The dawn of Independence

Wed,March 20, 2019 01:43 AM

Today lets discuss the economic history of India in the modern times and after the British left the subcontinent. From the time India got its independence to the economic crisis of the 90s to being the third largest economy (PPP terms), in the world today.

This is in continuation with the article published on 13th, March 2019, in these columns.
The dawn of Independence: After independence, the country was facing a dilemma in choosing the structure of its economy and the ideology of being a Socialist or a Capitalist system. The policy makers at that time decided against a Capitalist model due to many reasons. They felt that Capitalism has been an instrument of the Colonial masters and therefore it should not be applied in the new India that fought against the very same colonialism and imperialism.

The political atmosphere at the time of independence and immediately after that has also been highly favourable in trying to adopt a socialistic pattern of society. It should also be understood here that India didnt adopt a complete socialist model in the lines of USSR or China, but we undertook a journey in that direction.

India opted for planned economic development. The key concern was to develop heavy industries and rapid industrialization, therefore India went for centralized planning. The Five Year Plans which successfully transformed erstwhile USSR were made a tool for development. Here, it is important to note that our economic policies were socially oriented and controlled by the state. India began to follow a mixed economy pattern, wherein majority of manufacturing was a responsibility of the Government, while agriculture remained mostly outside the public domain and in private individual farmers hands.

However, despite all efforts on economic front, the country did not develop at rapid pace largely due to lack of capital investment, cold war politics, defense expenditure, and rise in population, too many restrictions on trade( license raj)and inadequate infrastructure. Indias growth during the 50s, 60s, 70s and 80s was very low and quite sluggish.

Neither private industrial growth was anything to boast off nor were the public sector behemoths adding colour to the faded economy that India was known to be. But in the late eighties and in the beginning of the 1990s, the Indian policy makers realized that state controlled economy was not able to produce desired results in almost 45 years since independence.

The rate of growth improved in the 1980s due to high rate of investment (mainly due to political changes at the centre). Private savings had financed most of Indias investment, but by the mid-1980s further growth in private savings was difficult because they were already at quite a high level. As a result, during the late 1980s India relied increasingly on borrowing from foreign sources.

As there was more external borrowings and less growth within the economy, this trend led to a balance of payments crisis in 1990; in order to receive new loans, the country had to seek advice from the IMF. As a consequence the government launched the LPG reforms and many other reforms were taken to strengthen the economy. This commitment to economic reform was reaffirmed by the government that came to power in June 1991.
Economic reforms and a new beginning:

Although there was modest liberalization in the 1980s, the decisive turning point came in July 1991 when the government of P V Narasimha Rao announced sweeping reforms. It opened the economy to foreign investment and trade; it dismantled import controls, lowered customs duties, devalued the currency and made the rupee fully convertible on the trade account; it virtually abolished licensing controls on private investment, dropped tax rates and broke public sector monopolies.

It is due to these reforms that the GDP growth rate rose from below 3 percent to more than 7.5 percent a year for three years in a row in the mid-nineties, inflation came down from 13 percent to 6 percent by 1993, exchange reserves shot up from $1 billion to $20 billion by 1993, and had crossed $100 billion by end of 2003 and well above $400 billion by 2018.

India is a leading country in services sector so much so that she is referred to as the back office of the world. However, India has made significant progress in various spheres of science and technology over the years and can now take pride in having a strong network of S&T institutions, trained manpower and an innovative knowledge base.

India has already become hub for manufacturing of small cars and engineering goods. India is one of the largest and fastest-growing markets for food and agricultural products and generic medicine in the world.

GDP (PPP terms) forecast by 2020


Forecast for 2020

The Indian economy is one of the fastest growing economies in the world today. The rising income and savings levels, investment opportunities, huge domestic consumption and younger population will ensure growth for decades to come. The main engines of Indian economy are sectors such as Information Technology, Telecommunications, ITES, Pharmaceuticals, Banking, Insurance, Light Engineering Goods, Auto Components, Textiles & Apparels, Steel, Machine Tools and Gems &Jewellery. These sectors are likely to grow at a rapid pace world over, creating demand for Indian products and services.

India is at present the 3rd largest economy on PPP (Purchasing Power Parity) basis and 6th largest in terms of GDP market basis and is likely to maintain its growth trajectory in times to come. The coming few decades are likely to witness tectonic shift in economic structure of the world. Indias share in world output is projected to be 20.8% by 2040 as per an estimate.

World Economy: Future Economic Power Shifts (2008-2040) (% Share of World GDP in PPP)
Source: World Bank for GDP in terms of purchasing power parity in 2008; Projections for 2014- 2040 by Mr. Mathew Joseph, Senior Consultant, ICRIER


1. What is the World banks forecast of Indias share in the world GDP by 2020?

A.Approximately 6%
B. Approximately3%
C. Approximately 8%
D. Approximately16%

2. India presently follows which pattern of economy?

B. Socialistic
C. Communistic
D. Mixed

3. India opted for the development of which of the following in its first phase of five year planning?

A. Agriculture
B. Heavy industries
C. Decentralised planning
D. Privatisation

4. According to the World Bank estimates, which country is projected to be the world leader in terms of GDP(PPP) by 2040?

A. China
B. India
D. Japan

5. The terms capitalistic, socialistic or mixed are used to refer to

A. Political systems
B. Economic structure
C. Social economic structure
D. Party a and b

Answers for the test of 13th March, 2019:

1. B
2. C
3. D
4. C
5. C



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