DEVELOPMENTPOLICIESANDEXPERIENCE

(194790)

UNIT

III
UNIT

I
The two chapters in this unit give us an overview
of the state of the Indian economy as it was at the
eve of independence till after four decades of
planned development, which was a path that India
chose. This meant that the Government of India
had to take a series of steps such as the
establishment of the Planning Commission and
announcement of five year plans. An overview of
the goals of five year plans and a critical appraisal
of the merits and limitations of planned development
has been covered in this unit.
After studying this chapter, the learners will
becomefamiliarwiththestateoftheIndianeconomyin1947,the
yearofIndiasIndependence
understandthefactorsthatledtotheunderdevelopmentand
stagnationoftheIndianeconomy.

INDIAN ECONOMY
ON THE

EVE OF INDEPENDENCE

1
4INDIANECONOMICDEVELOPMENT

1.1 INTRODUCTION
Theprimaryobjectiveofthisbook,
Indian Economic Development,isto
familiariseyouwiththebasicfeatures
oftheIndianeconomy,andits
development,asitistoday,inthe
aftermathofIndependence.However,it
isequallyimportanttoknowsomething

aboutthecountryseconomicpasteven
asyoulearnaboutitspresentstateand
futureprospects.So,letusfirstlookat
thestateofIndiaseconomypriortothe
countrysindependenceandforman
ideaofthevariousconsiderationsthat
shapedIndiaspostindependence
developmentstrategy.
ThestructureofIndiaspresentday
economyisnotjustofcurrent
making;ithasitsrootssteepedin
history,particularlyintheperiodwhen
IndiawasunderBritishrulewhich
lastedforalmosttwocenturiesbefore
Indiafinallywonitsindependenceon
15August1947.Thesolepurposeof
theBritishcolonialruleinIndiawas
toreducethecountrytobeingafeeder
economyforGreatBritainsown
rapidlyexpandingmodernindustrial
base.Anunderstandingofthe
exploitativenatureofthisrelationship
isessentialforanyassessmentofthe
kindandlevelofdevelopmentwhich
theIndianeconomyhasbeenableto
attainoverthelastsixdecades.1.2

1.2 LOW LEVEL OF ECONOMIC

DEVELOPMENT UNDER THE
COLONIAL RULE
Indiahadanindependenteconomy
beforetheadventoftheBritishrule.
Thoughagriculturewasthemain
sourceoflivelihoodformostpeople,
yet,thecountryseconomywas
characterisedbyvariouskindsof
manufacturingactivities.Indiawas
particularlywellknownforits
handicraftindustriesinthefieldsof
cottonandsilktextiles,metaland
preciousstoneworksetc.These
productsenjoyedaworldwidemarket
basedonthereputationofthefine
qualityofmaterialusedandthehigh
standardsofcraftsmanshipseeninall
importsfromIndia.
Box 1.1: Textile Industry in Bengal
MuslinisatypeofcottontextilewhichhaditsorigininBengal,
particularly,
placesinandaroundDhaka(spelledduringthepreindependenceperiodas
Dacca),nowthecapitalcityofBangladesh.DaccaiMuslinhadgained
worldwide
fameasanexquisitetypeofcottontextile.Thefinestvarietyofmuslinwas
calledmalmal.Sometimes,foreigntravellersalsousedtorefertoitas
malmal
shahi ormalmal khas implyingthatitwaswornby,orfitfor,theroyalty.
India is the pivot of our Empire... If the Empire loses any other part of its

Dominion we can survive, but if we lose India, the sun of our Empire will have
set.
Victor Alexander Vruce, the Viceroy of British India in 1894
INDIANECONOMYONTHEEVEOFINDEPENDENCE5

Theeconomicpoliciespursuedby
thecolonialgovernmentinIndiawere
concernedmorewiththeprotection
andpromotionoftheeconomic
interestsoftheirhomecountrythan
withthedevelopmentoftheIndian
economy.Suchpoliciesbroughtabout
afundamentalchangeinthestructure
oftheIndianeconomytransforming
thecountryintoanetsupplierofraw
materialsandconsumeroffinished
industrialproductsfromBritain.
Obviously,thecolonialgovernment
nevermadeanysincereattemptto
estimateIndiasnational andper
capita income.Someindividual
attemptswhichweremadetomeasure
suchincomesyieldedconflictingand
inconsistentresults.Amongthe
notableestimatorsDadabhai
Naoroji,WilliamDigby,FindlayShirras,
V.K.R.V.RaoandR.C.Desaiitwas
Raowhoseestimatesofthenational
andpercapitaincomesduringthe
colonialperiodwereconsideredvery
significant.However,moststudiesdid
findthatthecountrysgrowthof
aggregaterealoutputduringthefirst
halfofthetwentiethcenturywasless
thantwopercentcoupledwitha
meagrehalfpercentgrowthinper
capitaoutputperyear.

1.3 AGRICULTURAL SECTOR

IndiaseconomyundertheBritish
colonialruleremainedfundamentally
agrarianabout85percentofthe
countryspopulationlivedmostlyin
villagesandderivedlivelihooddirectly
orindirectlyfromagriculture.However,
despitebeingtheoccupationofsuch
alargepopulation,theagricultural
sectorcontinuedtoexperience
Fig. 1.1 Indias agricultural stagnation
under the British colonial rule

Box 1.2: Agriculture During

Pre-British India
TheFrenchtraveller,Bernier,described
seventeenthcenturyBengalinthe
followingway:TheknowledgeIhave
acquiredofBengalintwovisitsinclines
metobelievethatitisricherthanEgypt.
Itexports,inabundance,cottonsand
silks,rice,sugarandbutter.Itproduces

amplyforitsownconsumption
wheat,vegetables,grains,fowls,ducks
andgeese.Ithasimmenseherdsofpigs
andflocksofsheepandgoats.Fishof
everykindithasinprofusion.From
rajmahal totheseaisanendless
numberofcanals,cutinbygoneages
fromtheGangesbyimmenselabourfor
navigationandirrigation.

Takenoteoftheagriculturalprosperityinourcountryintheseventeenthcentury.
Contrastit
withagriculturalstagnationaroundthetimewhentheBritishleftIndia,around200
yearslater.
6INDIANECONOMICDEVELOPMENT

stagnationand,notinfrequently,
unusualdeterioration.Agricultural
productivity becameincrementally
lowthough,inabsoluteterms,the
sectorexperiencedsomegrowthdue
totheexpansionoftheaggregatearea
undercultivation.Thisstagnationin
theagriculturalsectorwascaused
mainlybecauseofthevarious
systemsofland settlement that
wereintroducedbythecolonial
government.Particularly,underthe
zamindari systemwhichwas
implementedinthethenBengal
PresidencycomprisingpartsofIndias
presentdayeasternstates,theprofit
accruingoutoftheagriculturesector
wenttothezamindars insteadofthe
cultivators.However,aconsiderable
numberofzamindars, andnotjust
thecolonialgovernment,didnothing
toimprovetheconditionof
agriculture.Themaininterestofthe
zamindars wasonlytocollectrent
regardlessoftheeconomiccondition
ofthecultivators;thiscaused
immensemiseryandsocialtension
amongthelatter.Toaverygreat
extent,thetermsoftherevenue
settlement werealsoresponsiblefor
thezamindars adoptingsuchan
attitude;datesfordepositingspecified
sumsofrevenuewerefixed,failing
whichthezamindars weretolosetheir
rights.Besidesthis,lowlevelsof
technology,lackofirrigationfacilities
andnegligibleuseoffertilisers,all
addeduptoaggravatetheplightof
thefarmersandcontributedto
thedismallevelofagricultural
productivity.Therewas,ofcourse,
someevidenceofarelativelyhigher

yieldofcashcropsincertainareasof
thecountryduetocommercialisation
of agriculture.Butthiscouldhardly
helpfarmersinimprovingtheir
economicconditionas,insteadof
producingfoodcrops,nowtheywere
Work These Out
ComparethemapofBritishIndiawiththatofindependentIndiaandfind
outtheareasthatbecamepartsofPakistan.Whywerethosepartsso
importanttoIndiafromtheeconomicpointofview?(Refer,toyour
advantage,DrRajendraPrasadsbook,India Divided).
WhatwerethevariousformsofrevenuesettlementadoptedbytheBritish
inIndia?Wheredidtheyimplementthemandtowhateffect?Howfardo
youthinkthosesettlementshaveabearingonthecurrentagricultural
scenarioinIndia?(Inyourattempttofindanswerstothesequestions,you
mayrefertoRameshChandraDuttsEconomic History of India, whichcomes
inthreevolumes,andB.H.BadenPowellsThe Land Systems of British
India,alsointwovolumes.Forbettercomprehensionofthesubject,you
canalsotryanddevelopanillustratedagrarianmapofBritishIndiaeither
byhandorwiththehelpofyourschoolcomputer.Remember,nothing
helpsbetterthananillustratedmaptounderstandthesubjectathand).
INDIANECONOMYONTHEEVEOFINDEPENDENCE7

producingcashcropswhichwereto
beultimatelyusedbyBritish
industriesbackhome.Indias
agriculturalproductionreceiveda
furthersetbackduetothecountrys
partitionatthetimeofindependence.
Asizeableportionoftheundivided
countryshighlyirrigatedandfertile
landwenttoPakistan;thishadan
adverseimpactuponIndiasoutput
fromtheagriculturesector.
ParticularlyaffectedwasIndiasjute
industrysincealmostthewholeofthe
juteproducingareabecamepartof
EastPakistan(nowBangladesh).
Indiasjutegoodsindustry(inwhich
thecountryhadenjoyedaworld
monopolysofar),thus,suffered
heavilyforlackofrawmaterial.

1.4 INDUSTRIAL SECTOR

Asinthecaseofagriculture,soalso
inmanufacturing,Indiacouldnot
developasoundindustrialbaseunder
thecolonialrule.Evenasthecountrys
worldfamoushandicraftindustries
declined,nocorrespondingmodern
industrialbasewasallowedtocome
uptotakeprideofplacesolong
enjoyedbytheformer.Theprimary
motiveofthecolonialgovernment
behindthispolicyofsystematicallydeindustrialising
Indiawastwofold.The
intentionwas,first,toreduceIndiato
thestatusofamereexporterof

importantrawmaterialsforthe
upcomingmodernindustriesin
Britainand,second,toturnIndiainto
asprawlingmarketforthefinished
productsofthoseindustriessothat
theircontinuedexpansioncouldbe
ensuredtothemaximumadvantageof
theirhomecountryBritain.Inthe
unfoldingeconomicscenario,the
declineoftheindigenoushandicraft
industriescreatednotonlymassive
unemploymentinIndiabutalsoanew
demandintheIndianconsumer
market,whichwasnowdeprivedofthe
supplyoflocallymadegoods.This
demandwasprofitablymetbythe
increasingimportsofcheap
manufacturedgoodsfromBritain.
Duringthesecondhalfofthe
nineteenthcentury,modernindustry
begantotakerootinIndiabutits
progressremainedveryslow.Initially,
thisdevelopmentwasconfinedtothe
settingupofcottonandjutetextile
mills.Thecottontextilemills,mainly
dominatedbyIndians,werelocatedin
thewesternpartsofthecountry,
namely,MaharashtraandGujarat,
whilethejutemillsdominatedbythe
foreignersweremainlyconcentratedin
Bengal.Subsequently,theironand
steelindustriesbegancomingupin
thebeginningofthetwentiethcentury.
TheTataIronandSteelCompany
(TISCO)wasincorporatedin1907.A
fewotherindustriesinthefieldsof
sugar,cement,paperetc.cameupafter
theSecondWorldWar.
However,therewashardlyany
capital goods industry tohelp
promotefurtherindustrialisationin
India.Capitalgoodsindustrymeans
industrieswhichcanproducemachine
toolswhichare,inturn,usedfor
producingarticlesforcurrent
consumption.Theestablishmentofa
fewmanufacturingunitshereand
8INDIANECONOMICDEVELOPMENT

therewasnosubstitutetothenear
wholesaledisplacementofthe
countrystraditionalhandicraft
industries.Furthermore,thegrowth
rateofthenewindustrialsectorand
itscontributiontotheGross Domestic
Product (GDP) remainedverysmall.

Anothersignificantdrawbackofthe
newindustrialsectorwasthevery
limitedareaofoperationofthepublic
sector.Thissectorremainedconfined
onlytotherailways,powergeneration,
communications,portsandsome
otherdepartmentalundertakings.

1.5 FOREIGN TRADE

Indiahasbeenanimportanttrading
nationsinceancienttimes.Butthe
restrictivepoliciesofcommodity
production,tradeandtariffpursued
bythecolonialgovernmentadversely
affectedthestructure,compositionand
volumeofIndiasforeigntrade.
Consequently,Indiabecamean
exporterofprimaryproductssuchas
rawsilk,cotton,wool,sugar,indigo,
juteetc.andanimporteroffinished
consumergoodslikecotton,silkand
woollenclothesandcapitalgoodslike
lightmachineryproducedinthe
factoriesofBritain.Forallpractical
purposes,Britainmaintaineda
monopolycontroloverIndiasexports
andimports.Asaresult,morethan
halfofIndiasforeigntradewas
restrictedtoBritainwhiletherestwas
allowedwithafewothercountrieslike
China,Ceylon(SriLanka)andPersia
(Iran).TheopeningoftheSuezCanal
furtherintensifiedBritishcontrolover
Indiasforeigntrade(seeBox1.3).
Themostimportantcharacteristic
ofIndiasforeigntradethroughoutthe
colonialperiodwasthegenerationof
alargeexportsurplus.Butthis
surpluscameatahugecosttothe
countryseconomy.Severalessential
commoditiesfoodgrains,clothes,
Work These Out
PreparealistshowingwhereandwhenothermodernindustriesofIndia
werefirstsetup.Canyoualsofindoutwhatthebasicrequirementsarefor
settingupanymodernindustry?What,forexample,mighthavebeenthe
reasonsforthesettingupoftheTataIronandSteelCompanyatJamshedpur,
whichisnowinthestateofJharkhand?
HowmanyironandsteelfactoriesarethereinIndiaatpresent?Arethese
ironandsteelfactoriesamongthebestintheworldordoyouthinkthat
thesefactoriesneedrestructuringandupgradation?Ifyes,howcanthisbe
done?Thereisanargumentthatindustrieswhicharenotstrategicinnature
shouldnotcontinuetobeinthepublicsector.Whatisyourview?
OnamapofIndia,markthecottontextiles,jutemillsandtextilemills
that
existedatthetimeofindependence.
INDIANECONOMYONTHEEVEOFINDEPENDENCE9

keroseneetc.becameconspicuous

bytheiracutescarcityinthedomestic
market.Furthermore,thisexport
surplusdidnotresultinanyflowof
goldorsilverintoIndia.Rather,thiswas
usedtomakepaymentsforthe
expensesincurredbyanofficesetup
bythecolonialgovernmentinBritain,
expensesonwar,againfoughtbythe
Britishgovernment,andtheimportof
invisibleitems,allofwhichledtothe
drainofIndianwealth.

1.6 DEMOGRAPHIC CONDITION

Variousdetailsaboutthepopulation
ofBritishIndiawerefirstcollected
throughacensusin1881.Though
sufferingfromcertainlimitations,it
revealedtheunevennessinIndias
populationgrowth.Subsequently,
Fig.1.2 Suez Canal: Used as highway
between India and Britain

Box 1.3: Trade Through the Suez

Canal
SuezCanalisanartificialwaterway
runningfromnorthtosouthacrossthe
IsthmusofSuezinnortheastern
Egypt.ItconnectsPortSaidonthe
MediterraneanSeawiththeGulfof
Suez,anarmoftheRedSea.Thecanal
providesadirecttraderouteforships
operatingbetweenEuropeanor
Americanportsandportslocatedin
SouthAsia,EastAfricaandOceaniaby
doingawaywiththeneedtosailaround
Africa.Strategicallyandeconomically,
itisoneofthemostimportant
waterwaysintheworld.Itsopeningin
1869reducedthecostoftransportation
andmadeaccesstotheIndianmarket
easier.
Not to scale

Work These Out

PreparealistofitemsthatwereexportedfromandimportedintoIndia
during
theBritishrule.
CollectinformationfromtheEconomic Survey forvariousyearspublished
bytheMinistryofFinance,GovernmentofIndia,onvariousitemsofexport
fromIndiaanditsimports.Comparethesewithimportsandexportsfrom
thepreindependenceera.Alsofindoutthenamesofprominentportswhich
nowhandlethebulkofIndiasforeigntrade.
Nottoscale
10INDIANECONOMICDEVELOPMENT

everytenyearssuchcensusoperations
werecarriedout.Before1921,India
wasinthefirststageofdemographic
transition.Thesecondstageof
transitionbeganafter1921.However,
neitherthetotalpopulationofIndianor
therateofpopulationgrowthatthis

stagewasveryhigh.
Thevarioussocialdevelopment
indicatorswerealsonotquite
encouraging.Theoverallliteracylevel
waslessthan16percent.Outofthis,
thefemaleliteracylevelwasata
negligiblelowofaboutsevenper
cent.Publichealthfacilitieswere
eitherunavailabletolargechunksof
populationor,whenavailable,were
highlyinadequate.Consequently,
waterandairbornediseaseswere
rampantandtookahugetollon
life.Nowonder,theoverallmortality
rate wasveryhighandinthat,
particularly,theinfant mortality
rate wasquitealarmingabout218
perthousandincontrasttothe
presentinfantmortalityrateof63per
thousand.Life expectancy wasalso
verylow32yearsincontrasttothe
present63years.Intheabsenceof
reliabledata,itisdifficulttospecifythe
extentofpovertyatthattimebutthere
isnodoubtthatextensivepoverty
prevailedinIndiaduringthecolonial
periodwhichcontributedtothe
worseningprofileofIndiaspopulation
ofthetime.

1.7 OCCUPATIONAL STRUCTURE

Duringthecolonialperiod,the
occupationalstructureofIndia,i.e.,
distributionofworkingpersonsacross
differentindustriesandsectors,
showedlittlesignofchange.The
agriculturalsectoraccountedforthe
Fig. 1.3 Poverty, malnutrition and poor health facilities also cause the population to grow slowly
INDIANECONOMYONTHEEVEOFINDEPENDENCE11

largestshareofworkforce,which
usuallyremainedatahighof7075
percentwhilethemanufacturingand
theservicessectorsaccountedforonly
10and1520percentrespectively.
Anotherstrikingaspectwasthe
growingregionalvariation.Partsofthe
thenMadrasPresidency(comprising
areasofthepresentdaystatesofTamil
Nadu,AndhraPradesh,Keralaand
Karnataka),MaharashtraandWest
Bengalwitnessedadeclinein
thedependenceoftheworkforceon
theagriculturalsectorwitha
commensurateincreaseinthe
manufacturingandtheservices
sectors.However,therehadbeenan

increaseintheshareofworkforcein
agricultureduringthesametimein
statessuchasOrissa,Rajasthanand
Punjab.

1.8 INFRASTRUCTURE
Underthecolonialregime,basic
infrastructuresuchasrailways,ports,
watertransport,postsandtelegraphs
diddevelop.However,therealmotive
behindthisdevelopmentwasnotto
providebasicamenitiestothepeople
buttosubservevariouscolonial
interests.RoadsconstructedinIndia
priortotheadventoftheBritishrule
werenotfitformoderntransport.The
colonialadministrationalsocouldnot
accomplishmuchonthisfrontdueto
apaucityoffunds.Theroadsthatwere
builtprimarilyservedthepurposesof
mobilisingthearmywithinIndiaand
drawingoutrawmaterialsfromthe
countrysidetothenearestrailway
stationortheporttosendthesetofar
awayEnglandorotherlucrative
foreigndestinations.Therealways
remainedanacuteshortageofallweather
roadstoreachouttotherural
areasduringtherainyseason.
Naturally,therefore,peoplemostly
livingintheseareassuffered
grievouslyduringnaturalcalamities
andfamines.
TheBritishintroducedthe
railwaysinIndiain1850anditis
consideredasoneoftheirmost
importantcontributions.Therailways
affectedthestructureoftheIndian
economyintwoimportantways.On
theonehanditenabledpeopleto
undertakelongdistancetraveland
therebybreakgeographicaland
culturalbarrierswhile,ontheother
hand,itfosteredcommercialisationof
Indianagriculturewhichadversely
affectedthecomparativeselfsufficiency
ofthevillageeconomiesin
India.ThevolumeofIndiasexport
tradeundoubtedlyexpandedbutits
benefitsrarelyaccruedtotheIndian
people.Thesocialbenefits,whichthe
Work These Out
Canyoufindoutthe
reasonsbehindfrequent
occurrenceoffaminesin
Indiabeforeindependence?

YoumayreadfromNobel
LaureateAmartyaSens
book,Poverty and Famines.
Prepareapiechartfor
theoccupationalstructure
inIndiaatthetimeof
independence.
12INDIANECONOMICDEVELOPMENT

Indianpeoplegainedowingtothe
introductionoftherailways,werethus
outweighedbythecountryshuge
economicloss.
Alongwiththedevelopmentof
roadsandrailways,thecolonial
dispensationalsotookmeasuresfor
developingtheinlandtradeandsea
lanes.However,thesemeasureswere
farfromsatisfactory.Theinland
waterways,attimes,alsoproved
uneconomicalasinthecaseofthe
CoastCanalontheOrissacoast.
Thoughthecanalwasbuiltatahuge
costtothegovernmentexchequer,yet,
itfailedtocompetewiththerailways,
whichsoontraversedtheregion
runningparalleltothecanal,andhad
tobeultimatelyabandoned.The
introductionoftheexpensivesystem
ofelectrictelegraphinIndia,similarly,
servedthepurposeofmaintaininglaw
andorder.Thepostalservices,onthe
otherhand,despiteservingauseful
publicpurpose,remainedallthrough
Fig.1.5 Tata Airlines, a division of Tata and
Sons, was established in 1932
inaugurating the aviation sector in India
Fig. 1.4 First Railway Bridge linking Bombay with Thane, 1854

Work This Out

Thereisaperceptionstill
goingaroundthatin
manywaystheBritish
administrationinIndia
wasquitebeneficial.This
perceptionneedsan
informeddebate.How
wouldyoulookatthis
perception?Arguethis
outinyourclassWas
theBritishRajgoodfor
India?
INDIANECONOMYONTHEEVEOFINDEPENDENCE13

inadequate.Youwilllearnmoreabout
thepresentstatusofvarious
infrastructureinChapter8.

1.9 CONCLUSION
BythetimeIndiawonitsindependence,
theimpactofthetwocenturylong
Britishcolonialrulewasalready

showingonallaspectsoftheIndian
economy.Theagriculturalsectorwas
alreadysaddledwithsurpluslabour
andextremelylowproductivity.The
industrialsectorwascryingfor
modernisation,diversification,capacity
buildingandincreasedpublic
investment.Foreigntradewasoriented
tofeedtheIndustrialRevolutionin
Britain.Infrastructurefacilities,
includingthefamedrailwaynetwork,
neededupgradation,expansionand
publicorientation.Prevalenceof
rampantpovertyandunemployment
requiredwelfareorientationofpublic
economicpolicy.Inanutshell,the
socialandeconomicchallengesbefore
thecountrywereenormous.