India - Tale of Economics

India - Tale of Economics

The economic history of India begins with the Indus Valley Civilization, whose economy appears to have depended significantly on trade and examples of overseas trade, notable being Indus-Mesopotamia relations. The Vedic period saw countable units of precious metal being used for exchange. Around 600 BC, the Mahajanapadas minted punch-marked silver coins. The period was marked by intensive trade activity and urban development. By 300 BC, the Maurya Empire had united most of the Indian subcontinent. The resulting political unity and military security allowed for a common economic system and enhanced trade and commerce, with increased agricultural productivity. The Maurya Empire was followed by classical and early medieval kingdoms, including the Cholas, Guptas, WesternGangas, Harsha, Palas, Rashtrakutas and Hoysalas.

During this period between 1 CE and 1000 CE, the Indian subcontinent is estimated to have accounted for one-third, to one-fourth of the world's population, and product. According to the Balance of Economic Power, India had the largest and most advanced economy for most of the interval between the 1st century and 18th century, the most of any region for alarge part of the last two millennia. India experienced per capita GDP growth in the high medieval era after 1000 CE, during the Delhi Sultanate in the north and Vijayanagara Empire in the south.

The Era of Decline & Collapse

During the Mughal rule India was prosperous into the early 18^th century. It is estimated that 28,000 tonnes of bullion flowed into the Indian subcontinent between 1600 and 1800, equating to 20% of the world's production in the period.An estimate of the annual income of Mughal treasury, in 1600, is £17.5 million in contrast to the tax take of Britain two hundred years later, in 1800, totalled £16 million. The South Asia region, in 1600, was estimated to be the second largest in the world, behind China's.

But in the early half of the 18th century, Mughal Empire fell into decline, with Delhi sacked in Nader Shah's invasion of the Mughal Empire, the treasury emptied, tens of thousands killed, and many thousands more carried off, with their livestock, as slaves, weakening the empire and leading to the emergence of post-Mughal states. The Mughals were replaced by the Marathas as the dominant military power in much of India, while the other smaller regional kingdoms who were mostly late Mughal tributaries, such as the Nawabs in the north and the Nizams in the south, declared autonomy. However, the efficient tax administration system was left largely intact, with revenue assessment increased to 50 percent or more, in contrast to China's 5 to 6 percent, to cover the cost of the wars.

After the decline of the Mughal Empire, Mysoreans embarked on an ambitious economic development program that established the Kingdom of Mysore as a major economic power, with some of the world's highest real wages and living standards in the late 18th century. During this period, Mysore overtook the wealthy Bengal Subah as India's dominant economic power, with highly productive agriculture and textile manufacturing. Mysore's average income was five times higher than subsistence level at the time. The Maratha Empire also managed an effective administration and tax collection policy throughout the core areas under their control and extracted chauth from vassal states.

India went through a period of deindustrialization in the latter half of the 18th century as an indirect outcome of the collapse of the Mughal Empire, and that British rule later caused further deindustrialization. According to Williamson, the Mughal Empire's decline reduced agricultural productivity, which drove up food prices, then nominal wages, and then textile prices, which cost India textile market share to Britain even before the latter developed factory technology, though Indian textiles maintained a competitive advantage over British textiles until the 19th century. 

British East India - The Looting

The British East India Company conquered Bengal Subah at the Battle of Plassey in 1757. After gaining the right to collect revenue in Bengal in 1765, the East India Company largely ceased importing gold and silver, which it had hitherto used to pay for goods shipped back to Britain.

In addition, as under Mughal rule, land revenue collected in the Bengal Presidency helped finance the Company's wars in other parts of India. Consequently, in the period 1760–1800, Bengal's money supply was greatly diminished. The closing of some local mints and close supervision of the rest, the fixing of exchange rates and the standardization of coinage added to the economic downturn.

During the period 1780–1860 India changed from an exporter of processed goods paid for in bullion to an exporter of raw materials and a buyer of manufactured goods. In the 1750s fine cotton and silk was exported from India to markets in Europe, Asia, and Africa, while by the second quarter of the 19th century, raw materials, which chiefly consisted of raw cotton, opium, and indigo, accounted for most of India's exports. From the late 18th century the British cotton mill industry began to lobby their government to tax Indian imports and allow them access to markets in India. Starting in the 1830s, British textiles began to appear in—and then inundate—Indian markets, with the value of the textile imports growing from £5.2 million in 1850 to £18.4 million in 1896. The abolition of slavery encouraged Caribbean plantations to organize the import of South Asian labour.

The British subjugated vast land through the power of their artillery and the cynicism of their amorality. They displaced nawabs and maharajas for a price, emptied their treasuries as it pleased them, took over their states through various methods including, from the 1840s, the cynical ‘doctrine of lapse’ whenever a ruler died without an heir and stripped farmers of their ownership of the lands they had tilled for generations.

With the absorption of each native state, the Company official John Sullivan also known as the founder of the ‘hill-station’ of Ootacamund, or ‘Ooty’, observed in the 1840s, ‘The little court disappears, trade languishes, the capital decays, the people are impoverished, the Englishman flourishes, and acts like a sponge, drawing up riches from the banks of the Ganges, and squeezing them down upon the banks of the Thames.’ The India that the British East India Company conquered was no primitive or barren land, but the glittering jewel of the medieval world. Its accomplishments and prosperity the wealth created by vast and varied industries.

Economic impact of imperialism

Debate about the economic impact of British imperialism on India was first raised by Edmund Burke who in the 1780s vehemently attacked the East India Company, claiming that Warren Hastings and other top officials had ruined the Indian economy and society. The British rule in the 18th century took the form of plunder and was a catastrophe for the traditional economy. According to the economic drain theory the British depleted food, and money stocks and imposed high taxes that helped cause the terrible famine of 1770, which killed a third of the people of Bengal.

British control was delegated largely through regional rulers and was sustained by a generally prosperous economy through the 18th century, except for the frequent, deadly famines. British raised revenue through local tax administrators and kept the old Mughal tax rates.

British colonial rule created an institutional environment that stabilized Indian society, while they stifled trade with the rest of the world. They created a well-developed system of railways, telegraphs and a modern legal system. This infrastructure was mainly geared towards the exploitation of resources, leaving industrial development stalled and agriculture unable to feed a rapidly accelerating population. Indians were subject to frequent famines, had one of the world's lowest life expectancies, suffered from pervasive malnutrition and were largely illiterate.

Republic of India - Socialist reforms (1950–1990)

The Republic of India, founded in 1947, adopted central planning for most of its independent history, with extensive public ownership, regulation, red tape and trade barriers. It adopted a socialism-inspired economic model with elements of capitalism. India adopted a USSR-like centralized and nationalized approach called Five-Year Plans. This policy resulted in forming bedrock of post-colonial Indian economy. Before independence a large share of tax revenue was generated by the land tax. Thereafter land taxes steadily declined as a share of revenues.

The economic problems inherited at independence were exacerbated by the costs associated with the partition, which had resulted in about 2 to 4 million refugees fleeing past each other across the new borders between India and Pakistan. Refugee settlement was a considerable economic strain. Partition divided India into complementary economic zones. Under the British, jute and cotton were grown in the eastern part of Bengal (East Pakistan, after 1971, Bangladesh), but processing took place mostly in the western part of Bengal, which became the Indian state of West Bengal. As a result, after independence India had to convert land previously used for food production to cultivate cotton and jute. Growth continued in the 1950s, the rate of growth was less positive than India's politicians expected. Toward the end of Nehru's term as prime minister, India experienced serious food shortages.

Beginning in 1950, India faced trade deficits that increased in the 1960s. The Government of India had a major budget deficit and therefore could not borrow money internationally or privately. As a result, the government issued bonds to the Reserve Bank of India, which increased the money supply, leading to inflation. The Indo-Pakistani War of 1965 led the US and other countries friendly towards Pakistan to withdraw foreign aid to India, which necessitated devaluation. India was told it had to liberalise trade before aid would resume. The response was the politically unpopular step of devaluation ccompanied by liberalisation. Defence spending in 1965/1966 was 24.06% of expenditure, the highest in the period from 1965 to 1989. Exacerbated by the drought of 1965/1966, the devaluation was severe. GDP per capita grew 33% in the 1960s, reaching a peak growth of 142% in the 1970s, before decelerating to 41% in the 1980s and 20% in the 1990s. From FY 1951 to FY 1979, the economy grew at an average rate of about 3.1 percent a year, or at an annual rate of 1.0 percent per capita. During this period, industry grew at an average rate of 4.5 percent a year, compared with 3.0 percent for agriculture.

Economic liberalisation in India

Economic liberalisation in India was initiated in 1991 by Prime Minister P. V. Narasimha Rao and his then-Finance Minister Dr. Manmohan Singh. Rao was often referred to as Chanakya for his ability to steer tough economic and political legislation through the parliament at a time when he headed a minority government. Rao assumed office as PM and with Manmohan Singh as FM took the Critical decisions within one month. Exchange rate adjustments were announced, gold from the reserve assets of Reserve Bank of India (RBI), to raise $400 million, was shipped out soon thereafter. Two months later the statement on industrial policy announced dramatic changes while the Union budget presented to Parliament announced far-reaching decisions, way beyond the remit of conventional budgets. When Rao lost the election, the new Prime Minister , Atal Bihari Vajpayee administration surprised many by continuing reforms, while at the helm of affairs of India for six years, from 1998–2004. The BJP-led National Democratic Alliance Coalition began privatising under-performing government-owned business including hotels, VSNL, Maruti Suzuki, and airports, and began reduction of taxes, an overall fiscal policy aimed at reducing deficits and debts and increased initiatives for public works.

Economic liberalisation led to large economic changes and the Indian steel industry began expanding into Europe in the 21st century. In January 2007 India's Tata bought European steel maker Corus Group for $11.3 billion. In 2006 Mittal Steel (based in London but with Indian management) acquired Arcelor for $34.3 billion to become the world's biggest steel maker, Arcelor Mittal, with 10% of world output. The GDP of India in 2007 was estimated at about 8 percent that of the US. The government started the Golden Quadrilateral road network connecting Delhi, Chennai, Mumbai and Kolkata with various Indian regions. The project, completed in January 2012, was the most ambitious infrastructure project of independent India. 

However in 2004 , Bajpayee lost to  Dr Manmohan Singh who became the new Prime Minister in coalition government of The United Front. His government attempted a progressive budget that encouraged reforms, but the 1997 Asian financial crisis and political instability created economic Stagnation. Towards the end of 2011, the Congress-led UPA-2 Coalition Government initiated the introduction of 51% Foreign Direct Investment in retail sector. But due to pressure from fellow coalition parties and the opposition, the decision was rolled back. However, it was approved in December 2012.

The Resurgent India

In 2014 Narendra Modi took the charge as Prime Minister with massive mandate and unleashed another round of reforms. In the early months of 2015, Narendra Modi further opened up the insurance sector by allowing up to 49% FDI. This came seven years after the previous government attempted and failed to push through the same reforms and 16 years after the sector was first opened to foreign investors up to 26% under the under Atal Bihari Vajpayee's administration. The Modi Government also opened up the coal industry through the passing of the Coal Mines (Special Provisions) Bill of 2015. It effectively ended the Indian central government's monopoly over the mining of coal, which existed since nationalization in 1973 through socialist controls. It opened up the path for private, foreign investments in the sector, since Indian arms of foreign companies are entitled to bid for coal blocks and licences, as well as for commercial mining of coal. This resulted in billions of dollars’ investments by domestic and foreign miners. In the 2016 budget session of Parliament, the Narendra Modi led BJP Government pushed through the Insolvency and Bankruptcy Code. The Code creates time-bound processes for insolvency resolution of companies and individuals. These processes will be completed within 180 days. If insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors. This law drastically eases the process of doing business, according to experts and is considered by many to be the second most important reform in India since 1991 next to the proposed GST.

On July 1, 2017, the BJP-led NDA Government under Narendra Modi approved the Act to Uniform Goods and Services Tax (India). It was approved 17 years after the legislation was first proposed under the earlier BJP-led NDA Government under Atal Bihari Vajpayee's administration in 2000. Touted to be India's biggest tax reform in 70 years of independence and the most important overall reform in terms of ease of doing business since 1991. GST replaced a slew of indirect taxes with a unified tax structure and was therefore showcased as dramatically reshaping the country's 2.5 trillion-dollar economy. Subsequently the government recapitalised NPA-hit public sector banks (PSBs) with massive Rs 2.11-lakh crore two-year road map to strengthen, which includes recapitalisation bonds, budgetary support and equity dilution. In the last three-and-a-half years, the government has pumped in more than Rs 51,000 crore capital in public sector banks. The Government introduced Real Estate Regulation and Development Act and gave its nod for an increase in the carpet area of the affordable houses eligible for interest subsidy under the Credit Linked Subsidy Scheme (CLSS) for the Middle Income Group (MIG) under the Pradhan Mantri Awas Yojana (Urban). Intensifying its crackdown on black money, the government has collated information about 5,800 shell companies who’s near zero-balance accounts saw nearly Rs 4,574 crore of deposits post note ban and Rs 4,552 crore withdrawal thereafter. Vital information has been received from 13 banks regarding the bank account operations and post-demonetisation transactions of some of the 2,09,032 suspicious companies that had been struck off the Register of Companies earlier this year.

Today after its seventh decade of independence, India stands on the cusp of major change: a transformation that could lead to unprecedented economic growth paired with radical improvements in the nation’s Human Development Index (HDI). Over the past two decades, India’s gross domestic product (GDP) has risen by more than US$1tr and India is poised to increase its GDP by 9% per year to become a US$10tr economy over the coming two decades.

A consistent GDP growth rate with a per capita income rising will boost quality of life for more than 1.25bn citizens. This would be the largest national development effort any democracy has ever attempted. Reaching this goal will call for a concerted effort—from businesses, entrepreneurs, investors, and government leaders. Today the Young India is driven by the belief that India can build shared prosperity for its 1.25 billion citizens by transforming the way the economy creates value. Corporate India has a critical role to play in this story, not only by creating value by addressing key societal needs, but in supporting a vibrant entrepreneurial sector.