CHAPTER 5

Growth of the Indian Economy between 1947 and 1990

In this chapter the growth of the Indian economy since independence has been analyzed. It provides an account of India’s economic development, its achievements, shortfalls, and future challenges. The economic policies and the politics behind the transformation of the Indian economy have been used as a backdrop. “India’s economic journey from an impoverished country to an emerging global economy is an inspiring example for many developing nations. In order to understand India’s economic voyage, it is essential to shed some light on India’s political and economic history. After 200 years of British rule, India became an independent, sovereign nation in 1947. This newly born nation faced a number of issues. In 1947 when the British transferred power to India, the country inherited a crippled economy with a stagnant agriculture and a peasantry steeped in poverty” (Gosai 2013). As the first Prime Minister of India, Jawaharlal Nehru (1946) put it:

India was under an industrial capitalist regime, but her economy was largely that of the pre-capitalist period, minus many of the wealth-producing elements of that pre-capitalist economy. She became a passive agent of modern industrial capitalism suffering all its ills and with hardly any of its advantage.

It was a mission impossible but policymakers and others of that time did their best and transformed the Indian economy. To better understand India’s economic growth, its economic progress should be divided into two phases: the first 43 years after independence (up to 1990) and the next three decades (1991 to the present) as a free market economy.

During the first 43 years after independence, India promoted a mixed economic system in which the government played a major role as central planner, regulator, investor, manager, and producer. Starting in 1951, the government based its economic planning on a series of five-year plans influenced by the Soviet model. Initially, the attempt was to boost the domestic savings rate, which more than doubled in the half century following the First Five-Year Plan (1951 to 1955). With the Second Five-Year Plan (1956 to 1961), the focus began to shift to import substituting industrialization, with an emphasis on capital goods. A broad and diversified industrial base developed.

“The private sector owned and operated small- to medium-size businesses, and industries protected by the government and the government took care of everything else. The government was in charge of most of the consumer services, including transportation such as airlines, railroads, and local transportation; communication services such as postal, telephone and telegraph, and radio and television broadcasting; and social services such as education and health care. The intention of the government was to provide these services at a reasonable cost as well as employment. India adopted five-year development plans in order to improve infrastructure, agricultural production, health care, and education, but progress was extremely slow” (Gosai 2013).

Growth of agriculture and allied activities:

Agriculture and allied activities constitute the single largest contributor to the Gross Domestic Product (GDP). They, are vital to the national well-being as, besides providing the basic needs of the society and the raw materials for some of the important segments of Indian industry, they provide livelihood for almost two thirds of the work force. The share of the agricultural products in the total export earnings, both in primary and processed forms, is very significant. India’s agriculture is composed of many crops, with the foremost food staples being rice and wheat. Indian farmers also grow pulses, potatoes, sugarcane, oilseeds, and such non-food items as cotton, tea, coffee, rubber, and jute (a glossy fiber used to make burlap and twine). India is a fisheries giant as well. India’s production of food grains has been increasing every year, and India is among the top producers of several crops such as wheat, rice, pulses, sugarcane and cotton. It is the highest producer of milk and second highest producer of fruits and vegetables. Besides providing for the livelihood of farmers and laborers, the agricultural sector also addresses food security for the nation.1

Over the last 4 decades, agriculture has made important strides in the country. “Since the late 1960s the introduction of new, high-yielding hybrid varieties of seeds (HYVs), mainly for wheat and secondarily for rice, has brought about the most dramatic increases in production, especially in Punjab (where their adoption is virtually universal), Haryana, western Uttar Pradesh, and Gujarat. So great has been the success of the so-called Green Revolution that India was able to build up buffer stocks of grain sufficient for the country to weather several years of disastrously bad monsoons with virtually no imports or starvation and even to become, in some years, a modest net food exporter” (Encyclopaedia Britannica). It has been able to meet the growing demand of the increasing population for their essential consumption. At the same time, it is necessary to ensure that the process of development is sustainable. Despite the overwhelming size of the agricultural sector, however, yields per hectare of crops in India are generally low compared to international standards and agricultural growth has been fairly volatile.

Key issues affecting agricultural productivity include the decreasing sizes of agricultural land holdings, continued dependence on the monsoon, inadequate access to irrigation, imbalanced use of soil nutrients resulting in loss of fertility of soil, uneven access to modern technology in different parts of the country, lack of access to formal agricultural credit, limited procurement of food grains by government agencies, and failure to provide remunerative prices to farmers.2 These problems have continued to frustrate India for decades. It is estimated that as much as one-fifth of the total agricultural output is lost due to inefficiencies in harvesting, transport, and storage of government-subsidized crops.3

Livestock: Animal husbandry is one of the important sub sector of agricultural economy and plays a significant role in the rural economy by providing gainful employment particularly to the small/marginal farmers, women and agricultural landless laborers. This sector also provides milk, eggs, meat, wool, hides and skin, dung, bones, hooves and draught power. Manures and slaughter house by-products are also sources of energy. “The contribution of the livestock sector has increased to about Rs. 27,700 crores in 1987–88 as compared to Rs. 10,600 crores in 1980–81 which constitutes 25.5 per cent of the total agricultural output. The animal husbandry sector has made good progress in the livestock production and health” (Planning Commission, Eighth Plan, Vol. 2).

Forestry: The total forest cover is 708,273 square km, which is 21.54 percent of the total area of the country.4 Forests play an important role in the India’s socio-economic development. They are rich sources of energy, housing, firewood, timber and fodder and they provide employment to a large section of the rural population. Demand for forest products and services in the country is increasing with economic growth, industrialization and increase in population. A large section of population depends upon forests for their livelihood. Commercial forestry is not highly developed in the country.

Fisheries: The major constraints in fisheries were over-concentration on shrimp fishing, non-exploitation of unconventional fishery resources in the marine sector and slow progress in the expansion of extensive and semi-intensive aquaculture systems in the inland and brackish-water fisheries. Processing and marketing facilities for sea food and inland fish were inadequate. The Fishery Survey of India carried out studies on assessment of suitable craft and gears for marine fisheries and disseminated information about fishery resources availability. In the inland water fisheries sector, the establishment of about 300 Fish Farmers Development Agencies (FFDA) and fish seed production by circular Chinese type of hatcheries etc. contributed to an increase in the average yield (Planning Commission, Eighth Plan, Vol. 2).

Industrial development:

The industrial sector was to play a key role in the achievement of such socio-economic change and public enterprise was seen as harbinger of this transformation. This gave rise to the concept of a mixed economy in so far as industry sector was concerned, with primacy of emphasis on the role of the state in the development for the modern industries base. State control and ownership of industries reflected the economic thinking and ethos of the times and was “the best that could have been expected, given the domestic and world environment extant at the time” (Rakesh Mohan 1992).

The Industrial Policy Resolution of April 1948 was the first document to provide insights on how the industrial structure was to evolve over a period to time. The Second Resolution of 1956 was a reflection of the economic diversification envisaged as part of the strategy of development. P C Mahalanobis (1961, 1963) was the architect of the strategy.

As a corollary to the industrialization strategy, and in support of it, the industrial licensing mechanism was evolved and strengthened over time till the early seventies. The fundamental basis for industrial licensing was provided by the Industries (Development and Regulation) Act (IDRA), 1951. Form the early fifties and eighties industrial licensing and a series of control in the sphere of industrial activities had created distortions in allocative efficiency, and constricted domestic production and competitiveness in the Indian industry. Industrial licensing was gradually relaxed since the mid-seventies and more sharply since the mid-eighties with favorable effects on industrial production.

The government exercised other controls such as on raising of capital issues, prices and production of selected commodities, foreign exchanges, export import allocation of credit etc., as part of the development strategy.

The experience of the eighties showed that industrial growth could pick up if barriers to entry were eliminated and units were given freedom to produce products that markets demanded. It had also become clear that public sector could not expand and needed to improve its competitive positions. The pick-up in capital market activity showed that industrial financing could be increasingly undertaken from private funds. The experience also revealed that if Indian industrial units were to be rendered competitive, they could gain higher shares in the international markets, besides improving the availability of industrial goods in the domestic markets (Sharma 1997).

Banking and finance:

India’s financial system, as of now, is large with a variety of banks, financial institutions, capital market institutions, non-banks and a number of indigenous banking and financial institutions, going beyond the dichotomy prevalent in the pre-independence period of organized and unorganized financial sectors.

The prime focus of the development of Indian banking system has basically been confined to ensure timely and adequate credit support for the viable and productive sectors of the economy. Indeed, nationalization of major banks in 1969 was a historic step in recognition of the potential of the banking system to promote broader economic objectives viz. growth, regional balance and diffusion of economic power. Since nationalization, Indian banking industry has made an impressive progress, especially in extending geographical spread and functional reach. There has been a considerable change in the structure and progress of banks during the pre-as well as post-bank nationalization period.

Since independence “the Indian capital market has evolved into a dynamic system of the Indian financial system. The primary capital market has developed as an important source of funding aided by amiable public policies, product innovation, and institutionalization. Improvement in infrastructure, adoption of state-of-art technologies and streamlining of the regulatory framework have up graded the Indian stock market to the international standards” (Misra 1997).

External sector:

Policy makers in independent India supported the external sector by a combination of initial increase in import, adaptation, protection and cautious utilization of scarce foreign exchange resources. Import substitution was accepted as not only a ‘correct strategy but also inevitable in a continental economy such as India’. Even as export-pessimism coupled with import substitution continued to hold sway, a realization that exports could still be promoted through concerted government action was also gaining ground. “The crafting of the change in the policy stance was fashioned by the recommendations of a number of committees which were set up during the seventies and eighties” (Kapur 1997). Foreign investment policy during the late sixties and seventies was marked by tight regulation and discretionary control. Towards the end of the eighties alongside the growing importance of external transactions in economic activity, there have been fundamental shifts in the policy approach.

Social sector and poverty: The Indian state has been more penetrated by social actors. Alleviation of poverty has been one of the main objectives since the beginning of the plan periods. However, the combined effect of growth through trickle down and direct attack through various anti-poverty programmes has been quite dismal. Even though poverty ratio has witnessed some decline in the eighties and nineties, the level has remained high. Deaton and Dreze (2007) point out that the number of Indians living at less than a dollar a day has come down, even though there is a substantial debate about the extent of decline in the poverty rate. “The lack of effective targeting of public distribution system (PDS), backtracking from land reform measures, inadequate attention to primary education and health care system have been the missing links” (Mohapatra 1997). India’s public health record presents a dismal picture. The infant mortality rate declined by 30 percent in the 1980s. India’s growth has produced more development for the rich and the middle class than the poorest sections of society. India’s growth has increased economic inequality.

“The trajectory of economic policies favoring India’s growth was path dependent. From 1947 to 1975 the policy consensus favored an important role of the state within a relatively closed economy. Private enterprise survived during this period but India’s trade declined. Changes in the policy consensus favoring economic deregulation began to appear in the mid-1970s, which prepared the ground for the tectonic policy shifts beyond 1991. The major challenge for India’s development is inclusive growth. Growth has unambiguously reduced poverty and improved the human condition in India. But the gains of the middle and richer classes have been greater than those that went to the poorer sections of society” (Mukherji 2009).

India’s Growth Trajectory since Independence

From 1950 to 1980, India’s real GDP grew at an annual average rate of 3.6 percent (1.5 percent in per capita terms). The shift to a higher growth path during the course of the 1980s is referred to as the Indian growth turnaround. Fast growth in India since the early 1980s has placed it among the top nine rapidly growing economies in the world (Ahmed and Varshney 2009). An analysis of aggregate data suggests a pickup in growth during the early 1980s, before most of the major policy changes. The low growth in the first phase is referred to as the “Hindu rate of growth,” a period in which import duties were among the highest in the world, foreign direct investment (FDI) was prohibited in many sectors of the economy, and there was extensive regulation of interest rates. The upward shift in India’s growth path during the 1980s is significant for two reasons: The turnaround happened well before the balance of payments (BoP) crisis of 1991 and the large-scale macroeconomic reforms that ensued.

“It was the service sector that led the increase in the overall growth rate in the early 1980s. Since many components of services are income related (such as financial services, business services, and hotels and restaurants) and begin to increase only after a certain stage in development, the fact that India’s service sector created the impulse for the growth turnaround is puzzling. What is indisputable is that something happened during the 1980s that opened the door to a rise in growth” (Ghate and Wright 2010).

It is commonly believed India’s growth acceleration was mainly due to a change in the state’s attitude toward the business sector from being antibusiness to being probusiness in the early 1980s and less to do with changes in economic policies. Sen (2007) finds little empirical support, however, for the argument that the state’s attitudinal shift to the private sector in the 1980s was the primary cause of India’s growth acceleration. He has argued that the effect of the attitudinal shift of the state toward the private sector on India’s growth acceleration was second order, and if it did have an effect on growth at all, it was only through changes in economic policies, rather than independently of the latter. He favors a “back to basics” story of India’s growth acceleration. The increase in economic growth occurred due to three policy-influenced fundamentals:

1. A)Financial deepening
2. B)A rise in public investment
3. C)A fall in the relative price of equipment

From the “mid-1970s to the early 1980s, financial deepening, which was a consequence of the bank nationalization of 1969, and an increase in public fixed investment were the key factors for India’s growth acceleration. Growth was sustained from the early 1980s onward by the fall in the relative price of equipment investment brought about by trade reforms targeting the capital and intermediate goods sectors. Thus, India’s growth acceleration can be attributed in its early phase to a classically statist model of development and in its later phase to economic reforms that significantly altered the rules of the game with respect to the integration of Indian firms with the world economy” (Sen 2007). India is today a changed country from what it was half a century ago. It still has huge challenges staring it in the face, but at the same time, the country has long since broken with the “Hindu rate of growth”; its population below the poverty line has fallen steadily since the late 1960s, and sharply over the last decade; and it has joined the pantheon of major players globally.

It seems quite remarkable that India did what no other newly independent developing country did. It invested in politics first—establishing democracy, free speech, independent media, and equal rights for all citizens. While a large part of the credit for this does go to the early political leaders, such as Mahatma Gandhi, Nehru, and Ambedkar, and to progressive writers and intellectuals, such as Rabindranath Tagore, Periyar E.V. Ramasamy, and Sarojini Naidu, as in all matters of history, luck also plays a role. And India had it in ample measure. In any case, the upshot was that in terms of political design and structure, with regular elections, a progressive constitution, secularism, free media, and an empowered supreme court, India resembled an advanced nation, and in this respect had very few peers in the developing world (Basu 2018).

India’s downside turned out to be its economy. With growth sluggish, large swathes of population living in abject poverty, and widespread illiteracy, the country trudged along decade after decade. Despite overall growth remaining subdued at around 3.5 percent per annum, much was happening beneath that. India tried to institute five-year planning, with an effort to set up heavy industries, large-scale steel production, and dam building to generate electricity on a large scale. Somewhere in the mid-1960s India had a successful green revolution and broke out of the trap of low agricultural productivity and frequent famines. Though this was most visible in Punjab, Haryana, and western Uttar Pradesh, its benefits were felt across the nation.

Sivasubronian’s (2000) comprehensive statistical study shows that annual growth, from being negligible during the first 50 years of the 20th century, moved up to somewhere between 3 and 3.5 percent in the decades immediately after the country’s independence in 1947. Nayyar (2006) in his Kingsley Martin lecture at Cambridge University, in fact, identifies 1951 and 1980 as the two turning points in India’s growth in the 20th century. Growth declined between 1979 and 1980; it had plummeted to 5.2 percent, the worst year in India’s history from 1947 to now. In fact, after 1979 to 1980, India has not had a single year of negative GDP growth.

“What India meant by the term “socialism” (and pursued—that too without much success) was a kind of welfare state, in which there would be support for the poor in terms of health care, education, and basic food. But even this was more often present in writings emerging from the government than in actual action. In terms of the government owning the means of production, India was nowhere near a socialist state: India had roughly 14 percent of the GDP coming from state-owned enterprises, whereas for China this was 40 percent. These data are not easy to compute, and there is indeed a big margin for error, but the large difference is significant”(Basu 2018).

Democracy is a remarkable achievement for India. It needs to be appreciated that this, like good infrastructure, is an institutional and political investment that modern India has inherited and it would be folly to damage it just when the nation has reached a stage where it is able to take advantage of and build on it to power its economy, promote development, and even step up the GDP growth rate.

Good growth is the outcome of various factors: the nature of institutions in the nation, the prevalent social norms, the positioning of the nation in the global polity, and the nature of the economic policy pursued by the government. Some of the drivers of growth are beyond the control of any individual or organization. But there are also some that can be shaped by the government and individuals in the nation. Economic growth does not occur solely because of good economics, but is due to many other factors that lie beyond mainstream economics (Basu 2018).

Barring the growth spike in 1975, the nation chugged along at a fairly steady low-growth rate, of around 3.5 percent per annum, for the first three decades. Given that India’s population was initially growing at over 2 percent per annum, this meant a snail’s pace growth of barely over 1 percent for per capita income. Table 5.1 presents the annual GDP growth rate, averaged over decades, and shows India growing at 3.91 percent, 3.68 percent, and 3.09 percent over the 1950s, 1960s, and 1970s, respectively. In decadal terms, the big break was in the 1980s, when the growth breached the 5 percent mark for the first time.

Table 5.1 India’s decadal GDP growth and investment rates

Notes: The GDP growth rate before 2011 is shown at factor cost, at constant prices, with 2004–2005 as base; the GDP growth rate after 2011 is shown at factor cost, at constant prices, with 2011–2012 as base; and Investment rate refers to gross capital formation as a percentage of GDP.

Source: Economic Survey 2017–2018, Government of India, 2018.

Growth picked up through the 1980s owing to freed up markets and eased controls, which were beginning to smother the country’s growth. But, by the end of the 1980s, more than anything else, it was fiscal laxity that helped India grow faster and also set the stage for the big crisis of 1990 to 1991, when the first Gulf War precipitated a massive slowdown and a BoP crisis for India (Basu 2018). The broad direction of India’s growth is upward; there is indeed a sharp rise in growth between the 1970s and 1980s. There were some important policy drivers behind the growth pickup, including greater reliance on markets and less on the state. From the mid-1980s fiscal fueling contributed to the growth but also to the economic crisis of 1990 to 1991.

Turning to economic policy, the most important story was that of savings and investment. What arguably gave a boost to savings, and therefore, investment was the decision to nationalize all banks in 1969. One consequence of this was that there was a sudden rise in the number of bank branches in relatively remote rural areas (a consequence of a directive from the government to the state-owned banks). This made it easier for people to save money, and through the 1970s there was a steep and unprecedented rise in India’s savings rate. The spread of banking facilities in India played a positive role in promoting savings. Public savings tend to boost overall savings because, although public savings displace private savings, this displacement effect is muted.

India saw a most unusual growth pattern for a developing country. It was not the manufacturing sector that led India’s growth but the services sector. Over the next 15 years India services sector growth was primarily because of the information technology sector, in which the country excelled. To complete the picture of how India has developed overall, it is important to look at other primary indicators of progress: literacy, poverty, inequality, and health. The story here has been less encouraging. For a nation committed to equality and socialism, India did surprisingly poorly on these important indicators of overall development (Basu 2018). Poverty has been declining, but with over 20 percent of the population living on less than $1.90 a day and 60 percent living on $3.20 a day or less, there is still a great distance to go. These indicators provide little comfort and the nation cannot be unmindful of the fact that they can become a drag on overall development and even GDP growth. “Inequality numbers are dismaying as socialism in India is mainly a rhetorical exercise”. In a nation that now has several individuals listed among the world’s wealthiest individuals, the numbers on poverty tell us that India does have work to do in reversing some of these inequality trends.

To conclude, the country’s development indicators have changed in the last half century. The country has experienced an increase in per capita income—especially since the 1980s—as well as reductions in poverty and infant mortality rates. These improvements are not insignificant and mark a sharp break from the near stagnation that the country experienced during British rule. For several hundred million poor people in delicate health and with little education, however, the country will have to find a way to overcome the technical, institutional, and economic barriers to developing the capabilities necessary for functioning of the economy.

Endnotes

1. 1.State of Agriculture in India. http://prsindia.org/policy/discussion-papers/state-agriculture-india, (accessed on December 25, 2019).
2. 2.Ibid.
3. 3.India – Agriculture. https://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/India-AGRICULTURE.html, (accessed on December 25, 2019).
4. 4.Ghosh, S. February 16, 2018. State of Forest Report says that India’s forest and tree cover has increased by 1 percent. https://india.mongabay.com/2018/02/state-of-forest-report-says-that-indias-forest-and-tree-cover-has-increased-by-1-percent/, (accessed on December 25, 2019).