Overview of Indian Economy

Let’s discuss the overview of Indian Economy. According to Angus Maddison database,

• The contribution of India and China to global GDP was 50.5% in 1000 AD.
• It was 52% in 1600 AD with India’s contribution of 23% and China’s contribution was 29%.
• India’s share in global GDP came down to 16.1% in 1820
• India’s share in global GDP in 2021 was 7.3%

It reflects how much British empire exploited India.

Overview of Indian Economy: Basic Characteristics of Indian Economy

The World Bank classified economies on the basis of per capita income into four categories:

1. Low Income
2. Low Middle Income
3. Upper Middle Income
4. Higher Income

The India falls under Lower Middle Income category ($995 – $3895) as India’s per capital income was $1891 in 2019. India is 3^rd largest economy in the World in terms of Purchasing Power Parity (PPP).

The reasons of low income are:

• High level of Poverty
• High level of Unemployment
• High level of Illiteracy

Factors influencing the nature of Indian Economy are:

• Low per capita real income
• Rapid population growth
• High rate of unemployment, underemployment and disguised employment
• Excessive reliance on primary sector
• Vicious cycle of poverty
• Rising unemployment

At the time of Independence, India was an agrarian economy.

So, there was significant shift toward service sector after 1980s.

Indian Economy in British Era

During British era, there was unilateral transfer of capital and raw material to Britain.

Dadabhai Naoroji published first estimate of National Income in India in this book “Poverty and Un-British Rule in India” for year 1867-1868.

• India’s national income was Rs 340 crore.
• Rs 20/annum per capita income at current prices.
• Rs 142/annum per capita income at prices of 1948-1949

The British era can be classified into three phases:

1. 1600 AD – 1757 AD:
   1. Foundation of East India Company in 1600 AD
   2. Procured raw material for their factories
   3. Find market for their completed goods
2. 1757 AD – 1857 AD
   1. Battle of Plassey
   2. Blatant robbery by East India Company
   3. Exploitive land policy, dishonest company officials
3. 1858 onwards (also called British Crown Period)
   1. British quashed sepoy mutiny
   2. British crown dissolved company
   3. Assumes exclusive control of India
   4. Colonial exploitation
   5. De-industrialisation
   6. Agriculture commericalisation
   7. Wealth drain
   8. Westernization of Indian education system

Some of the highlights of British Era was:

• British land taxation programme was to exploit Indian peasantry. They introduced Zamindari, Mahalwari and Ryotwari System to collect excessive land tax from farmers.
• They commercialized Indian agriculture to produce for British Industries. Commercialization caused increased frequency of famines and reduced farmers to landless labour.
• British de-industrialised India. Although considerable industrialization occurred during British rule, but that was motivated by self interest of Britain
• British transportation system was designed to exploit India. They developed railways to transports goods from hinterland to ports and vice-versa.
• Western education was introduced to Indians to generate group of Indians who has shaky gasp of English but enough westernized to be estranged from their own culture.
• Wealth drain from India:
  • British salaries were high
  • Viceroy received 25,000 pound per year
  • Governor received 10,000 pound per year
  • Engineering service starting salary was 420 pound per year
• According to Dadabhai Naoroji’s calculation, Indian paid 10 crore pound in house cost to Britain between 1829 to 1865. It rose to 40-50 million pound per year by 1930.
• India’s per capital income increased by 12% from 1600 to 1947, whereas Britain’s for same period was 553%
• India’s total GDP during 1600 to 1947 increased by 2.44 times whereas for Britain was 52 times

At Independence in 1947, India was a destitute economy. India’s share of global GDP fell from 23% in 1600 AD to 3% in 1947.  India’s share of global export fell from 33% in 1600 AD to 3% in 1947.

Indian Economy till 2008 and After 2008

• 1951 – 1980:
  • The growth rate of GDP was slow during first three decades of Independence
  • Called “Hindu rate of Growth” by Professor Raj Krishna in 1998
  • Low growth rate of around 3.5%. Per capita income growth was 1.5%
• 1981 – 1990:
  • The period of economic buoyancy and recovery
  • Sixth five-year plan
  • Higher government spending led to higher economic growth
  • Liberalised import policies, increased import of capital goods & raw material for manufacturing boosting production of luxury goods in India
• 1992 – 2008
  • Post – reform period
  • Following 1991 economic crisis, reforms were implemented. LPG policies were adopted
  • Higher GDP growth rate
  • More inflow of foreign capital
  • Growth rate was:
    • 8^th five-year plan (1992 – 1997) – 6.7%
    • 9^th five-year plan (1997 – 2002) – 5.3%
    • 10^th five-year plan (2002 – 2007) – 7.6%
    • 2003 – 2007 – 8.6% (2^nd fastest growing economy after China)
  • 2008 – 2021
    • Indian economy was decoupled from rest of the world during Lehman Brothers collapse
    • Government introduced the stimulus package of Rs 1.86 lakh crore in 2008
    • RBI eased monetary policy& injected Rs 5.6 lakh crore
    • Economy recovered but fiscal deficit increased beyond the limit set by FRBM Act. Current deficit also ballooned
    • Economy’s productive capacity expanded drastically due to credit growth
    • Policies like GST, IBC, Corporate tax cuts, demonetization was implemented
    • Prior to Covid – 19, average economic growth between 2008 – 09 and 2019 – 20 was 6.50%
    • Growth slowed due to structural bottlenecks
    • In 2019 – 20, economy grew by 4% only

Structure changes in Indian economy

• Indian economy post Covid – 19
  • Covid – 19 was declared as global pandemic by WHO on March 11, 2020
  • Covid – 19 first case was reported in Wuhan China in December 2019
  • India experienced three waves of infection with total case world’s second largest
  • India imposed most stringent lockdown in 2020
  • GDP contraction was more severe in countries with higher Stringency Index – India, Argentina, Italy and USA
• Sectoral impact of Covid – 19
  • Contact intensive sectors were almost halted
  • Services sector suffered the brunt of pandemic
  • Retail trading, hotels and restaurants, air transportation services, logistic services, education, real estate and automotive sector was severely impacted
  • Real estate and automotive sector were severely impacted
  • Indian labour market suffered severe decline during first wave of pandemic
    • Reverse migration from urban to rural areas
    • Demand for MGNREGA employment increased in rural areas
  • Agriculture remained robust in terms of production
  • Manufacturing reached a new low
• Economic recovery post Covid
  • GDP contracted by 6.6% in 2020-21
  • GDP growth of 8.1% in 2021-22
  • India is expected to overcome Covid-19 pandemic losses in 12 years (as per RBI estimates)

Structural change refers to fundamental changes that have occurred in critical components of Indian economy over time. Primary sector’s contribution to GDP decreases overtime while secondary and tertiary sector increases. In long run, tertiary sector surpasses the secondary sector.

In India, the service sector has largely replaced the industry sector and now it dominates the economy.

In 2020-21, Service contributed 60.90% of the economy followed by secondary sector (19.80%) and the primary sector (20.10%).

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