Monthly Archives: March 2017

The Story of Indian Economics (part 1)

When the British left India and the nation witnessed independence after several decades, the economy was crippled and people were impoverished with the GDP crashing down at staggering rates. The GDP then was a meager 93.7 billion rupees as compared to the present GDP which is 7.376 trillion rupees. This can be attributed to the de-industrialization policy of the colonial government which led to the absence of the secondary sector and reduced India’s status to a mere supplier of raw materials. Also, the tertiary sector in India was almost non-existent, which was another major setback to India’s economic growth.

At this point Indian leaders had to decide which type of economy India was to adopt and in the end although with India’s living conditions and economic situation in a bad shape a socialist economy would have been more ideal, on a long term basis a mixed economy was probably the best option. However, this decision would change India forever. A mixed economy demands a rigid and clear constitution to draw a line between the capitalist and socialist aspects of the economy which in my opinion was one failure of the new government.

Indian economics since independence can be divided into four stages:

  • The Nehruvian and post-independence period (1950-1985)
  • The crisis period (1985-1993)
  • The reform period (1993-1998)
  • The growth period (1998-present)

The Nehruvian period:

This key feature of this era was the closed door policy viz. foreign trade was minimized through import substitution which gave birth to domestic industries and various small scale industries. Although this established an industrial foundation in India the economic growth was less and the aggregate supply went down. At this time India’s economy had a share of 3.8% of the total world income. The government’s aim during this period was recovering from the losses incurred during colonial rule and it emphasized on addressing serious problems such as poverty and unemployment. The government introduces the five year plans to provide a comprehensive strategy to address all the economic problems and aim at economic growth.  Nehru wanted to create a balance between the rural and the urban sectors in his economic policies. He stated there was no contradiction between the two and that both could go hand in hand. He denied to carry forward the age old city versus village controversy and hoped that in India, both could go hand in hand. Nehru was intent to harness and fully exploit the natural resources of India for the benefit of his countrymen. The most distinctive, and often debated feature of Nehru’s economic policies, was the high level of state and central control that was exercised on the industrial and business sectors of the country. Nehru emphasized that the state would control almost all key areas of the country’s economy, either centrally or on a state-wise basis. His Socialist emphasis on state control somehow seemed to undermine his stress on industrial policies. The rigorous state laws and License rules put a great degree of restrain on the free execution of industrial policies. Even the farmers, along with the business personnel, found themselves to be at the receiving end of rigorous state control policies and high taxation. Poverty and unemployment were widespread throughout Nehru’s governance.

The Crisis period:

Towards the end of 1980s, India was facing a Balance of Payments (BoP) crisis, due to unsustainable borrowing and high expenditure. The Current Account Deficit (3.5 percent) in 1990-91 massively weakened the ability to finance deficit. The causes of this crisis were:

  • Break-up of the Soviet Bloc:
  •  Iraq-Kuwait War:
  •  Slow Growth of Important Trading Partners:
  •  Political Uncertainty and Instability:
  •  Loss of Investors’ Confidence:

Thus, the balance of payments situation came to the verge of collapse in 1991, mainly because the current account deficits were mainly financed by borrowing from abroad. The economic situation of India was critical; the government was close to default. With India’s foreign exchange reserves at USD 1.2 billion in January 1991 and depleted by half by June, an amount barely enough to cover roughly three weeks of essential imports, India was only weeks way from defaulting on its external balance of payment obligations.