The Indian Economy

Matthew McCartney

• Publisher: Agenda Publishing
• Year: 2019
• Print ISBN: 9781788210096
• eBook ISBN: 9781788212731
• Topic: Politics & International Relations
• Subtopic: Economic History
• Index: Politics & International Relations

The Indian economy has undergone dramatic changes over recent decades encompassing episodes of rapid growth and stagnation. It is a complex economic story that stretches back to the seismic events of 1947. This book charts the development of the Indian economy since independence and partition, and provides a rigorous presentation of India's contemporary political economy.

As well as providing a comprehensive survey of the main features of the Indian economy, the book critically examines key debates surrounding the country's economic trajectory, in particular those that link it to the dominance of particular class interests, and those that argue that India's economic growth has not delivered equivalent welfare gains. Throughout, the book uses revealing case studies of poverty and inequality, of education, health, work and gender issues to outline the human story behind the economic figures and performance indicators. The economic impact of internal geography, regional diversity and discrimination is also assessed. The distinct, and sometimes puzzling, features of India's political economy are explored, including the significance of the service sector, a weakening state, and the democratic failure of public service delivery.

The book offers an authoritative overview of the contemporary Indian economy suitable for students seeking an introduction to this most diverse of economies.

1

Introducing the Indian economy, 1947–2017

It seems obvious to begin a book about contemporary India in 1947, the moment the British Indian Empire became just India (and Pakistan). But it does need justification. Some scholars have emphasized 1947 as being more about continuity. Gradual political change, such as the 1909 Morley-Minto Reforms and 1935 Government of India Act had slowly increased both the number of Indians able to vote and the participation of Indians in political office. After 1937 Indian politicians formed governments to rule at state level while the British political presence was increasingly being squeezed out of day-to-day local politics and became ever more isolated at the highest levels of government. During the Second World War the British Indian Army expanded rapidly through the recruitment of Indian soldiers and senior officers. While almost entirely British in the 1930s only around half the officers of the elite Indian Civil Service (ICS) were British by 1946. As this book shows later rapid growth of Indian owned business, particularly in consumer goods but also in banking, shipping and iron and steel had also reduced the predominant economic role of Britain in India by 1947.

But 1947 is crucial.

The year marked much more than just a change in personnel at the top of government. The British colonial government was very much in power until independence. In 1939 Britain declared war on behalf of India without local consultation and mobilized the entire country for soldiers and supplies. In 1942 the mass anti-British Quit India Movement was crushed and its leadership easily rounded up and imprisoned. Independence in 1947 marked a real change in political power relations. The year also saw a real change in the foundation of political power from a very restricted voting franchise to democracy based on a universal franchise, which rejected property, gender and education qualifications. The British had long rejected universal franchise. The final legislatures elected under British rule in 1946 had rested on an electorate of 30 million people, or less than 10 per cent of the population. Independence was also scarred by the horrors of partition which saw British rule across the sub-continent being replaced by two independent nations, India and Pakistan (then comprising West and East Pakistan, the latter becoming independent Bangladesh in 1971). Partition caused the largest mass migration (14 million people) in human history and during the few months around independence perhaps one million people lost their lives. We cannot understand the heavy expenditure on the military, the ongoing conflict between India and Pakistan, nuclear threats in recent decades and occasions of actual warfare, the problems experienced by the 172 million Muslims in India or the near absence of trade between these two countries without reference to Partition. It is often forgotten that British India was not ruled as a single entity but was an amalgam of chunks under direct British rule and 562 states that were ruled by hereditary princes and governed under close supervision of the British government. This all changed with independence. By 1950 all of the princely states except Sikkim had chosen to accede to one of the newly independent states of India or Pakistan, or else had been invaded and annexed, most notably with the invasion of the state of Hyderabad in 1948. The Portuguese colony of Goa was only integrated into India by force of arms in 1961. This book also makes the case that economic policy-making and the pattern of economic growth underwent a dramatic shift after independence. The state shifted to a much more interventionist and pro-industry economic strategy after 1951. Big private business released the Bombay Plan in 1944 acknowledging their acceptance of independence and as a manifesto for more government efforts to promote economic development. Looking at data on economic growth for the entirety of the twentieth century, Hatekar and Dongre (2005) argue that the most significant break (increase) in growth rates occurred alongside this shift in policy-making, around 1952.

THE CONSTRAINTS AND OPPORTUNITIES FOR ECONOMIC GROWTH

This chapter examines the economic constraints and opportunities that existed for the new Indian state, ruling elite and wider population in 1947. It engages with the debate about whether an objective observer in 1947 should have been optimistic or pessimistic about the likely prospects of the Indian economy after 1947. This reflects very well the longstanding British narrative that India would fail without the support of colonial rule and the promise of the nationalist movement that colonialism was a drag on the Indian economy. A related question is whether the economic growth of the Indian economy in the 70 years since independence has been better or worse than we would have reasonably anticipated in 1947. This chimes with the common practice in India on major post-independence birthdays, such as the fiftieth and sixtieth, to reflect on achievements since 1947.

Table 1.1 below shows limited but important economic and social data for 1947 and 2017. Can we draw from them any conclusions about whether India has experienced successful economic growth and development over the 70-year period?

One way of judging the “economic success” of independence would be to look at average growth rates before and after independence. Such a comparison would give us a very clear conclusion. Between 1900 and 1946, the average annual economic growth rate of British India was about 1 per cent, or zero per cent in per capita terms. Between 1951 and 2017, GDP annual growth averaged about 5 per cent, or around 3 per cent in per capita terms (Hatekar & Dongre 2005). Although the term “miracle” would be an exaggeration, this before and after comparison can be used to label independence as an “economic success”. The problem with such a comparison is that economic growth was much easier to come by after 1947. The first half of the twentieth century encompassed the two world wars and the Great Depression of the 1930s when world trade and world agricultural export prices collapsed. This had serious implications for an economy such as India, which was so heavily dependent on agricultural and raw material exports. The world economy and with it, world trade boomed after 1947. So was India a success or was she just lucky?

Table 1.1 1947 and 2017: two snapshots

	1947	2017
GDP per capita	$50	$2,134
Main exports	Tea, cotton textiles, jute manufactures, hides and skins, spices and tobacco, cashew kernels, black pepper, tea, coal, mica, manganese ore, raw and tanned hides and skins, vegetable oils, raw cotton, and raw wool	Pearls, precious and semi-precious stones and jewellery, mineral fuels, oils and waxes and bituminous substances, vehicles, parts and accessories, nuclear reactors, boilers, machinery and mechanical appliances, pharmaceutical products, and organic chemicals (all goods) and software services, followed by business, travel, transportation (all services)
Life expectancy	32 years	68.8 years
Literacy	12%	74%

Source: various government reports

Another method would be to compare India with similar developing countries and to judge India a success after 1947 if in economic terms India outperformed them. Scholars have conducted such an exercise between India and variously South Korea, China, Pakistan, Ghana and other developing countries. Figure 1.1 shows that Ghana and South Korea had broadly equivalent levels of GDP per capita in 1960 and then probably a bit higher than India. Ghana experienced an economic disaster, with years of negative growth until the mid-1980s, which saw its GDP per capita drop by about 30 per cent. Steady economic growth then resumed and by 2017 GDP per capita in Ghana was around $1,800, slightly below India. Figure 1.2 by contrast shows how decades of rapid economic growth in South Korea transformed its GDP per capita from levels broadly equivalent to India in 1960 to more than ten times that in India by 2017. This relentless expansion was only briefly interrupted by short recessions in 1997 and 2008. So India can be judged a success by comparison to some developing countries (such as Ghana) and a failure relative to others (such as South Korea). Not surprisingly, many scholars remain suspicious of efforts to compare and make judgements among countries with such different histories, geographies, and cultures.

Figure 1.1 Ghana per capita GDP (2010 constant prices, US$)

Source: World Bank Development Indicators 2018.

Figure 1.2 South Korea per capita GDP (2010 constant prices, US$)

Source: World Bank Development Indicators, 2018.

A third way to judge success is to learn from the discussion of post-1948 China in Bramall (2009) who declares the “potential-outcome framework” to be the “best” way to approach such a question. The criterion for this method is straightforward. If India experienced faster economic growth (outcome) in the post-independence period than we could reasonably have expected in 1950 (potential) we can judge it to be a success. The big problem is what determines economic “potential”?

This chapter focuses on five deep determinants of economic potential that have been identified as significant, both generally in the study of economic growth and specifically for the case of post-independence India. These are the role of the state, geography, institutions, culture and economic structure. The aim of the rest of this chapter is not to evaluate the relative strength of these various deep determinants of economic growth, rather to present and discuss the relevance of five well-supported theories in relation to the experience of India, post-independence, and to then make a judgement about the success of the Indian economy between 1947 and 2017.

THE ROLE OF THE STATE

Theorists of the “developmental state” have focused on what allows a state to intervene successfully to promote economic growth. In doing so they have typically drawn upon the rapid growth stories of countries in Asia. They have argued, for example, that the state in South Korea pushed investment into industry, and within industry promoted the pace of technological advance and compelled firms to export rather than sell to the domestic market (Chang 1993; Rodrik 1995). Variously a state with a growth oriented leadership, a meritocratic bureaucracy free of political interference, and autonomy from domestic and foreign interests are three of the necessary features of a developmental state (Grabowski 1994; Leftwich 2000; Huff et al. 2001). We will now explore these features of a developmental state and gauge the extent to which they were present in India in 1947. Another important features of the developmental state, the ability to dominate or co-opt civil society, is discussed later.

Leadership

Economic growth is often driven by a strong leader with a growth-oriented vision. Such leaders have included Lee Kuan Yew in Singapore and President Park in South Korea. Leading the Indian nationalist movement were some of the greatest political figures of the twentieth century. When Mohandes Karamchand Gandhi (The Mahatma) was assassinated in 1948 the charisma of his leadership fell to Jawaharlal Nehru. Nehru survived at the helm of the Congress Party and as prime minister for 17 years, until his death in 1964. Nehru provided continuity in leadership: “Throughout the 1950s Nehru enjoyed unlimited, indeed, virtually unchallenged power over the Indian republic. He was the darling of India’s people, the hero of his party, the unrivalled leader of his government” (Wolpert 1996: 457). One of the facets of Nehru’s strong leadership was in his ability to support the growth of strong layers of leadership at every level of the party. By the 1960s such state-level leaders included Kumaraswami Kamaraj in Madras, Sanjiva Reddy in Andhra Pradesh, Siddavanahalli Nijalingappa in Mysore, Atulya Ghosh in West Bengal and Sadashiv Kanoji Patil in Maharashtra. The difference between Nehru and other “developmental state” leaders like Lee Kuan Yew and Park was that Nehru did not have a single-minded commitment to economic growth. Nehru had parallel commitments to socialism, equality, balanced regional economic development, and achieving economic independence that in various ways undermined any drive to maximize economic growth. India after 1947 for example remained committed to trying to achieve a measure of regional equity in industrialization, rather than maximizing industrial growth by directing resources to those regions with easy access to raw materials or ports and consequently the best prospects for industrialization.

Meritocratic and non-political bureaucracy

A key feature of developmental states is “bureaucratic power”. The ability of the state to promote long-term growth is shaped by the creation of a “powerful, professional, competent, insulated, career based bureaucracy” independent of the vagaries of short-term politics and able to formulate and implement economic goals through long-term planning. Such a bureaucracy is characterized by promotion on merit, good salaries in comparison with private sector alternatives, usually life-time tenure in office, clear sanctions for corruption, and is often dominated by a planning agency standing outside and above individual ministries – often known as a “pilot agency” (Chibber 1999; Leftwich 2000; Wu 2004; Doner et al. 2005). Often the developmental bureaucracy is bound together through an esprit de corps built from a common and shared training process, in France this was through recruitment from the Grandes Ecoles (Loriaux 1999), Korea from the Korean Military Academy (Cotton 1991) and in Japan from the Tokyo Law School (Leftwich 1994).

India in 1947 had a bureaucracy that was meritocratic and elitist but not one that was oriented to promoting economic growth. Over the nineteenth century, British colonialism had established something like a modern civil service. Landmarks in this effort included the shift to an exam-based system for recruitment in 1853 and the establishment of the Indian Civil Service (ICS) in 1892. This effort created a highly professional service based on a competitive exam and an internal merit system that largely eradicated nepotism and patronage (Rothermund 1993; Roy 2002; Kohli 2004). The ICS was regarded by many as the best civil service of any developing country in the 1940s, and “could stand comparison with any analogous body of senior administrators anywhere in the world” (Hanson 1966: 268). By 1951 it was an elitist, meritocratic, professional institution of bureaucratic power. It was corporate and autonomous, with a shared elite or educational background and well-structured path of promotion (Herring 1999). Recruitment into the top echelons was through competitive examination (with an acceptance rate in recent years of 0.01%) and subsequent training was done on a batch basis through dedicated staff colleges first in Delhi and later in Mussourie. This shared training experience created an esprit de corps that remained with ICS members throughout their careers. The new Constitution of independent India protected civil servants from arbitrary dismissal or reduction in rank (Chakrabarty 2006). The ICS continued functioning on the British model for the first few decades after independence and provided a check on the populist or corrupt inclinations of politicians. Even now, badly governed states such as Bihar were well served (Appu 2005).

In practice the ICS was unable to translate its potential into promoting rapid economic growth. The colonial state had done much to, in the words of Leftwich (2000:126), “concentrate sufficient power, autonomy and capacity at the centre to shape, pursue and encourage the achievement of explicit development objectives”. The political reality below the summit of the 1,000 officers of the ICS was considerably more fragmented. British colonialism was based on securing agreements with influential members of traditional ruling classes to secure order and only secondarily to raise tax revenue (remember those 562 princely states noted earlier) (Kohli 2004). This limited the ability of the state and elite bureaucracy to penetrate society and subordinate it to growth-oriented goals (Evans 1995). The limited penetration was reflected in the very low level of tax collection which never exceeded more than 10 per cent of GDP during the colonial era. As well as a limited downward reach the colonial state was not growth-oriented. The limited developmental inclinations of the colonial state can be seen in patterns of government expenditure. Expenditure on development functions such as irrigation (0.1% of GDP in 1879–80) and education (2% in 1900–01) were minimal (Habib 2006: 146). During the colonial era there was no industrial policy, no department charged with promoting new industrial technologies and there were few public subsidies to promote industrial growth (Kohli 2004). (Critics, however, have accused the Indian colonial government of effectively running an industrial policy to benefit manufacturing firms based in Britain by assuring them of easy access to Indian markets and to cheap Indian raw materials (Habib 2006).) Independent India inherited a civil service with limited downward reach and one attuned to maintaining law and order but not promoting rapid economic growth and industrialization.

Autonomy from domestic and foreign interests

Developmental states tended to consolidate state power and autonomy before national or foreign businesses and other groups became influential. This enabled developmental states to promote economic growth and industrialization without compromise to either domestic or foreign interests with different agendas (Leftwich 1995; Evans 1995). This section shows that the Indian state used the moment of independence to strengthen its own power over national business and other groups with mixed success and over foreign business with striking success.

The Indian state strengthened itself at independence. The independence of the princely states and the political role of the princes ended and they were amalgamated into India. Where negotiations failed, military force was used. The large states of Kashmir and Hyderabad were incorporated by military force and the communist uprising in Telengana...

Table of contents

• Cover
• Title Page
• Copyright Page
• Dedication
• Contents
• Acknowledgements
• List of Tables and Figures
• Maps
• 1. Introducing the Indian Economy
• 2. The Indian Economic Story Since 1947
• 3. Measuring Economic and Human Development
• 4. The Form of the Indian Economy
• 5. Human Factors in the Indian Economy
• 6. Making the Indian Economy Unique
• Conclusion: Prospects for the Indian Economy
• References
• Index