Economic reforms in India

Economic reforms in India

Economic reforms in India is something which is under close study. The phrase is commonly used to describe post-1991 events. The country however has seen a number of distinct eras, which had definite differences from the economic practices of the previous eras. In a sense, economic reforms can be said to have started with the first large scale integration of the country from many small kingdoms and provinces to a large entity under one government.

The Pre-British Era

This was a period in Indian history where for the first time, large areas of the land was brought under the control of a single entity either the Lodhis, The Suris or the Mughals. Though coinage and commerce with neighboring states was practiced, it is in this era that noticeable use of Macroeconomic stimuli like building of roads, tombs and gardens was introduced (most likely unconsciously). Large scale building projects like the Grand Trunk Road (2500 kilometers long - 16th Century), Tuglakabad, Fatehpur Sikri, Taj Mahal were carried out in this period. This led to urbanization of alternate locations and creation of skilled labor pools, concentrated around these cities. This process started with the Suris (notably Sher Shah Suri) and ended with Aurangazeb.

The British Era

Even under the Delhi rulers, India was not fully integrated under one government. The Western and Southern parts of the country were still outside the influence of the Delhi empire. With the arrival and the rapid establishment of the British East India Company as a single trading block, the economic landscape changed. With the Company influencing decisions in different parts of the country, there was a general direction given to the governance and to the economy as such. The British soon formalized the colonization of the country and with this, the economic policies began to reflect those of the British Empire.

Large-scale trading with other countries and the formation of industries like textile and steel happened in this era. This also saw the discovery of petroleum and the setting up of a refinery in Digboi, Assam.

The British Era was characterized by the country growing into an economic block and also by industrialization of many parts of the country notably Bombay (now Mumbai), Calcutta (Kolkata) and Madras (Chennai).

"The Great Calamity"

Roughly thirty-year period from 1870-1900 in British-controlled India (see British Raj), in the wake of the Indian rebellion of 1857 against British rule. The period is of interest especially to historians, economists and demographers because of the manner in which governing administrative policies caused its disastrous conditions to arise and be exacerbated. Furthermore, it represents one of the most severe such economic and demographic collapses ever suffered by a modern nation, exceeding in scale even the similar disasters of the nearly contemporaneous Potato Famine in Ireland, the Ukraine during the mass Soviet collectivization of agriculture in the 1930s, the Killing Fields of Cambodia’s Khmer Rouge in the 1970s, and the famines and massive demographic ruin resulting from the Thirty Years’ War in the lands that now constitute Germany in the 1600s.

India in the 1700s had been a relatively prosperous nation on the basis of cumulative GDP, food and crop production, literacy rates, urban conglomerations, per capita income and flourishing industries such as textiles, glass products and metallurgy with substantial exports to Europe, the Americas and other regions in Asia. However, by 1900 India’s native industries had been virtually decimated with a substantial excess of imports, chiefly from elsewhere in the British Empire, in relation to exports. Skilled Indian artisans had largely lost work and been compelled to return to small farms or work at subsistence levels in cities, resulting in significant de-urbanization and the growth of enormous and squalid slums in cities such as Calcutta and Madras. Additionally, up to 40 million Indians perished in massive and recurrent famines that swept India during the Great Calamity period. The extent to which the Great Calamity was a deliberate genocide perpetrated by the British against potentially rebellious Indian communities, or was a predictable yet still unintentional product of a ruthless imperial policy, remains quite controversial.


Following the victory by the British general and statesman Robert Clive at Plassey in 1757, the British East India Company, which had already established a presence in the Indian Subcontinent by the late 1600’s, began to rapidly seize administrative control of numerous regions particularly in coastal India and Bengal. British military forces and political officials, acting on behalf of the Company, subsequently proceeded to establish their domain over more inland areas of Indian territory from the native rajas, nawabs and Mughal viceroys. Since the East India Company was substantially interested in concerns of favorable balance of trade and mercantilist trading policy, Company officials generally took steps to weaken native industries which they saw as competitors, by raising duties and tariffs selectively on local producers, restricting Indian exports while promoting increases in imports, and assuming control of Indian farmland and production facilities, exporting foodstuffs and goods to wealthier buyers in Britain.

These policies caused severe difficulties for local farmers and craftsmen, with dramatic decreases in production of food and textiles especially in Bengal, which suffered a catastrophic famine in the late 1700’s. However, much of the Company’s control over Indian territory was indirect, and many native rulers and policies were left in place. Nevertheless, native frustration with the Company’s economic restrictions, small nationalist uprisings in the early 1800’s, and religious objections by both Hindus and Muslims to the greasing of cartridges used in Company-supplied firearms, using pig and/or cow fat-— a standard policy—- led to the outbreak of the Great Rebellion (also called Sepoy Mutiny, First War of Indian Independence) in 1857. After a short period of intense and brutal fighting requiring reinforcements of British troops from elsewhere in the Empire, the Great Rebellion was crushed with substantial bloodshed.

After 1857, the British Crown assumed direct control of the domains in the Indian Subcontinent formerly ruled on behalf of the East India Company while declaring Queen Victoria to be the Empress of India, resulting in the beginning of the British Raj. Many Indian officials were dismissed or executed for perceived or suspected disloyalty, resulting in a more pervasive and direct expansion of British mercantilist policies throughout India. Tariffs on Indian merchants were raised substantially while more and much larger tracts of Indian farmland were seized and administered by British officials for production of goods, including essential foods, which were then exported to Britain. Harsh restrictions were placed on Indian internal trade to allow for profits by British functionaries acting as middlemen, and the flooding of Indian markets with British goods led to substantial deflation of native Indian goods—- driving millions of Indian artisans out of work—- while a series of regulations on food production and transport led to substantial inflation of the price of foodstuffs.

Furthermore, in the 1870’s and early 1880’s, British soldiers initiated further expeditions into Afghanistan, where the British had suffered a disastrous defeat in 1842 (see First Anglo-Afghan War). Britain regained interest in Afghanistan due to increasing competition with Russia for domination of trade in Central Asia in the later decades, and while the British were again defeated in the Second Anglo-Afghan War, they raised taxes substantially on Indian peasants to help fund the expensive expeditions into Afghanistan’s forbidding and hostile terrain. Sporadic remaining uprisings in British-controlled Indian territory were ruthlessly crushed, with many suspected combatants in rebellious villages killed or sent to work camps in remote territories such as Andaman Island.


The result of these collective and pervasive shocks to India’s economy and agriculture was a “perfect storm” in which Indian farmers suffered tremendous and sudden difficulties in both producing and distributing food, while skilled Indian workers were unable to derive sufficient income from ruined industries to purchase foodstuffs that were increasingly expensive. The massive dislocations led to the almost complete collapse of India’s native industries and the deaths of 30-40 million Indians in the 25-30 famines that rocked India during the period. Literacy in India dropped markedly, while the native textile industry in particular collapsed almost entirely. By some estimates over $1 trillion in today’s wealth was transferred from India to other regions within the British Empire during the period, occurring on top of earlier wealth transfers such as the British acquisition of the Kohinoor Diamond in 1849, the rightful possession of which remains a highly controversial issue in the present. The famines continued up to independence, with the catastrophic Bengal Famine of 1943 claiming over 3 million more lives. Since independence in 1948, despite still substantial poverty among much of India’s population, such large-scale famines have been rare, and literacy has substantially increased even in rural regions.

Many authors, such as William Digby, Mike Davis, Amartya Sen, K.T. Shah and Gertrude Emerson, have discussed the Great Calamity and surrounding epochs in India at great length. Their studies have focused in particular on the transfer of wealth and the famines that overran India during the period, demonstrating the extent to which the administrative policies of the Raj effectively blocked the distribution of food and economic emergency measures traditionally used in democratic countries, in particular, to confront food shortages. Davis, for example, has noted that the caloric intake of many Indian workers under the British-imposed economic regime-- in comparison to their labor output-- compared unfavorably with some World War II concentration camps such as Auschwitz.

Nevertheless, the extent to which the Great Calamity constituted a deliberate genocide, as opposed to a disastrous though basically unintended consequence of a predatory imperial policy, is highly debated. While mass intimidation of potentially rebellious villages was acknowledged practice, it is questionable whether hard-hit regions in India were directly targeted for destruction due to supposed disloyalty, or were merely left vulnerable to the sudden shocks of oppressive British agricultural and administrative policies-- or otherwise swept up in general acts of retaliation by British troops and administrators who suspected sedition and a threat to their rule but did not single out particular tribal groups and communities per se. It is unclear how aware Raj officials were of the scale of the famines. Furthermore, many British citizens in the Indian Subcontinent-- such as William Digby himself-- did seek to obtain food aid for especially stricken regions such as Madras, though their pleas were largely ignored by high-ranking British officials.

The Nehruvian Era

This era started out with the independence and was marked by a high degree of uncertainty with respect to the direction the country had to take. Nehru was enamored by the Socialist model of development and envisioned an economy directed by the government. The country under him adopted the Socialist model of development. This marked, in a sense, a reform from the British economic model. Under this model a Planning Commission was set up and a process of generating Five-Year Plans was initiated.

The central idea was that the country had to progress in orderly steps. The first plan focused on Agriculture and the second on Industries. Though Agriculture remained shackled by lack of labor reform, industrialization picked up in a big way. The large industrial institutions that today form the "Navratnas" had their roots in this period, either as separate companies or as departments in the respective ministries.

The Nationalist Era

The period after Nehru was politically fluid and notable reforms did not happen immediately. After Indira Gandhi became the Prime Minister, the economic process in the country changed direction. Till this period, the state was primarily a planner of the growth, with high degree of private participation. From this period onward the central government became the planner and the executor of macroeconomic policies.

This period saw the success of the Green Revolution which effectively freed India from starvation. There was lesser dependence on aid.

Mrs. Gandhi had a deep suspicion of foreign companies and this led to the nationalization of all foreign-owned companies. Primarily the nationalization was done in the banking and the refining sectors. This period saw the formation of large companies in these sectors. Notably Indian Oil Corporation, Hindustan Petroleum, Bharat Petroleum. The State Bank of India became a parent organization for these banks and all banking was brought under the Reserve Bank of India.

During the seventies, India moved closer to the Socialist bloc and the development was often in collaboration with these countries. A number of Indian companies tied up with Russian or Soviet Bloc companies to manufacture products in India. This led to some degree of high technology finding its way into the Indian industries. However, this period was characterized by the near total withdrawal of Western companies from India.

The major successes in this period were the development in space and nuclear frontiers.

After the assassination of Mrs. Gandhi in 1984, Rajiv Gandhi became the Prime Minister. The overwhelming majority for this government allowed for some bold deisions on the economic front. This period saw the opening up of the telecom sector and the focus on high-technology. The First Gulf War saw high oil prices and the Indian economy, largely dependent of Gulf oil was on the verge of collapse. There was a debt repayment crisis and the forex reserves were near zero. This period saw India pledging its gold to boost up reserves. With this balance of payment crisis the nationalist period also came to an end.

Recent Reform

The economic liberalisation of 1991, initiated by then Indian prime minister P. V. Narasimha Rao and his finance minister Manmohan Singh in response to a balance-of-payments crisis, did away with the Licence Raj (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors.cite paper | author=Panagariya, Arvind | title=India in the 1980s and 1990s: A Triumph of Reforms | date=2004 | url=] Since then, the overall direction of liberalisation has remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies.cite news | title=That old Gandhi magic | date= November 27 1997 | publisher=The Economist | url=]

Since 1990, India has emerged as one of the wealthiest economies in the developing world; during this period, the economy has grown constantly with only a few major setbacks. This has been accompanied by increases in life expectancy, literacy rates and food security.

ee also

*Economy of India
*Timeline of the economy of India


* Davis, M. Late Victorian Holocausts: El Niño Famines and the Making of the Third World, 2001, Verso. ISBN# 1859847390
* Digby, W. 'Prosperous' British India: A Revelation from Official Records, 1969 ed., Sagar Publications.
* Emerson, G. Voiceless India, 1930, Doubleday.
* Sen, A. Poverty and Famines: An Essay on Entitlement and Deprivation, 1984, Oxford University Press. ISBN# 0198284632
* Shah, K. Wealth and taxable capacity of India, 1924, P.S. King & Sons.

See also

*Bengal Famine

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