The Grand incoming of the (Republic of) India

India’s economic history has been one huge paradox, from living its golden time in the Mughal era to being absolutely shattered by the British and its present path to regain its former glory.

This article tries to walk readers through a very brief economic history of India comparing the economy through the Mughal era to the British raj and the present day modern economy. 

BY RATTANDEEP | 9 Mins Read

The early first phase of India’s true economy starts from the Indus valley civilisation. People of those times were well settled economically in terms of practicing agriculture, well developed tools and an elaborate knowledge of urban planning. All these present an image of a thriving and advanced economy.

The Pre-British era

The real golden age starts with the Delhi sultanate in the early 1200’s which represents the first part of the second phase of Indian economy. This period saw an initial disruption but eventually the sultanate plays a pivotal role in integrating India with rest of the world. This period marks the time when technological advancements from all over the middle east were adopted at large in the Indian subcontinent. This was followed by the spreading out of various artisanal industries particularly the textile industry. This period saw India gain the status of a great economic power by the 1500’s.

With the rise of Mughal era, India saw a lot of pivotal developments. The Mughals undertook various critical infrastructure projects and economic reforms. They oversaw the construction of famous roads like the grand trunk road. They also introduced a single currency and taxation system across the country. Apart from this the extensive unification agenda and the exchange of knowledge between India and the west through the middle east saw trade boom, which resulted in exponential productivity growth. During this time, India overtook the Qing china and became the largest global economy. Manufacturing boomed and as a result manufacturing contributed over 25% to India’s GDP. The main industries included textiles, shipbuilding and steel. India alone accounted for over 95% of British imports from Asia, with the Bengal province accounting for over 40% of the total Dutch imports. This leas to a huge trade imbalance which was followed by huge amounts o f gold and silver flowing out the west to India. It is reported that emperor Auranzeb’s treasury had annual inflow of $100 million($450 million according to 1990 dollars)  which was 10 times greater than that of the French king louis xiv with population that was just 7 times that of France. Even the degree of urbanisation was higher than the Europeans with over 15% of the total population living in cities. All this saw India gaining its much-cherished title of the golden sparrow which as of 1700 contributed about 25% to the global GDP.

The British Era

From the early 1700’s there was the collapse of the Mughal empire which resulted in fragmentation and led to a period of relative decline followed by the British conquest of India. 

The economy during British rule was characterised by ‘’the great divergence”. This phenomenon plays out with the ever increasing industrialisation of Europe and the simultaneous increase of British power over India. The policy approach by the successive British administrators (first EIC and then the Colonial government) were aimed at extracting all economic benefit from the Indian economy while enriching their own coffers. Industrialisation was vastly encouraged in Britain leading to rise of cities like Manchester and London, while India was systematically deindustrialised. This was effected by a policy of opening up Indian market for all kinds of British produce while there were high tariffs and even blatant bans on Indian imports into Britain. India was made into a large supplier of raw materials as well as the biggest captive market for British goods where British producers had a complete monopoly. This policy approach led to a systematic ruin of India’s economy causing a huge plunder of wealth and resources from India to British. 

The only positives of the colonial rule were the establishment of a comprehensive irrigation system along with an enviable railway network which was considered the most advanced at that time. Even though the main motive behind these developments were to secure British economic and military interests these developments were extremely handy when India became independent in 1947, though poor maintenance had rendered most of the canals and railways obsolete, thereby a lot of resources were used up on upgrading them.

At the time of independence, the share of Indian economy had declined from almost 24% to about 3.8% in 1952. Dr. Manmohan singh aptly put the situation as follows ‘’ the brightest jewel of the British crown was the poorest country in the world in terms of per capita income at the beginning of the 20th century.’’

The post-Independence Era

Such was the herculean task before the Indian economy. The abject poverty over-dependence on agriculture, vast social differences and huge drain of resources to Britain in the past even cast a doubt over India’s existence as a separate nation. With Nehru at helm of Indian politics, he set on to make India a loose mixed economy with great emphasis on the socialist aspect. The period of 1950 to 1970 was referred to as by the socialist boom by many even though the time was not without its own problems. Indian politicians focussed on using deficit financing to establish heavy industries and capital goods. This had disastrous results as Indian subsequently faced a payments crisis which was followed by a devaluation and the government asking RBI to print money which caused an inflationary spiral in the economy. The onset of the second five-year plan led to the establishment of the once popular licence raj. This separated clear industries where the government and private entities could be present. This was also followed by a lot of restrictions on private enterprises such as the monopolies and restrictive trade practices act brought by Indira Gandhi which severely restricted private entities leading to full control of government over the economy. Shortly after this the socialist boom of 1950-70 ended. This was then followed by a bust which continued till the 1990’s. this bust was characterised by a huge socialist shift away from the mixed economy ideals as pioneered by the Janata government of 1977. George Fernadez the then industries minister forced companies like IBM and Coca cola out of India thus effectively blocking out all foreign capital from the Indian economy. This again led to a dire condition for the economy.  In 1980, Indira Gandhi came back to power with a reform agenda forced on her by the IMF in order to secure a much-needed IMF loan to avert a crisis. These reforms include the abolition of the tariffs and quota systems, severe restrictions on private sector and marked an effective end for the licence raj as it was known back then. The Rajiv Gandhi government enacted these light reforms but they were also left unaccomplished after his death in 1987. The economy in the late80’s was in dire straits, the GDP had stagnated, India faced a balance of payment crisis, inefficiency induced by a large unproductive public sector chipping away at India’s resources, widespread bureaucratic red tape along with corruption. All this pointed to an impending crisis which came in the early 1990’s. India had just 3 weeks of reserves to cover its import bill along with spirally inflation and the central bank refusing to allow more currency printing. India asks for IMF’s help which argued for huge reforms to usher in a free market economy. The govt of VP singh then adopted the LPG policy which was the brainchild on then finance minister Manmohan singh. This policy brought huge changes to the Indian economic landscape however they were hindered by the fallout of the Asian economic crisis in 1997.

the next wave of reforms was accompanied with NDA-1 which moved to liberalize the telecommunications and it sectors, privatising several state-run enterprises and ushering in huge infrastructural projects. The fruits of these reforms were seen in the form of an accelerating economy which was left untouched by even the the great recession of 2008. The period post liberalisation saw Indian economy expand by about 7% annually till 2012, when the economy deteriorated sharply. India was pushed into an effective state of policy paralysis. The economy went from being growing in high single digits to being called as a part of the fragile five. The state of economy eased when oil prices fell sharply allowing the government to raise taxes on oil and bridge its budget deficit to manageable levels. Then the NDA-2 government moved to usher in significant lpg reforms with a huge focus on improving the ease of doing business in India and promoting FDI in the country. this has had a positive impact on the Indian economy with India getting billions of dollars in FDI consistently over the past 3-5 years. This spectacular growth had put India once gain in the spotlight of the world with many anticipating India to replace china as the next biggest growth driver on the world economy.

Challenges 

Even though India has never looked back after the 1991 reforms, there are many structural problems facing the economy. First of all, the high level of unorganised and shadow economic activity has led to a parallel economy which is difficult to manage and efforts to formalise it by the acts of demonetisation and the introduction of goods and services act has led to huge disruptions for the economy. Following this the bad loan crisis in the public sector banks and the eventual default by a large NBFC (IL&FS) has led to big credit squeeze in the economy, hurting demand which was the biggest driver of all economic growth we experienced post the election of the NDA-2 government. This has led to a severe slowdown and a growth recession in the economy with the economic growth dropping for the past year and half. Due to this reason, India could be staring at a long recession if we don’t address this ongoing slowdown immediately. Add to this the glaring inequality in the economy with India being the second most unequal economy according to Oxfam international. All these reasons are of great concern to the economic future of the country. India needs some deep structural reforms to address all these above issues. Even though India may be poised to be become the third largest economy by 2030 and the largest by 2050 according to some international institutions but all this will not be possible without the implementation of deep reforms.

India has been a dynamic thriller from the being at the top of the economic ladder in the early millennium to being the poorest economy at the start of 1900’s.With India again on its way to reclaim its former glory  , it is imperative to watch out how India uses its slowly increasing clout around the world. It would also be interesting to watch how the relationship between India and China evolves 10 years from here and how the former world powers respond to a possible power struggle between the two strategic rivals.