Chapter 1: STATE OF THE INDIAN ECONOMY PRE - INDEPENDENCE
Concepts of World Economy
Distribution networks supply goods and services to the economy and so there are three such models: state, market and state market mix. The state system is such that the state shall supply goods and services and the consumer shall not have to bear any burden of payment (USSR / Communist China), in the market mode of distribution the goods shall be brought in the market and the forces of demand and supply shall determine prices (Capitalist economies), the third kind is the most prevalent system where some services that are essential are supplied by the state whereas the remaining are open to the market to supply and for these the consumer has to bear prices. The goods supplied by the state shall be subsidised or be free.
Capitalism: This system emerged in the work of Adam Smith, Wealth of Nations (1776). It became popular among the countries of America and Europe. The system had the private sector deciding the questions like What to produce? How much to produce? What price to sell it at? Adam Smith wanted free competition, non-interference by state to ensure that the markets brought equilibrium.
Socialism: In this the state had a larger role in deciding the questions of distribution and supply, it also believed in collective ownership over all assets and means of production as was in USSR. The Communism philosophy believes in state ownership over everything and absolute power to state for running the economy (as in pre 1985 China). These philosophies saw their roots in Karl Marx’s work.
Market economy: The great depression of 1929 saw a failure of the Smithsonian ideas of Capitalism failing as the economies collapsed and large scale unemployment was seen. The new idea of economy was proposed by John Maynard Keynes. He suggested that the capitalist economies absorb certain good qualities of socialist economies like, production of basic goods and services.
This would mean that the state can guarantee a basic standard of living for the people and thus increase their purchasing power to create a demand for market based goods. His ideas helped the depression hit economies come out of the turmoil. The states now started producing the goods that were absolutely essential for survival “public goods”. The market forces were now focused on goods that were non-essential. This created a social sector.
A second version was proposed for the socialist states. They were advised to accept the self- correcting power of the market forces and move towards a mixed economy. The suggestion was rejected by the communist and socialist states and this would lead to their economic collapse as was seen in 1991 (USSR and most eastern European nations).
Some like China in 1985 started Open Door policy and this was seen as a transition to a market socialism. This was going to create a huge market economy in China but the same didn’t happen in USSR and there was a period of economic turmoil as the transition from pure socialism to mixed economy happened.
Democratic nations had smooth transitions and most favoured a mixed economy to a pure market or socialist one. Eventually it was decided that the mixed economy was the only solution for a country and the extreme form of capitalism or socialism was to be avoided. This ended the question of dichotomy of the older economic models.
India too started as a mixed economy however it had leaned more towards a socialist pattern till the structural changes in 1991. The socio economic and political forces in the country shall keep on reinventing this state market mix. However the East Asian economies took this shift from state control to a broader market control voluntarily whereas India did it under compulsions and too late i.e. 1990’s.
This was developed in Washington for helping the Latin American countries to come out of their crisis. The principles were
- Free flow of FDI
- Low tax rates and wider tax base
- Competitive currency rates.
- Secure property rights
- Deregulation, open trade, privatization
- Fiscal discipline
- Investment in fields that offer good economic returns or have
potential to improve income distributions like healthcare, education and infrastructure.
It is a misguided belief that this system was an imposition of the Washington based institutions like IMF, WB and US treasury on developing countries. The anti-consensus people argued that these guidelines were forced on countries that sought funding or assistance from international agencies like IMF.
The consensus however gave rise to “Liberalization, Privatization and Globalization”. It also became known as “neo liberalism” as it was a rebirth of the Adam Smith based ideas of economy. India too saw the Washington consensus forced upon it by IMF during the “Balance of Payments” crisis in 1991. Open trade it was argued would only benefit the larger, developed economies as they were industrialised and not the poor countries whose industries couldn’t compete with them.
Sectors of an economy:
- Primary: Direct use of natural resources for production. E.g.: Agriculture, fishing, mining. India at the time of independence was an agrarian economy (A country where primary sector is responsible for 50% of the GDP, but now it is not so even though a large number of people still depend on primary sector for employment).
- Secondary: Manufacturing or industrial sector. (A country where secondary sector is responsible for 50% of the GDP – industrial economy).
- Tertiary: Service sector. E.g. Banking, finance. (A country where tertiary sector is responsible for 50% of the GDP – Service economy).
British rule lasted for two centuries before India won its
independence in 1947. The sole purpose of the British economic
policy was to reduce India into a feeder economy for expansion
of Britain’s own modern industrial base. Pre independence India
had a flourishing economy based on agriculture and handicrafts.
The quality of workmanship in field on textiles and precious
stones was high leading to a worldwide base for Indian products.
The British policy was to turn India into an exporter of raw
materials and consumer of finished goods. This led to disruption
of Indian economy. The British never made any attempt to
calculate the national or per capita income. Amongst Indian
economists V.K.R.V Rao was first to do so.
Indian economy was highly agrarian as 85% of Indians depended on
it. But the sector remained stagnant as the British focused on
extracting maximum revenue from it without any capital
development. The revenue collection system further aggravated
woes. The poor productivity, lack of irrigation and other
factors led to ruin of this sector. Although a few areas that
grew cash crops were seen to prosper but here to rural
indebtedness increased as food crops were neglected. Finally
after partition the fertile and irrigated jute growing areas
went to Pakistan and India lost its monopoly.
Indian industry which was mainly handicraft based was destroyed
by British. The reason being to support the industrial base of
Britain. The export of finished machine made goods flooded India
and the artisans couldn’t compete with them. The second half of
the 19th century saw jute industry dominated by
foreigner in east India and cotton mills dominated by Indians in
western India. Iron and steel plants were started around the
beginning of 20th century and after the Second World
War the cement, sugar, paper industry started. But the
contribution of these to GDP remained small. Moreover these
remained confined to railways, ports, communications and other
foreign trade was an export surplus but the trade surplus went
mostly in fuelling the expenses of the colonial administration
in India. The common people never got the benefit of this trade.
The trade also led to acute shortage of commodity for domestic
demands. The British capital investment in railways was to
benefit its own industrial base as the markets expanded. The
communication facilities too were for the purpose of law and
order and the Indians never derived any benefit out of it.
Fig 2: Economy of the world
all the British domination was seen in all aspects of the Indian
economy and was the main reason it remained stagnant for two
The structure and organization of Villages and Towns
The village community was based on a simple
division of labour. There existed classes of people
called farmers, weavers, goldsmiths, carpenters, potters, oil
pressers, washermen, cobblers, barber-surgeons, etc. All
these occupations were hereditary and passed by tradition from father to son. These craftsmen were paid a
stipend out of the crops at the harvest time in lieu of
the services performed
Most of the food produced in the village was
consumed by the village population itself. The raw
materials produced from primary industries were the
feed for the handicrafts. Thus the interdependence of
agriculture and hand industry provided the basis of the
small village republics to function independently of the
The villages although were self sufficient but they did acknowledge some outside authority, may be that of a local princeling, who in
turn may be under a Muslim Nawab or a Hindu king, by
paying a portion of the agricultural produce varying
between one-sixth to one-third or even in some periods
one-half as land revenue. The land revenue sustained the
The villages also had panchayats for dispute resolution and money lenders who lent at exorbitant rates to farmers. The villages existed in peace but still were affected by wars and aggression. But lack of transportation and a central government helped their survival.
The Indian industries "not only supplied all local
wants but also enabled India to export its finished
products to foreign countries."
Thus, Indian exports
consisted chiefly of manufactures like cotton and silk
fabrics, calicos, artistic wares, silk and woollen cloth.
Besides, there were other articles of commerce like
pepper, cinnamon, opium, indigo, etc.
In this way,
Europe was a customer of Indian manufactures during
the 17th and 18th centuries. It was this superior
industrial status of India in the pre-British period that
prompted the Industrial Commission (1918) to record :
- "At a time when the West of Europe, the birth place of
modern industrial system, was inhabited by uncivilised
tribes, India was famous for the wealth of her rulers
and for high artistic skill of her craftsmen. And even at
a much later period, when the merchant adventurers
from the West made their first appearance in India,
the industrial development of this country was, at any
rate, not inferior to that of the more advanced
The period is broadly divided into industrial growth during
the 19th century and industrial progress during the 20th
century. It was mainly the private sector - whether
indigenous or foreign — that carried industrialization
Only after the First World War some protection
was granted to Indian industries otherwise Indian
industry had to weather all storms and face world competition on its own strength. This explains the slow growth of industrialization.
Within the Indian community, conditions were
not favourable for the emergence of industrial leaders,
partly because of the peculiar way in which factory
industry came to India, as compared to its development
In the West two principal groups were ready
to set up factories : the merchants and the master
craftsmen. The merchants had capital, marketing ability
and capacity to manage labour. The master craftsmen
did not have capital but had understood the materials
and their proper handling.
Because of certain peculiar
features, neither Indian merchants nor Indian craftsmen
took interest in the factory system
merchants belonged to the Baniya or moneylending
community. They possessed capital and were always
eager for its security and profits. But when the factory
system was introduced in India by the British, the
merchant class found greater opportunities for trad
The development of shipping nd railways resulted in larger trade, both external and internal.
Besides, there were more opportunities for lending
money. Thus, the merchants found greater scope for
profits in their traditional occupations and hence did not
give them up and take to the factory industries.
At the same time, Indian craftsmen too did not
play the part played by their western counter-parts in the
field of industrialization because they did not possess
large capital. Besides, they were without proper training
Tariff Protection to Indian Industries
In 1923 the Government controlled by the British agreed to give tariff protection to the Indian industries on recommendation of the First Fiscal Commission.
The protection was given from the period of 1924 to 1939 and extended to key sectors. This was used to full advantage by the Indian entrepreneurs and they succeeded in capturing the Indian market and also eliminating foreign competition by 1939.
The First World war was a boon for the local industry as the demand for goods increased. New industries came up to meet this demand and this led to full utilization of capacity and increase in output. Such industries were known as war babies.
The tariff protection and war together made Indian industrialists dominant compared to foreigners.
Causes of slow growth of private
enterprise in India's
Unimaginative private enterprise.
One important reason frequently mentioned is the inadequacy of
Indians were reluctant to enter
the industrial field because of the comparatively easier
and secure scope for profit which existed in trading and
The Britishers who pioneered industrial
change in India were not really interested in industrialization of the country as such. But then Indian industrialists too were so short-sighted, they rarely bothered
about the future and cared very little for replacement and
for renovation of machinery.
They were influenced by
nepotism rather than ability in their choice of personnel.
They were also influenced by their trading background
viz., high price and high profit margin rather than low
prices and larger sales.
Problem of capital and private enterprise
the 19th and 20th centuries, Indian industrialists had
suffered from lack of adequate capital. Just as British
enterprise was prominent, so also British Capital was
significant in India's industrialisation.
Capital was scarce not only
because the resources of the country were underdevel
oped but also because the avenues for the investment
of surplus wealth were few. There were no Government
loans or company stocks and debentures. Accordingly,
people held their wealth in the form of gold and silver.
There was complete absence of financial institutions to help the transfer of savings to industrial
investment. The indigenous financial institutions
concerned themselves with rural moneylending and
financing of internal trade.
In the beginning funds for investment came
from surpluses earned in rural moneylending and
trading. But in course of time new resources were also
tapped. For instance rulers and princes, those who
amassed wealth from opium trade and in the cotton boom
during the civil war in America, wealthy professional
people like doctors and lawyers, Government officials,
etc.-these people were induced to part with their wealth
and savings for investment in industrial enterprise.
Private enterprise and the role of the Government.
One of the important reasons and according to
some authorities, the most important reason for the slow
growth of Indian industries was the lack of support from
Indian enterprise was
operating under a foreign government which was
extremely unsympathetic to native private enterprise.
The tariff policy in India reflected the needs of
business interests in Great Britain. The British interests
advocated free access to the Indian market. Till 1924 the
Government refused to impose custom duties on the
import of foreign goods. Even when they imposed low
duties on some goods for purposes of collecting revenue,
they sought to neutralise their effects by imposing
equivalent excise duties on goods of local origin.
the Government ultimately adopted a policy of protec
tion, it did not give protection to all industries but only
to a few selected industries which fulfilled certain
THE THEORY OF DEMOGRAPHIC TRANSITION
The theory of "demographic transition" postulates
a three stage sequence of birth and death rate as typically
associated with economic development.
First Stage of Demographic Transition :
Death rates are high in the first stage of
an agrarian economy on account of poor diets, primitive
sanitation and absence of effective medical aid.
are also high in this stage as a consequence of widespread
prevalence of illiteracy, absence of knowledge about
family planning techniques, early age of marriage and,
deep-rooted social beliefs and customs about the size of the family,
attitude towards children.
In such a society the actual rate of
growth of population is not high since high birth rate is
balanced by high death rate. It is a stage of high growth
potential but of low actual growth.
Second Stage of Demographic Transition :
Economic development also brings about all-round improvement including the improvement in transport which
makes the supply of food regular. All these factors tend
to reduce death rate.
Thus in the second stage, birth rate
remains high but death rate begins to decline rapidly. This
accelerates the growth of population. High growth potential of the first stage is realized in the high actual growth
in the second stage as a consequence of decline in death
High birth rate and falling death rate contribute to the
growth of the average size of the family in the second
The Third Stage of Demographic Transition :
Economic development further changes the character of
the economy from an agrarian to a partially industrialized one. With the growth of industrialization, population tends to shift away from rural areas towards industrial and commercial centres.
One of the features of
economic development is typically increasing urbanization, and children are usually more of a burden and less
of an asset in an urban setting than in a rural. The
consciousness to maintain reasonable standard of living tends to reduce the size of family in an industrialized
economy; since the death rate is already low, this is
possible only if birth rate falls.
Thus, the characteristics
of the third stage are low birth rate, low death rate, small
family size and low growth rate of population. This is the
stage of incipient decline of population.
Historically it has been observed that
death rate can be controlled more easily because the
measures to reduce death rate are exogenous in nature
and hence readily acceptable to the people.
reduction of birth rate can be brought about by operating
on endogenous factors, like changing social attitudes
and customs, beliefs and dogmas about the size of the
family, about marriage, etc. This requires a much longer
time than the fall of death rate.
Consequently, birth rate
tend to fall after a time lag. The second stage of
demographic evolution has, therefore, been termed as
the stage of population explosion. This stage is the most
hazardous period for a developing economy.
Q.Which of the following has/have occurred in India after its liberalization of economic policies in 1991?
1. Share of agriculture in GDP increased enormously.
2. Share of India’s exports in world trade increased.
3. FDI inflows increased.
4. India’s foreign exchange reserves increased enormously.
Select the correct answer using the codes given below : (UPSC CSAT 2017)
1 and 4 only
2, 3 and 4 only
2 and 3 only
1, 2, 3 and 4
Ans . B
Q.Consider the following in respect of ‘National Career Service’:
1. National Career Service is an initiative of the Department of Personnel and Training, Government of India.
2. National Career Service has been launched in a Mission Mode to improve the employment opportunities to uneducated youth of the country.
Which of the above statements is/are correct? (UPSC CSAT 2017)
Both 1 and 2
Neither 1 nor 2
Ans . B
Labour Ministry launched this portal in 2015.
Q.With reference to ‘National Skills Qualification Framework (NSQF)’, which of the statements given below is/are correct?
1. Under NSQF, a learner can acquire the certification for competency only through formal learning.
2. An outcome expected from the implementation of NSQF is the mobility between vocational and general education.
Select the correct answer using the code given below: (UPSC CSAT 2017)
Both 1 and 2
Neither 1 nor 2
Ans . B
Q.Recognition of Prior Learning Scheme’ is sometimes mentioned in the news with reference to (UPSC CSAT 2017)
Certifying the skills acquired by construction workers through traditional channels.
Enrolling the persons in Universities for distance learning programmes
Reserving some skilled jobs to rural and urban poor in some public sector undertakings
Certifying the skills acquired by trainees under the National Skill Development Programme
Ans . A
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