in agriculture
- Feudal relations were prevailing among the britishers and cultivators
- Explain zamindari and ryotwari, malhari were village community was responsible
6. Tradition and subsistence economy
- Indian economy was a traditional and rural economy at the time of independence.
- Major population lived in villages or In rural areas
- Rural economy was a subsistence economy
- Even after the introduction of commercialisation of agriculture large portion of agricultural production was still non
commercialised.
- There was limited trade in agriculture even within the country
- Even though some commercial crops were exported to england but it was limited to some area only the majority part of rural
area practiced barter exchange and payment of land revenue was majorly made in kind rather than cash.
- Majority of villages were independent and were not dependent on trade for getting consumer goods could arrange from local
agriculture.
- Method of production used for cultivation was primitive and traditional practices
7. Amputated economy
- The policy of british of divide and rule always promoted discrimination among various groups on the basis of caste, religion,
race etc which ultimately resulted in the patriation.
- And areas producing agricultural surplus went to pakistan
- Textile industry remained in india
- Besides that the powerhouse of raw material was bangladesh for various cotton jute textile.
- Therefore the political partition made the country amputated.
8. Dependent colony
- Use of india as colony
- Source of raw material and market for finished goods
- Both india as well as british government were dependent on each other for their survival.
- Immediate discontinuation of relations among them could leave india without income and consumer it used to consume.
9. Depreciated economy
- Extensive use of factor of production leads to wear and tear.
- If not replaced then stock of gross capital declines.

Quick Notes Page 4

 - If not replaced then stock of gross capital declines.
- After world war 2, india supplied
Indianeconomyalsoturnedintodepreciatedeconomy.IndianinfrastructurewaslargelyusedtosupplylargequantityofgoodstoBritish
ersduringthewartime.Indiawaspaidforitintermsofsterling.Butduetolackofrealcapital,therewasnoreplacementofthedepreciatedc
apitalstockanditsproductioncapacitydeclined.AtthetimewhenIndiabecameindependent,thekindofinfrastructureithas,requiredh
eavyinvestmentstobeabletousedforproductiveusesandeconomicdevelopmentofthe nation.

Policy regime topic

1. 2 phases in india's development history
2. The period of 30 years from 1950 to 1980 was phase of social experimentation in which indian version of socialism was
developed.
3. The second phase of economic development started at the beginning of the eighties (1980-81) and continues till today. This
was the phase of “Market experimentation,” in which the oppressive control regime set up during the first phase was
modified and physical controls gradually removed
4. The industrial policy resolution of 1948 introduced basic frame work for the evolution and development of indian version of
socialism.
5. It divided the the industrial sector in 4 catogories
- State Monopoly (3: Defence, atomic energy, railway).
- (2) Mixed sector (6: Aircraft, Ship building, Telecom equipment, Mineral oil, coal, iron),
- (3) Govt control (18 industries)
- (4) Private enterprise.
6. It also elaborated the objective of developing heavy industries and machine building sector, re-emphasised the objective of
expanding the public sector and heling the small and cottage industries.
7. The industrial resolution of 1956 reduced it into 3 sectors
- State monopoly
- Mixed sector
- Private enterprise
8. The expansion of state role took place through multiple channels including nationalisation of industries and financial
institution
9. The phase of indian socialism can be divided into 2 phases
- Commanding heights during this phase the public government sector occupying the commanding heights was implemented
and this helped in eliminating the monopolies from various sectors.
- This policy approach for the first time was outlined in industrial resolution of 1948 and got legal backing from industrial
development and regulation act of 1952, the level of control over the industries was ambitious which required with every
industry required to obtain a license (from 1953) for any investment above Rs. 1 lakh. Licensing of all industries was, however,
soon found to be administratively infeasible and licensing restricted to those industries employing 50 (100) or more people
with (without) power. The exemption limit was also raised to Rs. 10 lakh in 1960 and further to Rs. 25 lakh in 1963.
- Besides the state monopolies in defence, railway and air transport public monopolies were created in power,
telecommunication, aircraft and ship building.
- Government industries were created in 12 other industries.
- Public vs private
- Many labour law were enacted Industrial Disputes Act 1947 (covering all ‘workers’ with salary up to Rs. 500 per month &
dealing with disputes, strikes & lock outs and retrenchment), The Minimum Wages Act, 1948 (govt prescription of minimum
wages), the Employee Sate Insurance Act, 1948 (injuries, medical requirements) and the Employees Provident Fund Act, 1952
(retirement benefits)
- Result the economic growth was impressive as compared to the colonial past, growth accelerated sharply from pre
independence level to an average of 4.5, indian economy was ranked at 39 out of 74 countries, average income grew by 2%
per year, 52% population was below poverty line, total factor productivity grew by 1.6, investment grew by 7.9.
- The growth of Government consumption at 6.6% also far exceeded economic growth. In contrast the growth rate of private
consumption was a very modest 3.7% per annum a rate slower than that of GDP growth.
Legislative and bureaucratic socialism
1. After the commanding heights the government focused on controlling organised and modern private sectors even in the areas
where it had been allowed to compete.
2. Many fast growing economy like taiwan china korea had a large public sector including government owned banks but no one
interfered with the growth and initiatives of pvt sector the way india did.
3. Another failure was to ignore that it was time to isi to export promotion.
4. Monopolies and restrictive practice act 1969 was introduced to control family owned large industrial houses
5. The nationalisation of 14 banks was followed by nationalisation of general insurance which was the investment source for the
private sector
6. The copper industry coal mines were for the first time nationalised in the 1971 to 1973
7. The foregin regulation act was introduced to control the equity of foreign investors in private sector investment in india
8. The climate for private investment detoriated during the sub phase because of tightening of labour laws in india
9. The was decline in the total factor productivity from 1.6
10. he massive expansion of public investment, though it did build needed infrastructure, was seldom based on allocating
resources where the highest social return was to be found. Further, public monopolies, once built by the government, had

Quick Notes Page 5

 resources where the highest social return was to be found. Further, public monopolies, once built by the government, had
little incentive to behave better than any private monopoly
11. This lead to affecting the efficiency of

Experiment in market reforms

1. This policy phase had 2 points
- The move from import substituting industrialisation to export promotion
- The restoration of freedom to compete followed by moves to restore competetion in different sectors and markets
2. The process of industrial and import-export de-control and easing of investment restrictions started during this phase.
3. There was liberalisation on prices production and distribution and investment
4. The overall effect of these reforms was to greatly increase the degree of domestic competition in the economy
5. Other domestic reforms included a reduction in corporate income, personal income and wealth tax rates and on Estate duty
(inheritance tax)
Imports substitution to export promotion
- A substantial increase in the availability of imported inputs and capital goods through special scheme Among these were,
Advance Licence (AL), Intermediate Advance Licence, Special Import License (SIL), Import Export Pass book scheme, Export
Promotion Capital Goods Scheme (EPCG) and Tradable Replenishment (REP) Licenses
- A reduction in tariffs on imported inputs & capital goods through duty free imports of the former and reduced duty import of
the latter
- Neutralisation of domestic input taxes (e.g. excise) and availability of domestic raw materials at world prices
- More export promotion zones (EPZs), which had simpler administrative procedures for duty free import. (f) Special credit
facilities & lower interest rates on pre and post-shipment credit. (g) Reduced taxes on profits from exports of goods and
services (professionals)
- The restricted list of imports, which contained intermediate goods that were produced in insufficient quantity to meet
domestic demand was also gradually expanded and made more flexible
- adjusted per capita GDP growth rate increased by 2.2% points, from 1.1% per year

Quick Notes Page 6