The Indian Economy

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The Indian Economy

• Presentation by A.V. Vedpuriswar

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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
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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.
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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 percent. 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.
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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
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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.
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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
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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
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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
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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.
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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.