BCom Economic Trends in India Notes Study Material

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BCom Economic Trends in India Notes Study Material

INDIAN ECONOMY IN THE PRE-INDEPENDENCE PERIOD

The pre-independence period was a period of near-stagnation for the Indian economy. India was under British rule from 1757 after the British East India Company won the Plassey Battle till Aug. 14, 1947, i.e., for 190 years. This period was a period of exploitation of India in every possible way to protect and promote British trade and industry. During this period all economic policies were framed as to benefit British manufacturers by getting cheap Indian agricultural and industrial products like jute, cotton, coffee, tea, indigo, and rubber.

The British rule can be divided into two time slots first the rule of the East India Company ranging from 1757 to 1858, and second the rule of the British Government in India from 1858 to 1947. During this period England was passing through a period of changes in the techniques of production which revolutionized production. The coming of the industrial revolution which synchronized with the period of British conquest helped the British to sell machine-made goods in India in competition with Indian-made handicrafts.

The Britishers were not interested in developing India for Indian economic development. The growth of railways or the spread of irrigation or the expansion of education and the creation of revenue settlements were all initiated with one supreme goal, i.e., to accelerate the process of economic drain from India. (BCom Economic Trends in India Notes Study Material)

During the I and II Industrial revolutions, India was developed as a market for British manufactured goods. Till the First World War, British capital was invested in India in those sectors that they felt necessary for the growth of British industry and serve the interest of Britain to keep control of the Indian economy. With these objectives plantations, jute and cotton, mining, banking, and railways were developed.

Later on, investment was also made in the paper, match-box, and sugar mills were established as they were found highly profitable industries and also helped in maintaining rule over India. There was very little development of engineering industries, Tata Steels, however, was an important exception. (BCom Economic Trends in India Notes Study Material)

After the I world war, the British economic policy has been changed. The policy protection was half-hearted and was provided to only those goods, which are not imported from Britain. Still, through efforts of Indian capital and enterprise, a number of industries like textiles, steel, sugar, casting, and engineering were established in Western India like Bombay and Ahmedabad. The development of these industries greatly helped Britain in Second World War and more industries were provided protection and more British and European Capital was invested.

The British regulatory role was to extract maximum by way of levies, taxes, and war taxes to help Britain, but some promotional work has been done by way of protection in the first half of the 19th century, which helped the Industrialisation of India.

INDIAN ECONOMY AT INDEPENDENCE

Indian economy at the time of independence was overwhelmingly rural and agricultural in character with nearly 85 percent of the population living in villages and deriving their livelihood from agricultural and related pursuits using traditional, low productivity techniques. The backwardness of the Indian economy is reflected in its unbalanced occupational structure with 70 percent of the working population engaged in agriculture. Even with this large proportion of the population engaged in agriculture, the country was not self-sufficient in food and raw materials for industry. (BCom Economic Trends in India Notes Study Material)

The average availability of food was not only deficient in quantity and quality but also precarious as exhibited in recurrent famines. Illiteracy was as high as 84 percent majority of children (60%) in the 6-11 age group did not attend school. Mass communicable disease spread and in the absence of a good public health service, mortality rates were very high (27 per thousand). Thus the economy was faced with the problems of mass poverty, ignorance, and diseases which were aggravated by the unequal distribution of resources between different regions.

The British rule was a long story of the systematic exploitation by an imperialistic government of a people whom they had enslaved by their policy of divide and rule. The benefits of British rule were only incidental if any. The main motive of all British policies was to serve the interest of England. (BCom Economic Trends in India Notes Study Material)

It meant the modernization of various sectors like Steel, Engineering, Sugar, Textiles, etc. of the Indian economy which strengthened the process of integration of the Indian economy with British Capitalism. “It was, therefore, not an accident nor was it historically exceptional that India was integrated into world capitalism without enjoying any of the benefits of capitalism, without taking part in the industrial revolution. It was modernized and under-developed at the same time.”

Thus, in 1947 when the British transferred power to India, we inherited a crippled economy with stagnant agriculture and a peasantry steeped in poverty. As Jawaharlal Nehru put it: “India was under an industrial capitalist regime, but here economy was largely that of the pro-capitalist period, minus many of the wealth-producing elements of that pre-capitalist economy. She became a passive agent of modern industrial capitalism suffering all its ills and with hardly any of its advantages.”

Dadabhai Naoroji, a distinguished Indian economist, in his classic paper on the ‘Poverty of India’ (1876), emphasized that the drain of wealth and capital from the country which started after 1757 was responsible for the absence of development of India. According to Dadabhai Naoroji, “The drain consists of two elements—first, that arising from the remittances by European officials of their savings, and for their expenditure in England for their various wants both there and in India: from pensions and salaries paid in England; and second that arising from remittances by non-official Europeans.”

The economic drain of wealth prevented the process of capital creation in India but the British brought back the drained-out capital and set up Industrial concerns in India owned by British nationals. The government protected their interests and thus the British could secure almost a monopoly of all trade and principal industries. (BCom Economic Trends in India Notes Study Material)

Several estimates of national income were prepared in the British period J. R. Hichs, M. Mukherjee and S. K. Ghosh calculated the rates of growth of per capita income for the period 1860-1945 at 1970-71 prices. Their findings are as under:

No doubt the Indian economy during the British rule presents a picture of near-stagnation over a long period with a growth rate of 0.5 percent from 1860-1945. Hicks and others concluded: “The low growth rate during the pre-independence years seems to owe its origin to the decline in per capita income between 1885 and 1905 and between 1925 and 1950. Occasional periods of stagnation are noticeable, for instance, periods 1860 to 1865 and 1930 to 1935 and 1945 to 1951, etc.”

On the eve of independence, industrial progress had been very slow and had been flooded with cheap machine-made British products. India was facing a rural economy with poor per capita income, low productivity, inadequate facilities for education little concern for health and public welfare. (BCom Economic Trends in India Notes Study Material)

INDIAN ECONOMY IN THE POST-INDEPENDENCE PERIOD

Immediately after the attainment of independence, the Government’s main concern was to make the country economically sound and severe inflationary pressures and to alleviate shortages of essential food items which had been aggravated by the partition of the country in 1947. It aimed to make India a welfare nation, bring prosperity, eliminate poverty, and reduce disparities in income and regional imbalances. The country adopted a system of mixed economy reserving key industries, minerals, and infrastructure sectors for state enterprises besides defense production, transport, and communication. (BCom Economic Trends in India Notes Study Material)

Finally, the concept of co-ordinated planning of development programs under the auspices of the Central government, Prime Minister Nehru set up to Planning Commission in 1950 to assess the country’s need for material capital and human resources.

The Planning Commission set out the following long-term objectives of planning:

(i) To make an assessment of the material, capital, and human resources of the country, including technical personnel, and investigate the possibilities of augmenting such of these resources as are found to be deficient in relation to the nation’s requirements.

(ii) To formulate a plan for the most effective and balanced utilization of the country’s resources.

(iii) To increase production to the maximum possible extent so as to achieve a higher level of national production and per capita income.

(iv) To achieve full employment.

(v) To reduce inequalities of income and wealth; and

(vi) To set up a Socialist Society based on equality and justice and the absence of exploitation.

The first five-year plan expressed clearly the long-term objectives or goals of economic planning in India as follows:

“Maximum production and full employment, the attainment of economic equality or Social Justice which constitute the accepted objectives of planning under present-day conditions are not really so many different ideas but a series of related aims which the country must work for. None of these objectives can be pursued to the exclusion of others, a plan of development must place balanced emphasis on all of these.”¹

With the formulation of the first five-year plan, India embarked on the programme of planned economic development of the country. In his book “Planning and the Poor,” B.S. Minhas a former member of the planning commission states: “Securing rapid economic growth and expansion of employment, reduction of disparities in income and wealth, prevention of concentration of economic power, and creation of the values and attitudes of a free and equal society have been among the objectives of all our plans.”²

The story of economic development in independent India is often destroyed by beliefs in fashion or caricatures of perceptions that shape conventional wisdom. If we consider India during the 20th century as a whole, the turning point in economic growth was circa 1951.

If we consider India since independence, the turning point of economic growth was circa 1980. In the first phase of growth in post-independence India, from 1950 to 1980, India was not the lumbering elephant that it is often made out to be. In the second phase, from 1950 to 2005, India was not quite the running tiger that some believe it has become. The real failure, throughout the second half of the 20th century, was India’s inability to transform its growth into development, which would have bought about an improvement in the living conditions of ordinary people. (BCom Economic Trends in India Notes Study Material)

So, we can study the economic trend of India under two phases of economic growth i.e., since independence: 1950 to 1980 and 1980 to 2005.

(a) First Phase of Economic Growth in India since Independence (1950 to 1980)

The pace of economic growth in India during the period from 1950 to 1980 constituted a radical departure from the colonial past. For the period 1900 to 1947, there are two sets of growth rates based on alternative estimates of national income. If the economy had continued to grow at the rate based on the Sivasubramonian estimates, national income would have doubled in 70 years whereas per capita income would have doubled in 350 years. If the economy has continued to grow at a lower rate, based on the Maddison estimates, national income would have doubled in 87.5 years whereas per capita income would have doubled in 1,750 years.

The reality in independent India turned out to be different. The growth achieved during the period from 1950 to 1980, meant that GDP doubled in 20 years while GDP per capita would have doubled in 50 years. In fact, between 1950 to 1980, GDP multiplied by 2.86 while GDP per capita multiplied by 1.5. The latter was not as modest as it seems because during this phase the rate of population growth was more than 2 percent per annum. (BCom Economic Trends in India Notes Study Material)

Obviously, this growth was impressive with reference to the near stagnation during the colonial era. It was also much better than the performance of the newly industrialized countries at comparable stages of their development. However, the growth was not enough to meet the needs of a country where the initial level of income was so low.

But it has been shown that, during this period, India’s performance in terms of economic growth was about the same as in most countries in the world. It was certainly not as good as East Asia. But it was definitely not as bad as Africa. In fact, the actual rate of growth of output per worker in India was very close to the average across the world.

It is clear that there was a sharp acceleration in the rate of growth circa 1980. Some analysts, as also many casual observers, attributed this performance to economic liberalization which began in the early 1990s. However, discerning scholars recognized the reality that the structural break, which was a second turning point in the economic performance of independent India, occurred around 1980.

(b) Second Phase of Economic Growth in India From 1980 to 2005

In comparison with the preceding 30 years, there was a distinct set-up in rates of growth for GDP and GDP per capita. The growth rates achieved on average, during the period from 1980 to 2005, meant that GDP doubled in 12.5 years where GDP per capita doubled in 20 years. In fact, between 1980-81 and 2004-05, GDP multiplied by 3.81 while GDP per capita multiplied by 2.37. This growth was impressive, not only in comparison with the past in India but also in comparison with the performance of most countries of the world.

Indeed, in terms of growth, India performed much better than the industrialized countries which experienced a slowdown in growth, the transition economies which did badly, and much of the developing world. And it was only East Asia, particularly China which performed better. The expansion of aggregate demand, mostly through a rapid increase in public expenditure on investment and consumption, was the major factor underlying rapid economic growth during the 1980s. This is widely accepted.

Even so, orthodoxy argues that this growth supported the expansionary macroeconomic policies was not sustainable and culminated in the crisis of 1991. The most fashionable explanation, advocated by orthodoxy, is that the rapid economic growth in India is largely attributable to economic reform. There is, however, a fly in the ointment. The turning point in growth was 1980, whereas economic liberalization began in 1991. (BCom Economic Trends in India Notes Study Material)

In the last two decades, India’s Service Sector has given a great contribution to the country’s economical development. Information technology, Trade, Transport, and Communication have also contributed to Indian economic development. On the contrary industrial sector has given less contribution to economic development. (BCom Economic Trends in India Notes Study Material)

After analysis of Table No. 3.2, it is revealed that in 1950-51 the contribution of the agricultural sector to GDP was 55.28%, which reduced to 31.37% in 1990-91, 23.89% in 2000-01, and only 18.20% in 2013-14. On the contrary, the service sector whose contribution was 34.07% in 1950-51, has taken increased to 57% in 2013-14. The percentage contribution of the Industrial Sector to GDP was 10.65% in 1950-51. increased to 24.80 in 2013-14. Finally, we can say that, after the Global financial crisis (2007-09), India has also affected but this crisis effect was comparatively lower than American and other European Countries.

(c) Economic Reforms in India: Liberalisation, Privatisation, and Globalisation (LPG) Model of Development

Economic reforms in India were introduced in 1991 by the Congress government led by Mr. P.V. Narasimha Rao. During this age of economic crisis, our government may be pointed out that a consensus has been achieved in the country to introduce and implement economic reforms so as to accelerate the process of development. The primary goals of economic reform are:

(i) A higher rate of growth.

(ii) An enlargement of employment potential leading to full employment.

(iii) Reduction of the population living below the poverty line.

(iv) Promotion of equity leading to a better deal for the poor and less well-off sections of our society; and

(v) Reduction of regional disparities between the rich and poor states of India.

There is no doubt that economic reform has been able to promote relatively higher growth. After the teething troubles of the first two years viz., 1991-92 and 1992-93, the growth rate during 1993-94 to 1997-98 has averaged more than 7 percent per annum. After 1991-92, the momentum of growth has been maintained providing increasing evidence that the growth potential has improved as a result of the reforms initiated in 1991.

If we compare the annual average growth rate during the pre-reform period (1980-81 to 1990-91) which was of the order of 5.2 percent per annum, then the post-reform decade (1990-91 to 2000-01) also shows a little higher average annual growth rate of 5.8 percent of real GDP.

2 RE-2nd Revised Estimate; 1 RE – 1st Revised Estimate; PE- Provisional Estimates, After 2004-05 At 2004-05 prices.

If we compare the annual average growth rate during the pre-reform period (1980-81 to 1990-91) which was of the order of 5.2 percent per annum, then the post-reform decade (1990-91 to 2000-01) also shows a little higher average annual growth rate 5.8 percent of real GDP. However, there is a distinct improvement in the growth rate of GDP during the 4-year period (2000-01 to 2003-04) to an average of 6.0 percent and further to 7.9 percent in the next 8 years from 2004-05 to 2012-13.

In order to introduce economic reform in India, the LPG model of development was introduced in 1991 by Finance Minister Dr. Manmosa Singh with the charter of a new strategy to emphasize on Liberalisation, Privatizace, and Globalization. LPG model of development emphasizes a bigger role for the private sector. It envisages a much larger quantum of Foreign Direct Investment (FDI) to supplement our growth process. It aims at a strategy of export-led against import substitution practiced earlier.

The economy was opened to other countries to encourage more exports. Thus, it facilitates the import of foreign capital and technology and other allied imports, reduction in import duties barriers. (BCom Economic Trends in India Notes Study Material)

The experience of a decade or more of the LPG model does not provide conclusive evidence of substantial improvement of various parameters. The model emphasizes a capital-intensive pattern of development but it does not serious about unemployment, inequality, and poverty which are key indicators of balanced growth. Dr. A.P.J. Abdul Kalam, ever since he became the president of India has been advocating his vision of 2020, and to eradicate poverty from India. He has been emphasizing the adoption of PURA (Providing Urban Amenities in Rural areas). (BCom Economic Trends in India Notes Study Material)

In his address to the Food Security Submit on 5th February 2004, he outlined the concept and strategy of PURA as the lever of economic upliftment of villages. The GDP growth rate has been on average 6 percent per annum during the last decade. It has to be gradually increased up to 10 percent and be sustained for several years. Then it is possible for India to get the status of a developed nation. It is the roadmap of PURA. (BCom Economic Trends in India Notes Study Material)

Finally, in order to study the economic trends of India, it is necessary to understand the impact of planning in India. It would therefore be better if the trend of national income, per capita income, and changes in the national product are analyzed over the last 50 years of planning: to indicate the broad trends of growth of national Income from 1st five-year plan to the 11th five-year plan.

The data given in the table reveals that during the 60 years period 1950-51 to 2011-12, the annual rate of growth of national income was increased by approx. 15 times. There was a very perceptible improvement in the growth rate during the 1980s. During the last two decades (1990-91 and 2010-11), the average annual growth of Gross National Income at current prices is approx. 14.38 percent and per Capita Net National Income at current prices are approx. 12.32 percent. On the whole, the performance of the economy during the last two decades can be considered very satisfactory. (BCom Economic Trends in India Notes Study Material)

During this period the growth rate of goods and services in the economy, and the growth of per capita income is an indicators of the change in the standard of living of the people. But poverty, unemployment, price hike, literacy, and regional imbalances are very serious issues in front of the Indian Economy to make India progressive and vibrant with a sustainable high growth rate from a worldwide perspective.

BCom 1st Year Economic Trends in India Notes Study Material

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