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Image: Shutterstock.com

The Fall and Rise of the Indian Economy

15 August 2019

8 minutes read

G 2

Photo: Prof. Bishnupriya Gupta |
Credit: Manishita Dass

There have been several inferences and interpretation to India’s economic development over the past century. Moreover, there are several “myths” ascribing to the country's “fall and rise”, especially that globalisation has not always lead India to prosperity, Professor Bishnupriya Gupta from the University of Warwick writes.  

There has been much discussion in recent years about India’s growth failure in the first 30 years after independence in 1947. India became a highly-regulated economy and withdrew from the global market, which led to inefficiency and low growth. 

The architect of Indian planning –Jawaharlal Nehru, the first prime minister, did not put India on an East Asian path. As a contrast, the last decade of the 20th century has seen the reintegration of it into the global economy. Today, India is one of the fastest growing economics of the world.

There is a separate discussion of economic development under colonial rule. Shashi Tharoor, a former United Nations' Under-Secretary, argued in his book Inglorious Empire that Britain’s industrial revolution was built on the destruction of Indian textile industries and British rule turned India from into an exporter of agricultural goods. The statement relates to the decline of the traditional textile industry that dominated the global markets in the 17th and 18th centuries. The European trading companies bought textiles in India and sold to the European markets.

There is yet another view on colonial rule from Niall Ferguson in his book Empire: How Britain Made the Modern World. Ferguson claimed that even if the British rule did not increase Indian incomes, things might have been much worse under a restored Mughal regime in 1857. The British built the railways and connected India to the rest of the world.

All these views put globalisation at the centre of the analysis. I am going call them the “myths of the market”. The reason I do this, is that without statistical evidence, we cannot have an unbiased view of global connections on India's economic development. This graph depicts what is India’s long run economic development looks like:

Gupta

Source: Aniruddha Bagchi, Why did the Indian economy stagnate under the colonial rule? In Ideas for India 2013.

What the graph tells us is that there was a slow decline and stagnation over a long period even as East India Company increased trade in Indian textiles and the British Empire provided unrestricted access to the global market and British capital market. There was stagnation even as trade increased, the colonial government built a railway network and British entrepreneurs owned large parts of the industrial sector. In 1947, the country was one of the poorest in the world.

The graph also tells us that growth picked up after independence in a regulatory regime as India moved towards protecting the economy from trade and foreign capital and Restrictions on trade and private investment.

Did colonial rule lower living standards? Evidence on wages and per capital GDP from 1600 show a prosperous economy in 1600 under the Mughal Emperor Akbar. Living standards began to decline from the middle of the 17th century, before colonisation, and continued as the East India Company gained territorial control in 1757. It is important to note that the decline coincided with increased integration with international markets and the rising trade in textiles to Europe.

The Indian growth reversal began in independent India with regulation of trade and industry and a break with the global economy.

India was the main producer of textiles using traditional technology and dominated world markets. Trade although increasing, contributed little to India’s GDP per capital. Indian competitive advantage was due to low wages and quality of design. However, this advantage disappeared with the industrial revolution. The modern cotton textile industry in Britain could produce cheaper yarn and cloth, and replaced Indian products in the world market. In 1857, India became a part of the global economy of the British Empire. Indian trade volume increased, but the composition of what they traded changed. From an exporter of industrial products, the economy began to supply food and raw material to the Empire. Thus, despite rising trade, per capital income stagnated. 

What explains the stagnation in incomes? The colonial government had invested very little in the main sector, agriculture. The bulk of British investment went to the railways, but not in irrigation. The railways initially connected the hinterland with the ports, but over time-integrated markets, reducing price variability across markets. However, it did not contribute increasing agricultural productivity. Without large investment in irrigation, output per acre declined in areas that did not get canals. Industry on the other had was the fastest growing sector, but employed only 10 per cent of the work force. Stagnation of the economy under control rule had little to do with trade.

Indian growth reversal began in independent India with regulation of trade and industry and a break with the global economy. For the first time in the 20th Century, the Indian economy began to grow as the graph shows with investment in capital goods industries and agricultural infrastructure. Industrial growth and the green revolution in agriculture moved the economy from stagnation to growth. This growth slowed down, but the economy did not stagnate as in the colonial period. Following economic reforms after the 1980s, India has entered a high growth regime, the foundation of which was laid under the policies of Nehru. The initial increase in growth was a response to removal of restrictions on domestic private investment, well before reintegration into the global economy in the 1990s. There are lessons from history to understand Indian growth today.

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Updated:   16 August 2019 / Responsible Officer:  CBE Communications and Outreach / Page Contact:  College Web Team