The Indian Economy

Presentation by A.V. Vedpuriswar

 The Indian Economy

The Moghul Rule

During the Mughal Empire, at the end of the sixteenth
century, with plenty of arable land, India's agriculture was
comparable with other contemporary societies, including
those of Western Europe. Its productivity too was
comparable. Even the subsistence-oriented peasant got a good
return.
India had a vigorous and large skilled workforce that
produced not only cotton but also luxurious products for the
rich landlords, the courts, and the aristocracy. Consequently,
the economy produced a fabulous financial surplus.
Cont…
Indian methods of production and of industrial and
commercial organization could stand comparison with
those in vogue in any other part of the world. It had
developed an indigenous banking system. Merchant capital
had emerged with an elaborate network of agents, brokers,
and middlemen. Its bills of exchange were honored in major
cities of Asia.

Notwithstanding the surplus and the trade, the peasant was

extremely poor. The rapacious Mughal state took away
something like half the agricultural produce, there was little
incentive to improve the land. Despite their vigorous trade,
the merchants hid their wealth for fear of the tax collector.
The British Rule
Indian industry declined in the nineteenth century. India
enjoyed 17.6 percent of the world's industrial production in
1830, while Britain's share was 9.5 percent. By 1900, India's
share had declined to 1.7 percent while Britain's had grown to
18.6 per-cent. But this decline was caused by technology.

Unlike the Japanese government following the Meiji reforms

after 1868, which actively promoted the country's development,
Britain neglected India. It was an imperial power and had little
interest in the people of India.
Cont….
The British education system in India produced only a thin
upper crust of extremely well-educated Indians. Although it
built railways and canals, Britain made no effort to provide
credit to entrepreneurs or farmers in a capital-starved
country. Nor did it sufficiently protect the infant Indian
industry that came up in the nineteenth century (although it
did from 1921 onwards).
The Indian colony was not terribly profitable to Britain. After
the crude period of exploitation in the eighteenth century was
over, Britain's rising prosperity in the next century owed more
to its free trade with the "new world" and to its investments in
America.
Britain did not become poorer after losing India. Instead, it
enjoyed prosperity in the 1950s and 1960s, at the very time
that it was losing its colonies.
Cont…
The forces of global capitalism in the second half of the
nineteenth century and early twentieth century did not release
widespread growth and development in India, as they did, for
example, in Japan. By 1914, India had the world's largest jute
manufacturing industry, the fourth-largest cotton textile
industry, the largest canal network, the third-largest railway
network, and 2.5 percent of world trade. India also had an
experienced merchant class which had begun to develop modern
industry.
Max Weber, the German sociologist, who admired the richness
of India, attributed the absence of development to the caste
system.
Swedish economist Gunnar Myrdal (1967) argued that India's
social system and attitudes were an important cause of its low
productivity, primitive production techniques, and low levels of
living. Poor work discipline, contempt for manual work, lack of
punctuality, alertness, and ambition, low aptitude for
cooperation, and superstition were the result of inhibiting
attitudes. Cont….
These were compounded by unfavorable conditions, such as a
debilitating land tenure system, low standards of efficiency and
integrity in public administration, weak participation of the
people in local affairs, and a rigid and unequal social structure.
These premodern attitudes and institutions had to be attacked
directly, primarily through education India could not wait to
erase them as a by-product of growth and income. But India
was a "soft state." It would not be able to impose the social
discipline that this required. He said this in 1967.
According to Gurcharan Das, the above explanations are
simplistic.
Successful Hindu entrepreneurs can be both extremely
religious and aggressive in business. The Indian farmer
responds quickly to market-based incentives, as the green
revolution demonstrates.
Cont…
Brahmins will plow their own land in traditional Uttar
Pradesh if they have to, and conservative Rajput Thakurs in
Rajasthan will shed their feudal ways for the sake of a
commercial opportunity.
From 1972 to 1982, GDP growth averaged 3.5% a year--the
so-called "Hindu rate of growth". The economy was still held
back by the socialist system Nehru had built in the 1950s, and
by the elaborate "licence raj" the Indian bureaucracy had
constructed to regulate it.
From 1982 to 1992, after Rajiv Gandhi began stealthily to
liberalise the economy, GDP growth climbed to an average of
5.2% a year. A crisis in 1991 prompted far-reaching if
incomplete reforms: slashing import tariffs, selling some
government-owned businesses, and easing licensing
restrictions on what businesses could make. From 1992 to
2002 the growth rate climbed to 6%. Cont…
Indian business has enjoyed a sharp fall in the cost of capital.
The decline in global interest rates and stable, low inflation at
home have enabled the Reserve Bank to cut its benchmark rate
from 12% in 1997 to 6% by the end of 2003. This has
encouraged a borrowing binge among consumers, especially to
buy houses.
Concerns about the pace of capital spending and about access to
credit for enterprises remain. A Reserve Bank study published
in December concluded that corporate investment might
actually fall in this fiscal year compared with last.
Foreigners are helping to drive up the stockmarket, but are still
wary of direct investment. India reported only $4.7 billion in
foreign direct investment in the fiscal year ending in 2003, less
than a tenth of what China attracted in 2002.

Cont…
The continued caution of foreign and Indian investors alike is
not surprising. The structural impediments to investment in
India have been eased but not removed. They include
restrictive labour laws that make it hard to shed staff. Nor,
despite improvements in some areas, have the deficiencies in
India's infrastructure--roads, electricity, water supply--been
fixed.
Laws complicating land transactions, and the labyrinthine
intricacies and glacial pace of litigation, are further
deterrents. So is a cumbersome and corrupt bureaucracy.
The public-sector budget deficit has been running at around
10% of GDP for the past six years, a very high level by
international standards.
Cont….
The deficit already hampers growth by limiting government
spending on infrastructure, education and health. Almost all
the money goes on interest payments, civil-service wages and
pensions, defence and subsidies.

A fiscal-responsibility law passed in 2003 requires the

government to eliminate the revenue deficit by 2008, and
gradually to reduce the central-government fiscal deficit as a
percentage of GDP. It is hard to see how this is to be
achieved.