Chapter 10: Indian Economy- Bussines Economic - (CA Foundation) Short Notes

India's Economic Evolution: From Pre-British Era to Post-1991 Reforms

India Before the British: A Wealthy, Self-Sufficient Economy

Between the 1st and 17th centuries, India was one of the richest countries, holding about one-third to one-fourth of the world’s wealth. Its economy thrived on self-sufficient villages and bustling trade cities.

• Villages were self-reliant: Farmers grew food, made clothes, and local craftsmen produced textiles, jewelry, and handicrafts.
• Cities served as hubs for trade, religion, and administration, attracting merchants and workers.

Example: In a village, one family grows rice, another makes pottery, and another weaves cloth. They exchange goods locally and sell surplus in nearby towns.

Ancient Indian Economic Thought: The Arthashastra

The Arthashastra, written by Kautilya (Chanakya) for King Chandragupta Maurya, is one of the world’s oldest texts on economics and governance. It emphasized:

• Prioritizing agriculture for a strong treasury.
• Collecting fair taxes to avoid burdening people.
• A king’s duty to work for the welfare of all, not personal gain.

Example: A bountiful harvest leads to higher tax revenue, enabling the kingdom to build roads, forts, and armies, keeping people safe and content.

Arrival of the British and Economic Shifts

From 1757, the British East India Company began ruling parts of India, followed by direct British government control from 1858 to 1947. This marked a significant shift in India’s economy.

British Policies and Their Impact

Before British rule, India exported high-quality textiles and handicrafts. The British Industrial Revolution changed this:

• Raw materials like cotton, jute, and iron were shipped to British factories.
• Cheap, machine-made British goods flooded Indian markets.
• High taxes on Indian exports and low taxes on British imports made Indian products uncompetitive.

Example: A weaver crafting handloom sarees couldn’t compete with inexpensive machine-made cloth from Manchester.

Consequences of British Rule

• Handicrafts and artisans lost jobs, pushing millions back to farming.
• Overcrowded farms led to tiny, unproductive plots and widespread poverty.
• The Zamindari system empowered landlords to collect high rents, trapping farmers in debt.

Example: A farmer grows crops but pays high rent to a zamindar, falls into debt, and remains poor.

Early Industrialization in India

Modern industries emerged after 1850:

• Cotton mills: By the 1930s, India had the 5th largest cotton spinning capacity globally.
• Jute mills near Calcutta were the world’s largest, producing ropes and sacks.
• Other industries included iron, leather, matches, and rice mills.

Note: The British restricted heavy industries to avoid competition, limiting factory growth to just 7% of India’s economy by 1946.

Key Takeaways

• India was once a rich, self-sufficient economy with skilled artisans.
• British policies destroyed local industries, pushing people into poverty.
• Industrialization began but remained limited under British rule.

Example Summary: A village once thrived with farmers and weavers. The British took raw materials, sold cheap goods back, and local artisans lost jobs, overcrowding farms and increasing poverty.

India in 1947: The State at Independence

When India gained independence in 1947, it faced significant challenges:

• Mostly rural with few cities.
• High poverty and low incomes.
• Low literacy (18%) and life expectancy (32 years).
• Divisions by wealth, caste, religion, and rural-urban gaps.

Example: Picture a vast village of poor, uneducated farmers using basic tools.

Nehru’s Vision for Economic Development

Jawaharlal Nehru, India’s first Prime Minister, aimed to modernize India through:

• Building large industries like steel plants and dams.
• Government control over key sectors (socialism).
• Five-year plans via the Planning Commission.

Example: The government built the Bhilai steel plant and Bhakra-Nangal dam, prioritizing public sector growth.

Industrial Policies of 1948 and 1956

• 1948 Policy: Government controlled key industries (e.g., railways, atomic energy), while private businesses needed licenses.
• 1956 Policy: Expanded public sector dominance, limiting private sector growth.

Example: A private car factory needed multiple government licenses, often delayed.

Nehru’s Dual Inspirations

• Heavy industry and socialism (Nehru’s vision).
• Small-scale and village economies (Gandhi’s vision).

Example: Building steel plants while protecting village weavers.

Foreign Investment and Trade

Initially open, trade faced a foreign exchange crisis by 1958, leading to:

• Import controls and restrictions on foreign machines.
• Careful allocation of investment licenses.

Example: A factory needing a German machine couldn’t import it due to dollar shortages.

The Hindu Growth Rate

From 1950 to 1980, India’s GDP grew at a slow 3.5% annually, known as the Hindu Growth Rate. Reasons included:

• Focus on dams and steel, not consumer goods.
• Neglect of agriculture, leading to food shortages.
• Dependence on US wheat during 1966-67 droughts.

Example: A bad monsoon caused crop failure, forcing India to import wheat under the PL 480 program.

The Green Revolution

To address food shortages, India launched the Green Revolution:

• Introduced new seeds, fertilizers, and irrigation.
• Boosted wheat and rice production, especially in Punjab and Haryana.
• Achieved food self-sufficiency.

Example: New wheat varieties led to larger harvests, ending reliance on food aid.

Increased Government Control in the 1970s

• 1969 & 1980: Nationalized 20 private banks.
• More licenses and trade restrictions (License Raj).
• Protected small-scale industries, limiting big companies.

Example: A large textile company couldn’t produce shirts, reserved for small units.

Challenges of Over-Control

• License Raj stifled private business growth.
• India missed the global export boom of the 1970s and 1980s.
• Wars, droughts, and oil price hikes worsened economic conditions.

Example: A factory needing a new machine faced delays due to licensing rules, discouraging expansion.

Realization by the 1980s

Policymakers recognized that excessive control hindered growth, paving the way for the 1991 reforms.

1980s: Early Reforms by Stealth

In the 1980s, India remained under heavy government control but began small, quiet reforms to boost growth.

Example: A factory owner could now add machines with fewer permissions.

Key Reform Areas

Industry

• 1985: Removed licenses for 25 major industries.
• Broad-banding: Allowed companies to switch products without new licenses.
• Relaxed MRTP rules, raising the asset limit from ₹20 crore to ₹100 crore.

Example: A truck manufacturer could also produce cars in the same factory.

Taxes

Introduced MODVAT (an early GST), taxing only value-added to avoid double taxation.

Example: A soap maker paid tax only on the final product’s value, not on raw materials like oil or wrappers.

Trade

• Expanded Open General Licence (OGL) for easier machine imports.
• Improved export incentives.
• Removed price controls on cement and aluminum.
• Allowed rupee depreciation to boost exports.

Example: A textile factory could import modern looms easily, making exports more competitive.

Results of 1980s Reforms

GDP growth improved to 5.7% (1980–85) and 5.8% (1985–90), up from 3.5%.

Remaining Challenges

• MRTP Act still restricted big companies.
• Small-scale reservations limited large firms.
• Inefficient public sector companies.
• High import restrictions reduced competition.

Example: A small screw factory was protected from foreign competition, with no pressure to improve quality.

Significance of 1980s Reforms

These reforms showed that reducing controls could boost growth, setting the stage for the bold 1991 reforms.

Before 1980	Early 1980s Reforms	Result
Tight government control	Removed some licenses, eased imports, export incentives	Growth jumped to ~5.7%
Heavy taxes at every step	MODVAT introduced	Companies saved money
Rupee artificially strong	Rupee weakened	Exports grew
MRTP limited big companies	Limit raised to ₹100 crore	Some freedom to expand

Example Summary: By the late 1980s, a scooter manufacturer could produce mopeds and trucks without multiple licenses, import machines, export more, and pay less tax.

1991: The Turning Point

Why Drastic Reforms Were Needed

• Fiscal deficit: Excessive government spending led to heavy borrowing and rising interest payments.
• Oil crisis: The Gulf War spiked oil prices, worsening India’s balance of payments.
• Forex crisis: Only $1.2 billion in reserves, enough for 2 weeks of imports.
• IMF conditions: Emergency loans required policy changes.
• Political and economic instability eroded confidence.

Example: Like a family spending beyond its means, borrowing heavily, and facing a cash crunch when fuel prices soar.

The LPG Reforms

Led by PM P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh, India introduced Liberalisation, Privatisation, Globalisation (LPG) to open the economy.

Goals

• Stabilisation: Control inflation, fix balance of payments, reduce debt.
• Structural reforms: Make India competitive and modern.

Stabilisation Measures

• Devalued the rupee to boost exports.
• Cut wasteful subsidies and government spending.
• Raised interest rates to control inflation.

Structural Reforms

Liberalisation

Ended the License Raj and removed many price controls.

Example: A fan factory could start or expand with fewer approvals.

Privatisation

Allowed private entry into government-dominated sectors and sold public company shares (disinvestment).

Example: Shares of VSNL and Maruti were sold, improving efficiency.

Globalisation

• Reduced import tariffs.
• Eased foreign direct investment (FDI).
• Encouraged exports.

Example: Brands like Pepsi and Suzuki entered, connecting India globally.

Results of 1991 Reforms

• Increased competition, better quality, and more jobs.
• Foreign technology and investment boosted growth.
• GDP growth surged, especially in the 2000s IT boom.

Before 1991	After 1991
Heavy government control	Free markets, less red tape
Many licenses needed	License Raj reduced
High import taxes	Lower import taxes
No foreign companies	FDI allowed
Public sector dominated	Private & foreign players welcomed

Example: Before 1991, Maruti had a 5-year waitlist. Post-reforms, Hyundai and Honda entered, offering more choices.

Fiscal Reforms: Controlling the Deficit

The Problem

India faced a fiscal deficit, spending more than it earned, leading to borrowing and inflation.

Example: A family earning ₹50,000 but spending ₹90,000 monthly, borrowing the rest, risks bankruptcy.

Solutions

• Simplified tax system to reduce loopholes.
• Improved tax collection through audits.
• Cut wasteful spending and subsidies for the rich.
• Disinvestment of public sector shares.
• Encouraged private sector participation.
• Stopped borrowing directly from RBI by 1997–98.

Example: Ending cheap LPG subsidies for the wealthy saved government funds.

What Was Wrong?	What They Did?	Simple Example
Spent more than earned	Cut wasteful spending	Stopped luxury purchases
High subsidies wasted	Removed subsidies for rich	No cheap LPG for rich
Tax loopholes	Clear tax system	More people paid income tax
Borrowed from RBI	Stopped printing money	No inflation from fake money

Financial Sector Reforms: Modernizing Banks

The Problem

Before 1991, banks were government-controlled, inefficient, and burdened with bad loans.

Reforms

• Freed interest rates for banks to set their own.
• Allowed new private and foreign banks (e.g., HDFC, ICICI).
• Reduced SLR/CRR, freeing up funds for loans.
• Relaxed branch opening rules.
• Introduced strict accounting to expose bad loans.

Example: Post-reforms, HDFC Bank offered faster loans and better services than older public banks.

Old System	After Reforms
RBI fixed interest rates	Banks set own rates
Only government banks	Private & foreign banks allowed
High SLR/CRR	Lower SLR/CRR, more loans
Tough branch rules	Freer branch operations

Capital Market Reforms: Empowering SEBI

The capital market allows companies to raise funds through shares and bonds. Pre-1991, it was opaque with fraud and insider trading.

Post-1992, SEBI gained legal powers to regulate markets, protect investors, and ensure transparency.

Example: SEBI ensures a company like ABC Ltd discloses accurate financials before selling shares, preventing fraud.

New Industrial Policy: Unleashing Growth

Key Changes

• Ended License Raj for most industries.
• Limited public sector to core areas like railways.
• Relaxed MRTP Act for big companies.
• Opened small-scale sectors to larger firms.
• Allowed private entry into monopolized sectors.
• Eased FDI up to 51% ownership.
• Reduced import tariffs and introduced a negative list.
• Devalued the rupee to boost exports.
• Disinvested public sector shares.

Example: Reliance expanded into telecom (Jio) due to relaxed MRTP rules.

Trade Policy Reforms: Opening to the World

Key Reforms

• Removed import/export licenses.
• Reduced tariffs from 355% to ~10%.
• Boosted exports with incentives.
• Devalued the rupee and made it convertible.

Example: Indian IT firms like Infosys grew by exporting services globally.

Results

• Exports in IT, pharma, and textiles soared.
• FDI increased, bringing technology and jobs.
• India’s forex reserves grew to cover 8 months of imports.

GDP Growth Post-1991

The 1991 reforms transformed India’s growth trajectory:

• 1992–1996: 5–7% growth.
• 2003–2008: 7–8.5% boom years.
• 2008–2009: Dipped to 3% due to global crisis, but recovered to 7.8%.
• 2020: -6.59% due to COVID, but rebounded to 8.68% in 2021.

Example: From a slow bicycle pre-1991, India became a fast bike with gears post-reforms.

From Planning Commission to NITI Aayog

The Planning Commission (1950–2014) created rigid 5-year plans. It was replaced by NITI Aayog in 2015 to promote cooperative federalism and innovation.

NITI Aayog’s Role

• Acts as a think tank and advisor.
• Promotes state collaboration and innovation.
• Monitors schemes like Ayushman Bharat.

Example: NITI helps states share solar power strategies for cohesive national plans.

Primary Sector: Agriculture

The primary sector (agriculture) employs 47% of India’s workforce and contributes 18.8% to GDP.

Progress

• From food imports to self-sufficiency and exports.
• Top producer of milk, pulses, jute, and spices.
• 2021-22: 316 million tonnes of food grains.

Government Support

• PM KISAN: Direct cash to farmers.
• MSP: Minimum crop prices.
• E-NAM: Online crop sales platform.

Challenges

• Small farms, low profits, and monsoon dependence.
• Infrastructure gaps and climate change risks.

Example: A tomato farmer loses money without cold storage when prices crash.

Secondary Sector: Industry

The secondary sector (manufacturing) contributes 30% to GDP and employs over 12 crore people.

Government Initiatives

• Make in India and PLI Scheme boost local production.
• GST simplifies taxes.
• PM Gati Shakti improves infrastructure.

Challenges

• Poor infrastructure and high input costs.
• MSMEs struggle for loans.

Example: Apple assembles more iPhones in India due to PLI incentives.

Tertiary Sector: Services

The tertiary sector (services) contributes 54% to GDP, driven by IT, banking, and tourism.

Why It Matters

• Top 10 globally in service exports.
• Attracts over 60% of FDI.
• Resilient during COVID due to digital services.

Example: Infosys earned billions during COVID by providing remote IT services.