The Growth and Development of Indian Economy from 1950-2020. 

Estimated Reading Time: 14 minutes

Introduction

Independence brought with it dreams of individual, economic, social, and political liberty. Seventy-two years later, as India aspires to join the $5 trillion club, these ideas have changed. In this article we present a curated history of the economy since 15 August 1947, reflecting on what drove economic policy and the transition to millennial India.

As we have entered the new millennium, it is important to analyse where we stand in comparison to other countries in terms of growth, stability, and poverty. As a result, the focus of this article will be on India in a global perspective, with emphasis on four sets of indicators: economic, institutional, infrastructural, and social. In a sense, this article is juxtaposing historical and cross-sectional perspectives in the contemporary situation, and it intends to provide my assessment of the performance and prospects ahead of the country. The benefit of this way of presentation, in my opinion, is that everyone can draw their own conclusions and construct their own impressions.

Pre-Independence Era: 1900-1947

Looking at a few data presented by Sivasubramonian (1998) on the performance of the Indian economy during the pre-Independence era of the twentieth century would serve the aim of this article.

The real Gross Domestic Product (GDP), which is essentially the national cake, or the complete sum of all final goods and services produced within our country’s geographical boundaries, expanded by only 0.9 percent every year on average. However, the individual portion of the national cake, i.e., real per capita GDP, expanded at a slower rate of 0.1 percent on average. On the eve of Independence, real per capita GDP, which was at Rs. 224 in 1900-01, had only improved marginally to Rs. 233.

Even with such low growth, there were significant fluctuations due to a number of years of drought, famine, and epidemics. As a result, aggregate GDP fell in 17 of the 47 years, while GDP per capita fell in 26 of them. 

Post-Independence: 1950-1990

Following independence, the government set out on an ambitious mission of planned economic growth to lift the country out of its pre-independence state of critical stagnation. In addition to unifying the nation and establishing an administrative and political infrastructure, the country had to deal with the aftermath of Partition. The development model of Jawaharlal Nehru foresaw the state playing a major role as an all-pervasive entrepreneur and financier of private businesses. A mixed economy was envisaged in the 1948 Industrial Policy Resolution. Previously, the Bombay Plan, advocated by eight powerful industrialists, called for a large public sector with state intervention and rules to safeguard the idigenous industries. 

India set up the Planning Commission in 1950 to oversee the entire range of planning, including resource allocation, implementation and appraisal of five-year plans. The five-year plans were centralized economic and social growth programmes modelled after those prevalent in the USSR. India’s first five-year plan, launched in 1951, focused on agriculture and irrigation to boost farm output as India was losing precious foreign reserves on foodgrain imports.

Apart from the oil crises of the early 1970s and early 1980s, the country had to deal with famines and wars while tackling these difficult challenges in the 1960s and 1970s. While analysing the data that will be presented further, keep these variables in mind.

The real GDP growth rate increased from 0.9 percent in the pre-Independence era to around 4.0 percent on an annual basis. In the 1980s, the rate of expansion accelerated significantly.In reality, during the 1980s, the annual average rate of 5.9% outperformed the global growth rate of 3.3 percent, the growth rate of developing countries at 4.3 percent, and even the growth rate of Asia excluding China and India, which was 5.1 percent. In comparison to the pre-Independence era, there were less fluctuations, and GDP growth was consistent throughout the years, with the exception of four years marked by crises.

While the rate of growth was significantly higher than that of the pre-Independence era, the surge in population growth to an annual average rate of over 2.0% could only raise per capita GDP by about 2.0% per year, despite the fact that this was twenty times the rate of growth in the pre-Independence era. Throughout fact, in the 1980s, yearly growth in per capita GDP was over 3.5 percent.

Food availability improved from 395 grams per day in 1951 to 510 grams per day in 1991, despite population expansion. Agriculture grew at a significantly faster rate of more than 2.5 percent, with post-green revolution growth of more than 3.0 percent. Importantly, this industry grew less reliant on the monsoon’s whims.

The industry grew at a pace of over 5.5 percent per year on average. Importantly, the industrial base expanded fast with the establishment of large-scale and heavy industries, establishing the groundwork for long-term industrial expansion. Services increased at a similar rate of about 5.0 percent, and it has been close to 6.0 percent since the second part of the 1970s.

GDP’s sectoral composition changed over time. Agriculture, which accounted for more than half of GDP during the first three Five-Year Plans, fell to around one-third by the end of the 1980s. Services, on the other hand, increased their share from around one-third to more than two-fifth. The industry’s stake increased from approximately 15.0 percent to almost a quarter.

The rate of saving (as a percentage of GDP) increased dramatically after independence. It increased from an average of approximately 11.9 percent in the first half of the century to just over 20.0 percent in the 1980s. During the same time span, the rate of investment increased from 13.7 percent to over 22.5 percent. 

In terms of inflation, the rate of increase was low throughout the first decade after independence, at 1.2 percent. During the 1960s, this increased to 6.3 percent, then to 9.0 percent in the 1970s. It was roughly 8.0 percent during the 1980s. 

Indira Gandhi took the bold decision of depreciating the Indian rupee by 57 percent on June 6, 1966. The rupee dropped from 4.76 to 7.50 per US dollar. This was done in response to India’s severe balance-of-payments crisis. Because of the country’s apathy toward foreign investments and neglect of the export sector, it was always in a trade deficit.The devaluation was intended to increase exports in the face of limited foreign exchange availability. Instead, it sped up inflation and prompted widespread condemnation. India’s action had ramifications for other nations as well. Oman, Qatar, and the United Arab Emirates, who had been using the Reserve Bank of India-issued Gulf rupee, were forced to create their own currencies. 

Under Indira Gandhi’s leadership, the sixth five-year plan (1980-85) committed to implement a series of initiatives targeted at improving the economy’s competitiveness. This entailed the removal of price restrictions, the start of budgetary reforms, a reorganisation of the public sector, lower import tariffs, and the de-licensing of domestic business, or the end of the licence raj.

While all the above indicators of growth are remarkable achievements, particularly over the preIndependence days, many of our goals that we set out to achieve did not materialise. The following indicators must not be ignored: 

  1. In terms of income, the goal of doubling average real per capita income by the end of the 1970s was only achieved toward the end of the 1980s.
  2. Despite all of the economic progress and efforts to address the issue head-on, poverty, defined as persons who are unable to spend enough money to reach the needed minimum calorie intake per day of 2400 in rural regions and 2100 in urban areas, remained unacceptably high.
  3. Even in 1990, the education system was not developed as we were unable to teach less than half of the population (48%) to read or write.
  4. In 1989-90, a quarter of our population did not have access to safe drinking water, and up to 87 percent did not have access to sanitation. During the second half of the 1980s, there was only one doctor accessible for every 2,520 Indians, and only one nurse for every 1,700 Indians.
  5. Even though we set out to attain external sector self-sufficiency, we encountered significant balance-of-payments challenges.

In summary, though the economy performed admirably in comparison to prior periods, it was insufficient to handle the problems, and, more crucially, by the late 1980s, it was no longer favourable to further quick expansion.

End of Socialist Era: the Golden Policy of 1991

The symptoms pointing to India’s worst-ever economic catastrophe, in 1991, were obvious for a long time. On 30 May of that year, the country had to sell 20 tonnes of gold to investment bank UBS for the first time in order to secure a $240 million loan. Following that transaction, it pledged gold three more times, shipping 46.8 million tonnes to guarantee $400 million in loans from the Bank of England and the Bank of Japan. By December of that year, all of the gold had been repurchased. On June 21, 1991, the Narasimha Rao-led administration entered power, with Manmohan Singh as finance minister, and began a series of economic reforms, including the repeal of the licence Raj.

On June 6, 1966, the rupee was devalued for the first time, by 57 percent, in order to boost exports. The action was prompted by the US withdrawal of help to India following the 1965 Indo-Pak conflict. The following devaluation, on the other hand, was significantly more eventful: on July 1, 1991, the Reserve Bank of India cut the currency’s value by 9%, and then by 11% two days later. This was when the economy was facing its worst crisis, and the country’s foreign exchange reserves could pay for only three weeks of imports. Devaluation is no longer a real option for governments and policymakers as exchange rates are determined by markets. 

1991 marks a turning point in independent India’s history, particularly in terms of the country’s economic development. It was in this year that the Indian government resolved to liberalise the economy and transform it from a command economy to a market one. To turn the crisis into an opportunity, the administration made certain major reforms to the economic structure and strategy. 

Objectives of New Economic Policy 1991

  1. Enter into the field of ‘globalisation’ and make the economy more market-oriented.
  2. Reduce the inflation rate and rectify imbalances in payment.
  3. Increase the growth rate of the economy and create enough foreign exchange reserves.
  4. Stabilise the economy and convert the economy into a market economy by the removal of unwanted restrictions.
  5. Allow the international flow of goods, capital, services, technology, human resources, etc. without too many restrictions.
  6. Enhance the participation of private players in all sectors of the economy. For this, the reserved sectors for the government were reduced to just 3.

Branches of New Economic Policy 1991

  1. Liberalisation
  2. Privatisation
  3. Globalisation

Liberalisation

  1. All commercial banks were now free to fix their interest rates. This was previously done by the RBI.
  2. Investment limit for small-scale industries was increased to Rs. 1 Crore.
  3. Indian industries were given the freedom to import capital goods.
  4. Companies were given the freedom to expand and diversify their production capacities based on market requirements. Previously, the government used to fix the maximum limit of production capacity.
  5. Restrictive trade practices were abolished. Licensing was removed in the private sector and only a few industries were required to obtain licenses, namely, liquor, cigarette, industrial explosives, defence equipment, hazardous chemicals and drugs.

Privatisation

  1. Under this, many public sector undertakings (PSUs) were sold to private players.
  2. PSU shares were sold to private players.
  3. PSUs were disinvested.
  4. The number of industries reserved for the public sector was reduced to 3 (mining of atomic minerals, railway and transport, and atomic energy).

Globalisation

  1. Tariffs were reduced – reduction of customs duties in import and export to attract global investors.
  2. Foreign trade policy was for the long-term – Liberal and open policy was enforced.
  3. The Indian currency was made partially convertible.
  4. The equity limit of foreign investment was increased.

Unprecedented growth of 2003-2008

India grew at an extraordinary rate of about 9% per year for five years, from 2003-04 to 2007-08. It was an export-led expansion, with the export-to-GDP ratio rising from 14% in 2003 to 25% in 2009, owing mostly to outsourcing of information technology (IT) and capital-intensive manufacturing. India’s exports have been known to follow global trade cycles, growing at a rate of 16.5 percent per year since 2002-03, compared to just 3 percent per year in the prior six years. The IT boom was genuinely extraordinary, thanks to the information and communication revolution as well as financial deregulation in the United States. India took advantage of the opportunity, harnessing its diaspora’s human capital in Wall Street enterprises and US academics to achieve export success.

The output surge was mostly financed domestically, with savings and investment rates increasing by roughly ten percentage points to 35-37 percent of GDP by 2007-08, approaching East Asian levels. For the first time, the private corporate sector became the main engine of growth, contributing nearly half of domestic investment, financed by a growing share of bank credit, topped up by unprecedented foreign private capital inflows. At their peak in 2007-08, the inflows: the sum of foreign direct investment (FDI), foreign portfolio investment (FPI) and external commercial borrowings (ECBs) totalled 10% of GDP, when current account deficit (CAD) was 2.5% of GDP and trade deficit 7.4% % of GDP. However, as the capital inflows were reportedly put to productive use, the criticisms against the inflows were muted. The ‘Dream Run’ was also a debt-led growth with bank credit to the private corporate sector (PCS) burgeoning at an unprecedented pace; a large share accrued to big business and politically connected firms. These resources went into infrastructure projects such as roads, ports, coal, and thermal power plants (Nagaraj, 2013). Public-private partnerships (PPP) was the preferred mode of investment in infrastructure as the Government cut down on public investment to adhere to fiscal orthodoxy in line with the Washington Consensus that was the guiding star of economic policy.

During the boom, the budget deficit shrank as government revenues increased and public investment was reduced in favour of the private sector (including foreign capital). Low interest rates, moderate inflation, and a balanced budget were maintained, but foreign exchange reserves steadily grew, owing to capital inflows rather than a trade surplus (as was the case in China)

The global financial crisis of 2008 snuffed out the boom. FPI fled to the safety of the dollar, as expected, but returned as the panic passed. To promote domestic demand, India, like most other countries, loosened its monetary and fiscal policy. The administration promptly implemented a salary raise for government employees, reversing the fiscal consolidation as planned. The US’s quantitative easing (QE) programme may have fueled international capital inflows, resulting in currency overvaluation in 2011 and 2012.

The Global Financial Crisis in 2008 upended the boom, though it affected India only modestly for two reasons: 

(i) its stricter financial regulations and 

(ii) relatively large and closed domestic markets. 

After a brief dip in 2008-09, India, because of accommodative monetary and looser fiscal policies (a concerted effort by the Group of 20 countries), witnessed a V-shaped recovery that lasted until 2011-12. Quantitative easing (QE) by advanced economies meant renewed capital inflows into emerging markets in search of better yields (that is, higher returns), until the wake-up call of the ‘Taper Tantrum’ (in May 2013) – when the US Federal Reserve hinted at raising interest rates – took place, reminding India of the perils of fickle capital inflows.

Growth Indicators

  1. Income Levels: Since 1947, India has made remarkable progress in terms of economic growth, income levels, and living standards. In 1950-51, the gross domestic product (GDP) was Rs 2,939 billion, and in 2011-12, it was Rs 56,330 billion (2004-05 constant prices). India’s GDP was predicted to be Rs 1,40,776 billion in 2018-19. (2011-12 constant prices).

During the same period, the average Indian citizen earned roughly Rs 7,513 in 1950-51, which climbed to Rs 41,255 in 2011-12 (2004-05 constant prices) and then to Rs 92,565 in 2018-19. (2011-12 constant prices). Despite a large growth in the country’s population, per capita income improved in real terms.

  1. Agriculture and Allied Sectors: The agricultural industry is a vital part of the Indian economy, providing employment to more than half of the population. Agriculture, forestry, and related sectors’ real gross value increased from roughly Rs 1,502 billion in 1950-51 to over Rs 22,263 billion in 2011-12, according to estimations.

The Green Revolution, which began in the 1960s, was a game-changer for the country. It saw the use of contemporary technology and methods for producing high yield variety seeds, which enhanced agricultural productivity and foodgrain output dramatically.

India’s net foodgrain production grew from roughly 48 million tonnes in the 1950s to a staggering 241 million tonnes in 2017. India continues to be one of the world’s largest producers of rice, wheat, and a variety of fruits and vegetables, as well as the world’s largest producer of milk.

  1. Industrial Diversification: Since independence, India has made great progress in terms of industrial growth. The 1991 Industrial Policy was a major economic reform that was implemented to revitalise the industrial sector. The strategy eliminated the industrial licencing system and allowed for more private sector engagement as well as foreign investment in the sector.

Manufacturing, building, and the electricity, gas, and water supply sectors all had real gross value added of roughly Rs 401 billion in 1950-51. The sector is currently (2011-12 series)  valued at Rs 36,684 billion.

In the manufacturing system, many sectors have gained traction. The automotive industry has attracted worldwide corporations and developed a range of goods that meet global quality requirements, starting with just three automobile businesses. India is becoming a major manufacturer of pharmaceuticals and conducts research to develop new drugs. Engineering and electrical machinery products have also progressed to become global benchmarks.

New areas such as information technology and telecommunications have changed the landscape in the services industry, opening up new options such as e-commerce and startups. India’s IT prowess is well-known around the world.

Conventional service industries have also grown, with financial services, tourism and hospitality, and retail all transforming in different ways, adapting to technology, and gaining market share.The actual gross value added for the services industry, which includes trade, hotels, transportation, and communications, grew from roughly Rs 308 billion in 1950-51 to Rs 14,023 billion in 2011-12, and is expected to reach over Rs 24,711 billion in 2018-19.

  1. Infrastructure: India has also achieved great progress in terms of infrastructure, and has worked diligently over the years to build a reliable transportation network. Road length increased from 0.4 million kilometres in the 1950s to 5.9 million kilometres in 2016-17.

The length of national and state highways has also grown significantly, while the number of registered vehicles has expanded significantly from 0.31 million in 1950-51 to about 253 million in 2016-17. Civil aviation has grown dramatically as well, with passenger numbers rising from 10.74 million in 1980-81 to a projected 345 million in 2018-19.

Since independence, the electricity sector in India has diversified tremendously and made great progress. Hydro, thermal, and nuclear energy production increased from 5.1 billion KWH in 1950-51 to 1,303.5 billion KWH in 2017-18. India’s installed plant capacity increased from 2.3 million MW in 1950-51 to 399 million MW in 2017-18.

  1. Converging with the World: During the 1990s, the process of liberalisation that began in the mid-1980s to make the Indian economy more accessible to trade and external flows picked up speed. The goal was to increase the efficiency of the Indian economy by lowering trade obstacles like import tariffs. India has established a substantial presence in the global economy today. In 1950-51, the value of products and services exported was roughly USD 0.1 billion, whereas in 2018-19, product exports were valued at USD 330 billion. India has surpassed the United States as the leading exporter of IT services.
  2. Human-Development Indicators: India has also made significant progress in terms of human development metrics. Literacy rates have risen substantially, from 18.3% in the 1950s to 52 percent in the 1990s to 73 percent in 2011. Other socio-economic indices, such as the gross enrollment ratios in schools and the number of accredited educational establishments in the country, have also improved significantly.

The percentage of Indian households with access to safe drinking water increased from 81.4 percent in 1991 to 91.4 percent in 2011. In the field of healthcare, the introduction of sophisticated and modern technology has resulted in a decrease in disease prevalence and an increase in lifespan.

Conclusion: an image of better future

The pace of reform remains rapid, with important reforms including the historic Goods and Services Tax, the Insolvency and Bankruptcy Code, and Ease of Doing Business reforms, among others, being implemented. All of them are expected to contribute to an ever-expanding and dynamic economy, as well as promote additional economic growth. The year 2022, when India celebrates 75 years of independence, is the new milestone on which the country has set its sights. As India celebrates another golden year as an independent nation, the growth story will definitely continue.

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