Indian Economy on the

eve of Independence
There is no doubt that our grievances against the British Empire had a sound basis. As the
painstaking statistical work of the Cambridge historian Angus Maddison has shown, India's
share of world income collapsed from 22.6% in 1700, almost equal to Europe's share of 23.3%
at that time, to as low as 3.8% in 1952. Indeed, at the beginning of the 20th century, "the
brightest jewel in the British Crown" was the poorest country in the world in terms of per
capita income.
-Manmohan Singh
IIT Delhi
Indian Economy on the eve of Independence
Important indicators of Indian economy in 1950-51

Indicator 1950-51 2011-12
GDP at 1999-00 prices
(Rs crore)
2,23,899 83,62,495
Per Capita NNP (Rs) 5708 38,037
Forex Reserves (US $
million)
1914 2,60,742
Life Expectancy at birth
(years)
32.1 66.1

Taken from Dutt & Sundaram Indian Economy p. 2 whose source is Economic Survey(2012-13)
Indian Economy- caught in a vicious
circle of poverty
Poverty
Low
consumption
& income
Low savings
& capital
formation
Low
productivity
& income
Features of Indian Economy at
Independence
1. Underdeveloped Economy
Low per capita income
Agricultural Economy
In 1948, about 70% of the population was dependent on agriculture which
contributed to 50% of the national income. Per hectare production was very
low
Underdeveloped industries
Basic & heavy industries were very few and productivity was low
Import based economy
Dependence on imports even for consumer goods
Poor infrastructure & human development
Poor quality & network of means of transport & communication and illiteracy

2. Predominance of Agriculture
Agriculture contributed more than 50% of the national income totally in
contrast to the economic structure of developed economies
More than 70% of the population was dependent on agriculture
Huge pressure of population on land


Taken from Uma Kapila, Indian Economy Since Independence p. 33
3. Stagnation of economy
Growth rate of per capita income during British period for almost a century
was less than 0.5%
The high population growth also reduced potential for growth
Main reasons were:
Overdependence on agriculture
Destruction of cottage & handicraft industries
Commercialization of agriculture
Economic drain of wealth to Britain
Discriminatory taxes which made Indian goods costlier
Taken from Jain T.R., Trehan M, Uppal R & Trehan R, Indian Economy p. 5

4. Depreciated Economy
In every economy, extensive use of factors of production leads to their wear &
tear. If these are not replaced, the production capacity falls. Such an
economy is called depreciated economy
During World War II, India supplied huge quantity of goods to Britishers and
was paid for it in terms Sterling. But due to lack of real capital, Indian
economy became depreciated soon after
Extensive use of means of transport during the war led to tremendous
depreciation of railway equipment during the war. This adversely affected
railway traffic
5. Semi-Feudal economy
Neither wholly feudal nor capitalistic, hence semi-feudal
Mixture of the following modes:
Feudalism Zamindari, Ryotwari & Mahalwari systems
Capitalism Capitalistic industries like cotton textile, iron & steel, sugar with large
amounts of foreign investment. Also present was capitalist agriculture like tea,
rubber & coffee plantations




6. Disintegrated Economy due to Partition
Per capita availability of land decreased
India got 82% of the population & 77% of the land
Disadvantage to agriculture While Pakistan became a surplus state in
foodgrains, India faced shortage due to lesser (65%) of the foodgrain area,
irrigation facilities, lesser cotton textile and jute producing areas
Setback to industries 91% of the industries remained in India but due to
shortage of raw materials, India had to import them to feed its industries
Foreign Trade India had to import jute, cotton etc. from outside causing
uncertain supply of raw materials
7. Income Disparities
A part of the high income inequality in India around the time of independence
was caused by very high incomes of the British in India
0.06% of the total population (British officials & businessmen) received 5% of
the total income (Madison, 2002)
Even after the departure of the British, income inequalities remained high
The main reason is the very low income level of the poor classes
Taken from Branko Milanovic, Peter H Lindert & Jeffery G Williamson, Measuring Ancient Inequality p. 56

8. Industrial Backwardness & Capital Deficiency
Deficiency of heavy & basic industries
Low productivity and capacity utilization
Total production of steel in 1947 was just 9 lakh tonnes
Low level of capital formation in India due to
Low inducement to invest
Low propensity & capacity to save
9. Lack of Social Overhead Capital
Social Overhead Capital or infrastructure capital consists of such industries
which help in the growth of other industries
Railways & other means of transport, electricity & other sources of power,
banking, communication etc.
The British designed these so as to serve their own interests without paying
attention to their role in development of Indian economy
10. Low Standards of Living
The standard of living among the peasant class which formed a huge part of
the population was very low
Famines continued to occur regularly in the country during the British period
The 1943 Bengal famine shook the foundations of the country
One of the main causes of the famines was the lack of purchasing power
among the peasants and related classes
Large number of people were unemployed as sufficient jobs were not created
to accommodate the growing population

Economic consequences of British
conquest
Indeed some kind of chart might be drawn up to indicate the close connection
between length of British rule and progressive growth of poverty. That rule began
with outright plunder, and a land revenue system which extracted the uttermost
farthing not only from the living but also from the dead cultivators. It was pure
loot.
-Jawaharlal Nehru
Economic consequences of British
conquest
Decline of Indian handicrafts and progressive ruralisation
Land systems (1793 1850)
Commercialization of Agriculture
Process of industrial transition in India
Colonial exploitation


Decline of Indian handicrafts and progressive
ruralisation

Attempts to restrict and crush Indian manufacturers
Disappearance of princely courts resulting in industries losing patronage
Competition of machine-made goods with handicraft-goods
Development of new forms and patterns of demand as a result of foreign
influence
Destruction of industries resulting in unemployed craftsmen moving
towards agriculture (Deindustrialization)




Introduced in Bengal and
neighboring areas. This settlement
raised status of revenue collectors
to that of private landlords.
Land systems
(1793 1850)
Zamindari Ryotwari
Evolved for large parts of
Bombay and Madras and
extended to north-eastern and
north-western India. This
settlement made each peasant
landlord of their own land and
peasant was directly responsible
to the state for annual payment
of land revenue.
Commercialization of
Agriculture(1850-1947)

Commercialization of agriculture implies production of crops for sale rather
than for family production.
Industrial revolution in Europe increased demands for raw materials.
British induced peasants for commercial crops by paying them more.
At the same time, introduction of railways networks enhanced
commercialization.
This led to fall in production of food to consume.
Consequently this period is also marked by occurrence of most terrible
famines.


Establishment of first cotton-
mill, jute mill and first coal
mine.
Establishment of railway
network
By end of 19
th
century there
were 194 cotton-mills and 36
jute mills and coal production
had risen to 6 million tonnes
per annum.
Process of industrial
transition in India
Industrial growth
during 19
th
century
Industrial
progress during
20
th
century
In 1905, SWADESHI movement
stimulated Indian industries.
First world war created great
demands for factory goods, which
increased the production of iron and
steel, jute, leather goods, cotton
etc.
In 1924, government of India gave
protection to selected Indian
industries against foreign
competition.

Colonial exploitation

Exploitation through trade policies
Forcing cultivators to cultivate and sell Indigo plant at a very low price
Forcing artisans through company agents to sign bonds to deliver a certain quantity of
goods at a price fixed by the Gomasta.
Exploitation through manipulating import-export duties:-
After 1700, imports of Indian printed cotton fabrics in England were banned.
Heavy import duties were imposed on Indian goods, other than foodstuff and raw materials
imported from India and very nominal duty on imports of British manufacturers into India.
Discriminating protection whittled down by the clause of imperial preference

Exploitation through export of British capital to India
Exploitation through finance capital via the managing agency system

Consequences of exploitation

India remained primarily an agriculture country and its agriculture became
commercialized.
Handicrafts destroyed and India became an importer of manufactured goods.
Policy of discriminating protection along with imperial preference gave British
complete control over the India market.
British developed economic infrastructure in the form of railways and
irrigation and electricity works with a view to promote foreign trade but no
effort was made to develop heavy and basic industries.
Managing agency system did help to promote consumer goods industries in the
initial phase, but exploitative in character later.
British exploited India through the economic drain via the home charges.

A Brief look at Union Budget 1947-48
BUDGET OF NEWLY FORMED INDIA
Announced by SHRI R.K. SHANMUKHAM CHETTY, Finance minister
Covers a period of 7 month from 15
th
Aaugust,1947 to 31
st
March,1948

Necessity to present a budget



Problems
arising out of
the partition
Economic
Situation in
the country
Decline in agricultural
and industrial production
Bad food position, had to
import a large amount of
food, causing flow of currency
Economic consequences
arising out of these
disturbances in Punjab and
North-West frontier provinces
Arrangement for coins
and currencies
Division of assets and
liabilities
Transfer of staff and
organizations
There remained some issues that could not be settled very easily and
hurriedly so arbitral Tribunal and Joint Defense Council was set up to
look at some issues that were left for further consideration.

Issues handled by Arbitral tribunal :
Allocation of debt between the two Dominions
the method of discharging the pensionary liability
the valuation of the Railways
the division of the assets of the Reserve Bank
Issues handled by Joint Defence council:
To reconstitute the Armed Forces between the two Dominions
To allocate the military stores, equipment and installations between them






Decisions taken under fiscal and
economic relation


Economy
Trade
Common
Currency
System
Equal contribution
Coordinatio
n
Revenue
Budgeted revenue was Rs. 171.15 crores-
This includes 50.5 crores from custom receipt, 29.5 crores from
income tax, 80.5 crores from ordinary collections.
Revenues from posts and telegraph was 15.9 crores and their
working expenses was 13.9 crores leaving a net surplus of 2 crores
Rebate of interest on its share of the accumulated profits in the
past was 71 crores

Revenue expenditure was Rs. 197.39 crores
Defense services accounts for 92.74 crores
22 crores for expenditure on the evacuation, relief and rehabilitation
of refugees from Western Pakistan.

Liabilities on Indian Government
Outstanding debt of the late Central Government and the pensions chargeable

subsidies on
imported
food grains
evacuation,
relief and
rehabilitation
of refugees
from Western
Pakistan
nation
building
activities
such as
education,
medical,
public health
includes loans
Means to Revive Economy

Started issuing loans at two percent

But, a small time later there was strong criticism as there were
flaws in monetary policies:
Considered to be a cheap money policy
No absolute criterion to judge propriety of rates at which
govt. borrow in market
Question of keeping a balance between industry and
government demand such that funds are utilized in best way
Steps to overcome loan problem


1. Programs to obtain the funds required by Government as
cheaply as possible

2. Reorganize small saving movements, undertaking large
schemes of development

Sterling balance
Govt. tried to reduce the outflow of currency
Govt. aims that reserves to be used for purchasing capital goods not to finance deficits
Decided to adopt restrictive import policy(excluding certain essential items)
After all these adoptions govt. was able to credit their current account successfully


YEAR Earned
( in dollars)
Spent
(in dollars)
Net
Deficit/surplus
1939-1946 405 crores 240 crores + 165 crores
1946-1947 83 crores 98 crores - 15 crores
Taken from R.K. Shanmukham Chetty Speech (Minister of Finance), Union Budget 1947-48

Deficit and General final position
DEFICIT
Mostly covered by additional taxation
Increase existing export duties
To say exactly is not easy as it fluctuates with the changing expenditure and
revenue

POSITION
relatively small burden of unproductive debt and almost negligible external
debt
persistence of inflationary trends and the unsatisfactory food position
level of taxation has badly affected incentive for investment

References
Datt, Gaurav & Mahajan, Ashwini, Datt and Sundaram Indian Economy
Jain T.R., Trehan M, Uppal R & Trehan R, Indian Economy
Branko Milanovic, Peter H Lindert & Jeffery G Williamson, Measuring Ancient
Inequality
Kapila, Uma, Indian Economy Since Independence
R.K. Shanmukham Chetty Speech (Minister of Finance), Union Budget 1947-48