The Indian Economy

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.