India on the eve of colonization

India had been a major link in the maritime trade between Asia and Europe.
Arabian Sea tradebetween Gujarat and Malabar at the Indian end and Persian Gulf and Red Sea at the
West Asia end of great antiquity.
To the East, Spices from Indonesia exchanged with Indian textiles.
Spices and Indian textiles were the most important items India exported. India got horses and precious
metals in return.
Before the arrival of the Europeans, clusters of mercantile tradeGujarat, Malabar, Coromandel and
Bengal. Overland trade via Delhi, Punjab region with Central Asia and then via Genoese and Venetian
merchants with Europe.

The Coming of the Europeans
The Europeans came for spices and other luxury items from the East and also for spreading religion.
The overland route had fallen to Islamic empires. Therefore, the Europeans had to seek naval routes and
build up their mastery in the sea.
The backing of the government for naval explorations and very sophisticated organization and financing of
companiesquite unknown in the world at that time.

Asian Trade and European Traders
The Dutch and the English East India Companies bought spices from Indonesia and sold Indian cotton
textiles.
They remained part of the traditional Asian foreign trade structure involving India.
However, Europe emerged as a bigger market for Indian cotton textiles.
Indian cotton textiles emerged by 1700 as the prime export item.
In the late-eighteenth century, South Asia accounted for approximately a quarter of the worlds textile
output and almost certainly a larger percentage of the worlds seaborne trade in textiles.
Basically, India clothed the world.

The state of the Indian economy on the eve of colonization
Mughal Empire: Sophisticated central state and administrative structure.
Primarily agrarian economy. Land revenue was the principal source of revenue for the Mughal empire. Tax
on crops, not rent on land.
The areas from which the revenue went to the treasury were known as Khalisa.
The remaining portion consisted of jagirs, or territories whose revenues were assigned by the king to his
mansabdars (officers or nobles) in lieu of their personal pay, and allowances for the maintenance of their
military contingents.
The Rent on land that zamindars (hereditary possessors of a right to a share in the peasant's produce and a
fiscal claim over and above the land revenue ) got was not significant.







The Land Revenue system
The revenue was imposed in kind, determined by means of surveys of the cropland.
The revenue was often commuted into cash at market prices; in some places the revenue was fixed in
cash.
When revenue was fixed in cash, the peasants had to sell their crops to meet their tax obligations.
Even when revenue was collected in kind, revenue officials often sold them for cash. The jagirdars were
a highly urbanized class with a disdain for rural life. Theirs was a non-hereditary transferable job (like
modern bureaucrats). They preferred revenue in cash over kind.
The Mughal economy was highly monetised

Production for market
There was a large class of landless peasants in the agricultural sector..due to the caste-system. Also,
pauperized peasantry would be swelling the ranks.
Orchards were laid out by members of almost all the higher classes of societySubstantial investment and
production for market.
Direct cultivation of agricultural land by the superior classes themselves (khud-kasht) involved commodity
production and use of hired laborerselements of capitalist farming.

Rural Industry
Rural industry: Production included textiles of the coarser kind, pottery, agricultural implements made of
wood and iron, sugar, leather etc. by village artisans The artisans were remunerated with a share in the
output of the village and sometimes with some cultivable land for their own use.
Raw silk, salt, saltpetre, and indigo were produced in rural areas but traded widely.

Urban Industry
Toward the beginning of the seventeenth century, the largest towns of Mughal India appear to have been
much larger in population than the largest European towns.
Urban industrial production: Production of luxury goods for the imperial court and for the nobility, most
commonly organized in palace-workshops called karkhanas. Products were finer textiles, carpets and shawls,
decorative metalware and pottery, wood and ivory carving, manufacture of arms and musical instruments.
1595 statistics show that the zamindars of Bengal possessed 4260 pieces of cannon and 4400 boats.

Modern business forms
Ship-building and boat-building was highly developed. The Parsee master-carpenter built ships for
European companies with the help of hired labour.
In mid-eighteenth century Lucknow, the number of 'apprentices' employed by a master printer of textiles
could be as high as 500.
In Kashmir shawl industry the large workshops containing up to 300 looms were in fact the property of
master craftsmen (ustads)
Some carpenters in Bengal and Bihar similarly used hired workers and when the latter's number was
sufficiently high, the proprietor of the workshop assumed managerial/entrepreneurial functions.

Merchant Capital
Merchant capital was considerable in size.
The large drain of food grains and other agricultural produce from the countryside to the towns. The
supplies were largely marketed. Whether the peasant sold the grain in his village or at the nearest fair or in
the urban market, the merchant usually took over.
According to European sources, in 1663, Surat merchants were "very rich," some of them worth more than
5 or 6 millions (of rupees). They had fifty ships trading with various overseas countries.
Virji Vora, reputedly the richest Surat merchant at that time, was said to have an "estate" of 8 million
rupees.
Another merchant, Abdul Ghafur, was said to have possessed twenty ships, of between 300 and 800 tons
each. He alone conducted trade equal to that of the whole English East India Company.

Banking and Finance Capital
The system of credit and banking that prevailed in India was highly developed.
Tavernier remarks that "in India a village must be very small indeed, if it has not a money-changer, called
shroff (sarraf).
Shroffs acted as banker to make remittances of money and issue letters of exchange. Hundis
They discounted merchants' hundis and thus financed commerce, particularly long-distance and
international trade, to a very large extent.

The decline of the Mughal empire
The Mughal empire collapsed within a few decades after Aurangzebs death.
Rise of regional powersNawabs of Oudh and Bengal, Marathas in the West, Nizam in the South.
East India Company becomes the ruler of Bengal after the Battle of Plassey 1757.
After the Anglo-Maratha Wars, the East India Company emerged as the supreme territorial power.

Stages of Colonization: 1757-1900
1st stage (second half of the 18th century) : Mercantilist phase marked by direct plunder and the East India
Companys monopoly trade, functioning through the investment of surplus land revenues in the purchase
of, at low prices, of Indian finished goods for export to England and Europe
2nd Stage (first half of the 19th century): Industrial Revolution in England dramatically changes the pattern
of trade, transforming India from a producer and exporter of manufactured goods to a producer of raw
materials for English factories. Deindustrialization. Contradictions between extraction of tribute and creation
of market for English goods.
3rd stage (second half of the 19th century): British capital pours in. Railways, commercialization of
agriculture and further development of India as the source of raw materials and the market for English
manufactured goods (capital goods as well as consumer goods).

EIC after 1757: Extraction of Agricultural Surplus in Bengal
Diwani rights in BengalThe EIC could now raise land revenue.
Pressure on zamindars and revenue-farmers (highest bidders for revenue farms in auctions) to increase
revenue.
Famine of 1770: killed one-third of the population of Bengalalmost 10 million.
The 1901 Famine Commission found that twelve famines and four "severe scarcities" took place between
1765 and 1858.
The last big famine in British India was the Bengal Famine of 1943. After independence famines
disappeared, despite trebling of population.
Amartya Sen agued that the famines in the British era were due to the absence of democracy.

Maximization of Land Revenue
1789: Total surplus of Bengal was Rs. 3.25 crore, of which the Company extracted Rs 2 crore , the rest was
for zamindars and others.
Permanent Settlement of 1793 conferred ownership rights on zamindars in exchange for a permanently
settled revenue obligation to the state.
To begin with, the zamindars condition worsened. His share was fixed at one-eleventh part of the land
revenue.
Zamindari rights were often sold off or auctioned to bankers and merchants.



Land Revenue and the tribute
Entire land revenue was treated as gross profits of the Company. Deduct expenses necessary for
maintaining government and army, law and order and get Net Profits.
The net profits were then used for the purchase of Indian commodities. ---Investments
Monopoly powers; buy cheap and sell dear. Enlargement of Profit before the tribute was received in
England.

British Trade with India
Imports from India as a share of British imports increased from 12 % in 1750-51 to 24% in 1797-98.
British exports to India increased from 6.4 % to 9 %.
The colonizers were not looking for markets for their goods. They were looking for colonial commodities
which had markets worldwide.

The size of the tribute
According to Irfan Habib, in 1801, at a crucial stage of Britains industrial revolution, drain or unrequited
transfers to Britain from India represented about 9% of the GNP of the British territories in India, 2% of the
GNP of Britain and 30% of British domestic savings available for capital formation in Britain.

Industrialization in England
One view is that industrialization was an endogenous process in Englandtechnological advancements,
scientific spirit, property rights and contract laws etc.
The other view is that The English got crucial apprenticeship in textiles industry and trade through
participation in the global trade in Indian cotton textiles.
Technological breakthroughsInventions by James Watt, Samuel Crompton, James Hargreaves, Richard
Arkwright in the second half of the 18th century.
The Calico Acts (16901721) banned the import of textiles into England followed by the restriction of sale
of most cotton textiles.
Tariff on Indian goods steeply raised in England between 1797 and 1814. . Why?

End of Monopoly of EIC
Industrialization in Britain, making India a potential market for British Goods.
Monopoly obsoletethe vicious critique of Adam Smith in Wealth of Nations (1776)
Monopoly of EIC abolished in 1813, except China Trade.
All monopoly rights of EIC withdrawn in 1833.

Deindustrialization
Urban artisans were hit hardest because of decline of traditional aristocratic class and the export market.
Karkhanas declined.
The new ruling class was the British who consumed British luxury goods and the Indian elitelandlords,
professionals who imitated the British. Thus decline of urban demand for Indian manufactures.
Absolute decline in urban population in Eastern India, except Calcutta which, being the capital of British
India, grew fast.
Traditional ship-building industry goes down.
Alongside the cotton goods, English exports to India of iron goods, (bar and bolt as well as cast and
wrought), together with hardware and cutlery, guns, glass, and 'machinery', increased enormously
throughout the nineteenth century, causing a slump in the corresponding crafts in India, including rural
India.
The artisans and weavers in the rural hinterland were hurt much later, after the penetration by railways.

The decline of merchants and bankers
The Indian merchants and bankers were not politically powerful under the Mughalsbecause the state was
not depended on them. The Mughal state had its own well-organized treasury and imperial heavily guarded
convoys.
They became powerful during the decline of the Mughal empire for servicing the financial needs for
regional powers.
As India passed into the hands of EIC, there was once again a decline of indigenous bankers and merchants.
Entry of company servants and private British traders into inland trade.
The introduction of common company legal tender, postal service and district treasuries led to the decline
of the indigenous bakers and financiers.

Contradictions in EICs objectives
The importance of tribute was undiminished.
Land revenues continued to be extracted at a very high rate throughout large parts of India, even in
ryotwari and mahalwari regions.
The tribute traditionally took the form of export of Indian commodities.
But deindustrialization closed that route.
Cotton and Indigo only provided short-term solutions as American cotton was more suited to the British
textile machinery and West Indian indigo production out-competed Indian indigo.

Opium
The solution was found in Opium.
Opium, produced in India, was exported to China. China would in return furnish tea and silk. In 1855,
England consumed tea and silk of China to the value of 8.5 million pounds, while exporting a mere 1 million
worth of goods to that country. The balance was sheer gain obtained through Indian exports of opium,
which in 1855 amounted to 6.23 million pounds.
Opium Wars.( 1939-1942) and (1956-60)
Opium became the premier article of export of India, accounting for nearly a third of the total value of
Indian exports.

Crown Rule and the third phase of colonization in the 19th century
Under the new regime the emphasis shifted from the levy of direct tribute through land revenue to the
exploitation of India as a market and as a source of raw materials and a destination for British capital.
The transformation of zamindars into true landlordsthe ally of the British Crown, scared after the Sepoy
Mutiny.
About the middle of the nineteenth century, factory production was extended to all industries in Britain.
Search for new profitable outlets for British capital.




British foreign investment and development of railways
British 'net foreign investment' was equal to 42% per cent of the net domestic capital formation in fixed
assets during 1860-69; 80% per cent during 1880-89 and peaked at 114% during 1905-14.
British capital pouring into railways construction in India. Fantastic expansion of railways in India, with a
guaranteed rate of return of 5 % by the Government of British India.

Expansion of the market for British commodities
Higher inflow of imports from Britain as the railways opened up markets.
Cotton textiles, silk goods, wool manufactures, metal manufactures, machinery tools, equipment and rolling
stock for railways expanded tremendously.
As modern Indian industries emerge, all the machinery goods being to be imported from Britain.
Indian exports also expanded. Western Indian cotton, Punjab Wheat, Bengal jute, Assam Tea, South Indian
oilseeds and hides and skins etc. Opium falls behind.

The tribute
Indias tribute in this period till first world war began to be realised though a multilateral trading pattern:
a) India generated an export surplus with countries in the European continent, Japan, the US and other
countries by exporting large quantities of food and raw materials.
b) Britain had a huge export surplus with India exporting textiles and other manufactured goods ,including
railway stock ,to India.
c) Britain, however had developed a massive balance of payment deficit with the rest of the world largely
because of the massive investments it was making globally including in the US and the white colonies.
British exports to the newly industrialising countries of Europe and the US were beginning to decline
because of protectionist policies in these countries undergoing industrialization.
In this situation, Britain used its export surplus with India and Indias tribute to adjust her balance of
payment deficit with the rest of the world.
The burden of EICs London establishment and of dividends to its shareholders was replaced after 1858 by
the costs of Secretary of States India Office, while the India Debt in England, already considerable due to the
Companys military adventures and the expenses for suppressing the Mutiny, was sharply enhanced when
the compensation to Company shareholders was added to its account.
Home charges also included pensions to British Indian officials and army officers, military and other stores
purchased in England, costs of army training, transport and campaigns outside India but charged on Indian
finances and the guaranteed interest on railways.
In 1901-02, Home charges came to 17.3 million poundsrailway interest 6.4 million pounds, interest on
India debt, 3 million pounds, army expenses 4.3 million pounds, store purchases 1.9 million pounds,
pensions 1.3 million pounds.

Global implications of the tribute
Flow of investment from mother countries to the colonies of European settlement overseas.
Apart from the returns earned from that flow of investments, the outward flow from Britain supported the
largest flow of migrants (from Europe) in the late nineteenth century, which not only brought in high returns
because of the abundance of land and natural resources in the settler colonies, but also helped improve the
living conditions of the Europeans left behind and the rise of USA as the worlds richest country.


Land Revenue Systems under the British

Zamindari System (Permanent Settlement):
Zamindars and jagirdarswere declared proprietors of the land with fixed revenue obligations to the state
(90% of rent).
Peasants became tenant farmers, rents were collected by a series of intermediaries (inflating the rent
burden on the peasants.
Covered present-day Uttar Pradesh (except Oudh and Agra), Bihar, West Bengal, most of Orissa, Rajasthan
(except Jaipurand Jodhpur)--57% of the total area cultivated.

Ryotwari System:
Individual cultivators (ryots) became proprietors of their land with right to sub-let, mortgage and sell land.
Short-period settlement of rent and the rent obligation could be changed by the government.
Land becomes a transferable property.
Covered Maharashtra, Karnataka, Andhra Pradesh, Tamil Nadu, Kerala, most of MP, Assam, Jaipur,
Jodhpur38% of total cultivated area.

Mahalwari System:
Revenue settlement was made with entire villages as collective units.
Peasant farmers contributed shared of the total revenue obligation (83% of gross produce to begin with,
later decreased) in proportion to their respective holdings.
Covered Punjab (in both present-day India and Pakistan), Haryana, parts of MP and Odisha, Oudh and Agra.
5% of cultivated area.

Consequences of colonial land revenue system
Zamindari Areas: A class of absentee landlords was created. Proliferation of intermediaries. The
zamindarsfound different ways of levying taxes and other obligatory payments on the peasants.
Ryotwari and Mahalwari areas: Land alienation and polarization of society into landlords and rich peasants
on the one hand and tenants and agricultural laborers on the other hand. Alienation of land due to very high
initial assessment of land revenue. The pressure of land revenue continued to be very high till the mid-
19thcentury, after which land revenue declined in importance as the source of government revenue.
Emergence of highly unequal distribution of rural assets. Even today, rural asset inequality in India is very
high by global standards.
Technological change
Technological improvements as a response to famines.
Large investments in irrigation in Punjab, Sind and United Provinces by 1920s.
Tank Irrigation in South India revived. By 1924, 18% of Net Sown Area came under irrigation.
Imperial Research Institute in 1905, Royal Council of Agriculture Research in 1929.



Commercialization of Agriculture
Commercialization is often interpreted as a sign of transition from pre-capitalism to capitalism. Was such
transition taking place in India in the colonial period?
Agricultural commercialization was forced and artificial.
Peasantry was dependent and subordinate.
A normal process of commercialization of agriculture: increased marketed surplus from increased
production over self-consumption requirements of the peasants. Sign of high productivity.
An artificial process of commercialization of agriculture: Forced to sell a high proportion of their output to
meet immediate cash requirements, Sign of low productivity.

Reasons for Commercialization
Drain from India to England. Since India already de-industrialized/, agricultural commodities had to
marketed and exported to meet this drain.
First half of the 19thcentury: Indigo, silk, opium, sugarcane
Indigo, silk, opiumthese were not really peasant crops, though grown by peasants. European planters or
the government controlled production. Considerable amount of coercion was involved. Peasant cultivation
was preferred because unpaid family labor reduced labor costs.
Production of these crops was oriented towards international markets. Highly volatile and distant markets.
Peasants often revolted or defied government orders.
British/European Industrialization, transport revolution and commercialization of Indian agriculture
Britain was the factory of the world by mid-19thcentury. India supplied agricultural raw materials and food
crops to industrializing nations, importantly Britain.
Opening of Suez canal made transport of bulk commodities easier and cheaper. Development of railways
made inland movement of commodities cheaper.
Jute, for example, was needed as a packing material because of the movement of huge amounts of goods.
The Jute industry in Bengal grew by successfully challenging the Dundee (Scotland) mills. The Jute industry
was entirely European controlled.
In the second half of the 19thcentury, principal cash crops: cotton, wheat, sugarcane, jute and tea. Much less
coercion involved compared to the early period.
Just like indigo, silk and sugarcane before, cotton, sugarcane and wheat from India in the latter half of the
19thcentury were often used to supply the needs of the European industries or consumers whenever
traditional sources of these agricultural commodities/ raw materials were cut off due to political or other
reasons.
Instability of the international markets for cotton and wheat was compensated by the stability of the
growing domestic market.
Subsistence agriculture of a dependent peasantry. Distress buying and selling under the compulsions of
debt. Cash requirements of peasantspayment of rent, debt obligations. The role of advances for cash crops
in meeting their subsistence needs.
Marketing behaviour of peasants was a survival strategy. Chains of tenurialleases. Rent burden multiplied.
No incentive to invest in agriculture since no cost distribution. Risk of production is passed by the
landowners to sharecroppers/tenants. Peasants consumption forced down. Indebtedness.
No industry-agriculture linkage. Peasants sold food crops/cash crops to buy food crops.
Interlocking of credit and tenancy. Landlords had no interest in investment in agriculture or innovation, as
his income from interest on loans from tenants would have gone down if agricultural productivity increased
and peasants need for loans decreased.
Sugarcane cultivation in the Gorakhpur district of U.P. lack of correspondence between rent calendar and
harvest calendar.

Price-responsiveness of peasants
Peasants producing jute in Bengal did not depend majorly on advances. For them, relative prices of jute and
rice was the main determinants of jute production.
However, the benefits of jute price changes were hardly passed on to the peasants.
In sugarcane, too, advances were not only used for subsistence purposes, but also for investment purposes
in the production of gurfrom sugarcane.

Land Reforms in Independent India
Abolition of Intermediaries
Tenancy Reforms: Reduction of Rents, security of tenure, ownership rights of tenants
Ceiling on land holdings and distribution of surplus land
Consolidation of holdings
Compilation and updating of land records
-------Only Partially successful.

Rise of modern Industry in India
Late 18thand early 19thcenturyPrivate merchants from Europe (mainly, Britain) adopted a
business organization called agency houses, so called becausea)acted as business agents for others against
a fee for their service and b) organic links with a firm in London of which the merchant in India acted as the
'agent'.
They did not bring in capital. Initially, main source of financedeposits of company servants.
Because of their connections with the London, the agency houses acted as a safe medium for remittance of
funds by the Company servants to their families back home.
Later as they gained reputation, The Agency houses could act as banks, receive loans from London
and EIC and raised Indian capital.
European promoters were on unfamiliar ground in India. Therefore, they needed Indians as agents
to assist them in a myriad waysknown as the banian. The banianwas the centre of the operation and
received a percentage of sale proceeds. In the east, to begin with Bengali banians, later replaced by
Marwaris.

Agency Houses in Calcutta: first half of the 19thcentury
Agency Houses often had Indian partnersCarr, Tagore and company, Oswald, Seal and Co..
Rustomji, Turner and Co.
However, Indo-European partnership in agency houses were fatally decimated in the crisis of the
1840s
The British came back, but not the Bengalis. Also, later agency firms did not have Indian partners.




The Bombay scenario
Bombay, coming later under the British rule, was spared the worst excesses of the early decades of
the Company rule. Also, the Bombay Presidency being a chronically revenue-deficit area, depended on
remittances from the Bengal Presidency, which made the EIC dependent on merchants and bankers.
The pioneers in the Bombay textile industry came almost entirely from among the Parsitraders,
shippers and financiers of Bombay.
The Parsicommunity had a unique relationship with the British. They were more Westernized than
the other communities.

Opium Trade
Bombay replaced Suratby the middle of the 18thcentury. as the main port on the West. The Europeans
made their base in Bombay and drew Indian merchants and shipbuilders from Suratarea.
Since 1770s the fortunes of Indian merchants linked to the China trade.
Prior to beginning of industries in India, Bombay, like Calcutta, was a commercial city.
Bombays rise as a rival city to Calcutta is linked to the trade upswing connected to the rising demand of
China for opium.
Opened up opportunities for merchants in Ahmedabad, Surat, Broach, Cambay, Baroda, Bombay.
In Western India, opium trade remained a clandestine operation. In Bengal, production and trade was tightly
controlled by the Company.
Frustrated EIC allowed regulated trade in Bombayexport permit.
Setbacka) Treaties of Nanking (1842) and Tientsin (1858) opened up opium trade to the world and b)
Steamships that rendered the older sailing vessels of Indian merchants obsolete.
By 1850, Indian merchants had lost their control over China trade.
However, Bombay intermittently benefitted from periods of English demand for cotton for their textiles.

Rise of Modern industry: Infrastructure and Institutions
Abolition of transit and town duties between 1836 and 1844.
Assault on Thugeesand Pindaris.
Unification of currency The company rupee was declared legal tender throughout he Empire
Homogenization of weights and measures was less successful.
Introduction of Railways in 1854
Modern British Education
Modern Judicial System, including Company Laws, in 1850. Limited liability introduced soon after.

First Phase of Industrialization: 1850-1914
Jute industries in Bengalvirtual walkover to the Scots. No Indian Initiative.
Cotton mills in Bombay, by Parsees (CowasjeeNanabhaiDavar) and in Ahmedabad, by a Brahmin civil servant
from Surat, RanchodlalChotalal.
Primary accumulation of capital for Bombay industrialists in Opium trade






Conflict with British Industrial interests
Indian and British firms in India operated in separate spheres.
No conflict between Indian business and the Colonial state.
But conflict with firms in England. Manchester's growing hostility to Indian cotton textile industry.
All import duties on textile goods were banished in 1882. Opposed by Indians.
Factory Acts of 1892 protecting workers' welfareparticularly women and children.
In 1894, a countervailing excise duty was imposed on production of textile goods to offset the duty on
imports
----Birth of nationalist Politics

Difference between Western and Eastern India
Bombay benefitted from the large class of merchants from Gujarat, with a larger ethnic and
communal diversity in Bombay business circleParsis, Hindu Bhatiasand Bhansalis, Muslim Bohras,
Khojasand Memons.
In the East, after the withdrawal of Bengali entrepreneurs and their eventual exclusion from upper
echelons of business, business was entirely dominated by Europeans, until challenged by the Marwarisin a
bitter business fight (colored by racism ) in the early 20thcentury.
The Bombay industries also showed greater flexibility to adopt innovations and tackle changing
market conditions, including orienting themselves towards the domestic market.

The Impact of Planning on Economic Growth

The Rationale for Planning
n Nehrus consolidation of power and its impact on economic policy
n The objectives of planning Why plan?
n The three assumptions underlying the planning process:
o the basic constraint on development was the deficiency of capital
o Industrialization provided the means for surplus labour to be productively employed
o Government needed to control investment because if market forces operated concentration of
investment (both location and holding) would continue and investment would flow to non-essential
sectors
The Three Pillars of Planned Economic Growth
The Industries (Development & Regulation) Act of 1951
The Licensing System
Progressive Taxation
The Industries (Development & Regulation) Act, 1951
n The most complex and comprehensive system of control and regulation of private sector enterprise
devised worldwide
n Objectives:
o regulation of investments according to plan priorities and targets
o prevention of concentration of holding
o balanced industrial development to reduce disparities in levels of development
o protection and encouragement of small-scale industries
The Licensing System
n Delegated vast powers to the bureaucracy
n All existing industries had to register
n Licenses were required for new investments, capacity addition or over-production
n Industries were subject to regulation that included the power to:
o investigate the operations of a firm
o assume management control if necessary
o control supply, distribution and prices of products
The Act initially covered 42 industries and 150 articles of manufacture
The list was expanded in 1956 to include an additional 26 industries and by the mid-sixties it covered all
industries
Problems of the licensing system
n Delays in clearances
Large number of applications, inadequate infrastructure for review
n Sequential consideration of applications
Designed to prevent unnecessary investment, but restricted competition
n Absence of criteria for selection
Arbitrary decisions, opportunities for corruption
Progressive Taxation
n Taxation was related not just to economic policy but to social strategy as well
n Income tax rates were hiked both to collect additional revenue and reduce disparities in income
n New Taxes were introduced
Estate Duty (1953)
Capital Gains Tax (1956)
Wealth Tax (1957)
Gift Tax (1958)
The Impact of Planned Development
n Growth rates remained high during the 50s
n Industry grew at an average of about 7% during this period
n Agricultural production increased by an average of 4 percent
n Planned economic development was seen as a success
Why was growth in the 50s not sustained?
Rapid growth in the 50s was the result of unique circumstances
Huge increases in budgetary support for public sector investment increased output
Good monsoons in 1953-54 and 1954-55 which increased agricultural production, reduced inflation and
generated demand for manufactured goods
Large sterling balances accumulated during the war years provided capital necessary for imports
Export Pessimism and its Impact on Policy
Export pessimism meant that an export led model was seen as unworkable
India had to become self-reliant through import substitution industrialization
The emphasis in planning was on investment in the public sector, particularly heavy industry which was
seen as the key to growth
Self-reliance meant development of diversified indigenous industrial capabilities that would eventually
create a base for exports
Impact on Indian Industry
The policy of import substitution meant high import barriers and poor economies of scale
Licensing constrained private investment (except by large firms) and public investment did not generate
significant returns for increasing investment
Concentration of location and holding continued in the private sector
Share of assets held by the top six firms (Tata, Birla, Martin Burn, Mafatlal, Associated Cement and
Bangur Group) increased from 20 to 21 percent between 1958 and 1967
No significant change in location of industry
40 percent of licenses were for investments in and around the port cities of Bombay, Calcutta and
Madras
The Economic and Political Impact of Low Growth
The sixties saw a decade of relatively low growth caused by the inefficiencies in investment, the cost of
two wars, a series of poor monsoons and also policy instability
Economic Crisis and Popular Discontent
Low rates of economic growth and inflation
Increases in income disparities
Decline in foreign reserves and a 54% devaluation of the rupee in June 1966
Congress Performance in the 1967 Elections
Congress Party performance
Causes of decline
The Direction of Economic Policy
Policy at crossroads
AICC recommendations, June 1967
Social control over banking
Nationalization of general insurance
Implementation of the Monopolies Commission Report
Abolition of privy purses
The Power Struggle within the Congress
The Syndicate view of economic policy
The Draft Outline of the Fourth Five Year Plan
The AICC Session of April 1969
The Syndicates criticism of economic policy
Mrs. Gandhi's response
The Presidential Election of July 1969
The Need for an Election
The Opposing Candidates


The Radical Agenda
The Impact on Economic Policy
Bank Nationalization
Additional controls on private industry
The conscience vote and its impact
The Note on Economic Policies of July 1969
appointment of a Monopolies Commission
ban on investments totaling more than one crore rupees by large business houses
limitations on entry of foreign capital
conversion of loans to equity to create a joint-sector in the economy
The MRTP Act
The Act was passed in 1969 and came into effect from May 1970
Objectives
o Prevention concentration of power to common detriment
o Control of monopolies
o Prohibition of monopolistic and restrictive trade practices
The Act applied only to private sector firms, not government undertakings
o The Act was implemented by the Monopolies & Restrictive Trade Practices Commission
The Commission divided Indian Industry, outside the small and medium-scale sector into three
categories:
o Large Industrial Houses (assets in excess of 20 crores)
o Dominant Undertakings (market share of 33 percent)
o Foreign firms and subsidiaries
All firms which came under the purview of the Act had to register with the Department of Company
Affairs (DCA) and also secure approval from the MRTP Commission for additional investment
The MRTP Act and other controls on private industry were popular measures and gave the Congress
Party rich political dividends
Nationalization of additional sectors
General Insurance Business (Nationalization) Act, 1972
Nationalization foreign oil companies, 1974-76
Coking Coal Mines (Nationalization) Act, 1972
Coal Mines (Nationalization) Act, 1973
Foreign Exchange Regulation Act, 1974
Designed to impose additional restrictions on foreign investment in India
Foreign firms had to divest foreign shareholding to 40% and become an Indian company under the
Companies Act and would be treated largely similar to domestic firms
For higher holdings restrictions applied
Restrictions included limitations on profit transfer and acquisition of property
The maximum permissible equity holding was 74 percent
Exceptions being made only in rare cases where a firm was engaged in core activities, used
sophisticated technology or met specified export commitments
Increases in Taxation
Tax rates were increased, both as a way of collecting additional revenue and as an important tool of
social policy
Both corporate taxes and income taxes continued to increase
The top rate of corporate tax reached 63% and the top rate of income tax reached 97% by the mid
seventies
Increasing controls on private sector investment
Acceptance of the concept of the joint-sector in principle
Insertion of clauses for conversion of loans to equity in loan agreements
Government set limits on salaries and allowances of senior managers
As a result of new legislation two new layers of bureaucratic control were added to the licensing system
All firms which came under the MRTP Act needed to get MRTP approval before licenses were granted
Depending on the view of the Ministry of Industry some private-sector investments needed specific
approval from the Cabinet Committee on Economic Affairs
The impact of policy changes
The changes in government policy ensured greater political stability, but it had implications for economic
policy
There was an increased emphasis on public-sector investments
Growth strategy shifted from emphasizing growth to a more direct attack on poverty
This involved higher spending on poverty alleviation and more targeted investments in agriculture to
reduce dependence on food aid
Agriculture and Poverty
Increase in food production was the great success story of the seventies
Targeted intervention in agriculture reduced dependency on imports
Investments in irrigation and extension services increased yields and made output less dependent on
monsoon
However, growth in output was not accompanied by significant reduction in poverty The green
revolution involved high-yielding seeds, chemical fertilizers and pesticides and lots of water
Benefits went primarily to areas with well developed irrigation infrastructure, primarily select states and
districts in the north-west, east and south
The Food Corporation of India began to procure output at minimum support prices which provided an
assured market for produce
Returns from increasing yields went primarily to larger landowners
Income disparities in agriculture continued and this made government intervention through poverty
alleviation programmes essential
Industry
Capital for investment and efficiency of investments continued to be a problem for industry
The 1973 oil crisis caused by the OAPEC oil embargo doubled oil import costs
Public sector investments did not generate significant returns and capital was scarce because of
increased revenue expenditure
For the private sector the additional controls were restrictive, but firms learned to cope just as they had
in the 50s
The process of adjustment
Violation of capacity restriction
o 20 percent of licenses operated in excess of licensed capacity
o 4 percent at double licensed capacity
Creation of unlicensed capacity
o Investments were made without obtaining licenses
o Government often issued licenses when unlicensed capacity was discovered
Non-operation or under utilization of licenses
o Under utilization to create scarcity and drive up prices
o Non-operation to prevent rivals for gaining additional licenses
o Lobbying to prevent punitive action
Deliberate flouting of government regulations
o Rules were often broken as part of deliberate policy since it was difficult, sometimes impossible,
to adhere to all rules
Government as a risk absorption mechanism
Clauses on converting loans to equity were often not implemented in the manner intended
When units were profitable, industry lobbied to keep them as loans
When units became sick, the loans were converted to equity prior to takeover by the government
This further increased expenditure on the public-sector
Structural Evolution of Industry
In 1976 the top 20 business houses controlled nearly two-thirds of total productive capital in the private
corporate sector
Concentration did not decrease significantly despite the MRTP Act.
Sales of the top 20 companies as percentage of sales in the private corporate sector increased from 61%
to 87% during the 1970s
While concentration remained, there were changes at the top of the list
The Tata and Birla groups remained dominant with 40% of the sales of the top 20
However, some firms, less dominant earlier, and some new ones, began to grow despite additional
controls
The fastest growing firms were newer entrants to the list, like the Modi and Escorts groups and later
Reliance
Positive Aspects of Planned Development
Created a wide industrial base within a short period of time which helped private industry after
liberalization
The need for skilled manpower for the public sector prompted a huge expansion in higher education,
especially technical education
Created a large aspiration middle class
Growth in the 70s
Growth rates remained low in the seventies
The 1971 war, the 1973 oil price hike and low industrial growth meant that growth rates averaged only
3% during the decade
Mrs.Gandhi, in the face of mounting opposition tried to assert her power by declaring an Emergency, but
it eventually leads to her removal from office
Reasons for Liberalization
The disillusionment with socialism
The failure of controls led to a change in attitude towards the private sector during the seventies
It became clear, even to die-hard socialists that economic policy was not having the desired effects
The experience of South East Asia and Latin America
The export-led growth model and borrowing for investment was seen as more successful
Support for market friendly policies among the middle classes
Impatient with slow growth and also more assertive
Now benefiting from private sector profits
Pressure from international agencies
The need to secure funding from the IMF led to changes in policy
Mrs. Gandhis views on economic policy
Mrs.Gandhis views on economic policy changed during her second term in office
Policy became more pragmatic and there was less emphasis on socialism in economic policy making
Though not publicly acknowledged, the process of liberalization began during her second term in office
Liberalization Measures
Relaxation of imports of manufactured goods
Tariff reductions and reduction of quantitative restrictions
Price de-control in select sectors
Partial de-control of steel and cement prices
Grant of licenses without reference to Plan projections of demand
Increased emphasis on efficiency of investment
Implementation of L.K.Jha Commission recommendations
20 industries were placed under automatic licensing
However, licensing restrictions were not lifted and Mrs.Gandhi was careful not to be too closely
identified with liberalization


Economic Performance in the 80s
n The economy performed better in the 80s compared to the sixties and the seventies
n GDP grew by 5.8 percent and industry by 7.8 percent on average per during the decade
n This was in comparison to growth of 3.0 percent in the 1970s
n However, like the fifties, higher growth was largely the outcome of factors that were unsustainable,
especially in times of crisis
n Exports did not grow significantly in the first half of the 80s because industry was not yet competitive
n However, growth remained high because of positive external factors which made increased imports
possible
n The rapid increase in domestic oil production because of new oil discoveries meant that outflow of FE for
oil imports was relatively less
n There was also an increase in remittances from expatriate workers
n Concessional external funding, especially from the World Bank and the IMF kept debt service obligations
down in the first half of the decade
n In the second half of the decade though exports increased it could not cover for increasing imports and
competitiveness remained a problem for industry

Economic Strategy since 1985
n Rajiv Gandhis economic strategy focused on three aspects of reform
n Encouraging capital imports to upgrade technology
Elimination of quantitative controls on import of industrial machinery and cuts in tariffs
n Modest industrial deregulation to increase investment
reduction in number of industries subject to licensing
n Rationalization of tax system in order to increase revenue
The Reasons for High Growth
n Relaxation of controls in some sectors of industry
n Increased availability of funds for consumption and investment because of reductions in taxes
n Increased availability of cheaper imported inputs for domestic production
n Private capital inflows and borrowing abroad

Negative aspects of growth in the 80s
n Large fiscal deficits
n Poor competitiveness
n Large current account deficits
n Rapid rise in external debt

Large Fiscal Deficits
n Reforms were carried out within the constraints of a democratic environment
n There was an emphasis on carrying out reforms that directly and immediately benefited some sections
n The harder reforms that might have alienated electoral constituencies, but could have resulted in better
quality growth, were put off
n Reduction in taxation was popular, but there was no emphasis on preventing tax evasion
n Tax collection did not go up significantly
n Revenue expenditure increased during the eighties both because of a hike in salaries of government
employees and, later in the eighties because of increase in subsidies and liberal grant of unsecured loans

Competitiveness in Indian Industry
n Competitiveness continued to be a problem for Indian industry
n Industry could not respond as quickly as the government expected to external competition
n Private industry tried to get continued protection arguing that the government was liberalizing too
quickly and tried to stall liberalization measures
n Labor reforms were not implemented and so even when domestic industry tried to become competitive
by downsizing they found that labor regulations stood in their way
n Though there was an emphasis on efficiency, there were no moves to divest public sector units or to
close down unviable units
n Investment increased in high-technology, liberalized sectors, but not enough to increase exports
significantly

Dealing with the CAD
n Dealing with the current account deficit was critical if import intensity was to continue
n The shortfall was made up by two sources of external funding
NRI Investments and Deposits
Commercial borrowing abroad
n The government liberalized investment rules and allowed NRIs to invest in Indian capital market,
provided holdings did not exceed 3% of shares in a firm
n They were also given attractive returns on bank deposits and assurance of repayment in a convertible
foreign currency
n Deposits by NRIs in Indian banks increased as returns were higher than investments abroad

Reasons for short-term borrowing
n NRI deposits were only one source of foreign exchange
n The second source was short-term commercial borrowing abroad
n Borrowing was necessitated by the fact that exports did not rise to keep up with increasing imports
n The government had the option to go to the IMF for funding
n However, the liberalization measures were unpopular within the Congress party and in rural areas and
the government was worried about the political implications of going to the IMF
n A politically more feasible option was short-term commercial borrowing abroad which was available
n However, the only loans commercially available were short term loans
n There was increased availability of loans from international banks because of
n Higher returns on loans to developing countries
n The Latin American debt crisis and reduction in lending to traditional borrowers
n The banks, however, were concerned about risks in lending
n International banks were reluctant to give medium-term or long-term loans and gave only short term
loans to developing countries

Rapid rise in external debt
n External debt doubled from US $ 35 billion in 1984-85 to $ 69 billion in 1990-91
n NRI deposits rose from $ 3 billion in 1984-85 to $10.5 billion in 1990-91
n Short term external debt grew sharply to $ 6 billion
n The increasing reliance on external short-term debts made the country vulnerable to external shocks

Immediate Causes of the Crisis
n The Iraqi invasion of Kuwait in August 1990 and its financial impact
n Political Instability
n Downgrade by international credit-rating agencies
n Repayment of short term debt and the decline of foreign reserves

The Impact of the Gulf War
n The price of oil nearly doubled
n Value of petroleum imports increased from US $ 3.5 billion in 1989-90 to $ 5.7 billion in 1990-91
n Workers remittances from the Gulf were sharply reduced
n There was a loss of some export markets in the Gulf region
n Fearing rupee depreciation import payments were brought forward by firms and export proceeds held
abroad leading to negative impact on foreign reserves
n NRI inflows turned to outflows as NRIs, fearing a moratorium on payments in denominated currencies,
withdrew deposits and took funds out of the country

The Political Crisis
n The Congress Party lost the election in November 1989 and though it emerged as the largest single
party, it refused to form a coalition government
n The second largest party the Janata Dal formed a non-Congress Government under V.P.Singh
n The V.P.Singh government fell apart in December 1990 because of internal divisions within the party and
also within the coalition supporting it
n A caretaker government was set up prior to new elections in May 1991.
n The political uncertainty was heightened by the assassination of Rajiv Gandhi in May 1991

Lowering of credit ratings
n Increased political uncertainty, along with the negative effects of the Gulf War, led to a downgrading by
international credit rating agencies
n Additional commercial borrowing abroad was not possible
n Low ratings also meant that many international banks refused to roll-over short term debt and
demanded immediate repayment

The Crisis of 1991
n By June 1991 official reserves fell to the equivalent of just a few weeks imports
n Inflation reached double digits
n Lack of foreign exchange was starving domestic industry of crucial imported inputs
n Poor credit-rating meant that gold reserves had to be transferred abroad as collateral for loans
n The country was finally forced to go the IMF for a stand-by loan in order to stabilize the situation