Economic Policy and Change, 1800–1947

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ECONOMIC POLICY AND CHANGE, 1800–1947

ECONOMIC POLICY AND CHANGE, 1800–1947 India, by the end of the eighteenth century, had attained a high degree of development not only in agriculture but also in a wide variety of industries. Spinning and weaving remained the major industries, but iron manufacture, shipbuilding, and several other industries were also flourishing by 1800. India produced manufactured goods not only for home consumption but also for export.

However, by about 1858, there was a marked decline in the output of the manufactures. In 1880 the Famine Commission noted that agriculture formed almost the sole occupation of the mass of the population, and that any remedy for India's predicament must include the introduction of diversity of occupations. The agricultural sector by 1881 employed more than 70 percent of the male working force; this proportion did not change until 1931. Employment in manufacturing declined from about 25 to 30 percent of the workforce in 1800 to 18 percent in 1881, and further to 15 percent in 1931. Varying estimates of per capita income from 1850 to 1900 show that the average annual per capita income did not change much during 1867 to 1882, then declined somewhat by 1900. On the basis of the most reliable estimate for the years 1900 to 1947, there was an increase of about 12 percent in per capita income during this period.

According to Simon Kuznets, et al. (1955), international differences in per capita income were not significant by about 1800. Colin Clark's estimate (1957) of the per capita income of the United Kingdom, in international units, was 378 in 1688. India's per capita income for that year was probably not different from that of the United Kingdom. Even assuming that India's per capita income was 25 percent lower than that of the United Kingdom, it could not have been less than 284 in international units. India's per capita income was about 200 in international units in 1925–1929, according to Clark. By these estimates, India's per capita income declined by about 30 percent between 1688 and 1925–1929. The decline probably was much greater. All the available data suggest that India passed through a phase of economic stagnation, or even decline, for the 150 years before independence.

Aspects of Economic Policies

Alexander Gerschenkron's research suggests that, during the period from 1800 to 1914, the role of the state in economic development was an increasing function of the relative backwardness of a country, on the basis of the experience of France, Germany, and Tsarist Russia. In India, the state was not only passive but even inimical to development. However, it did create important prerequisites for development. It brought about political and administrative unity and established an administrative, legal, and judicial system. It developed the railways and communications and introduced modern education. In spite of these real achievements, its policies not only lacked an orientation toward development but were such as to retard economic progress. The capacity of Indian farmers to improve the productivity of land was hampered by excessive and uncertain land taxes. These excessive land taxes would not have brought about the deterioration of agriculture if a part of them had been spent in improving agricultural techniques, as in Japan. Nor were these tax receipts used for starting an iron and steel industry to provide inputs for railways, which would have reduced the need for imports. The development linkages of iron and steel would have stimulated industrial developments in general; the building of railways produced a great momentum to industrialization in Europe, Japan, and the United States. Far from fostering an iron and steel industry, the state prevented Indians from starting one; Indian entrepreneur J. N. Tata was denied permission to manufacture iron in the central provinces in the 1880s.

Land revenue financed the export of capital to the United Kingdom for the payment of home charges (which included the expenses of the India office in London, and other commitments of the British government of India to England), interest on and repayment of avoidable and unproductive foreign debt, and some private remittances. The average annual level of this economic drain, on a conservative estimate, was about 2 to 3 percent of national income from 1800 to 1947. So India had to generate an export surplus of this magnitude. Thus, if the economic drain were excluded, India had a surplus on government as well as on external trade account. These surpluses could have been used for capital formation in India; they were actually used for the economic development of the United Kingdom.

British commercial policies were such as to adversely affect Indian exports, particularly textiles. From 1800 to 1850, there was in force an elaborate network of mercantilist provisions designed to aid British textiles, which penalized Indian textiles and industrial products in British markets, in foreign markets, and even in Indian markets. Further, Indian shipping was hampered by the policy of not permitting Indian ships to participate in the trade between the United Kingdom and India. Even the government stores' purchase policy discriminated against Indian industries, to the advantage of manufacturers in the United Kingdom. British industries, particularly the textiles industry, developed as a result of this protectionist policy, particularly against Indian imports, until 1858. Though all contemporary advanced countries protected their industries during the nineteenth century, India was unable to follow suit. Consequently, India's manufacturing sector experienced a significant decline.

The British government's policy did change after World War I, with the adoption of discriminating protection to Indian industries; government purchasing procedures too were reorganized to allow potential Indian suppliers to bid on equal terms with British suppliers. However, the shift in policy was piecemeal. Tariff protection was granted only to existing industries; there was no provision for new industries such as chemicals and machine tools. Furthermore, the shift came when the major railway construction was already completed. Despite such halting tariff protection, India was able to develop industries that included steel, cement, sugar, matches, and textiles.

Urgency of Planned Process of Development

Because of what has been described as a period of arrested economic development from 1800 to 1947, India faced tremendous problems of dire poverty, unemployment, and acute economic backwardness at the time of independence. Among the fifty-five countries for which the United Nations published per capita income data for 1952–1954, India's per capita income was one of the lowest. All these problems were aggravated by its large population, increasing at the rate of 2 percent per annum.

If a social catastrophe were to be avoided, India had to accomplish in a few decades the degree of economic development that had taken other countries more than a century. Under the circumstances, it was clear to the Indian leadership, even before independence, that there was an urgent need for initiating a planned process of development. In fact, the president of the Congress Party appointed a National Planning Committee in 1938 to create a program for planned development. The interrupted work of the committee was taken up by the Planning Commission of the Government of India in 1950. The era of planning thus began with the first Five-Year Plan (1951–1956) and still continues.

Vinayak Bhatt

See alsoBritish Crown Raj ; Land Tenure from 1800 to 1947 ; Maritime Commerce, 1750–1947 ; Trade Policy, 1800–1947