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Indian Economy on the eve of IndependenceThere is no doubt that our grievances against the British Empire had a sound basis. As the painstaking statistical work of the Cambridge historian Angus Maddison has shown, India's share of world income collapsed from 22.6% in 1700, almost equal to Europe's share of 23.3% at that time, to as low as 3.8% in 1952. Indeed, at the beginning of the 20th century, "the brightest jewel in the British Crown" was the poorest country in the world in terms of per capita income.-Manmohan SinghIIT Delhi1Indian Economy on the eve of IndependenceImportant indicators of Indian economy in 1950-51

Indicator 1950-512011-12GDP at 1999-00 prices (Rs crore)2,23,89983,62,495Per Capita NNP (Rs)570838,037Forex Reserves (US $ million)19142,60,742Life Expectancy at birth (years)32.166.1

Taken from Dutt & Sundaram Indian Economy p. 2 whose source is Economic Survey(2012-13)Indian Economy- caught in a vicious circle of povertyFeatures of Indian Economy at Independence1. Underdeveloped EconomyLow per capita incomeAgricultural EconomyIn 1948, about 70% of the population was dependent on agriculture which contributed to 50% of the national income. Per hectare production was very low Underdeveloped industriesBasic & heavy industries were very few and productivity was lowImport based economyDependence on imports even for consumer goodsPoor infrastructure & human developmentPoor quality & network of means of transport & communication and illiteracy

2. Predominance of AgricultureAgriculture contributed more than 50% of the national income totally in contrast to the economic structure of developed economiesMore than 70% of the population was dependent on agricultureHuge pressure of population on land

Taken from Uma Kapila, Indian Economy Since Independence p. 333. Stagnation of economyGrowth rate of per capita income during British period for almost a century was less than 0.5%The high population growth also reduced potential for growthMain reasons were:Overdependence on agricultureDestruction of cottage & handicraft industriesCommercialization of agricultureEconomic drain of wealth to BritainDiscriminatory taxes which made Indian goods costlier

Taken from Jain T.R., Trehan M, Uppal R & Trehan R, Indian Economy p. 5

4. Depreciated EconomyIn every economy, extensive use of factors of production leads to their wear & tear. If these are not replaced, the production capacity falls. Such an economy is called depreciated economyDuring World War II, India supplied huge quantity of goods to Britishers and was paid for it in terms Sterling. But due to lack of real capital, Indian economy became depreciated soon afterExtensive use of means of transport during the war led to tremendous depreciation of railway equipment during the war. This adversely affected railway traffic5. Semi-Feudal economy Neither wholly feudal nor capitalistic, hence semi-feudalMixture of the following modes:Feudalism Zamindari, Ryotwari & Mahalwari systemsCapitalism Capitalistic industries like cotton textile, iron & steel, sugar with large amounts of foreign investment. Also present was capitalist agriculture like tea, rubber & coffee plantations

6. Disintegrated Economy due to PartitionPer capita availability of land decreased India got 82% of the population & 77% of the landDisadvantage to agriculture While Pakistan became a surplus state in foodgrains, India faced shortage due to lesser (65%) of the foodgrain area, irrigation facilities, lesser cotton textile and jute producing areasSetback to industries 91% of the industries remained in India but due to shortage of raw materials, India had to import them to feed its industriesForeign Trade India had to import jute, cotton etc. from outside causing uncertain supply of raw materials7. Income DisparitiesA part of the high income inequality in India around the time of independence was caused by very high incomes of the British in India0.06% of the total population (British officials & businessmen) received 5% of the total income (Madison, 2002)Even after the departure of the British, income inequalities remained highThe main reason is the very low income level of the poor classes

Taken from Branko Milanovic, Peter H Lindert & Jeffery G Williamson, Measuring Ancient Inequality p. 56 8. Industrial Backwardness & Capital DeficiencyDeficiency of heavy & basic industriesLow productivity and capacity utilizationTotal production of steel in 1947 was just 9 lakh tonnesLow level of capital formation in India due toLow inducement to investLow propensity & capacity to save9. Lack of Social Overhead CapitalSocial Overhead Capital or infrastructure capital consists of such industries which help in the growth of other industriesRailways & other means of transport, electricity & other sources of power, banking, communication etc.The British designed these so as to serve their own interests without paying attention to their role in development of Indian economy10. Low Standards of LivingThe standard of living among the peasant class which formed a huge part of the population was very lowFamines continued to occur regularly in the country during the British period The 1943 Bengal famine shook the foundations of the countryOne of the main causes of the famines was the lack of purchasing power among the peasants and related classesLarge number of people were unemployed as sufficient jobs were not created to accommodate the growing population

Economic consequences of British conquest Indeed some kind of chart might be drawn up to indicate the close connection between length of British rule and progressive growth of poverty. That rule began with outright plunder, and a land revenue system which extracted the uttermost farthing not only from the living but also from the dead cultivators. It was pure loot.-Jawaharlal NehruEconomic consequences of British conquest Decline of Indian handicrafts and progressive ruralisation Land systems (1793 1850)Commercialization of AgricultureProcess of industrial transition in IndiaColonial exploitation

Decline of Indian handicrafts and progressive ruralisation

Attempts to restrict and crush Indian manufacturersDisappearance of princely courts resulting in industries losing patronageCompetition of machine-made goods with handicraft-goods Development of new forms and patterns of demand as a result of foreign influenceDestruction of industries resulting in unemployed craftsmen moving towards agriculture (Deindustrialization)

Introduced in Bengal and neighboring areas. This settlement raised status of revenue collectors to that of private landlords.Evolved for large parts of Bombay and Madras and extended to north-eastern and north-western India. This settlement made each peasant landlord of their own land and peasant was directly responsible to the state for annual payment of land revenue.Commercialization of Agriculture(1850-1947)

Commercialization of agriculture implies production of crops for sale rather than for family production.Industrial revolution in Europe increased demands for raw materials.British induced peasants for commercial crops by paying them more.At the same time, introduction of railways networks enhanced commercialization.This led to fall in production of food to consume.Consequently this period is also marked by occurrence of most terrible famines.

Establishment of first cotton-mill, jute mill and first coal mine.Establishment of railway networkBy end of 19th century there were 194 cotton-mills and 36 jute mills and coal production had risen to 6 million tonnes per annum.In 1905, SWADESHI movement stimulated Indian industries.First world war created great demands for factory goods, which increased the production of iron and steel, jute, leather goods, cotton etc.In 1924, government of India gave protection to selected Indian industries against foreign competition.

Colonial exploitation

Exploitation through trade policiesForcing cultivators to cultivate and sell Indigo plant at a very low priceForcing artisans through company agents to sign bonds to deliver a certain quantity of goods at a price fixed by the Gomasta.Exploitation through manipulating import-export duties:-After 1700, imports of Indian printed cotton fabrics in England were banned.Heavy import duties were imposed on Indian goods, other than foodstuff and raw materials imported from India and very nominal duty on imports of British manufacturers into India. Discriminating protection whittled down by the clause of imperial preference

Exploitation through export of British capital to IndiaExploitation through finance capital via the managing agency system

Consequences of exploitation

India remained primarily an agriculture country and its agriculture became commercialized.Handicrafts destroyed and India became an importer of manufactured goods.Policy of discriminating protection along with imperial preference gave British complete control over the India market.British developed economic infrastructure in the form of railways and irrigation and electricity works with a view to promote foreign trade but no effort was made to develop heavy and basic industries.Managing agency system did help to promote consumer goods industries in the initial phase, but exploitative in character later.British exploited India through the economic drain via the home charges.

A Brief look at Union Budget 1947-48yufsguk26BUDGET OF NEWLY FORMED INDIAAnnounced by SHRI R.K. SHANMUKHAM CHETTY, Finance ministerCovers a period of 7 month from 15th Aaugust,1947 to 31st March,1948

Necessity to present a budgetThe chief factor whichhas contributed to this development is the general decline in agricultural and industrialproduction In the country due partly to the wide prevalence of communal disordersand generally to the increasing Industrial unrest. While the supply position has beendeteriorating, increases in wages and salaries given by private employers and theGovernment had the effect of augmenting the purchasing power of the people andwidening the gap between current money income and production of goods

explain the dropin production to some extent, but this is also partly due to labour unrest and strikes.28There remained some issues that could not be settled very easily and hurriedly so arbitral Tribunal and Joint Defense Council was set up to look at some issues that were left for further consideration.

Issues handled by Arbitral tribunal :Allocation of debt between the two Dominionsthe method of discharging the pensionary liabilitythe valuation of the Railways the division of the assets of the Reserve BankIssues handled by Joint Defence council:To reconstitute the Armed Forces between the two Dominions To allocate the military stores, equipment and installations between them

to reconstitute the Armed Forces betweenthe two Dominions and allocate the military stores, equipment and installations betweenthem29Decisions taken under fiscal and economic relationfree movement of trade between themwithout any internal barriers and the import and exchange controls of the twoDominions will be co-ordinate30RevenueBudgeted revenue was Rs. 171.15 crores-This includes 50.5 crores from custom receipt, 29.5 crores from income tax, 80.5 crores from ordinary collections.Revenues from posts and telegraph was 15.9 crores and their working expenses was 13.9 crores leaving a net surplus of 2 croresRebate of interest on its share of the accumulated profits in the past was 71 crores

Revenue expenditure was Rs. 197.39 crores Defense services accounts for 92.74 crores 22 crores for expenditure on the evacuation, relief and rehabilitation of refugees from Western Pakistan.

Revenue from the Posts and Telegraphs Department is expected to amountto Rs. 15.9 crores and the working expenses and interest to 13.9 crores leaving a netsurplus of Rs. 2 crores.31Liabilities on Indian Government Outstanding debt of the late Central Government and the pensions chargeable Means to Revive EconomyStarted issuing loans at two percent

But, a small time later there was strong criticism as there were flaws in monetary policies:Considered to be a cheap money policyNo absolute criterion to judge propriety of rates at which govt. borrow in marketQuestion of keeping a balance between industry and government demand such that funds are utilized in best way33Steps to overcome loan problem1. Programs to obtain the funds required by Government as cheaply as possible

2. Reorganize small saving movements, undertaking large schemes of development

Sterling balance Govt. tried to reduce the outflow of currency Govt. aims that reserves to be used for purchasing capital goods not to finance deficits Decided to adopt restrictive import policy(excluding certain essential items)After all these adoptions govt. was able to credit their current account successfully

YEAR Earned ( in dollars) Spent (in dollars) Net Deficit/surplus 1939-1946 405 crores 240 crores + 165 crores 1946-1947 83 crores 98 crores - 15 croresTaken from R.K. Shanmukham Chetty Speech (Minister of Finance), Union Budget 1947-48 Deficit and General final positionDEFICITMostly covered by additional taxationIncrease existing export dutiesTo say exactly is not easy as it fluctuates with the changing expenditure and revenue

POSITIONrelatively small burden of unproductive debt and almost negligible external debtpersistence of inflationary trends and the unsatisfactory food position level of taxation has badly affected incentive for investment

ReferencesDatt, Gaurav & Mahajan, Ashwini, Datt and Sundaram Indian EconomyJain T.R., Trehan M, Uppal R & Trehan R, Indian EconomyBranko Milanovic, Peter H Lindert & Jeffery G Williamson, Measuring Ancient InequalityKapila, Uma, Indian Economy Since IndependenceR.K. Shanmukham Chetty Speech (Minister of Finance), Union Budget 1947-48