248

Unit 3
Indian Economy:
Introduction
Subunit 1 249
The British Raj and
Pre-Independent India

Subunit 2 276
Industrial Transition Before
Independence (1860-1945)

Subunit 3 295
Indian Economy: Economic and
Industrial Planning in India

Subunit 4 339
Application and CUET Practice

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The British Raj and

01 Pre-Independent India

Introduction
In this sub-unit, students will outline the economic history of
British colonial India during the British Raj. Students will explore
the history of imperialist rule in India, the consequent disruption
of the traditional economy; the commercialisation of agriculture;
the rise of landlordism and its devastating effects; and starvation
and famine in India through accounts of many renowned Indian
economists. Students shall also engage with the economic history
of British colonial India critically as theorised by Karl Marx. The
text aspires to inform students of the importance of economic
history to be able to study the state of the Indian economy and its
development, in present, and in future.

Inquiry questions
1. How was India transformed into an economic colony under British rule?
2. What was the two-fold motive behind the systematic deindustrialisation affected by the
British in pre-independent India as evidenced by Marx?
3. How did the commercialisation of agriculture and pressure on land lead to famines and
starvation? Were they natural or man-made due to British colonial policies?

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1.1 Why must we study Economic History?

Economic historians study how past economies changed, and the factors that could influence
present and future economic development. They focus on practical questions about real economies.
For instance, how did the economic relationships between the Western countries and their
former colonies evolve historically? How did trade and exchange take place prior to and after their
colonisation? How can these relations be used to understand societal and economic changes that are
taking place at present?

The study of economic history explores all the questions listed above. Economic history, by nature,
takes into account the interplay between economic, social, political and cultural behaviour. This
has made it possible to question and reassess earlier findings, thus expanding the frontier of our
knowledge of the past and its ability to indicate our future. In this sub-unit, we will make use of
economic history to paint a picture of the imperialist rule of British India.

1.2 Development and Underdevelopment in Colonial

India
The British conquest had a profound impact on India. There was hardly any aspect of the Indian
economy that was not changed during the entire period of British rule down to 1947 when India
achieved its independence.

From the end of the eighteenth century, South Asia began to experience two overlapping processes of
change that transformed patterns of production and consumption in the region. These were the rise
of colonial rule and the integration of the region in the emerging world markets for commodities,
capital, and labour. The first process, the transition to colonialism, was underway for almost exactly a
century, 1757-1856. During this period, the British East India Company annexed the Indian territories
that came to constitute British India. At the turn of 1857, India had become a colony of the British
Crown. About 60% of the land area in present India, Pakistan, and Bangladesh belonged to British
India (look at the map below). Outside British India, there were more than 500 princely states in
South Asia, nominally independent but militarily dependent on the British.

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Map: British India and the princely states, around 1900

Source: The Economic History of India, 1857-2010, Oxford University Press

The second process, integration of the region with the world financial and commercial system, had
been active since the eighteenth century, but its impact earlier had been greater in some coastal
regions and weaker in the interior. The ratio of foreign trade to domestic product increased from
1-2 per cent in 1800 to a little less than 10% in the 1860s and to 20% by 1914. Although international
flows of income, capital, and labour were larger in the colonial period than before, more than half
of India’s foreign trade was restricted to Britain while the rest was allowed with a few other countries
like China, Ceylon (former Sri Lanka) and Persia (former Iran). The Opening of the Suez Canal in
Egypt further intensified British control over India’s foreign trade.

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The most important characteristic of India’s foreign trade throughout the colonial period was
the generation of a large export surplus. But this surplus came at the expense of several essential
commodities like food grains, clothes, kerosene etc. — which were scarcely available in the domestic
market. Further, this export surplus did not result in any flow of gold or silver into India but was used
to make payments for British administration and wars waged by the British.

India was crucial to the British Empire as a market for its manufactures, chiefly textiles, machinery,
and metals, and as a source of food, migrant labour, industrial raw materials, and natural
resources. Colonialism also strengthened the flow of trade and capital by setting up institutions and
infrastructure necessary for a market economy, as we study later in the sub-unit.

These were big changes. But did they make the average Indian better off? How did the Indian peasant
fare? What adverse effects did it have on the traditional village structure of the economy? We will
explore all these questions below.

1.3 Economic Performance

The conventional indicators of the progress and performance of the Indian economy over the last
fifty years or so of colonial rule will be discussed here. The performance of the economy in terms of
national product and income levels is much more difficult to assess because the colonial government
never made any sincere effort to estimate India’s national and per capita income. Some individual
attempts which were made to measure were inconsistent. Among the notable estimators – Dadabhai
Naoroji, William Digby, Findlay Shirras, V.K.R.V Rao and R.C. Desai – it was Rao, whose estimates
during the colonial period were considered very significant.

Various details about the population of British India were first collected through a census in 1881.
Though it had limitations, it revealed the unevenness in India’s population growth. Before 1921, India
was in the first stage of demographic transition. The second stage of transition began after 1921.
However, neither the total population of India nor the rate of population growth at this stage was very
high. The various social development indicators were also not quite encouraging. The overall literacy
level was less than 16%, and the female literacy rate was at 7%. The overall mortality rate was very
high, particularly, infant mortality was about 218 per thousand.

We do not have certainty about the history of agricultural output in colonial India, especially the
course of yield rates and productivity. The bulk of the Indian population remained employed in
agriculture throughout the late nineteenth and early twentieth centuries. At the close of the colonial
period in 1947, the extent of development in India was still very limited: average per capita foodgrain
availability was about 400 grams, and life expectancy at birth was only 32.5 years.

This evidence suggests that there was a distinct but slow-moving process of economic change at work
in India in the modern period. It was characterised by minimal improvements in rates of capital and
labour productivity resulting in fluctuating and uncertain patterns of growth. The laws, institutions
and social structure of contemporary South Asia were thus a creation of Britain’s requirement
for cheap labour and cheap exports within the imperial system, and the dominant classes that
have exercised control over agricultural and industrial capital for the last hundred years or so are
identified as the product of this colonial transformation.

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Check Your Progress 1

1. Comment on the social and economic performance of British colonial India.

2. Highlight the features of India’s pre-independence demographic structure.

3. What are the two overlapping processes that changed production and consumption patterns in
pre-independent South Asia?

1.4 Village Economy

As studied before, in order to understand the underdevelopment under British colonial rule, we
need a more comprehensive understanding of imperialism in India told through a lens of economic
history. The first to bring this dynamic approach to Indian history was the founder of modern
socialism, Karl Marx.

A highly influential revolutionary thinker and philosopher,

Karl Heinrich Marx was born on 5 May 1818 in Trier in
Western Germany, the son of a successful Jewish lawyer. Marx
studied law in Bonn and Berlin. His best-known works are the
1848 pamphlet ‘The Communist Manifesto’ (with his lifelong
collaborator Friedrich Engels) and the three-volume Das
Kapital (1867-1894). He wrote extensively on India in the New
York Daily Tribune from 1853 to 1861.

Marx’s critique of history, society and political economy holds

that human societies develop through class conflict. In the
capitalist mode of production, this manifests itself in the
conflict between the ruling classes (known as the bourgeoisie)
that control the means of production and the working classes
(known as the proletariat) that enable these means by selling
their labour power in return for wages. Marx’s ideas and
theories and their subsequent development, collectively
known as Marxism, have exerted enormous influence on
modern intellectual, economic and political history. Karl Marx

Marx opined that the understanding of the village system is key to the understanding of India. The
classic description of the village system is contained in his book ‘Capital’:

“Those small and extremely ancient Indian communities, some of which have continued down to this day,
are based on possession in common of the land, on the blending of agriculture and handicrafts, and on an
alterable division of labour, which serves, whenever a new community is started, as a plan and scheme ready
cut and dried.

The constitution of these ancient communities varies in different parts of India. In those of the simplest form,

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the land is tilled in common, and the produce divided among the members. At the same time, spinning and
weaving are carried on in each family as subsidiary industries. Side by side with the masses thus occupied
with one and the same work, we find the ‘chief inhabitant’, who is judge, police, and tax-gatherer in one; the
book-keeper, who keeps the accounts of the tillage and registers everything relating thereto; another official,
who prosecutes criminals, protects strangers travelling through and escorts them to the next village; the
boundary man, who guards the boundaries against neighbouring communities; the water-overseer, who
distributes the water from the common tanks for irrigation; the Bramhin, who conducts religious services;
the schoolmaster, who on the sand teaches the children reading and writing; the calendar-Brahmin, or
astrologer, who makes known the lucky or unlucky days for seed-time and harvest, and for every other kind of
agricultural work; a smith and a carpenter, who make and repair all the agricultural implements; the potter,
who makes all the pottery of the village; the barber, the washerman, who washes clothes, the silversmith, here
and there the poet, who in some communities replaces the silversmith, in others the schoolmaster. These dozen
of individuals are maintained at the expense of the whole community. If the population increases, a new
community is founded, on the pattern of the old one, on unoccupied land.”

The above described traditional Indian economy was broken from its foundation by the advent of
foreign capitalism, represented by British rule. If you recall your history lesson and read carefully,
you would understand that the British conquest of the Indian economy differed from the previous
foreign conquests in one major way. The previous conquerors had overthrown Indian political
powers but had made no basic changes in the country’s economic structure; they had gradually
become a part of Indian life, political as well as economic. The peasant, the artisan, and the trader
had continued to lead the same type of existence as before. The basic economic pattern, that of the
self-sufficient village economy as pointed out by Marx had carried on. Change of rulers had merely
meant change in the personnel of those who appropriated the peasant’s surplus. But the British
conquerors were different - they disrupted the traditional structure of the economy. Moreover, they
never became an integral part of Indian life. They always remained foreigners in the land, exploiting
Indian resources and carrying away wealth as tribute.

1.4 History of Imperialist Rule in India

Carrying out Marx’s analysis a little further, we can speak of three main periods that stand out in the
history of imperialist rule in India.
• The first is the period of early capitalism, represented by the East India Company, extending to
the end of the 18th century.
• The second is the period of Industrial Capital, which established a new basis of exploitation of
India in the nineteenth century.
• The third is the modern period of Finance-Capital, developing from its first beginning in the
closing years of the 19th century to its fuller development in the 20th century.

The original aim of the East India Company in its trade with India was the typical ambition of any
monopolist company - to make a profit by securing a monopoly trade in the goods and products of an
overseas country. The objective was not to look for a market for British manufactures, but the need to
secure a supply of the products of India (specially spices, cotton goods, and silk goods), which found a
ready market in England and Europe.

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The problem, however, which faced the Company from the beginning was that, in order to secure
these goods from India by way of trade, it had nothing of value to offer, except for precious metals.
Therefore in order to increase real wealth, a system of roundabout trade was started, in particular to
utilise the plunder from the rest of the colonial system, in Africa and America, to meet the costs in
India, where they did not yet have the power to plunder directly.

However, as domination began to be established in India, by the middle of the 18th century, methods
of power were increasingly used to secure the maximum goods for the minimum payment. But
when the administration of the revenues passed into the hands of the East India Company, with the
granting of the civil administration of Bengal, Bihar, and Orissa in 1765, a new field of limitless direct
plunder was opened up in addition to the profits of “trade”. The objective thus became to draw the
wealth out of India without having to send wealth in return.

Check Your Progress 2

1. Read the description of the village system as given by Marx in the chapter. Outline how it is
different from the present organisation of life and work in your present locality.

2. How did the British rule differ from the earlier conquests?

3. Describe the three main periods of imperialist rule in India as per Marx.

1.5 Capital Accumulation in British India

The Industrial Revolution (the Industrial Revolution was the transition from creating goods by hand
to using machines) happening in England at the time needed accumulation of capital, which was
missing from England. Until the middle 18th century banking capital was still rare. So how did the
access to capital accumulation come through in the second half of the 18th century?

Marx shows that the primary accumulation of capital of the

modern world is driven by the spoils of the colonial system. In
this way, the looting of India played an important role in the
Industrial Revolution in England. However, once the Industrial
Revolution had been established in England, the new task became
to find adequate outlets for sending manufactured goods. This led
to a revolution in the economic system.

The new needs required the creation of a free market in India in

place of the previous monopoly. It became necessary to transform
India from an exporter of cotton goods to the whole world into an
importer of cotton goods.

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1.6 Fall of Traditional Industries

In 1813, the monopoly of the East India Company in trade with
India was ended. Prior to 1813 trade with India had been relatively
small. But between 1814 and 1835 British cotton manufactures
exported to India rose from less than 1 million yards to over 51
million yards. In the same period, Indian cotton piece-goods
imported into Britain fell from one and a quarter million pieces to
306,000 pieces, and by 1844 to 63,000 pieces. By 1850 India, which
had for centuries exported cotton goods to the whole world, was
importing one-fourth of all British cotton exports. But it was not
only on the basis of the technical superiority of the machine
industry but also due to direct state assistance of only one-way
free trade between England and India. This was facilitated by
free entry for British goods into India, but tariffs imposed against
the entry of Indian manufactures into Britain, and prevention
of direct trade between India and European or other foreign
countries. This way the dominance of British manufactures was A handloom weaver in colonial India
built up in the Indian market and the Indian manufacturing
industries were destroyed. While machine-made cotton goods from England ruined the weavers,
machine-made twists ruined the spinning industry as well. The same process could be traced in
respect of silk goods, woollen goods, iron, pottery, glass and paper.

In England, the ruin of the old handloom weavers due to the Industrial Revolution was accompanied
by the growth of the new machine industry. But in India, the ruin of the millions of artisans and
craftsmen was not accompanied by any alternative growth of new forms of industry. This affected
not only the old manufacturing towns like Surat, Dacca, Murshidabad and their population but also
the basis of the old village economy - the union of agriculture and domestic industry. The millions of
ruined artisans and craftsmen, spinners, weavers, potters, tanners, smelters, smiths from the towns
and villages had no alternative but to rush into agriculture. India was forcibly transformed from
being a country of combined agriculture and manufactures, into an agricultural colony of British
manufacturing capitalism. We can observe that it was from this period of British rule, and from the
direct effects of British rule, that originates the deadly over-pressure on agriculture in India that is
felt even today.

This policy of the industrial capitalists, namely, to make India the agricultural colony of British
capitalism, supplying raw materials and buying manufactured goods, was explicitly set out by the
President of the Manchester Chamber of Commerce, Thomas Bazley in 1840:

“In India there is an immense extent of territory, and the population of it would consume British
manufactures to a most enormous extent. The whole question with respect to our Indian trade is whether they
can pay us, by the products of their soil, for what we are prepared to send out as manufactures.”

The export of raw materials increased, especially after 1833. Raw cotton exports increased from 9
million pounds in 1813 to 32 million in 1833, and 963 million in 1914. Even more significant was the

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rising export of food grains from starving India. It rose from 858,000 pounds in 1849 to 3.8 million
pounds by 1858, and 19.3 million pounds in 1914. Alongside this process, there was a heavy increase
in the number and intensity of famines in the second half of the 19th century.

In 1880, the Indian Famine Commission Report stated:

“At the root of much of the poverty of the people of India, and of the risks to which they are exposed in
seasons of scarcity, lies the unfortunate circumstance that agriculture forms almost the sole occupation of
the mass of the population and that no remedy for the present evils can be complete which does not include
the introduction of a diversity of occupations, through which the surplus population may be drawn from
agricultural pursuits and led to find the means of subsistence in manufactures or some such employment.”

Parsee cotton merchants of Bombay, circa 1800. India’s living standards fell through the middle of the 19th century as it didn’t do enough
to move toward production on a larger scale or with better machines.
Source: Universal History Archive/UIG, via Getty Images

The ruin of Indian industries, particularly rural artisan industries, proceeded even more rapidly
once the railways were built. The railways enabled British manufacturers to reach, and uproot
the traditional industries in the remotest villages of the country. The cotton weaving and spinning
industries were the worst hit. Silk and woollen textiles fared no better and a similar fate overtook the
iron, pottery, glass, paper, metals, spinning, oil-pressing, tanning and dyeing industries.

Apart from the influx of foreign goods, some other factors arising out of the British conquest also
contributed to the ruin of Indian industries. The oppression practised by the East Indian Company on
the craftsmen of Bengal during the second half of the 18th century, forcing them to sell their goods
below the market price and to hire their services below the prevailing wages, made a large number of
artisans abandon their ancestral professions.

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The gradual disappearance of Indian rulers and their courts who were the main customers of
handicrafts also led to the downfall of these industries. Moreover, Indian rulers and nobles were
replaced as the ruling class by British officials and military officers who patronised their own home
products. The British policy of exporting raw materials also injured Indian handicrafts by raising the
prices of raw materials like cotton and leather. This increased the cost of handicrafts and reduced
their capacity to compete with foreign goods.

The out-of-work handicraftsmen and artisans

failed to find alternative employment. The
only choice open to them was to crowd into
agriculture. On the one hand, millions of
peasants, who had supplemented their income
by part-time spinning and weaving, now had
to rely heavily on cultivation; on the other,
millions of rural artisans lost their traditional
livelihood and became agricultural labourers
or petty tenants holding tiny plots. They added
to the general pressure on land. According to
Census reports, between 1901 and 1941 alone
the percentage of the population dependent on
agriculture increased from 63.7% to 70%. This
increasing pressure on agriculture was one of
the major causes of the extreme poverty of India
under British rule. A fine cotton morning coat produced in India for sale to a wealthy
French aristocrat. Before de-industrialisation, India produced
much of the finest finished textiles in the world.
On the whole, industrial progress in India was Source: Cleveland Museum of Art. Public domain

exceedingly slow and painful. It was mostly

confined to cotton and jute industries and tea plantations in the 19th century and to sugar and cement
in the 1930s. Indian industrial development was also extremely lop-sided regionally. Indian industries
were only concentrated in a few regions and cities of the country, which led to wide regional
disparities in income. Further, the lack of protection for industries in its infancy and outright
opposition to Indian industries by the British policy dented industrial capacity.

Discover it Yourself
Make a list of all handicraft and traditional industries in your hometown. Analyse if the
proportion of traditional industries has gone up or down. Elaborate how they differ from the
colonial traditional industries of jute, cotton, etc.

During the twentieth century, the domination of India by British industrial capital in the nineteenth
century gave place to the domination of India by British finance capital. This brought important
economic and political consequences. We will explore this in the next section.

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Check Your Progress 3

1. How did industrial devastation in British colonial India come about?

2. How did the lack of a new machine industry in British colonial India affect the artisans?

3. What do the excerpts given by Thomas Bazley, the President of the Manchester Chamber of
Commerce, and the 1880 India Famine Commission Report reveal about the state of industrial
progression in British colonial India?

1.7 Transition to Finance-Capital

The distinctive forms of nineteenth-century exploitation of India by industrial capital did not exclude
the continuing of old forms of direct plunder, which were also carried out forward and at the same
time transformed. The “tribute” continued and grew rapidly throughout the nineteenth century
alongside the growth of trade. In the twentieth century, it grew even more rapidly alongside a relative
decline in trade.

The requirements of the nineteenth-century free-trade capitalism led to new developments in British
policy in India. First, it was necessary to abolish once and for all the Company and replace it by the
direct administration of the British government, representing the British capitalist class as a whole.
This was finally completed in 1858.

Second, it was necessary to open up India more completely for commercial gain. This required
the building of a network of railroads; the development of roads; the introduction of the electric
telegraph, and the establishment of a uniform postal system; the first beginning of an anglicised
education to secure a supply of clerks and subordinate agents. It was complemented by the
introduction of the European banking system and the improvement of irrigation — which had been
allowed to fall into complete neglect under British rule. But this process of active development, and
especially of railway construction, was to lay the foundations for the development of British capital
investments in India.

Thus, in terms of imperialist expansion, the “development of infrastructure” would be spoken of as

the export of capital. But in the case of India, the amount of actual export of capital was very small.
Only over the seven years of 1856-62 in the whole period up to 1914 was the normal excess of exports
replaced by an excess of imports, totalling 22.5 million pounds for the seven years, which was not a
very large contribution for an ultimate total of capital investments estimated at close on 500 million
pounds by 1914. Thus the British capital invested in India was in reality first raised in India from the
plunder of the Indian people, and then written down as debt owed by India to Britain, on which India
had to pay interest and dividends.

Therefore, the focus of British capital investments in India was the public debt. The origin of this debt
lay, in the first place, in the costs of war and other charges (often for military operations of British
imperialism outside India) debited to India, and later also in the costs of the railway and public works
schemes initiated by the Government.

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The Exploited Tribal Tea Plantation Workers in Assam in 19th century India, Under the British Raj
Source:http://www.oldindianphotos.in/2009/07/assamese-women-in-costume-picking-tea.html

With the development of railway construction, and development of tea, coffee, and rubber
plantations and a few minor enterprises, private capitalist investment from Britain in India began
to advance rapidly in the second half of the nineteenth century. In the same period, private British
banking began to advance in India after the removal of the restrictions of the Company’s monopoly.
For 1909-10, Sir George Paish estimated the total of British capital investments in India and Ceylon
(formerly Sri Lanka) at 365 million pounds, but the composition of this clearly reveals that the
process of the British capitalist investment in India, or so-called “export of capital”, did not imply a
development of modern industry in India. 97% of the British capital invested in India before the First
World War of 1914 was devoted towards purposes that facilitated the commercial gains for the British
through India.

1.8 Finance-Capital and the World Wars

The British nineteenth-century industrial monopoly and domination of the world market began to
weaken in the fourth quarter of the nineteenth century. Even in India the decline slowly but steadily
developed from the end of the third quarter of the nineteenth century.

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In the five years 1874-79, the British share of Indian imports was 82%, in addition to 11% for the
rest of the empire, leaving less than one-fourteenth of the Indian market for the outside world. By
1884-89, it had fallen to 79%, by 1899-1904 to 66%, by 1904-14 to 63%. At the same time, the profits of
invested capital and the volume of home charges were steadily increasing. The total trade between
Britain and India in 1913-14 amounted to 117 million pounds, which could be estimated to represent
a maximum total of 28 million pounds for British trading, manufacturing and shipping profits from
India in 1913.

However, the total British capital from investments in India was estimated to have reached 450
million pounds by 1911, and by the eve of the First World War of 1914 to have stood at over 500
million pounds. If the average rate of interest on this is made as low as 5%, this would yield 25
million pounds - to this if the profits and earnings of all that section of the capital representing
companies other than trading companies operating in India, as well as the income from financial
commissions, exchange transactions, other banking operations and insurance were included – this
would give a total of 40 million pounds for the net return. It is therefore evident that by 1914, the
interest and profits on invested capital and direct tribute considerably exceeded the total of trading,
manufacturing and shipping profits out of India. The finance-capitalist exploitation of India had
become the dominant character in the twentieth century.

The First World War and the following period accelerated this process, showing a sharp decline in
Britain’s share of the Indian market. While the old basis of colonial exploitation was collapsing, the
new basis of profits by finance-capitalist exploitation was steadily rising and increasing in volume. By
1929 the total of British capital investment in India was estimated at 573 million pounds and by 1933
at 1000 million pounds. Evidence shows that the exploitation of India in the modern period has been
far more intensive than in the old.

However, with the First World War, a complete reversal of policy was proclaimed by the Government.
Industrialisation was officially set out as the aim in the economic field. The reasons for this
proclaimed change of policy arose from the conditions of the war. Three main groups of reasons may
be distinguished.

• First, military strategic reasons. Without the most elementary basis of modern industry in India,
there was a lot of dependence for vital military needs on long-distance overseas supplies.
• The second was competitive economic reasons. Foreign competitors were beginning to break
down the British monopoly in the Indian market. A system of tariffs was implemented to prevent
this.
• Third, inner political reasons. To maintain control of India during the war and in the disturbed
period succeeding the war, it was essential to secure the cooperation of the Indian bourgeoisie,
and for this reason, it was necessary to make certain concessions and promises of concessions.

During the twenty years between the First and the Second World Wars, a measure of industrial
development undoubtedly took place in India, the most notable of which was the development of
the textile industry. However, India could not gain much holding in developing heavy industries like
iron, steel, and the production of machinery. The Second World War, and the consequent necessity
of developing India as a main supply base in the East, too, brought no basic change in the imperialist
attitude to the development of Indian industry. Although a certain measure of increased industrial

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activity took place in India during the war, whatever increase in production that took place in India
during the war arose “from the reckless over-working of existing plant and machinery, and more man-
hour shifts.” Thus, India showed the typical inverted economic development of a dependent colonial
country.

If we compare the proportion of the population in industry and agriculture during this period with
the pre-1914 figures, the low level of industrial development becomes apparent. According to the
census returns, the numbers dependent on industry actually decreased between 1911 and 1931, while
the numbers dependent on agriculture increased. Thus, the real picture of India on the eve of the
Second World War was a picture of what has been aptly called “de-industrialisation” in place of the
“industrialisation” of India under imperialist rule.

The strain on the Indian economy can be seen by putting together the figures of India’s defence
expenditure, which rose to increasing heights, in some years to nearly one-third of the total pre-
war national income. The foreign banking system working in conjunction with the Government’s
financial and exchange policy became an important tool to restrict industrial and independent
economic development in India.

British colonial Indian Army soldiers, 1944-45.

India incurred vast amounts of war expenditure during the First and Second World Wars. Millions of Indian soldiers and volunteers partici-
pated in World War 2 on Britain’s side.
Source: https://www.ww2online.org/image/british-colonial-indian-army-soldiers-india-1944-45

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Although the Second World War brought great impoverishment and suffering to the people of India
due to British policies, it enriched the top levels of Indian businessmen, merchants, contractors,
and big industrialists. The Indian capitalist class emerged from the war with a huge accumulation
of capital, but this was not based on any serious productive economic development or industrial
advancement during the war. Hence the demand of the Indian capitalist interests for industrialisation
and for new openings for investment reached extreme intensity at the close of the war.

Hence, imperialism was adapted to the new era. British vested interests could only be preserved in
India through a compromise with the Indian big bourgeoisie. India could be maintained as a safe
market for British manufactured goods only with the help of the Indian monopolists. Besides dealing
with big and middle businesses in India, British imperialists planned to develop Indian states as
their main future base. A number of Indian states came into the field, entering into partnership with
British financiers. Hyderabad announced its Godavari Valley Project and 40% to 70% of the capital
was offered by the British. The Travancore state, too, sold all rights for the development of its rich
thorium sands to a British firm. The rise of plantation industries such as indigo, tea, and coffee was
highly exploitative. This oppression was vividly portrayed by the famous Bengali writer Dinbandhu
Mitra in his play Neel Darpan in 1860.

This whole method of imperialist war finance was based on reckless inflation. Not only was the
opportunity to build the Indian economy lost, but as a result of the wartime strain, the economic
situation in India during the years following the Second World War was marked by increasingly
critical conditions, soaring inflation, rising prices and mass distress.

Imperialism worked against the development of Indian industries and also led to extreme poverty
among the agricultural population. This poverty limited the market for Indian industries, making
it difficult for them to grow and thrive. Thus, the industrial question in India cannot be solved
independently from the question of agriculture, which involves the foundations of imperialist
exploitation.

Check Your Progress 4

1. Why did the British administration transition to a finance-capital form of exploitation in colonial
India?

2. What do you understand about the deindustrialisation of British colonial India? What far-reaching
effects did it have on the colonial Indian economy?

3. Did British capital investments in British colonial India lead to industrial development? Why or
why not?

4. List the reasons why the British government changed the policy regarding the industrialisation of
colonial India during World War 1.

5. How did the Second World War facilitate and finance-capital facilitate de-industrialisation?

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1.9 Land System and Commercialisation of

Agriculture (1793 - 1929)
The problem of agriculture in India cannot be discussed without dealing with the problems of the
land system. The elementary basic issues that were identified underlying the agrarian crisis include
the following:

• The over-pressure of the population on agriculture, through the blocking of other economic
channels;
• The effects of the land monopoly and the burdens on the peasantry;
• The low technique and obstacles to the development of technique;
• The stagnation and deterioration of agriculture under the conditions of colonial and semi-
colonial economy;
• The increasing impoverishment of the peasantry, sub-division and fragmentation of holdings;
• Reduction of a growing proportion of the peasantry, from one-third to one-half in some regions,
to the position of a landless proletariat;

We will examine each of these points below:

The Over-Pressure on Agriculture

Often the contrast between the dependence of the majority of the population in India on agriculture
and the highly industrialised countries of Western Europe is commonly presented as a kind of natural
phenomenon. This is to showcase the backward character of Indian society. Such as this statement
in the classic Montague Chelmsford Report of 1918: “In the whole of India, the soil supports 226 million,
and 208 million of them get their living directly by, or depend directly upon, the cultivation of their own
or others; fields.” The Simon Commission Report of 1930 quoted the above statement and concluded
that change must in consequence come “very slowly”. However, the disproportionate and wasteful
dependence on agriculture as the only occupation for three-fourths of the people, at the time was a
modern phenomenon and the direct consequence of imperialist rule.

This is revealed in the official Census returns of the past half-century. The proportion of the
population dependent on agriculture rose from 61.1% in 1891 to 66.5% in 1901, 72.2% in 1911, and
73% in 1921. Parallel to this increasing pressure on agriculture, the proportion of the population
dependent on industry fell from 5.5% in 1911 to 4.3% in 1931. In 1911 undivided India, with a
population of 315 million, there were 17.5 million workers in industry, whereas in 1951 in the Indian
Union, with a population of 356 million, the country had only 16.7 million workers in industry. The
increase in the demand for food grains by the Britain population and the push to produce cash crops
like cotton, jute, wheat, indigo and opium by Indian cultivators to get greater returns led to the
commercialisation of agriculture. This reflects the continuing trouble of “deindustrialisation” – that
is as we noted earlier, the destruction of the old handicraft industry without compensating for the
advance of modern industry, with a continuous increase of the overcrowding of agriculture.

The overcrowding of agriculture means that an increasingly heavier demand was constantly put on

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the backward agriculture in India, to supply a livelihood for an increasingly heavy proportion of a
growing population. On the other hand, the effects of land monopoly and the burdens of exploitation
placed on the peasantry made the agriculture sector incapable of fulfilling this demand. The
increasing over-pressure on agriculture means that the proportion of the available cultivated land to
each cultivator was also continually diminishing. In 1911, Sir Thomas Holderness wrote:

Not only does the land of India provide food for this great population, but a very considerable portion of it
is set apart for growing produce which is exported . . . Subtracting the land this utilised. . . we shall find
that what is left over does not represent more than 2 ⁄ 3 acre per head of the total Indian population. India
therefore feeds, and to some extent clothes, its population from what 2⁄3 acres per head can produce.

Stagnation and Deterioration of Agriculture

The Indian economist, R. K. Das had estimated in 1930 that 70% of the available area for cultivation
was wasted and only 30% was used for productive purposes. There were patches of “cultivable
wasteland other than fallow” that were not brought under cultivation because that would have
required capital and people had little to spare. The task could have been accomplished by a collective
organisation with governmental aid. But this responsibility was never recognised by imperialism.
The original neglect of the irrigation and public works by the British Government was noted long ago
by Marx: “The British in East India accepted from their predecessors the departments of finance and of war,
but they have neglected entirely that of public works. Hence the deterioration of an agriculture . . .”

The overcrowded cultivators of India had to contend with only two-thirds of the cultivable area with
paralysing burdens and social conditions, including extreme poverty and primitive techniques. The
level of production was also lower than in any country. The over-crowding of agriculture and low
technique was also reflected in a colossal waste of labour: in India, there was one person employed
in cultivation for every 2.6 acres of land, as against 17.3 acres in the United Kingdom and 5.4 acres
in Germany. Overcrowding of agriculture also resulted in fragmentation of land into small holdings
most of which could not maintain their cultivators.

The lower yield in India was not due to natural disadvantages of lower productivity of the soil as was
pointed out by the reports of the Indian Central Banking Enquiry Committee of 1931, “that the soil of
India is naturally poor. This is not correct. It has become poor.” The same memorandum points out
that allowance had to be made “for part of the land in India producing two crops per year . . . This
advantage should equal any loss from drought . . . It is not therefore the soil that is responsible for the
poverty of rural India.”

Check Your Progress 5

Agriculture during Pre-British India

The French traveller, Bernier, described seventeenth-century Bengal in the following way: “The knowledge
I have acquired of Bengal in two visits inclines me to believe that it is richer than Egypt. It exports, in
abundance, cottons and silks, rice, sugar and butter. It produces amply — for its own consumption – wheat,

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vegetables, grains, fowls, ducks and geese. It has

immense herds of pigs and flocks of sheep and
goats. Fish of every kind it has in profusion. From
Rajmahal to the seas is an endless number of canals,
cut in bygone ages from the Ganges by immense
labour for navigation and irrigation.”

a. This is the account of the agricultural

prosperity in India in the seventeenth
century. Contrast it with agricultural
deterioration in the 18th and 19th centuries
we had read above. Explain in detail all the
ways agriculture had stagnated in India Land ploughing for rice cultivation in Kerala, 1902
during British colonial rule. Source: https://picryl.com/media

The Land Monopoly and the Burden on the Peasantry

In the traditional land system of India before British rule the land belonged to the peasantry, and the
Government received a portion of the produce, which under the Hindu kings varied from one-sixth
to one-twelfth of the produce and under the Mughal empire was raised to one-third. When the British
established their dominion, they took over the traditional land basis of revenue; but transformed
its character, and thereby transformed the land system of India. At the time when they took over,
the ruling regime was in disorder; the payments from the peasantry were extreme; but the village
community system and its traditional relationship to the land were still functioning.

Transformation of the Land System

As we saw the previous traditional “king’s share” was a proportion of the year’s produce, fluctuating
with the year’s production, and surrendered as tribute or tax by the peasant joint owners or self-
governing village community to the ruler. This was replaced by fixed money payments, assessed on
land, regularly due in cash irrespective of the year’s production. The majority of the settlements were
fixed on individual land-holders. The British established the English landlord system. The British
state took over the ultimate possession of the land, making the peasantry the equivalent of tenants,
who could be ejected for failure of payment. The previous self-governing village community was
robbed of its economic functions and administrative role; much of the common lands were assigned
to individual holders. From being owners of the soil, the peasants became tenants, and with the
further development of the process, an increasing proportion became landless labourers, or the new
class of agricultural proletariat, constituting over one-third of the agricultural population.

Creation of Landlordism
The introduction of the English landed system in a modified form was the first type of land
settlement attempted by the western conquerors. This was the character of the famous Permanent

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Land Settlement of Lord Cornwallis in 1793 for Bengal, Bihar, Orissa, and later extended to parts of
North Madras. The existing Zamindars, who were in reality tax farmers, or officials appointed by the
previous rulers to collect land revenue on commission, were constituted as landlords permanently,
subject to a permanent fixed payment to the Government.

At the time these terms of settlement were disadvantageous for the Zamindars and cultivators,
and very profitable for the Government. The figure was set at 3 million pounds to be raised by the
Zamindars in Bengal for the Government. Many of the old traditional Zamindar families broke
down due to the heavy burden and estates were either sold or put to auction. These estates were
bought by a class of businessmen. Later, with the fall in the value of money and the increase in the
amount collected from the peasantry, the Government’s share in the profits, which was permanently
fixed at 3 million pounds, became relatively smaller; while the Zamindars’ share became larger.
For this reason, the Permanent Settlement in Bengal began to be universally condemned by not
only the peasantry but also by the imperialists. The subsequent Zamindari settlements were made
“temporary” — that is, subject to periodical revision to permit successive raising of the Government’s
demand.

In the period after the Permanent Settlement, an alternative method called the Ryotwari system was
attempted in a number of other districts, beginning in Madras, and associated with the name of Sir
Thomas Munro, who, as the Governor of Madras, put it into force in 1820. The idea was to avoid both
the disadvantages of the Permanent and Temporary Settlements by making a direct settlement of
the Government with the cultivators. Thereby the Government secured for itself the entire profits
without needing to share them with intermediaries.

Thus the forms of land tenure in British India became traditionally classified under these three main
groupings, all deriving from the British Government.
• First, the Permanent Zamindari Settlements, which covered 19% of the total area of British India.
• Second, the Temporary Zamindari Settlements which covered 30% of the area.
• Third, the Ryotwari Settlements which covered 51% of the area.

The three systems of land revenue were

supplemented by the Mahalwari system. In
the Mahalwari system, if the Zamindar held
the whole estate, the settlement was with the
Zamindar; otherwise, payment was extracted
from individual cultivators. It is important to
not conclude that landlordism existed only in
49% of the area of British India. In practice,
through the process of sub-letting, and through
the dispossession of the original cultivators by
Grain cart drawn by hired labourers, Madras (1876-1878), Tamil
money-lenders and others securing possession Nadu, South India. Changes in land ownership and control affect-
of their land, landlordism spread extensively at ed how crop failures impacted human lives. Before the British
colonial period, Indian agriculture was dominated by subsistence
an increasing rate in the Ryotwari areas. Due to farming organised in small village communities. At the end of the
a lack of other effective outlets for investments, 18th century, village communities began to disband. The perma-
nent land settlement of Lord Cornwallis in 1793 impacted Bengal,
the moneyed classes excessively preyed on the Bihar, and Orissa, and later extended to North Madras.
peasants. Source: https://www.environmentandsociety.org

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In both the Permanently and the Temporarily settled Zamindari areas, the lot of the peasants were
left to the mercy of the Zamindars who raised rents to high limits, forced them to pay illegal dues and
to perform forced labour or begar. Even though the land revenue demand went on increasing year
after year – it increased from Rs. 15.3 crores in 1857-58 to Rs. 35.8 crores in 1936-37 — the proportion
of the total produce taken as land revenue tended to decline as the prices rose and production
increased. By now the population pressure on agriculture had increased to such an extent that the
lesser revenue demand of later years weighed on the peasants as heavily as the higher revenue
demand of the earlier years of the Company’s administration.

The demand for high revenue was made worse by the fact that the peasants got little economic return
for it. The government spent very little on improving agriculture. Almost its entire income was
spent on meeting the needs of the British-Indian administration, making the payments of direct and
indirect tribute to England. Even the maintenance of law and order tended to benefit the merchant
and the money-lender rather than the peasant. This was increased by the rigid collection structure of
land revenue. Land revenue had to be paid promptly on the fixed dates even if the harvest had been
below normal or had failed completely. But in bad years, the peasant found it difficult to meet the
revenue demand even if he had been able to do so in good years.

The Burden of Debt

The burden of debt grew increasingly with British rule and had become a major problem. The
causes of indebtedness of the Indian peasantry were economically incurred for payment of rent,
capital improvement, repayment of old debts and other purposes – closely linked with exploitation.
The ‘moneylender’ and ‘debt’ were not new phenomena in Indian society. However, the role of the
moneylender had taken on new proportions under capitalist exploitation, especially in the period of
imperialism.

The peasant cultivator, if he had not fallen into the ranks of the landless proletariat, was brought
under a triple burden. The government imposed heavy taxes and revenue demands on the peasants,
taking away their resources and leaving them impoverished. The Zamindars often acted as
exploitative landlords, taking excessive rent from the peasants and subjecting them to unreasonable
evictions. Moneylenders charged high interest rates, trapping them in cycles of debt and furthering
their economic vulnerability.

The growing commercialisation of agriculture also helped the moneylenders and merchants to
exploit the cultivator. The loss of land and the over-crowding of land forced the landless peasants,
and ruined artisans and handicraftsmen, to become either tenants of the money-lenders and
zamindars by paying high rent or become agricultural labourers at starvation wages.

Gold ornaments, the traditional form of savings, were drained from the peasantry to stave off
bankruptcy. Between 1931 and 1937 no less than 241 million pounds of gold was drained from India.
The number of abandonments by tenants who could not pay rent went on reaching high figures. By
1934-35 the agricultural returns revealed an absolute drop in the area of cultivated land by over 5
million acres. The drop in the area under food grains was 5,589,000 acres. The burden of agricultural
debt tripled: from 400 million pounds in 1921 to 1350 million pounds in 1937.

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The money lender was also greatly helped by the new legal system and the new revenue policy. By
introducing transferability of land the British revenue system enabled the money-lender or the rich
peasant to take possession of land. Even the benefits of peace and security established by the British
through their legal system and police were primarily reaped by the money-lender in whose hands
the law placed enormous power. Gradually the cultivators in the Ryotwari areas sank deeper into
debt and more and more land was passed into the hands of moneylenders, merchants, rich peasants
and other moneyed classes. The process of transfer of land from cultivators was intensified during
periods of scarcity and famines.

Discover it Yourself
Identify the major crops grown by farmers in your hometown in present times. Find out the
different avenues in which farmers obtain loans for production and cultivation. Contrast them
with the methods of revenue collection and loans administered in British India. How has the
situation improved?

Check Your Progress 6

1. What were the main causes of India’s agricultural stagnation during the British colonial period?

2. Identify the basic issues of the agrarian crisis in British India.

3. What do you understand about the commercialisation of agriculture? How did it adversely impact
the agrarian situation in British India?

4. Outline the creation of landlordism in British India. Differentiate between Permanent and
Temporary land settlement, Ryotwari and Mahalwari systems of settlement.

5. Describe how the peasant cultivator had to bear a triple burden in the land settlement system of
British India.

1.10 Famine and Starvation in Colonial India

A major characteristic of British rule in India, and the net result of British economic policies was the
prevalence of extreme poverty among people. Throughout British rule, Indians always lived on the
verge of starvation. It was difficult to secure employment or a living. As we saw, British economic
exploitation, the decay of indigenous industries, the failure of modern industries to replace the once-
gone handicraft industries, high taxation, the drain of wealth to Britain, and a backward agrarian
structure gradually reduced the Indian population to extreme poverty.

The poverty of the people found its culmination in a series of famines (much of it being the direct
consequence of British colonial policies) which affected all parts of India in the second half of the
19th century. The first of these famines occurred in Western Uttar Pradesh in 1860-61 and cost over

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2,00,000 lives. In 1865-66, a famine engulfed Orissa, Bengal, Bihar, and Madras and took a toll of
nearly 2,000,000 lives, with Orissa alone losing 10,00,000 people. More than 14,000,000 persons died
in the famine of 1858-70 in Western Uttar Pradesh, Bombay, and Punjab. Many states in Rajputana,
another affected area, lost 1/4th to 1/3rd of their population.

1876-1879 famine in Madras

Digby estimated 10.3 million people starved to death most of which were in South India (some refer to the tragedy as the Madras famine).
Maharatna estimated 8.2 million died from hunger and diseases that followed. British colonial rule argued that famine relief would be
an inappropriate response and encourage laziness. Some officials argued the Thomas R Malthus theory that famines are nature’s way
for population control and argued the British government should not intervene. The British government continued its policy of “forced
export” of food from India in 1876-1879, while the famine swept among its people.
Source: https://commons.wikimedia.org

Perhaps the worst famine in Indian history till then occurred in 1876-78 in Madras, Mysore,
Hyderabad, Maharashtra, Western Uttar Pradesh and Punjab. Maharashtra lost 8,00,000 people,
Madras nearly 35,00,000, Mysore nearly 20% of its population, and U.P. over 12,00,000. Drought led
to a country-wide famine in 1895-97 and then again in 1899-1900. The famine of 1896-97 affected over
9.5 crore people of whom nearly 45,00,000 died. The famine of 1899-1900 followed quickly and caused
widespread distress. In spite of official efforts to save lives from these major famines, many other
local famines and scarcities occurred. William Digby, a British writer, has calculated that in all, over
28,825,000 people died during famines from 1854 to 1901.

1.10.1 The Great Bengal Famine of 1943

The Bengal famine of 1943 was one of the worst disasters in twentieth-century South Asia. According
to a survey conducted by Professor K.P. Chattopadhyaya, 3 ½ million people had died. Epidemics
followed in the wake of famine, and by September 1944, 1,200,000 people in Bengal had died of
various diseases including cholera, smallpox, and malaria.

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The context of the famine is dated to March 1942, when the Japanese army had completed the
occupation of Burma (now Myanmar). During this time, there was a serious shortage in rice
production as India used to have 15% of its rice imports from Burma. The loss of Burmese imports
resulted in the takeover of rice reserves in areas vulnerable to the Japanese invasion within India,
which resulted in large-scale hoarding. Bengal was also lacking wheat, dried legumes, mustard,
sugar, and salt. Due to hoarding and rationing of foodgrains, the price of rice in Calcutta which was
Rs. 6 per maund in January 1942 rose to Rs. 11 in November 1942, Rs. 24 in February-April, 1943, Rs.
30 in May, Rs. 35 in July, Rs. 38 in August, Rs 40 in October 1943. The price rose to as high as Rs. 50 to
Rs. 100 per maund in the Mofussil districts.

Alarmed by Japan’s military successes, the British colonial authorities started preparing for a
Japanese invasion of eastern and coastal Bengal. This included two important measures: the removal
of rice in excess from coastal districts, and the removal of boats that could carry ten or more
passengers to deny supplies and transport to the Japanese. Moreover, due to the fear of the Japanese
invasion, the government of Bengal impounded 66,653 boats, thereby halting all rice movement
from surplus zones to the deficit districts of East Bengal. In these districts of Khulna, Midnapore, and
Bakarganj, the economy of the fishing class was also completely destroyed. People who were engaged
in pottery in different districts went out of trade and their families became homeless, as this industry
required large inland shipments of clay.

The main causes of the famine in 1943 accepted by many researchers after many debates are:
• An absolute shortage of rice, due to the loss of imports from Burma, and rice exports from Bengal
to Sri Lanka (since it was one of the strategic bases against Japan) and to those regions of the
British empire that could not get rice from Southeast Asia after the fall of Burma;
• The conditions and consequences of World War II, creating a drastic increase in the price of rice;
• The incompetence of the government of Bengal to control the supply and distribution of food
grains in the market, thus generating large-scale hoarding;
• Delayed response after the onset of famine by the British administration;
• The government’s slow response in putting into operation a nationwide system of moving
supplies from food surplus to deficit areas.

Amartya Sen, a renowned Indian economist noted that one important characteristic of the famine
was it created an uneven expansion of incomes and purchasing power. People who were involved
in the army, the military and civil defence works, or industries associated with war activities were
covered by distribution arrangements and subsidised good prices. As a result, they could access
abundant supplies of food while others faced the consequences of rising food prices.

Calcutta witnessed the famine in the form of destitute masses from the rural areas who travelled
there from the surrounding rural districts. People thought if they could move to Calcutta, they had a
better chance of survival than anywhere else in Bengal because the city had so many people engaged
in war-related activities. Below is a picture of a family who moved to Calcutta to obtain food. The
famine swept across at least 60% of Bengal’s net cultivable area, affecting more than 58% of the rural
households and reducing over 486,000 rural families to a state of beggary.

In the famine period, the worst affected groups seem to have been fishermen, transport workers,
paddy huskers, agricultural labourers, those in ‘other productive occupations’, craftsmen, and non-

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agricultural labourers, in that order. Reports made by the Famine Commission in 1880, 1898, and
1901 provide useful evidence to examine these events and suggest that food grains were present even
during years of famine. The Famine Commission of 1880 provided the first attempt to measure the
food supply in the country and the food requirements of the people. According to these measures,
British India around 1880 produced a surplus of 5 million tons of food grains that were available for
storage, export, or luxury consumption. Further, each region of India grew surplus food grains. The
Famine Commission of 1898 again made fresh estimates of food supply near 1880 and considered the
growth of population and acreage under food grains during the period 1880-98. The report concluded
that “the surplus produce of India, taken as a whole, still furnishes ample means of meeting the demands of
any of the country likely to suffer from famine at any one time, supposing such famines to be not greater in
extent and duration than any hitherto experienced.”. The measures of surplus production given by the
Famine Commission of 1880 show that food grain exports did not actually wipe out the surplus in
normal years.

A family arrived in Calcutta in search of food in November 1943.

Source: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9735018/figure/Fig2/

Moreover, food grain exports continued throughout the years of severe famine. Many observers have
thus concluded that if there was an absolute shortage of food in those years, then this was largely a
created shortage and cannot be attributed to natural disasters.

We note that there were many other indications of India’s economic backwardness and
impoverishment. Colin Clark, a famous authority on national income, has calculated that during
the period 1925-34, India and China had the lowest per capita incomes in the world. But India’s
economic backwardness and poverty to a large extent were not natural, but rather man-made. The
natural resources of India were abundant and capable of yielding if properly utilised, a high degree
of prosperity to the people. But, as a result of foreign rule and exploitation, a backward agrarian
and industrial economic structure, and the total outcome of its lack of social development, India
presented the paradox of poor people living in a rich country.

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Check Your Progress 7

1. There is a perception still going around that in many ways the British administration in India
was quite beneficial. This perception needs an informed debate. How would you look at this
perception – especially after studying our current sub-unit? Write out your arguments in 300
words.

2. What was one important characteristic of the Great Bengal Famine in 1943 as per the renowned
Indian economist, Amartya Sen?

3. Between 1850 and 1899, India suffered 24 major famines, a number higher than in any other
recorded 50-year period, resulting in millions of deaths. Elaborate how the following changes in
the Indian economy might have contributed to the frequent famines in British colonial India.
a. Commercialisation of agriculture
b. Rise of landlordism
c. Collapse of traditional industries

1.11 Conclusion
As evidenced by the subunit, the British conquest had a profound economic impact on India. Here
we will broadly summarise the important points covered throughout the sub-unit:

• An understanding of the economy before independence is necessary to understand and

appreciate the level of development achieved during the post-independence period.

• South Asia from the end of the 18th century witnessed two overlapping processes of change
that transformed its patterns of production and consumption. The first was the rise of colonial
rule and the second was the integration of the region in the emerging markets for commodities,
capital, and labour in order to generate a large export surplus for the British colonial system.

• British colonial rule differed from previous ruling classes in its economic structure. It did not
assimilate into Indian political or economic life but built around it and drained colonial India of
its resources.

• The village structure of pre-colonial India was broken down by the British as stated by Marx.
He identified three main periods that stand out in the history of imperialist rule in India: first is
the period of early capitalism, represented by the East India Company and extending to the end
of the 18th century; the second period is of Industrial Capital, which established a new basis of
exploitation of India in the nineteenth century; and the third is the modern period of Finance-
Capital, developing from its first beginning in the closing years of the 19th century to its fuller
development in the 20th century.

• The Industrial Revolution of England was facilitated by the spoils of the colonial system.
The Industrial Revolution necessitated the establishment of India as an outlet for sending
manufactured goods from Britain. The dominance of British manufacturers destroyed the

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traditional industries such as handicrafts, silk, woollen, iron, pottery, glass, and paper in India.
The lack of a modern machine industry in India further worsened the situation of Indian exports.

• The British colonial rule transitioned to finance capital to facilitate British capital investments in
India, most of which took the form of public debt. The debt was accrued due to costs of war and
other charges. The “export of capital” did not imply the development of modern industry in India
but the facilitation of commercial gains to the British.

• During the Second World War, India witnessed some industrialisation for three main reasons:
military and strategic reasons, competitive economic reasons, and inner political reasons.
Imperialism worked against the development of Indian industries and also led to extreme poverty
among the agricultural population.

• The Second World War enriched the top levels of Indian businessmen, merchants, contractors,
and big industrialists. However, Indian industrial progress was slow and painful. It was confined
to mostly cotton, jute industries, and exploitative plantations.

• The ruin of the handicraft industry forced workers to crowd agriculture for employment which
led to over-pressure and deterioration of agricultural land.

• The peasantry was crushed under the triple burden of government taxes, Zamindars’s exploitative
practices, and money lenders’ high interest rates. The commercialisation of agriculture was
necessitated by the British by pushing Indian cultivators to produce cash crops like cotton, wheat,
indigo, and jute. The exploitative landlordism further pushed Indian cultivators into poverty.

• The Permanent and Temporary Zamindari settlement, Ryotwari, and Mahalwari settlements
pushed the cultivators into growing debt. The net result of British colonial policies and
settlements such as these was the prevalence of extreme poverty which resulted in a series of
famines. The worst of the famines was the Great Bengal Famine of 1943 which claimed over 3
million lives.

A Glossary
• Imperialism: a situation in which one country has a lot of power or influence over others,
especially in political and economic matters
• Colonialism: Colonialism is the pursuing, establishing and maintaining of control and
exploitation of people and of resources by a foreign group of people.
• Bourgeoisie: The ruling class of the two basic classes of capitalist society, consisting of capitalists,
manufacturers, bankers, and other employers
• Proletariat: The class of wage earners, esp. those who earn their living by manual labour or who
are dependent for support on daily or casual employment
• Land Fragmentation: Land fragmentation is a state of division of holdings into discrete parcels
that are dispersed over a wide area.
• Maund: The maund, mun or mann is the anglicised name for a traditional unit of mass used in
British India.

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• Mofussil districts: Originally, the regions of India outside the three East India Company capitals
of Bombay, Calcutta and Madras; the provincial or rural districts of India.

References:
1. Famines in Late Nineteenth-Century India: Politics, Culture, and Environmental Justice. (2021, June 10). Environment & Society Portal.
2. Dutt, R. P. (1940, January 1). India To-day.
3. Roy, T. (2020, September 10). The Economic History of India, 1857–2010. Oxford University Press.
4. Sen, A. (1983, January 20). Poverty and Famines. OUP Oxford.
5. NCERT - INDIAN ECONOMY. Kalinjar Publications.
6. Chandra, B. (2020, January 1). History of Modern India.
7. Famines in India Timeline. (n.d.). Environment & Society Portal. https://www.environmentandsociety.org/exhibitions/famines-india/
timeline/famines-india-timeline

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02 Industrial Transition Before

Independence (1860-1945)

Introduction
The period from 1860 to 1945 was a crucial time for India’s
economy, especially as it transitioned toward industry under
British rule. This section explores how things changed during
this time. Students will look at how trade and manufacturing
evolved, how jobs shifted, and how industries grew, both through
local efforts and foreign influences. By examining these topics,
students can better understand the factors that shaped India’s
industrial landscape before it gained independence.

Inquiry questions
1. How did the process of industrial transition in pre-independent India take place?
2. How did the influx of foreign trade impact the development of indigenous industries
during the colonial period in India?
3. What were the key drivers behind the emergence of local industrial entrepreneurship
between 1916 and 1945, and how did it contribute to India’s industrial transition under
British rule?

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2.1 Trade and Manufacturing Process in Colonial

India
In 1860, soon after the British Crown took control of a vast majority of India, the Indian economy
became intertwined with the global economy, but not necessarily for the better. The British saw India
as a source of raw materials and a market for their finished goods. They imposed taxes and policies
that favoured British industries over Indian artisans, leading to a decline in India’s trade fortunes.

British policies favoured their own industries at the expense of Indian artisans, flooding the market
with cheap imported goods and driving many craftsmen out of business. It was a dark time for India’s
manufacturing sector, as centuries-old traditions began to fade away.

However, the dawn of the twentieth century brought with it pivotal changes in Indian trade and
manufacturing processes. This chapter explores them in detail, given the backdrop of India under the
direct rule of the British Crown from 1860 to 1945.

Figure 1: Women workers in colonial India’s cotton textile factories

2.1.1 Trade Process in Colonial India

Colonial India’s trade from 1860 to 1945 went through a landscape of changes, challenges, and
opportunities. At the dawn of the colonial era, India’s trade flourished. By 1750, India held a
significant share of the global textile market (about 25%), known for its rich fabrics and intricate
craftsmanship.

As the British established their dominance, India’s trade dynamics shifted. The British introduced
policies favouring their own industries, leading to a decline in Indian exports. The once-thriving
textile industry faced stiff competition from British factories, causing a sharp decline in both
exports and domestic consumption. The period between 1870 and 1900 was particularly rough, with
challenges like famines and the devaluation of currency weighing heavily on India’s trade.

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The silver lining during this time was, however, the opening of the Suez Canal in 1869. The canal
provides a direct trade route for ships operating between European or American ports and ports
located in South Asia, East Africa and Oceania by doing away with the need to sail around Africa.
Strategically and economically, it is one of the most important waterways in the world. Its opening
made access to the Indian market easier.

Figure 2: The Suez Canal significantly reduced the time, cost and distance of transportation

Despite setbacks, Indian merchants displayed remarkable resilience. They adapted to changing
circumstances, exploring new markets and products. The emergence of the opium trade in the early
twentieth century provided a lifeline for some merchant groups, enabling them to accumulate capital
and sustain their businesses.

The colonial rule also brought about infrastructural changes, such as the introduction of railways and
standardised measures. These developments facilitated India’s integration into the global economy,
enabling the expansion of overseas trade. India became a crucial node in the network of global
commerce, supplying raw materials and agricultural produce to other countries. Wars, famines, and
economic crises influenced trade patterns, causing periods of boom and bust. The American Civil
War and the Crimean War created opportunities for Indian exports, while the Great Depression and
the World Wars brought disruptions and hardships. Indian cotton, in particular, became a lifeline
during the American Civil War when supplies from the United States were disrupted.

India’s export composition underwent significant shifts over time. From textiles and agricultural
produce to jute and tea, India adapted its export basket to meet changing demand patterns. The rise
of industries like jute manufacturing reflected India’s evolving role in the global economy. Despite
India’s substantial exports, trade relations with Britain remained unequal. The colonial framework
imposed burdensome tariffs and policies, leading to a trade deficit for India. The extraction of

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resources and the imposition of “Home Charges” drained India’s wealth, perpetuating a cycle of
dependency. On the flip side, India was not immune to the allure of foreign goods. Coffee from
Arabia, sugar from the Caribbean, spices from the East Indies, and European luxury goods also
found their way into Indian markets. This influx of imports began to take its toll on India’s domestic
industries, particularly textiles.

Behind the scenes of foreign trade were indigenous merchant networks, operating in bustling
bazaars and trading hubs. These merchants played a crucial role in facilitating internal trade,
financing agricultural activities, and connecting remote regions to global markets. The advent of
railways further served as a new channel of internal distribution for trade. The legacy of colonial
trade left a lasting impact on India’s economy. While it fueled the growth of some industries and
facilitated economic integration, it also entrenched disparities and dependencies. The story of
colonial trade is a testament to India’s resilience in the face of adversity and its enduring quest for
economic independence.

2.1.2 Manufacturing Process in Colonial India

In the realm of manufacturing, colonial India witnessed complex developments, from the rise of
modern factories to the decline of traditional handicrafts. The advent of colonialism ushered in a
period of de-industrialisation for India’s traditional handicrafts. British policies and the influx of
machine-made goods led to the decline of artisanal industries, particularly in textiles and ironwork.
However, by the turn of the twentieth century, a modest revival began, fueled by domestic demand
and import substitution.

Against the backdrop of colonial rule, modern factories emerged as symbols of industrial progress.
Concentrated in port cities like Bombay and Calcutta, these factories heralded a new era of
mechanised production. Industries such as steel plants, cotton textiles and jute manufacturing
thrived, driven by British investment and technological advancements. The growth of modern
factories, however, faced several challenges. There was hardly any capital goods industry to help
promote further industrialisation in India. Limited access to capital, technological constraints, and
competition from British imports posed hurdles for Indian entrepreneurs. Despite these challenges,
pioneering industrialists like Jamsetji Tata ventured into sectors like steel manufacturing, laying the
foundation for India’s industrial future through the incorporation of Tata Iron and Steel Company
(TISCO) in 1907. Furthermore, the growth rate of the new industrial sector and its contribution to the
Gross Domestic Product (GDP) or Gross Value Added remained very small.

Throughout the colonial period, the British Crown’s role in industrialisation remained limited. Unlike
in Western countries, where governments actively supported industrial growth, colonial authorities
adopted a laissez-faire approach, favouring British interests over Indigenous industries. However, the
exigencies of wartime led to a shift in policy, with the government promoting domestic production
through protective tariffs and local procurement. The rise of modern factories brought about a
structural transformation in India’s economy. While agriculture remained dominant, the industrial
sector began to gain traction, particularly in urban centres. The emergence of factory-based
production marked a departure from traditional modes of manufacturing, paving the way for a more
mechanised and centralised industry. However, small-scale enterprises continued to dominate, with
cottage industries and artisan workshops still playing a vital role in India’s economy.
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Figure 3: Geographical distribution of industries in 1947

While industrialisation in the colonial era laid the groundwork for future economic growth, it also
perpetuated inequalities and disparities. The concentration of factories in urban centres exacerbated
rural-urban divides, while the dominance of British-owned industries limited Indigenous
entrepreneurship. Nevertheless, the seeds of India’s industrial prowess were sown during this period,
setting the stage for the country’s post-independence development journey.

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Check Your Progress 1

1. Explain the impact of the American Civil War on India’s cotton industry in 80-100 words.

2. Which industry experienced significant growth in colonial India due to the emergence of modern
factories?
a. Agriculture c. Steel manufacturing
b. Handicrafts d. Traditional weaving

3. Why is Jamsetji Tata considered one of the pioneering industrialists in colonial India?

4. Which of the following was a major factor contributing to the decline of traditional handicrafts in
colonial India?
a. Government subsidies c. Influx of machine-made goods
b. Increased demand for artisanal goods d. Favourable trade agreements with other
countries

5. Discuss the challenges faced by textile merchants in colonial India in the late nineteenth century.
Did the situation change in the twentieth century?

2.2 Structural Change in Employment in Colonial

India
Colonial India was an agrarian economy, with agriculture contributing vastly to the gross output
over two centuries of British rule. After agriculture, traditional handlooms and artisans significantly
contributed to the gross output. However, there was a shift in employment patterns in Colonial India,
which we explore in this section.

Despite being an agrarian economy, India’s industrial sector was booming through the production
of handicrafts. However, as the British began factory-based industrial production, the traditional
handicraft industry lost its market in India, as it could not compete with machine-made imported
goods selling for much cheaper in the market. This led to the process of de-industrialisation, wherein
former artisans were forced to go back into agriculture for livelihood. This led to about 75% of India’s
working population being engaged in agriculture, while only 10% and 15% were engaged in industry
and services respectively. In Kerala, Maharashtra, Madras and West Bengal, there was a relative shift
in the workforce away from agriculture, while in Orissa and Rajasthan, there was a shift towards
agriculture. Also within the manufacturing sector, employment in factories grew while employment
in the non-factory sector declined between 1901 and 1951.

There were a few fluctuations in this occupational structure over the second half of the nineteenth
century and the early twentieth century. The Swadeshi Movement in 1905 reversed the de-
industrialisation trend observed decades earlier. People slowly returned to their manufacturing
jobs as the proportion of the population involved in the industry gradually increased. Gradually, as
modern industries came about, the occupational structure shifted in favour of the industrial sector.

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Throughout the period, India’s labour force remained largely rural, and 95% of manufacturing
employment was in the traditional industry. We further explore in this section, the structural change
in employment with respect to the various industries in colonial India.

Figure 4: The textile industry was the first modern industry to emerge in the Bombay Presidency

Employment in the jute mills experienced continuous growth between the 1870s and 1920s. It fell
dramatically after the crisis of 1929 or the Great Depression, then stabilised around 300,000 workers
till the late 1940s, after it saw a gradual decline. The trend in employment in the cotton industry
was similar to that of jute. Bombay’s first textile mill was established in 1854, and production and
employment gradually increased since the 1870s. Less dependent on exports, the industry seemed to
have been less impacted by the crisis of 1929, but jobs had also become more scarce. At the beginning
of the twentieth century, children and women formed significant shares of the jute mill labour force,
often working as ‘half timers’ in the long working day: 15% and 11% respectively in 1910. The number
of children rapidly dropped in the 1920s, following a series of legislations. Despite these challenges,
manufacturing employment showed consistency and a balanced gender distribution.

It is important to notice that the volume of labour going to the modern industrial sector was small
in relation to the Indian workforce. Even in 1951, only about 2.1 per cent of the workforce was
in the modern manufacturing industry. If one were to add in all the employment in mining and
quarrying, and plantation, the share would not exceed 3.5 per cent. In relation to the vast size of the
Indian workforce in the modern sector, however defined, this number was extremely small. Modern
manufacturing therefore did not really draw away huge volumes of labour from the countryside
as a whole. Mining and quarrying remained relatively stable, however, with a slight increase from
engaging 0.1% of the workforce in 1901 to 0.4% in 1951.

Transport, storage, and communications saw a gradual increase in male involvement from 1.5% of
the workforce in 1901 to 1.9% in 1951, while female participation remained minimal, never exceeding
0.3% of the workforce. Overall, while there were fluctuations in the distribution of the workforce

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across different sectors, the period from 1860 to 1945 witnessed a gradual shift in employment
patterns, with some sectors experiencing growth while others declined. India was on the path to
getting more people involved in the secondary and tertiary sectors on the eve of Independence,
although it was clear that it would take decades to positively change the terminal levels of
occupational structure.

Check Your Progress 2

1. What was a significant factor contributing to the decline of traditional handicraft industries in
Colonial India?
a. Introduction of modern machinery c. Rise in demand for handmade goods
b. Increase in government support d. Expansion of export markets

2. Which region in Colonial India experienced a relative shift in the workforce away from
agriculture?
a. Orissa c. Rajasthan
b. Delhi d. Madras

3. Describe the impact of the Swadeshi Movement on the employment structure in Colonial India.

2.3 Process of Industrial Transition

Colonial India in the nineteenth century witnessed a significant
surge in private enterprise and industrial growth. This was in
stark contrast to the industrial landscape of the late eighteenth
and early nineteenth century, where the industry consisted mostly
of traditional handicrafts and artisans. The industrial transition
of the nineteenth century was driven mostly by colonial policies,
technological advancements, and changes in the global economic
landscape.

The lack of industrialisation in early colonial India is mainly

attributed to the laissez-faire economic policy of the colonial
government, which reduced India to merely an agrarian colony of
the capitalistic manufacturing British economy. However, modern
industrial enterprises in colonial India started to grow in the mid-
nineteenth century.

The derivation of the monopolistic status of East India Company in the early nineteenth century
fostered buoyant private economic activities in India, where modern industrial enterprises financed
both by British and Indian capital were set up in various fields. Jute mills expanded rapidly in
Calcutta in response to mounting global demand for ropes and other products, occupying a large
share of the international market by the late nineteenth century.

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Speaking of privatisation in colonial India, the East India Company (EIC) made many attempts
to establish iron and steel manufacturing industries and was unsuccessful. The credit for the
development of large-scale manufacture of steel in India goes to Jamshedji Tata and his son Dorabji
Tata. Tata Iron and Steel Company was set up in 1907 and it started the function of producing pig iron
in 1911 and steel ingots in 1912. More Indian entrepreneurs, following Jamshedji Tata, capitalised on
opportunities in various sectors such as textiles, jute, mining, and steel production, contributing to
the diversification of the industrial landscape.
The cotton milling business grew steadily
throughout the second half of the nineteenth
century, achieving high international
competitiveness as early as the end of
the nineteenth century. These mills were
established using Indian capital and hence were
private businesses. Technological advancements
in these industries played a crucial role in
India’s industrial transition. The introduction of
modern machinery, powered by steam engines,
revolutionised textile production and led to
the establishment of numerous textile mills
across the country, particularly in the Bombay
Presidency.

Meanwhile, India’s industrial structure had

started diversifying. Brewing, paper-milling,
leather-making, matches, and rice-milling
industries also developed during the century,
while heavy industries such as the iron industry
were also established as early as 1814 by the
British capital. Though these industries were
recorded officially as large industries, they
were small in character. Other industries
Figure 5: A poster from 1939 showing the Tata Iron and Steel Com- having small-scale character that operated were
pany’s products in Calcutta
tanning, vegetable oil processing, glass-making,
leather goods manufacturing, etc. Despite diversification, India’s modern manufacturing industry
could not develop on a sound footing before the outbreak of World War I. Due to progress in modern
industrial enterprises, some industries reached global standards by the beginning of the twentieth
century, accelerated by wartime manufacturing requirements.

Just before the Great Depression, India was ranked as the twelfth largest industrialised country
measured by the value of manufacturing products. India owed this transitional industrial growth to
the cotton textile, iron and steel, and jute industries’ growth during the late nineteenth century. The
cotton mill industry in India had 9 million spindles in the 1930s, which placed India fifth globally
in terms of the number of spindles. The Indian jute mill industry was the largest in the world in
terms of the amount of raw jute consumed for production at the end of the 19th century. India’s iron
industry was ranked eighth in the world in terms of output in 1930. It is interesting to note that a
large part of this growth in heavy industries was observed due to favourable conditions for privatised
manufacturing.
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The nineteenth century saw a remarkable rise

in private enterprise and industrial growth in
colonial India. Albeit for their own benefit,
the British introduced favourable policies for
industrialisation and trade in the nineteenth
century. This included the construction of
railways and the development of telegraph lines
throughout India, among other infrastructural
projects which enabled the movement of goods,
services, ideas and information throughout Figure 6: The first Jute mill in India was established in Rishra in
the country. They also introduced new legal 1855 by George Acland
and administrative frameworks that encouraged privatisation, like the establishment of commercial
courts and property rights laws.

Check Your Progress 3

1. What factor is primarily attributed to the lack of industrialisation in early colonial India?
a. Technological backwardness c. Lack of skilled labour
b. Laissez-faire economic policy d. Government regulations

2. Who is credited with the development of large-scale steel manufacturing in colonial India?
a. East India Company c. Jamshedji Tata
b. British entrepreneurs d. Dorabji Tata

3. Create a flowchart illustrating the factors driving the industrial transition in colonial India during
the nineteenth century. Include at least four key factors and their interconnections.

4. Construct a timeline showcasing the major milestones in the industrial growth of colonial India
from the early 19th century to the outbreak of World War I. Include significant events such as the
establishment of key industries, technological advancements, and policy changes.

5. Describe the role of private enterprise in the industrial growth of colonial India during the
nineteenth century. Discuss the impact of British colonial policies, technological advancements,
and global economic changes on the development of industries such as textiles, jute, and steel.
Use specific examples to support your answer.

2.4 Foreign Trade and Infrastructure

As we studied in the first section of this subunit, foreign trade
played a crucial role in the economy of colonial India. The
utilisation of British infrastructure, particularly railways, roads,
and ports, significantly influenced India’s trade dynamic. This
section further explores the role of colonial infrastructure in
boosting foreign trade in colonial India.

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Before we delve into the impact of colonial infrastructure on India’s foreign trade, we must
understand the motive behind the development of railways, roads and ports. These major
developments were carried out in India to serve colonial interests. The roads primarily served the
purposes of mobilising the army within India and drawing out raw materials from the countryside to
the nearest railway station or port to send these to Britain or other lucrative foreign destinations.

The British introduced the railways in India in 1850 and it is considered as one of their most
important contributions. The railways affected the structure of the Indian economy in several
important ways:
1. On one hand, it enabled people to undertake long-distance travel and thereby break geographical
and cultural barriers.
2. On the other hand, it fostered commercialisation of Indian agriculture which adversely affected
the self-sufficiency of the village economies in India.
3. The volume of India’s exports undoubtedly expanded but its benefits rarely accrued to the Indian
people. The social benefits, which the Indian people gained owing to the introduction of the
railways, were thus outweighed by the country’s huge economic loss.

Figure 7: The first passenger train that ran in India, from Bombay to Thane (16 April, 1853)

In terms of the economy, the railways played a major role in integrating markets and increasing
trade. Domestic and international economic trends shaped the pace of railway construction and the
demand for the important traffic flows to the ports. The arrival of railways also significantly reduced
trade costs due to higher supply and increased trade flows. The railways accounted for nearly 20 per
cent of the total increase in national income during the mid-nineteenth century. It appears that the
railways’ primary impact on the Indian economy was to increase interregional and international
trade. By the turn of the century, India was the largest exporter in Asia and the ninth largest in the
world. The growth in railways played a critical role in that expansion of trade. In all, the growing
presence of railroads reduced the cost of trade, lowered price gaps among regions, and increased the
amount of goods being traded.

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The British constructed the railway network primarily to serve their own interests, facilitating the
movement of raw materials from the hinterlands to ports for export and imported goods from ports
to interior regions. However, the focus was on strategic routes linking resource-rich areas to ports,
rather than on holistic development or connectivity within India. Ports like Bombay, Calcutta, and
Madras were developed as crucial nodes for trade. The colonial administration invested in improving
port facilities to streamline the export of goods to Britain and facilitate imports. These ports were
also developed with a singular focus on British trade rather than serving the broader economic needs
of India.

Figure 8: Sassoon Dock, the oldest dock of Mumbai, was built in 1875

The colonial authorities also took measures to develop the inland trade and sea lanes. However, these
measures were far from satisfactory. The inland waterways, at times, also proved uneconomical
as in the case of the Coast Canal on the Orissa coast. Though the canal was built at a huge cost to
the government exchequer, it failed to compete with the railways, which soon traversed the region
running parallel to the canal. It had to be ultimately abandoned. The introduction of the expensive
system of electric telegraph in India, similarly, served the purpose of maintaining law and order. The
postal services, on the other hand, despite serving a useful public purpose, remained inadequate.

Infrastructure, including railways, roads, and ports, played a complex role in colonial India’s trade
dynamics. While they facilitated trade and economic development to some extent, they were mainly
instruments of colonial exploitation, serving British economic interests rather than those of the local
population.

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Check Your Progress 4

1. Was the introduction of railways beneficial for India? Why or why not?

2. What was the primary motive behind the development of railways, roads, and ports in colonial
India?
a. To foster economic development and connectivity within India
b. To facilitate the movement of British troops and goods for export
c. To enhance local trade and commerce
d. To promote cultural exchange and break geographical barriers

3. Which of the following statements accurately describes the impact of railways on India’s economy
during the colonial period?
a. Railways primarily contributed to the self-sufficiency of village economies in India.
b. The expansion of railways significantly reduced trade costs, leading to a decrease in trade
flows.
c. Railways were developed to serve holistic development and connectivity within India.
d. The growth in railways played a critical role in expanding interregional and international
trade.

4. Discuss the role of colonial infrastructure, particularly railways, roads, and ports, in shaping
India’s trade dynamics during the colonial period. Highlight both their facilitative and exploitative
aspects.

2.5 Local Industrial Entrepreneurship in British India

The period between 1916 and 1945 in British India witnessed significant developments in local
industrial entrepreneurship, despite facing various challenges like economic policies favouring
Britain and limited access to capital and resources. These developments were crucial to the industrial
and wider economic landscape of the time and shaped post-independence India’s economic
landscape likewise.

Community networks played a vital role in the emergence of Indian entrepreneurship in the early
stages of cotton and jute textile industries in the late 19th and early 20th century respectively,
overcoming the lack of market institutions and government support. Though the jute industry was
dominated by the British, the cotton industry was shaped and cared for by the natives, mainly the
Parsee entrepreneurs. Amartya Sen commented on the early pattern of Indian industrialisation: ‘It is
most significant to note that the two manufacturing industries that provided the basis of the British
industrial revolution, namely cotton textiles, and iron and steel, were both developed mainly by
Indian and not British industrial enterprises. British enterprise confined itself apart from transport,
mainly to export industries, e.g. tea, coffee, indigo, and jute goods and to extractive and trading
operations.

Several new features distinguished India’s industrial entrepreneurial performance during the period
1914-1939 compared to the period before 1914. The new industrial concerns were mostly founded

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by Indian business communities, especially by the Marwaris. Wartime speculation and profiteering
had led to the accumulation of capital in the hands of Indian business communities, and they were
now eager to extend their operations from trade and speculation to industry. In these circumstances,
Indian business houses began investing their accumulated assets in new forms, especially cotton
mills, jute mills, sugar mills and paper mills. They breached the virtual monopoly, which the British
expatriate firms had hitherto enjoyed in business and industry.

Figure 9: Titaghur Paper Mill in the 1890s

After 1850, manufacturing entrepreneurship came about in India. In 1854, C. Davar established a
cotton textile manufacturing unit in Bombay. In four years, there were four textile mills in India.
Within a period of 25 years, the number had increased to 58. After that, a lot of entrepreneurs entered
into new ventures, the most prominent of them all being the TISCO in Jamshedpur, among other iron
and steel works. Jute mills and the pharmaceutical industry were also established. At the end of the
19th century, there were 18 jute mills and 51 cotton mills.

In 1905, the Swadeshi movement emphasised indigenous goods formed an important facet of
nationalism and developing nationalism in the minds of Indians. Major entrepreneurial names of
that era were Ghanshyam Das Birla, Khatans, Goenka, Mafatlal, Jejeebhoy, Gagalbhai, Kirloskar,
Hirachand, Wadia, Godrej, L.K. Singhania, Gujarlal and Lala Shriram. Indian manufacturing
entrepreneurship, especially the cottage industry, handloom clothes, soap and textiles was reborn
due to the Swadeshi Movement. Change-makers like JRD Tata, MS Oberoi, and Jamnalal Bajaj led
the new way for Indian entrepreneurs. The aftermath of World War I led to economic disruptions in
India, including inflation and unemployment, which prompted some Indians to seek alternatives in
industrial entrepreneurship.

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Check Your Progress 5

1. Who were the main contributors to the emergence of Indian entrepreneurship in the late 19th
and early 20th centuries in the cotton and jute industries?
a. British expatriate firms c. Marwari communities
b. Parsee entrepreneurs d. Indian government officials

2. What major impact did the Swadeshi movement have on Indian entrepreneurship?
a. It led to increased British investment in Indian industries.
b. It discouraged Indians from investing in indigenous industries.
c. It emphasised the production and promotion of Indigenous goods.
d. It favoured the importation of foreign goods over local products.

3. Describe the key factors that contributed to the rise of Indian industrial entrepreneurship
between 1916 and 1945, despite the challenges posed by colonial rule and economic policies
favouring Britain. Provide examples of prominent Indian entrepreneurs and industries during
this period to support your answer.

Recap
We have covered a variety of topics related to Indian industry during colonial rule in this subunit.
Here is a brief summary of the key concepts learnt in the subunit:
1. Trade Dynamics:
• Colonial policies favoured British industries over Indian artisans, leading to a decline in India’s
trade fortunes.
• Despite setbacks, Indian merchants adapted to changing circumstances and explored new
markets, such as the opium trade.
• Infrastructural changes like railways facilitated India’s integration into the global economy, but
trade relations with Britain remained unequal.
2. Manufacturing Landscape:
• Traditional handicrafts declined due to British policies and the influx of machine-made goods, but
modern factories emerged in sectors like textiles and jute manufacturing.
• Industrial growth faced challenges like limited access to capital and competition from British
imports, but pioneering entrepreneurs like Jamsetji Tata laid the foundation for India’s industrial
future.
3. Structural Changes in Employment:
• The shift from traditional handicrafts to modern factories led to fluctuations in employment
patterns, with a majority still engaged in agriculture.
• The Swadeshi Movement reversed the de-industrialisation trend, gradually increasing industrial
employment.

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4. Process of Industrial Transition:

• Colonial policies and technological advancements drove the transition from traditional
handicrafts to modern industries, particularly in textiles, jute, and steel.
• Despite challenges, India’s industrial prowess grew, making significant contributions to global
industries like textiles, jute, and iron.
5. Foreign Trade and Infrastructure:
• Colonial infrastructure like railways and ports facilitated trade but primarily served British
interests, leading to increased trade but limited economic benefits for India.
• Indian entrepreneurship in textiles and jute industries overcame challenges like limited
government support and British dominance, setting the stage for post-independence industrial
development.
6. Local Industrial Entrepreneurship:
• Indian entrepreneurs, especially during the period of 1916-1945, made significant strides in
industries like textiles, jute, and sugar, challenging British monopoly.
• Movements like Swadeshi emphasised indigenous goods, fostering nationalist sentiments and
driving industrial growth despite economic disruptions.

Now, answer these questions to cement your understanding of the topics covered.

1. What was one of the main factors contributing to the decline of traditional handicrafts in colonial
India?
c. Limited access to raw materials e. Introduction of machine-made goods
d. British policies favouring Indian artisans f. Increased demand from global markets

2. Which infrastructural development played a significant role in facilitating India’s integration into
the global economy during colonial rule?
a. Roadways c. Railways
b. Canals d. Airports

3. What contributed to the drain of Indian wealth?

a. Favourable trade agreements with European countries
b. Government subsidies for Indigenous industries
c. Imposition of “Home Charges” and extraction of resources by the colonial administration
d. Investments in infrastructure projects to benefit local communities

4. What event reversed the de-industrialisation trend in colonial India and gradually increased
industrial employment?
a. The American Civil War c. The Great Depression
b. The Swadeshi Movement d. The Crimean War

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5. What were some challenges faced by the industrial sector in colonial India?
a. Limited access to capital c. Lack of competition from British imports
b. Favourable government policies d. Abundant resources

6. Which colonial infrastructure primarily served British interests in facilitating the movement of
raw materials and goods?
a. Railways c. Inland waterways
b. Roadways d. Ports

7. What movement emphasised the promotion of indigenous goods and played a role in driving
industrial growth in colonial India?
a. The Industrial Revolution c. The Swadeshi Movement
b. The Green Revolution d. The Capitalist Movement

8. Which Indian entrepreneur played a significant role in the establishment of the Indian National
Congress during the colonial period?
a. Ghanshyam Das Birla c. Lala Lajpat Rai
b. Jamnalal Bajaj d. Dadabhai Naoroji

9. What was the primary focus of colonial infrastructure development like railways and ports in
India?
a. Facilitating trade between India and other countries
b. Enhancing connectivity within India
c. Supporting local industries
d. Promoting tourism

10. What industry witnessed a significant decline in employment after the crisis of 1929 in colonial
India?
a. Jute industry c. Iron and steel industry
b. Textile industry d. Paper industry

11. How did the Swadeshi Movement impact Indian entrepreneurship during colonial rule?
a. It discouraged Indigenous entrepreneurship
b. It emphasised reliance on British goods
c. It promoted Indigenous goods and fostered industrial growth
d. It had no impact on industrial development

12. Which colonial infrastructure development significantly reduced trade costs and increased trade
flows in colonial India?
a. Roadways c. Railways
b. Canals d. Airports

13. What were some of the challenges faced by Indian entrepreneurs in colonial India?
a. Limited access to capital and resources
b. Unfavourable government policies
c. Lack of competition from British imports

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14. What sector experienced fluctuations in employment patterns due to the shift from traditional
handicrafts to modern factories in colonial India?
a. Agriculture c. Mining
b. Services d. Manufacturing

15. Who played a crucial role in facilitating internal trade, financing agricultural activities, and
connecting remote regions to global markets in colonial India?
a. British merchants c. Indigenous merchant networks
b. European traders d. American investors

16. Which event led to a shift in policy in colonial India, with the government promoting domestic
production through protective tariffs and local procurement?
a. The Crimean War c. The Great Depression
b. The Swadeshi Movement d. The American Civil War

17. What was the primary motive behind the construction of railways in colonial India?
a. Facilitating long-distance travel for Indian citizens
b. Promoting tourism within India
c. Serving British interests in transporting raw materials and goods
d. Enhancing connectivity within India

18. What industry witnessed significant growth between the 1870s and 1920s in colonial India before
experiencing a decline?
a. Tea industry c. Sugar industry
b. Cotton industry d. Jute industry

19. What was the primary motive behind the establishment of the Tata Iron and Steel Company
(TISCO) by Jamsetji Tata in colonial India?
a. To promote British industrial interests
b. To challenge the British monopoly in the steel industry
c. To support traditional handicrafts
d. To facilitate trade with European countries

20. How did colonial policies affect employment patterns in colonial India?
a. They favoured Indigenous industries, leading to increased employment opportunities.
b. They led to a decline in employment due to limited access to resources.
c. They promoted British dominance, resulting in fluctuations in employment.
d. They facilitated the growth of modern factories, leading to a shift in employment from
agriculture to industry.

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References:
1. https://ncert.nic.in/textbook.php?keec1=1-10
2. https://www.vifindia.org/sites/default/files/139217913-Economic-Hist-of-India-Under-Early-British-Rule-Vol-1-1902.pdf
3. https://www.tcd.ie/Economics/assets/pdf/SER/1999/Hambrock_Hauptman.pdf
4. https://www.researchgate.net/publication/364088740_Labour_in_India_from_the_mid_19th_to_mid_20th_century
5. https://documents1.worldbank.org/curated/en/482781468268489222/pdf/The-evolution-of-labour-markets-in-India-1857-1947.pdf
6. https://www.rncollegehajipur.in/rn/uploads/products/Process%20of%20Industrialisation%20During%20British%20Period.pdf
7. https://link.springer.com/chapter/10.1007/978-981-13-3131-2_8
8. https://sites.socsci.uci.edu/~dbogart/indraileconachieve.pdf
9. https://oxfordre.com/asianhistory/display/10.1093/acrefore/9780190277727.001.0001/acrefore-9780190277727-e-603?p=emailAWKaMGx
eFIGjs&d=/10.1093/acrefore/9780190277727.001.0001/acrefore-9780190277727-e-603
10. https://people.bu.edu/dilipm/wkpap/CottoncommDec2021.pdf
11. https://egyankosh.ac.in/bitstream/123456789/44591/1/Unit-36.pdf
12. https://www.historydiscussion.net/british-india/industrial-development-in-india-during-the-british-rule/5979
13. https://ebooks.inflibnet.ac.in/mgmtp09/chapter/entrepreneurship-and-its-evolution-in-india/

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Indian Economy: Economic and

03 Industrial Planning in India

Introduction
This subunit delves into the history of the economic and industrial
planning process in India. Students will focus on different types
of economic systems and then apply that knowledge to the Indian
context by correctly placing India in system type.

Inquiry questions
1. What are the Techniques and Methods of Economic
Planning in India?
2. What are Five-Year Plans and how are they used by the
Government?
3. What are some policies passed by the Government of
India aimed towards economic development?

3.1 Economic Systems

Economic systems are the fundamental frameworks that govern the allocation of resources,
production, distribution, and consumption of goods and services within a society. The three
primary economic systems are capitalism, socialism, and mixed economies. Understanding the
characteristics, advantages, and disadvantages of each system is crucial for students to appreciate the
diverse economic philosophies and their real-world implications.

By exploring these economic systems, students will develop a deeper understanding of the
underlying principles, incentive structures, and trade-offs associated with each approach. This
knowledge will equip them with the analytical tools to critically evaluate the strengths and
weaknesses of different economic models and their suitability for addressing various societal goals.

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3.2 Capitalism
Capitalism is an economic system characterised by private ownership of capital and the means
of production, with market forces determining the allocation of resources and the distribution of
goods and services. Key features of capitalism include the pursuit of profit, competition, and limited
government intervention in the economy.

3.2.1 Some key features of Capitalism

• Private property rights: Individuals and businesses have the right to own property, capital goods,
and the means of production.
• Free markets: Prices, production, and the distribution of goods and services are determined
primarily by the market forces of supply and demand rather than by central planning or state
control.
• Profit motive: The driving force behind economic activity is the pursuit of profit by individuals
and businesses.
• Limited government intervention: The role of the government is limited to providing public
goods, enforcing property rights, and maintaining a legal framework for market transactions.
• Resource allocation and price determination: In a capitalist system, resources (labour, capital,
land, etc.) are allocated through market mechanisms based on supply and demand. Prices act
as signals, communicating information about scarcity and consumer preferences. High prices
incentivise producers to increase supply, while low prices encourage consumers to reduce
demand, leading to an equilibrium price. The profit motive drives producers to allocate resources
efficiently to meet consumer demand.
• The role of private property and free markets: Private property rights are a fundamental
principle, allowing individuals and businesses to own and control resources. Free markets
facilitate the voluntary exchange of goods, services, and resources between buyers and sellers
without government intervention. Competition among private enterprises in free markets
promotes innovation, efficiency, and consumer choice.

3.2.2 Advantages of Capitalism

Capitalism provides strong incentives for innovation, entrepreneurship, and economic growth,
as individuals and businesses strive to create new products, services, and technologies to gain a
competitive edge and maximise profits. It facilitates an efficient allocation of resources based on
market signals, where supply and demand determine the production and distribution of goods and
services.

Consumer sovereignty is the hallmark of capitalism, where production is driven by consumer

preferences, ensuring that goods and services align with the desires and needs of the market. This
system promotes economic freedom and individual liberty, allowing people to make their own
choices about what to produce, consume, and invest in, without excessive government control.

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3.2.3 Criticisms of Capitalism
While capitalism has its strengths, it also faces various criticisms and potential drawbacks. One
concern is the potential for monopolies and market failures, where a lack of competition can lead to
inefficiencies, higher prices, and a lack of consumer choice, often requiring government regulation
to maintain a level playing field.

Another criticism concerns the inequality in the distribution of wealth and income which can arise
within a capitalist system, as profits and resources tend to concentrate on a smaller segment of the
population, exacerbating economic disparities.
The profit motive, which drives innovation and productivity, can also lead to the exploitation of
workers and environmental degradation, as businesses may prioritise cost-cutting measures and
short-term gains over fair labour practices and sustainable practices.

Capitalism is also susceptible to cyclical economic instability, such as

recessions, unemployment, and economic downturns, which can have
far-reaching consequences for individuals, businesses, and society as
a whole. These cycles are often driven by factors like fluctuations in
consumer demand, speculation, and market imbalances.

Furthermore, critics argue that capitalism’s focus on profit

maximisation can sometimes come at the expense of social welfare or
the public good, as businesses may prioritise their bottom line over
broader societal interests, such as environmental protection, access to
public services, or addressing income inequality.

These criticisms highlight the need for a balanced approach, where

the strengths of capitalism are harnessed while addressing its potential
shortcomings through responsible regulation, social policies, and a
commitment to sustainable and ethical business practices.

Example
Silicon Valley, nestled in the San Francisco Bay Area, stands as a beacon of capitalist success,
driven by innovation and entrepreneurship. Renowned tech giants such as Apple, Google, and
Facebook, along with a multitude of startups, flourish within this ecosystem, propelled by the
principles of private ownership, the pursuit of profit, and a culture that embraces risk-taking.
The region’s prosperity is buoyed by factors such as abundant venture capital, a pool of highly
skilled talent, and a competitive landscape fostering continual innovation.

However, the capitalist model also faces critiques within this enclave of success. While Silicon
Valley epitomises the dynamism and potential of capitalism, it simultaneously grapples with
inherent issues such as income inequality, where vast wealth is concentrated in the hands
of a few, leaving many behind. Moreover, the soaring living expenses within the region pose
challenges for its workforce, highlighting disparities in access to resources. Despite these
critiques, the resilience and adaptability of capitalism continue to drive innovation and
economic growth in Silicon Valley and beyond.

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3.3 Socialism
Socialism, on the other hand, is an economic system where the means of production, distribution,
and exchange are owned or regulated by the community as a whole, rather than by individuals or
private entities. Socialist economies often prioritise social welfare, equality, and centralised planning
over market forces.

3.3.1 Some key features of Socialism

• The means of production (factories, machinery, land, etc.) are owned and controlled by the state
or community as a whole rather than private individuals or companies.
• Central planning by the government dictates what goods and services are produced, how they are
distributed, and what prices are charged.
• The goal is to distribute economic output equitably among the people and meet the needs of
society rather than generate profits.

3.3.2 Advantages of Socialism

Socialism promotes economic equality and prevents the exploitation of workers by ensuring that the
means of production are collectively owned and controlled. This system aims to distribute wealth and
resources more evenly among the population, reducing disparities and providing a basic standard of
living for all citizens.

Under socialism, the state takes responsibility for providing a comprehensive social safety net,
including access to healthcare, education, housing, and other essential services. This helps to
mitigate poverty and ensure that individuals’ basic needs are met, regardless of their economic
circumstances.

Socialism allows for coordinated, long-term economic planning by the state, which can facilitate the
efficient allocation of resources, the development of strategic industries, and the pursuit of broader
social and economic goals that may not be prioritised in a purely profit-driven capitalist system.

3.2.3 Criticisms of Socialism

One of the main critiques of socialism is the lack of competitive free markets and the profit motive,
which can lead to inefficiencies, shortages of consumer goods, and a lack of innovation. Without the
incentives of private ownership and profit-seeking, critics argue that there may be less motivation to
improve productivity and respond to consumer demand.

Central planning by the state, a key feature of socialism, is often criticised for being inflexible and
unresponsive to rapidly changing consumer preferences and market dynamics. Centralised decision-
making can also lead to bureaucratic inefficiencies and a lack of localised knowledge about specific
economic conditions.

Socialism is also criticised for restricting individual economic freedom and the right to private

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property ownership. In a socialist system, individuals have

limited ability to accumulate and control private capital, which
some view as an infringement on personal liberty and the pursuit
of entrepreneurial opportunities.

Additionally, critics argue that the concentration of economic

power in the hands of the state can lead to political suppression,
corruption, and a lack of transparency, particularly in
authoritarian regimes that claim to follow socialist principles.

While socialism aims to address economic inequalities and

provide a safety net, these critiques highlight the potential
trade-offs and challenges associated with this economic system,
particularly in terms of efficiency, individual freedom, and the
balance between state control and market forces.

Example
The Soviet Union, established in 1922, stands as a prominent example of a centrally planned
socialist economy. Within this framework, the state assumed ownership and control over
the means of production, distribution, and exchange, emphasising heavy industrialisation
and collective ownership. Central planning committees were tasked with setting economic
objectives, determining production quotas, and allocating resources.

While the Soviet model did achieve milestones such as rapid industrialisation and full
employment, it encountered significant challenges. These included inefficiencies within the
system, resulting in shortages of consumer goods and a lack of incentives for innovation.
Ultimately, the collapse of the Soviet Union in 1991 signalled the failure of this socialist
experiment.

The socialist command economy of the Soviet Union centralised economic decision-making
within the government, eschewing private property and market mechanisms in favour of
state control and distribution based on societal needs rather than profit motives. However, the
system’s inefficiencies and inability to match the productivity of capitalist economies highlighted
inherent flaws in central planning.

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3.4 Mixed Economy

Mixed economies combine elements of both capitalism and socialism, with varying degrees of
government intervention and private ownership. These systems aim to balance the efficiency of
market forces with the social welfare objectives of the government, resulting in a hybrid economic
model.

3.4.1 Some key features of Mixed Economy

• It combines elements of both capitalism (private property rights, market forces) and socialism
(state intervention, public ownership).
• The private sector coexists along with government regulation and state-owned enterprises in key
industries.
• The government uses fiscal and monetary policies to promote economic growth, employment,
and social welfare.

3.4.2 Advantages of Mixed Economy

A mixed economy harnesses the efficiency of free markets while utilising state intervention to correct
market failures and address social concerns. This system allows capitalism to thrive, incentivising
innovation, entrepreneurship, and productive economic activity, while also protecting social interests
and providing a basic social safety net for citizens.

By embracing elements of both capitalism and socialism, a mixed economy promotes economic
stability by giving the state tools to manage economic cycles, such as fiscal and monetary policies
to stimulate growth during recessions or cool down overheated economies. This approach aims to
mitigate the extremes of boom-and-bust cycles that can occur in purely capitalist systems.

Furthermore, a mixed economy recognises the role of the government in providing public goods,
regulating monopolies, and addressing externalities that the free market may not adequately address.
This allows for a balance between private enterprise and societal well-being, ensuring that essential
services and infrastructure are available to support economic development and social welfare.

3.4.3 Criticisms of Mixed Economy

While a mixed economy attempts to strike a balance between market forces and state intervention,
there is often a disagreement over the optimal level of government regulation and involvement in
the economy. Some argue that excessive regulation can stifle private enterprise, innovation, and
economic freedom, while others believe that more robust interventions are necessary to address
market failures and protect public interest.

One critique of a mixed economy is the potential for overregulation, which can create bureaucratic
inefficiencies, increase compliance costs for businesses, and distort pricing signals and resource
allocation. Overregulation can also lead to rent-seeking behaviour, where special interest groups seek
to influence policymakers for their own benefit, rather than the broader public good.

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Additionally, critics argue that government inefficiency and political
interests can distort resource allocation and pricing signals within a
mixed economy. Political considerations, rather than pure economic
rationale, may influence decisions related to subsidies, taxes, and
other interventions, leading to suboptimal outcomes and inefficient
use of resources.

Despite these critiques, proponents of a mixed economy argue

that it offers a pragmatic approach, combining the strengths of
both capitalism and socialism while mitigating their respective
weaknesses. The debate often centres on finding the right balance
and calibrating the appropriate level of state intervention to promote
economic growth, social welfare, and long-term sustainability.

Example
The Nordic countries such as Sweden, Denmark, and Norway stand as exemplars of successful
mixed economies, adeptly blending capitalist and socialist elements to create a unique economic
model. This approach maintains a robust private sector while also implementing strong labour
laws, generous social safety nets, and high taxes to fund public services. Additionally, state
ownership and regulation of key industries such as energy and transportation provide further
stability and control over essential services. By incorporating these socialist policies, the Nordic
model aims to mitigate the potential excesses of capitalism, fostering reduced inequality and
ensuring a high standard of living for all citizens.

One of the key strengths of the Nordic mixed economies lies in their ability to promote
prosperity alongside economic security. By harnessing the advantages of both capitalism
and socialism, these nations have established a delicate balance that facilitates innovation,
competition, and entrepreneurship within a framework of social welfare and equality. The
provision of universal healthcare, free education, and robust social safety nets ensures that
citizens have access to essential services regardless of their socioeconomic status. Furthermore,
the government’s active role in regulating markets and redistributing wealth through progressive
taxation helps to mitigate disparities and maintain a fairer distribution of resources.

However, despite their successes, the Nordic mixed economies are not without their critiques.
Critics often point to the high tax rates and extensive government intervention as potential
deterrents to economic growth and individual initiative. Additionally, concerns may arise
regarding the sustainability of generous social welfare programs in the face of demographic
shifts and changing economic conditions. Furthermore, achieving a balance between economic
efficiency and social equality requires constant vigilance and adjustment, as changes in global
markets or domestic policies can impact the delicate equilibrium of the Nordic model.

Overall, the Nordic mixed economies represent a compelling synthesis of capitalist dynamism
and socialist compassion, demonstrating the potential for achieving both economic prosperity
and social welfare in a modern society. By leveraging the strengths of each system while
addressing their respective shortcomings, these nations have created a blueprint for sustainable
development and inclusive growth that serves as a model for others to emulate.

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Think About It
1. Consider India and its economic system. Identify specific examples or instances where
you have observed the advantages or disadvantages of that system in action. How do these
real-life experiences align with or contradict the theoretical principles discussed in the
text?

2. Imagine you are an economic advisor to a newly formed nation. Based on your
understanding of the advantages and disadvantages of different economic systems, what
type of system would you recommend for this new country? Justify your recommendation
by considering factors such as the nation’s resources, population, cultural values, and
development goals.

3. Capitalism emphasises the profit motive and economic freedom, while socialism focuses
on economic equality and collective ownership. Reflecting on your personal values
and priorities, which aspects of these economic systems do you find most appealing
or concerning? Explain your reasoning and how these values might influence your
perception of different economic models.

3.5 Five Year Plans and Indian Planning

Imagine an Indian family, the Boses, living in a middle-class neighbourhood in India. Mr. Bose
is a government employee, and Mrs. Bose is a homemaker. They have two children, a son in high
school and a daughter in college. Like most families, the Boses have various financial goals and
responsibilities to manage.

One of their primary goals is to ensure that their children receive a quality education. With rising
tuition fees and educational expenses, they realise the need for careful planning to fund their
children’s education without compromising their daily needs or future aspirations.

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To achieve this, the Boses family sits together annually to create a household budget plan. They
assess their monthly income, fixed expenses (rent, utilities, groceries), and discretionary spending.
They then allocate funds for their children’s educational expenses, including tuition fees, books,
transportation, and other related costs.

However, planning is not just about budgeting for the present. The Boses also consider their long-
term goals, such as saving for their daughter’s higher education, their retirement, and potential
emergencies. They decide to invest a portion of their income in various financial instruments such as
mutual funds, fixed deposits, and insurance policies to secure their future.

Additionally, the Bose family recognises the importance of planning for contingencies. They set aside
an emergency fund to cover unexpected expenses, such as medical emergencies or job loss. This
fund provides them with a safety net and prevents them from going into debt or compromising their
long-term goals.

Through this systematic planning process, the Bose family can prioritise their goals, allocate
resources effectively, and make informed decisions about their finances. Planning helps them strike
a balance between their present needs and future aspirations, ensuring a secure and comfortable life
for themselves and their children.

Think About It
1. Think about a major event or project that you have organised, such as a school function,
family celebration, or a group assignment. What were the key steps involved in the
planning process? How did proper planning help ensure the successful execution of the
event/project? What challenges did you face due to a lack of planning in certain areas?

2. Imagine that you are the head of your household, responsible for managing the family’s
finances and resources. What goals would you set for your family’s well-being (e.g.,
education, healthcare, savings, etc.)? How would you go about planning and allocating
the available resources to achieve these goals effectively? What potential roadblocks or
uncertainties would you need to account for in your planning?

3. How might the principles of household planning, as demonstrated by the Bose family,
be applied to the context of national economic planning in India? Consider factors such
as resource allocation, goal-setting, risk management, and the role of government in
guiding economic development.

4. How might effective planning at the national level contribute to addressing key socio-
economic challenges and fostering inclusive growth for all citizens?

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3.6 Five Year Plans: History and Overview

Five-Year Plans, introduced by the Planning Commission (now the NITI Aayog), are comprehensive
national economic blueprints implemented in India. These plans chart out a development strategy,
resource distribution plan, and policy framework for a specific five-year period.

India embarked on the path of economic planning through Five-Year Plans post-independence in
1951. The Planning Commission devised these plans, which were later sanctioned by the National
Development Council. Over time, twelve Five-Year Plans were executed, spanning from 1951 to
2017, marking a significant era in India’s economic landscape. These plans aimed to guide the
nation’s progress by centralising planning efforts and distributing resources across sectors such
as agriculture, industry, and infrastructure. Initially, the focus was on industrialisation, reduction
of disparities, and fostering self-sufficiency through import substitution. Subsequently, the focus
evolved to encompass economic liberalisation, poverty alleviation, employment creation, and
sustainable growth.

The significance of Indian planning lies in the provision of its cohesive, long-term vision and
policy direction for the nation’s economic advancement. By offering a structured framework,
it facilitated the mobilisation and effective allocation of resources in alignment with national
priorities. Additionally, it contributed to promoting balanced regional development by targeting
underdeveloped regions for special attention. The centralised decision-making process ensured
coordination across states and sectors, fostering cohesive national development.

Various techniques were employed to implement Indian planning effectively. These included target-
setting to delineate specific goals, resource projection to estimate resource requirements, project
appraisal to assess feasibility, and robust monitoring and evaluation mechanisms to gauge progress
and efficacy. Additionally, tools such as public investment, licensing, price controls, and import
regulations were utilised to steer the economy and achieve desired outcomes.

3.6.1 The Importance of Five-Year Plans

The Five-Year Plans played a pivotal role in guiding India’s economic development by providing a
coherent long-term strategy and policy framework. They enabled the mobilisation of resources and
optimal resource allocation in line with national priorities across various sectors and regions.

A key feature of the planning process was its emphasis on promoting balanced regional development.
The Plans specifically targeted backward areas to ensure their growth and prevent widening
disparities with more prosperous regions.

The centralised nature of the planning mechanism allowed for coordinated decision-making and
effective implementation across different states and sectors of the economy. It facilitated synergy and
an alignment of policies at the national level.

To achieve their objectives, the Five-Year Plans employed various techniques. These included setting
specific targets for economic indicators, projecting resource requirements, conducting detailed

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appraisals of proposed projects, and establishing monitoring and evaluation mechanisms to track
progress.

The Plans utilised a range of policy tools to steer the economy in the desired direction. These
included public investment in key sectors, a licensing system to regulate private industrial
activity, controls on prices of essential commodities, and import restrictions to promote domestic
manufacturing.

Through this comprehensive approach involving long-term planning, resource allocation, regional
development strategies, centralised coordination, and a mix of policy instruments, the Five Year
Plans aimed to drive India’s economic transformation and address the nation’s developmental
challenges.

3.6.2 Goals of Five-Year Planning

The Five Year Plans aimed to steer India’s economic development and address various socio-
economic challenges through a comprehensive set of goals and objectives. One of the primary goals
was to achieve rapid economic growth and development by targeting specific GDP growth rates,
increasing per capita income levels, and promoting industrialisation across sectors.

Alongside economic progress, the Plans prioritised social development objectives such as reducing
widespread poverty, improving access to quality education and healthcare facilities, and addressing
income inequalities prevalent in society. Achieving self-reliance was another crucial goal, involving
promoting import substitution, reducing dependence on foreign aid, and developing robust domestic
industries.

Modernisation was a key objective, focusing on enhancing infrastructure facilities including roads,
power, and irrigation systems. It also involved adopting new technologies and increasing productivity
across various sectors to boost economic efficiency.

Furthermore, the Plans aimed to address regional disparities and promote balanced development
across different states and areas within India. This goal ensured that the benefits of economic growth
were distributed equitably and that less developed regions could catch up with their more prosperous
counterparts.

The Plans had specific objectives related to various sectors and areas of development. These included
increasing production in agriculture and industry to meet domestic demand, expanding employment
opportunities, developing infrastructure, and promoting science, technology, and human resource
development.

They also emphasised reducing economic inequalities, promoting social justice, and improving the
overall standards of living and quality of life for all citizens.

Through this comprehensive set of goals and objectives, the Five-Year Plans sought to transform India
into a self-reliant, industrialised, and prosperous nation while addressing critical socio-economic
challenges and ensuring inclusive growth for its people.

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3.6.3 Critiques of the Five-Year Plans

While the Five-Year Plans played a pivotal role in guiding India’s economic development, they
were not without their criticisms and shortcomings. One major critique was the overemphasis
on promoting heavy industries and public sector enterprises, which often led to inefficiencies in
resource allocation and production processes.

The excessive regulations, licensing requirements, and controls imposed by the government stifled
private enterprise and entrepreneurship, hindering the growth of a vibrant private sector in the
economy. Additionally, the targets set by the Plans were frequently criticised as being unrealistic and
not backed by adequate resource availability or implementation mechanisms.

Implementation gaps were a significant issue, arising from bureaucratic inefficiencies, lack of
accountability, and delays in decision-making processes. Consequently, the Plans often failed to
achieve their desired targets for economic growth, employment generation, and poverty reduction
within the stipulated timeframes.

In the initial decades after independence, the Five Year Plans were criticised for neglecting the
agricultural sector and rural development, which led to widening disparities between urban and rural
areas. Despite efforts to promote balanced regional growth, regional imbalances persisted, with some
states and areas lagging behind in terms of economic progress and development.

After the 12th Five Year Plan (2012-17), India recognised the need
for a more decentralised and flexible approach to economic
planning. As a result, the traditional Five-Year Plan model was
discontinued, and the NITI Aayog (National Institution for
Transforming India) was formed in 2015. This new institution
aimed to design long-term national development strategies
through a bottom-up approach, involving greater participation
and collaboration with state governments.

Other critiques of the Five-Year Plans included their lack of

flexibility and responsiveness to changing economic conditions
and market dynamics, as well as inefficiencies in resource
allocation and implementation due to bureaucratic delays and
corruption. Despite their ambitious goals, the Plans sometimes
failed to achieve targeted growth rates and development
objectives, highlighting the need for continuous evaluation and
reform of the planning process.

Check Your Progress 1

1. Explain the significance of the Five-Year Plans in providing a long-term strategy and policy
framework for India’s economic development.

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2. What were the primary goals of the Five-Year Plans in terms of economic growth, social
development, and self-reliance?

3. Describe the various techniques and policy tools employed by the Five-Year Plans to steer the
economy and achieve their objectives.

4. Identify and discuss three major critiques or shortcomings of the Five-Year Plans.

NITI Aayog
The NITI Aayog, or the National Institution for Transforming India, was established in 2015,
replacing the erstwhile Planning Commission, which was responsible for formulating and
implementing the Five-Year Plans. The creation of NITI Aayog marked a significant shift in India’s
approach to economic planning and policymaking.

Unlike the top-down, centralised model of the Planning Commission, the NITI Aayog was envisioned
as a think tank that would foster a more decentralised, bottom-up approach to development
planning. It was designed to serve as a platform for cooperative federalism, where the states and the
central government could collaborate and coordinate on policy formulation and implementation.

NITI Aayog’s primary mandate is to design and promote strategies for sustainable and inclusive
growth, fostering cooperative federalism, and facilitating the implementation of development
agendas across various sectors. Unlike the Five Year Plans, which were rigid and binding, NITI
Aayog’s recommendations are advisory in nature, allowing states greater flexibility in adapting
policies to their specific needs and priorities.

One of the key differences between the NITI Aayog and the Planning Commission lies in their
approach to resource allocation. While the Planning Commission played a central role in allocating
resources and funds to states and ministries, the NITI Aayog does not have such financial powers.
Instead, it focuses on providing policy advice, promoting best practices, and facilitating the sharing
of knowledge and resources among states.

NITI Aayog’s functions include formulating a national development agenda, fostering cooperative
federalism, monitoring and evaluating the implementation of programs and initiatives, and acting as
a knowledge and innovation hub. It also plays a crucial role in promoting public-private partnerships,
leveraging the expertise and resources of the private sector for development initiatives.

By adopting a more decentralised and collaborative approach, the NITI Aayog aims to address
the critiques levelled against the Five-Year Plans, such as a lack of flexibility, inefficient resource
allocation, and implementation gaps. It seeks to empower states and stakeholders, promote
innovation, and foster a more responsive and adaptive approach to economic planning and
policymaking in India.

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Think About It
1. Balanced regional development was a key goal of the Five-Year Plans. However, regional
imbalances persisted despite these efforts. What factors do you think contributed to this
issue, and how could the planning process have better addressed regional disparities?

2. The Plans emphasised public sector investment and state control over key industries.
Evaluate the pros and cons of this approach in terms of economic efficiency, innovation,
and overall development.

3. Considering the critiques of bureaucratic inefficiencies and lack of accountability, what

measures could have been taken to improve the implementation and monitoring of the
Five-Year Plans?

4. In your opinion, was the shift towards a more decentralised and bottom-up approach
to economic planning through the NITI Aayog a positive step? Discuss the potential
advantages and challenges of this new approach.

3.7 Industrial Policies of India

India’s industrial policies have played a pivotal role in shaping the country’s economic trajectory and
guiding the development of its industrial sector. These policies have served as strategic blueprints,
outlining the government’s approach, priorities, and strategies for promoting industrialisation,
regulating private sector participation, and addressing socio-economic objectives through the
industrial sector.

The significance of industrial policies lies in their ability to influence the pace, direction,
and composition of industrial growth. By setting the rules and incentives for various sectors,
these policies have aimed to foster self-reliance, enhance productivity, generate employment
opportunities, and contribute to the overall economic development of the nation.

India’s industrial policies have evolved over time, reflecting the changing economic ideologies and
priorities of different governments. This chapter focuses on three key industrial policies that have
significantly influenced India’s industrialisation journey: the Industrial Policy Resolution of 1956, the
Industrial Policy Statement of 1977, and the Industrial Policy of 1980.

The Industrial Policy Resolution of 1956 laid the foundation for India’s industrialisation strategy in
the post-independence era, emphasising the role of the public sector and import substitution. In
contrast, the Industrial Policy Statement of 1977 marked a shift towards economic liberalisation and
private sector participation. Subsequently, the Industrial Policy of 1980 sought to strike a balance
between state control and private enterprise.

By understanding the salient features and objectives of these industrial policies, students will gain
insights into evolving approaches to industrial development, the role of the public and private
sectors, and the strategies employed to achieve economic growth and self-reliance.

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3.8 The Industrial Policy Resolution of 1956

3.8.1 Historical Context and Rationale
In the aftermath of India’s independence, the nation faced the daunting task of rebuilding its
economy and achieving self-reliance. The Industrial Policy Resolution of 1956 was a landmark policy
that laid the foundation for India’s industrialisation strategy during this critical period. Formulated
under the leadership of Jawaharlal Nehru, the policy reflected the prevailing socialist ideology and
the belief in a strong role for the state in economic development.

The rationale behind this policy was to promote rapid industrialisation, reduce dependence on
foreign imports, and establish a self-sufficient industrial base. It aimed to harness the country’s
resources and channel them towards building a robust industrial sector, which was seen as a catalyst
for economic growth and employment generation.

3.8.2 Key Features

• Classification of Industries:
The Industrial Policy Resolution of 1956 classified industries into three categories: strategic
industries, basic and critical industries, and the remaining industries.

• Reservation of Strategic Industries for the Public Sector:

Strategic industries, such as defence, atomic energy, and railways, were reserved exclusively for
the public sector, ensuring state control over these vital sectors.

• Promotion of a Mixed Economy Model:

The policy envisioned a mixed economy model, where the public and private sectors coexisted.
While the public sector played a dominant role, the private sector was allowed to operate in the
remaining industries.

• Expansion of the Public Sector in Basic and Critical Industries:

The policy advocated for the expansion of the public sector into basic and critical industries, such
as steel, coal, and heavy machinery. These industries were deemed essential for the country’s
industrial development and self-reliance.

• Regulation of the Private Sector through Licensing and Controls:

The private sector’s activities were regulated through a comprehensive licensing system and
various controls. This included restrictions on the establishment of new industries, expansion of
existing ones, and the allocation of raw materials and resources.

• Emphasis on Import Substitution and Self-Reliance:

A key objective of the policy was to reduce India’s dependence on foreign imports by promoting
domestic production. The strategy of import substitution industrialisation was adopted,
encouraging the development of indigenous industries to meet the country’s demand for goods
and services.

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3.8.3 Objectives and Impact

The Industrial Policy Resolution of 1956 aimed to achieve several objectives, including:

Rapid industrialisation and economic growth through the development of a strong

industrial base.

Self-reliance and reduced dependence on foreign imports by promoting domestic

production.

Balanced regional development by establishing industries across different regions of the

country.

Employment generation and improvement in living standards through the creation of job
opportunities.

The impact of this policy was far-reaching. It led to the establishment of several public
sector enterprises in strategic and critical industries, such as the Steel Authority of India
Limited (SAIL), Bharat Heavy Electricals Limited (BHEL), and Hindustan Aeronautics
Limited (HAL). These enterprises played a pivotal role in India’s industrialisation and
contributed significantly to the country’s economic growth.

However, the policy also faced criticism for its excessive regulation of the private sector,
which hindered entrepreneurship and innovation. Additionally, the emphasis on import
substitution led to inefficiencies in some industries due to a lack of competition and
exposure to global markets.

Despite its shortcomings, the Industrial Policy Resolution of 1956 laid the groundwork for
India’s industrial development and shaped the country’s economic trajectory in the post-
independence era.

Think About It
1. The regulation of the private sector through licensing and controls was a key feature
of the Industrial Policy Resolution of 1956. Discuss the potential implications of such
regulations on entrepreneurship, innovation, and the overall competitiveness of the
Indian industry.

2. In retrospect, how do you think the Industrial Policy Resolution of 1956 shaped India’s
industrial landscape and economic trajectory in the post-independence era? What lessons
can be learned from this policy for future industrial development strategies?

3. The Industrial Policy Resolution of 1956 reflected the prevailing socialist ideology and
the belief in a strong role for the state in economic development. How do you think this
ideological stance influenced the policy’s approach and its long-term implications?

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3.9 The Industrial Policy Resolution of 1977

3.9.1 Historical Context and Rationale
In the late 1970s, India’s economic landscape witnessed a shift in ideology, paving the way for the
Industrial Policy Statement of 1977. Introduced by the Janata Party government, this policy marked a
departure from the earlier emphasis on state control and import substitution.

The rationale behind this policy stemmed from the recognition that the previous industrial policies
had led to excessive bureaucratic control, stifling private enterprise and innovation. Additionally,
there was a growing realisation that India needed to embrace globalisation and promote export-
oriented industries to remain competitive in the international market.

3.9.2 Key Features

• Dereservation of Industries Previously Reserved for the Public Sector:
The Industrial Policy Statement of 1977 dereserved several industries that were previously
reserved exclusively for the public sector, allowing private sector participation in these areas.

• Relaxation of Industrial Licensing Requirements:

The policy aimed to reduce the regulatory burden on industries by relaxing the stringent
licensing requirements that had been in place. This move was intended to encourage private
investment and entrepreneurship.

• Encouragement of Small-Scale and Cottage Industries:

Recognising the importance of small-scale and cottage industries in generating employment and
promoting decentralised growth, the policy provided incentives and support measures to foster
their development.

• Emphasis on Decentralisation and Regional Dispersal of

Industries:
The policy emphasised the need for decentralisation and
regional dispersal of industries to promote balanced regional
development and address regional disparities.

• Promotion of Export-Oriented Industries and Foreign

Technology Collaborations:
In a bid to enhance India’s export competitiveness and access
to advanced technologies, the policy encouraged the growth of
export-oriented industries and facilitated foreign technology
collaborations.

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3.9.3 Objectives and Impact

The Industrial Policy Statement of 1977 aimed to achieve several key objectives:

Promote private sector participation and entrepreneurship by reducing bureaucratic

controls and regulations.

Enhance India’s export competitiveness and foreign exchange earnings through the
development of export-oriented industries.

Foster balanced regional development by promoting the dispersal of industries across

different regions.

Generate employment opportunities, particularly in the small-scale and cottage industries

sector.

Facilitate the transfer of advanced technologies through foreign collaborations and joint
ventures.

The impact of this policy was significant. It paved the way for the entry of private players in various
industries, leading to increased competition and efficiency. Additionally, the relaxation of licensing
requirements and the promotion of export-oriented industries contributed to the growth of India’s
export sector.

However, the policy faced criticism for its abrupt shift from the previous socialist approach, leading
to uncertainties and disruptions in some sectors. Moreover, the emphasis on small-scale industries
was seen as neglecting the development of large-scale industries, which were crucial for achieving
economies of scale and technological advancements.

Despite these challenges, the Industrial Policy Statement of 1977 marked a turning point in India’s
industrial development, setting the stage for further economic liberalisation and private sector
participation in the years to come.

Think About It
1. The policy provided incentives and support for the development of small-scale and
cottage industries. analyse the potential advantages and challenges of focusing on this
sector in terms of employment generation, regional development, and overall economic
growth.

2. In retrospect, how do you think the Industrial Policy Statement of 1977 influenced India’s
industrial landscape and economic trajectory? What lessons can be learned from this
policy for future industrial development strategies?

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3.10 The Industrial Policy Resolution of 1980

3.10.1 Historical Context and Rationale
In the aftermath of the Industrial Policy Statement of 1977, which aimed to promote economic
liberalisation and private-sector participation, India witnessed a shift in political leadership and
economic ideology. The Industrial Policy of 1980, introduced by the Congress government led by
Indira Gandhi, sought to strike a balance between state control and private enterprise.

The rationale behind this policy stemmed from the belief that while private sector participation was
essential for economic growth, the public sector should continue to play a dominant role in strategic
and critical industries. Additionally, there was a recognition of the need for modernisation and
technological upgradation of industries to enhance productivity and competitiveness.

3.10.2 Key Features

• Reaffirmation of the Public Sector’s Dominant Role in Strategic and Critical Industries:
The Industrial Policy of 1980 reaffirmed the public sector’s dominant role in strategic and critical
industries, such as defence, atomic energy, and core infrastructure sectors. These industries were
deemed vital for national security and economic self-reliance.

• Continuation of the Licensing System with Some Relaxations:

While the policy continued the licensing system for industries, it introduced some relaxations to
encourage private sector participation. The licensing requirements were streamlined, and certain
industries were delicensed to promote investment and entrepreneurship.

• Promotion of Small and Medium-Scale Enterprises:

Recognising the importance of small and medium-scale enterprises (SMEs) in generating
employment and promoting decentralised growth, the policy provided incentives and support
measures to foster their development. This included access to credit, technology upgradation,
and marketing assistance.

• Emphasis on Modernisation and Technological Upgradation:

The policy emphasised the need for modernisation and technological upgradation of industries
to enhance productivity, efficiency, and global competitiveness. It encouraged the adoption of
modern technologies and the development of indigenous research and development capabilities.

• Encouragement of Foreign Investment and Technology Collaborations:

To facilitate the transfer of advanced technologies and promote industrial growth, the policy
encouraged foreign investment and technology collaborations in specific industries. This was
seen as a means to bridge the technology gap and enhance India’s industrial capabilities

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3.10.3 Objectives and Impact

The Industrial Policy of 1980 aimed to achieve several key objectives:
Maintain the public sector’s dominance in strategic and critical industries while promoting
private sector participation in other areas.

Foster the growth and development of small and medium-scale enterprises to generate
employment opportunities and promote decentralised industrialisation.

Enhance productivity, efficiency, and global competitiveness of Indian industries through

modernisation and technological upgradation.

Facilitate the transfer of advanced technologies and promote indigenous research and
development capabilities.

Attract foreign investment and collaborations to bridge the technology gap and support
industrial growth.
The impact of this policy was multifaceted. It led to the establishment of several public sector
enterprises in strategic sectors, while also providing a conducive environment for private sector
participation in other industries. The promotion of SMEs contributed to employment generation and
regional development, while the emphasis on modernisation and technology upgradation helped
enhance industrial competitiveness.

However, the policy faced criticism for its continuation of the licensing system, which was seen
as a hindrance to entrepreneurship and innovation. Additionally, the emphasis on public sector
dominance in certain industries raised concerns about inefficiencies and lack of competition.

Despite these challenges, the Industrial Policy of 1980 played a significant role in shaping India’s
industrial landscape and paving the way for further economic reforms and liberalisation in the
subsequent decades.

Think About It
1. The Industrial Policy of 1980 reaffirmed the public sector’s dominant role in strategic and
critical industries. Evaluate the potential advantages and disadvantages of this approach
in terms of economic efficiency, resource allocation, and technological advancement.

2. The policy continued the licensing system for industries, albeit with some relaxations.
Discuss the potential implications of this licensing regime on entrepreneurship,
innovation, and the overall competitiveness of the Indian industry.

3. Assess the rationale behind the policy’s emphasis on promoting small and medium-scale
enterprises (SMEs). How could this focus have contributed to employment generation,
regional development, and overall economic growth in India?

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3.11 Comparative Analysis and Evaluation

3.11.1 Contrasting the approaches and priorities of the three
industrial policies
The Industrial Policy Resolution of 1956, the Industrial Policy Statement of 1977, and the Industrial
Policy of 1980 represented distinct approaches and priorities in guiding India’s industrial
development. The 1956 resolution laid the foundation for a mixed economy model, with a strong
emphasis on the public sector’s dominance in strategic and critical industries. It prioritised import
substitution, self-reliance, and the regulation of the private sector through licensing and controls.

In contrast, the Industrial Policy Statement of 1977 marked a significant shift towards economic
liberalisation and private sector participation. It aimed to reduce bureaucratic controls, encourage
entrepreneurship, and promote export-oriented industries and foreign technology collaborations.
This policy reflected a departure from the earlier socialist approach and a recognition of the need to
embrace globalisation.

The Industrial Policy of 1980, however, sought to strike a balance between state control and private
enterprise. While reaffirming the public sector’s dominant role in strategic industries, it introduced
relaxations in the licensing system and encouraged private sector participation in other areas.
This policy prioritised the promotion of small and medium-scale enterprises, modernisation and
technological upgradation, and the facilitation of foreign investment and technology collaborations.

3.11.2 Assessing the effectiveness and impact of these policies on

industrial development
Each of these industrial policies had a profound impact on India’s industrial landscape, with both
successes and shortcomings. The 1956 resolution laid the foundation for the establishment of several
public sector enterprises in strategic sectors, contributing to the nation’s industrialisation and self-
reliance. However, the excessive regulation of the private sector hindered entrepreneurship and
innovation.

The 1977 Industrial Policy paved the way for increased private sector participation, leading to
enhanced competition and efficiency in certain industries. It also contributed to the growth of India’s
export sector. Nonetheless, the abrupt shift from the previous socialist approach led to uncertainties
and disruptions in some sectors, and the emphasis on small-scale industries was seen as neglecting
the development of large-scale industries.

The 1980 Industrial Policy facilitated the growth of small and medium-scale enterprises, generating
employment opportunities and promoting regional development. It also encouraged modernisation
and technological upgradation, enhancing industrial competitiveness. However, the continuation of
the licensing system and the public sector’s dominance in certain industries raised concerns about
inefficiencies and lack of competition.

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3.11.3 Lessons learned and implications for future industrial

policies
The experiences and lessons learned from these industrial policies hold valuable insights for
shaping future industrial development strategies in India. One key lesson is the need to strike a
balanced approach, leveraging the strengths of both the public and private sectors while fostering a
competitive and innovation-driven environment.

Future industrial policies should aim to create a conducive ecosystem for entrepreneurship and
private sector participation while ensuring that the public sector plays a strategic role in areas of
national importance and addressing market failures. Excessive regulations and bureaucratic hurdles
should be minimised to promote ease of doing business and attract domestic and foreign investment.

Additionally, policies should prioritise the adoption of modern

technologies, research and development, and skill development
to enhance industrial competitiveness and productivity. Emphasis
should be placed on promoting sustainable and inclusive growth,
addressing regional disparities, and fostering the development of
emerging sectors with high growth potential.

Continuous evaluation and adaptation to changing economic

landscapes and global dynamics are crucial. Industrial policies
should remain flexible and responsive to market dynamics
while aligning with the broader national development goals and
priorities.

By learning from the successes and shortcomings of past

industrial policies, India can craft future strategies that leverage
the strengths of both the public and private sectors, promote
innovation and technological advancement, foster sustainable
and inclusive growth, and position the nation as a globally
competitive industrial powerhouse.

Check Your Progress 2

1. What were the three categories of industries defined by the Industrial Policy Resolution of 1956?

2. Which industries were reserved exclusively for the public sector under this policy?

3. What was the key shift in approach introduced by the Industrial Policy Statement of 1977?

4. How did the Industrial Policy of 1977 aim to reduce bureaucratic controls and regulations on
industries?

5. Explain the measures taken by the 1977 Industrial Policy to encourage small-scale and cottage
industries.

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6. What was the rationale behind promoting export-oriented industries and foreign technology
collaborations in the Industrial Policy of 1977?

7. Which sectors did the Industrial Policy of 1980 reaffirm as being under the dominant role of the
public sector?

8. What were the key measures taken to promote small and medium-scale enterprises under the
Industrial Policy of 1980?

9. Compare and contrast the approaches of the three industrial policies towards the role of the
public and private sectors in industrial development.

10. How did the objectives of promoting self-reliance and import substitution evolve across these
three industrial policies?

11. Evaluate the changing priorities of these policies regarding the regulation of industries through
licensing and controls.

12. Analyse the varying emphasis placed on promoting small-scale industries, export-oriented
industries, and technological advancement across these three policies.

3.12 Industrial Licensing Policy

Ravi’s family has been running a small bakery in their local neighbourhood for as long as he can
remember. His parents started the business many years ago, and it has become a beloved part of the
community.

One day, Ravi’s parents told him that they wanted to expand the bakery and open a second location
in a nearby town. However, they expected that in order to do so, they needed to obtain a special
license from the government. Ravi was surprised to hear this, as he didn’t realise the government was
involved in regulating small businesses such as theirs.

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Ravi’s parents explained that the government had rules and regulations
in place, that required businesses to get approval before they could open
at new locations or make major changes. They said that the process of
getting a license could be quite complicated and time-consuming.

Ravi started to wonder about the pros and cons of this licensing system.
On one hand, he saw how it might help ensure that businesses follow
certain standards and rules. But on the other hand, he worried that it
could also make it really difficult for small businesses such as theirs to
grow and adapt to changing needs.

“What do you think, Ravi?” his parents asked. “Should we go through

the hassle of getting a license, or should we just stick to our one
bakery location?” Ravi paused to think. He knew that there must be
good reasons behind the government’s licensing policies, but he also
wondered if they might be holding back entrepreneurs and small
businesses like his family’s bakery.

What would you advise Ravi and his family to do?

Think About It
1. What are some potential benefits that a government licensing system could provide for
small businesses like Ravi’s family bakery?

2. Do you think the government should play a role in regulating and controlling the growth
of private businesses? Why or why not?

3. If you were in Ravi’s shoes, how would you weigh the pros and cons of going through the
licensing process to expand the family bakery?

4. Can you think of any alternative approaches the government could take to support small
businesses and entrepreneurship, rather than relying on a strict licensing system?

3.12.1 Background and Objectives of the Pre-1991 Industrial

Licensing System
In the decades following independence, India adopted a mixed economy model, combining elements
of capitalism and socialism. The country’s economic policies were heavily influenced by the idea of
self-reliance and the protection of domestic industries. As a result, the industrial sector was tightly
controlled by the government through a system of licenses and regulations, known as the “License
Raj.”

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The industrial licensing policy was introduced in 1951 as part of the Industries (Development and
Regulation) Act. This licensing system was introduced with the following key objectives:

• Regulation of Industrial Activity: The industrial licensing policy aimed to regulate the
establishment and expansion of industrial units across the country. Businesses were required to
obtain a license from the government before setting up or expanding their operations.

• Encouraging Small-Scale Industries: The licensing system was designed to promote the growth
of small-scale industries by reserving certain products for this sector and imposing restrictions
on the size of large industrial units.

• Promoting Balanced Regional Development: The industrial licensing policy also sought to
ensure a balanced distribution of industrial activity across different regions of the country, rather
than allowing concentration in a few industrialised states.

Under the industrial licensing policy, entrepreneurs and businesses were required to obtain licenses
from the government to establish new industrial units or expand existing ones. The licensing process
was complex and involved obtaining approvals from various government agencies. The policy also
restricted the entry of foreign companies and limited the production capacities of industries.

3.12.2 Circumstances Leading to the Economic Reforms of 1991

By the late 1980s, India’s economy faced several significant challenges. The country was grappling
with a severe balance of payments crisis, where it did not have enough foreign exchange reserves to
pay for essential imports. Additionally, the fiscal deficit (the difference between the government’s
income and expenditure) was rising, and inflation rates were high.

The industrial sector, which had been tightly controlled by the government through the licensing
policy, was performing poorly. Industries were plagued by inefficiencies, outdated technologies,
and a lack of competition. It became evident that India’s economic policies, including the industrial
licensing system, were hindering growth and development. As a result, it became clear that drastic
economic reforms were needed to revive the economy and integrate it with the global market.

3.12.3 Key Changes in the Industrial Licensing Policy After 1991

The economic reforms introduced in 1991 brought about significant changes to the industrial
licensing policy in India. These changes were aimed at liberalising the industrial sector and
promoting greater competition and efficiency:

• Abolition of Industrial Licensing: One of the key reforms was the abolition of the industrial
licensing requirement for the majority of industries in the country. Businesses no longer needed
to obtain a license from the government to set up or expand their industrial operations, except for
a few select sectors.

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• Removal of Restrictions on Business Size: The reforms also removed the restrictions on the
size of business houses, allowing them to freely expand their operations without the need for
government approval.

• Reduction in Industries Reserved for the Public Sector: Another significant change was the
reduction in the number of industries that were exclusively reserved for the public sector,
opening up these sectors to private and foreign investment.

3.12.4 Impact of the Changes in Industrial Licensing Policy

The changes in the industrial licensing policy had a profound impact on India’s industrial landscape:

• Encouraging Entrepreneurship and Private Sector Participation: The abolition of industrial

licensing encouraged entrepreneurship and allowed the private sector to play a more active role
in industrial development, leading to the emergence of new businesses and the expansion of
existing ones.

• Promoting Technological Advancements and Modernisation: The removal of restrictions on

business size and the entry of private players into previously protected sectors led to increased
competition, which in turn drove technological upgradation and modernisation of industrial
units.

• Challenges and Concerns: However, the implementation of the new licensing policy was not
without its challenges, as issues such as corruption in the granting of licenses and a lack of
effective follow-up and monitoring were observed in some cases.

These changes in the industrial licensing policy were part of the broader economic reforms
introduced in 1991, which aimed to transform India’s industrial landscape and integrate the country
with the global economy.

Check Your Progress 3

1. Summarise the key objectives behind the industrial licensing policy introduced in India prior to
1991.

2. Describe the major changes made to the industrial licensing policy as part of the 1991 economic
reforms.

3.13 An Overview of the Key Elements of the New

Industrial Policy of 1991
In response to the economic crisis, the Government of India introduced a comprehensive set of
reforms in 1991, known as the New Industrial Policy. The key elements of this policy included:

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• Liberalisation of Foreign Investment Rules: The new policy opened up various sectors to foreign
direct investment, allowing foreign companies to establish operations in India and participate in
the country’s industrial development.

• Deregulation of Industries Reserved for the Public Sector: The number of industries that
were previously reserved exclusively for the public sector (government-owned enterprises) was
significantly reduced, paving the way for private and foreign investment in these sectors.

• Abolition of the Monopolies and Restrictive Trade Practices (MRTP) Act: The government
repealed the MRTP Act, which had previously placed restrictions on the size and growth of large
business houses, in order to promote competition and efficiency in the industrial sector.

These reforms were aimed at reducing the government’s direct control over the industrial sector,
encouraging private participation, and fostering a more competitive and dynamic industrial
environment in India.

3.14 A Comparison of the Pre-1991 and Post-1991

Industrial Policy Frameworks
Prior to the 1991 reforms, India’s industrial policy was characterised by a high degree of government
control and regulation. The industrial licensing system, as discussed earlier, was a key feature of this
policy framework, which restricted the establishment and expansion of industrial units.

In contrast, the Post-1991 Industrial Policy Framework was marked by a significant shift towards
liberalisation and deregulation. The abolition of industrial licensing, the opening up of sectors to
foreign investment, and the reduction in industries reserved for the public sector were all aimed at
promoting competition, encouraging entrepreneurship, and fostering technological advancements in
the industrial sector.

3.15 Evaluation of the Overall Effectiveness and

Criticisms of the 1991 Industrial Policy Reforms
The 1991 Industrial Policy reforms were widely regarded as a success in transforming India’s
industrial landscape and integrating the country with the global economy. The reforms helped
to attract foreign investment, encourage the growth of the private sector, and drive technological
upgradation in industries.

However, the implementation of the reforms was not without its challenges and criticisms. In some
cases, issues such as corruption in the granting of licenses and a lack of effective follow-up and
monitoring were observed, which undermined the intended benefits of the reforms. Additionally,
concerns were raised about the impact of the reforms on small-scale industries and the uneven
distribution of the benefits across different regions of the country.

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When compared to the industrial performance of other emerging economies, India’s experience
stands out:

• China:
China implemented economic reforms earlier than India,
starting in the late 1970s. As a result, China’s industrial sector
experienced rapid growth and transformation, making it a global
manufacturing powerhouse.

• Brazil:
Brazil’s industrial sector grew significantly in the 1970s and 1980s,
driven by import substitution policies and government support.
However, after economic liberalisation in the 1990s, Brazil’s
industrial growth slowed down due to increased competition
from imports.

• South Africa:
South Africa’s industrial sector has been relatively advanced
compared to other African countries, but its growth has been
modest. The country has faced challenges such as labour unrest,
infrastructure deficiencies, and a lack of skilled labour.

In comparison, India’s industrial performance after the 1991 reforms has been impressive. The
country’s industrial sector has experienced steady growth, driven by the entry of new players,
increased foreign investment, and access to modern technologies. However, India still lags behind
countries like China in terms of overall industrial output and manufacturing capabilities.

The government’s role in addressing the issues raised during the implementation of the reforms,
such as ensuring the inclusive growth of the industrial sector, remained an area of ongoing debate
and policy refinement. Overall, the 1991 industrial policy reforms marked a significant turning point
in India’s economic history, paving the way for a more dynamic and globally competitive industrial
sector.

Check Your Progress 4

1. Comparing India’s industrial performance after the 1991 reforms with that of other emerging
economies like China, Brazil, and South Africa, what insights can be drawn?

2. In your opinion, what were the most significant impacts (both positive and negative) of the 1991
Industrial Policy Reforms on India’s industrial development and competitiveness?

3. How did the Pre-1991 and Post-1991 Industrial Policy Frameworks differ in terms of the
government’s role and approach to regulating the industrial sector?

4. What were some of the intended benefits and potential drawbacks of the liberalisation and
deregulation measures introduced as part of the 1991 Industrial Policy Reforms?

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3.16 Liberalisation, Privatisation, and Globalisation

Model of Development (LPG)

3.16.1 Background of the Economic Crisis:

In the early 1990s, India faced a severe economic crisis primarily due to inefficient management
of the economy during the 1980s. Here’s a closer look at the factors that led to this crisis and the
subsequent need for reforms:

1. Economic Mismanagement in the 1980s:

a. High Government Spending:
The Indian government was spending more than it was earning. This was partly
due to the need to address pressing issues such as unemployment, poverty, and
population growth.

b. Low Revenue Generation:

Despite the high expenditure, the government was not generating enough revenue.
This was due to inefficient tax collection and low income from public sector
enterprises.

c. Borrowing to Cover Deficits:

To cover the gap between its income and expenditure, the government borrowed
heavily from both domestic and international sources.

d. Increasing Foreign Debt:

A significant portion of the borrowed funds came from international lenders. By
the late 1980s, the debt had grown to unsustainable levels.

2. Trade Imbalance:
a. High Imports vs. Low Exports:
India’s imports, especially of essential items like petroleum, were growing much
faster than its exports. This created a trade imbalance.

b. Depleting Foreign Exchange Reserves:

The foreign exchange reserves, which are necessary to pay for imports and repay
foreign debt, dropped to critically low levels, barely enough to cover two weeks of
imports.

3. Inflation and Price Rise:

a. Rising Prices:
The prices of essential goods were rising, making it difficult for people to afford
basic necessities. This added to the economic stress.

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4. Lack of International Confidence:

a. Loss of Lender Confidence:
As India’s economic situation worsened, international lenders lost confidence and
were unwilling to provide more loans.

3.16.2 The Need for Economic Reforms

Given the dire economic situation, it became clear that immediate and long-term measures were
necessary to stabilise and revitalise the economy. The need for reforms was driven by several factors:

1. Immediate Stabilisation:
a. Addressing the Crisis:
The immediate need was to address the balance of payments crisis, stabilise the
economy, and restore international confidence.

b. Securing Financial Assistance:

To do this, India needed financial assistance from international institutions like
the International Monetary Fund (IMF) and the World Bank, which came with
conditions for economic reforms.

2. Long-Term Growth:
a. Sustainable Development:
There was a need to lay the foundation for sustainable economic growth.
This required structural changes to improve efficiency and competitiveness.

b. Modernising the Economy:

The existing economic policies were outdated and restrictive. Modernising these
policies was essential to integrate India into the global economy.

3.16.3 Key Policies Introduced in the Reforms

To address these issues, the Indian government introduced the New Economic Policy (NEP) in 1991,
which focused on Liberalisation, Privatisation, and Globalisation (LPG). Let’s delve into each of these
components:

1. Liberalisation
Objective: To reduce government control over the economy and encourage private enterprise and
competition.

Key Reforms:
a. Deregulation of the Industrial Sector:
• Industrial Licensing:
Previously, businesses needed government permission to start, close, or expand
operations. Most of these licenses were abolished, except for a few industries such
as alcohol, cigarettes, hazardous chemicals, and aerospace.

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• Reservation of Industries:
The private sector was allowed entry into areas previously reserved for the public
sector, except for atomic energy and railway transport.

• Price Controls:
Price controls on many industrial products were removed, allowing market forces
to determine prices.

b. Financial Sector Reforms:

• Role of RBI:
The Reserve Bank of India (RBI) shifted from being a regulator to more of a
facilitator, giving more autonomy to financial institutions.

• Private and Foreign Banks:

The establishment of private and foreign banks was encouraged. The foreign
investment limit in banks was increased to 74%.

• Branch Expansion:
Banks fulfilling certain conditions were allowed to open new branches without the
RBI’s approval.

c. Tax Reforms:
• Reduction in Tax Rates:
Personal and corporate tax rates were reduced to encourage voluntary compliance
and reduce tax evasion.

• Introduction of GST:
The Goods and Services Tax (GST) was introduced to create a unified national
market and simplify the tax structure.

d. Foreign Exchange Reforms:

• Devaluation of Rupee:
The Indian rupee was devalued to increase export competitiveness and boost
foreign exchange reserves.

• Market-Determined Exchange Rates:

The rupee’s value was allowed to be determined by market forces rather than
government control.

e. Trade and Investment Reforms:

• Reduction of Import Tariffs:
Tariffs on imports were reduced to promote competition and efficiency.

• Abolition of Import Licensing:

Import licensing was abolished for most goods, except for hazardous and
environmentally sensitive items.

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• Promotion of Exports:
Export duties were removed to make Indian goods more competitive in
international markets.

2. Privatisation
Objective: To reduce the role of the government in business and improve the efficiency and
performance of public sector enterprises (PSEs).

Key Reforms:
• Disinvestment:
Selling shares of public sector enterprises to the public and private investors. This
helped raise funds and improve the management of these enterprises.

• Autonomy to PSEs:
Granting more autonomy to PSEs in their operations to make them more efficient
and competitive.

• Special Status to PSEs:

Some PSEs were granted special status (maharatnas, navratnas, and miniratnas)
based on their performance and strategic importance, giving them greater
operational freedom.

3. Gobalisation
Objective: To integrate the Indian economy with the global economy and benefit from
international trade and investment.

Key Reforms:
a. Trade Policy Reforms:
• Dismantling Trade Barriers:
Quantitative restrictions on imports and exports were removed.

• Reduction in Tariffs:
Import tariffs were significantly reduced to promote competition and efficiency.

• Removal of Export Duties:

Export duties were abolished to enhance the competitiveness of Indian goods in
international markets.

4. Promotion of Foreign Investment:

• FDI and FII:
Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) were
encouraged, bringing in capital, technology, and expertise.

• Investment Limits:
Investment limits in various sectors, including banking and insurance, were
relaxed to attract more foreign investment.

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5. Outsourcing:
• Service Outsourcing:
Companies from developed countries started outsourcing services such as IT, BPO,
and other professional services to India due to lower costs and skilled manpower.

India became an active member of the World Trade Organization (WTO), advocating for fair global
trade rules and promoting free trade. The need for economic reforms in India arose from a severe
economic crisis caused by inefficient management, high government spending, low revenue
generation, and a significant trade imbalance. The reforms introduced under the New Economic
Policy focused on liberalisation, privatisation, and globalisation to stabilise the economy, modernise
policies, and integrate with the global economy. These reforms aimed to create a more competitive
environment, improve efficiency, and promote sustainable economic growth.

3.17 Economic Reforms in the Indian Economy

In the 1980s and 1990s, India faced severe economic challenges that prompted the government to
introduce significant economic reforms. These reforms, often referred to as the LPG reforms, focused
on Liberalisation, Privatisation, and Globalisation. The aim was to reduce government control,
encourage private enterprise, and integrate India into the global economy. These changes had
profound impacts on various sectors, particularly the service sector.

3.17.1 Impacts of Economic Reforms on the Service Sector

The service sector in India encompasses a wide range of industries, including information
technology (IT), banking, insurance, telecommunications, and business process outsourcing (BPO).
The economic reforms brought about significant transformations in these areas.

1. Information Technology (IT):

a. Growth and Expansion:
• The liberalisation policies allowed private enterprises to flourish, leading to the rapid
growth of the IT sector.
• Globalisation opened up international markets, making India a hub for software
development and IT services.
• Indian IT companies like Infosys, TCS, and Wipro became global players, contributing
significantly to the economy.

b. Employment Generation:
• The IT sector became one of the largest employers, providing jobs to millions of skilled
professionals.
• It also created numerous indirect employment opportunities in sectors such as real estate,
transportation, and hospitality.

c. Economic Contribution:
• The IT industry became a major contributor to India’s GDP, accounting for a substantial
share of the country’s exports.

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• It helped in improving the balance of payments by bringing in foreign exchange.

2. Banking and Financial Services:

a. Modernisation and Efficiency:
• The financial sector reforms reduced government control, allowing private and foreign
banks to enter the market.
• Banks modernised their operations, adopting new technologies and improving customer
service.

b. Increased Competition:
• The entry of private and foreign banks increased competition, leading to better products
and services for customers.
• It also resulted in more efficient banking operations and financial inclusion.

c. Expansion and Accessibility:

• Banks expanded their reach, opening new branches across the country, including in rural
and semi-urban areas.
• This expansion improved access to banking services for a larger segment of the population.

3. Telecommunications:
a. Growth and Innovation:
• Liberalisation allowed private players to enter the telecom sector, breaking the monopoly
of state-owned enterprises.
• This led to rapid technological advancements and improved services.

b. Affordable Services:
• Increased competition resulted in lower tariffs, making telecommunication services more
affordable.
• Mobile phone penetration increased dramatically, connecting even remote areas of the
country.

c. Economic Impact:
• The growth of the telecom sector contributed to economic development by improving
communication infrastructure.
• It facilitated the growth of other sectors, such as IT and e-commerce, by providing reliable
connectivity.

4. Business Process Outsourcing (BPO)

a. Emergence as a Global Hub:
• India became a preferred destination for outsourcing due to its cost advantages and skilled
workforce.
• The BPO sector grew rapidly, providing services such as customer support, technical
support, and back-office operations to global clients.

b. Employment and Skill Development:

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• The BPO industry generated millions of jobs, especially for young graduates.
• It also contributed to skill development and increased proficiency in English and technical
skills.

c. Economic Benefits:
• The BPO sector brought in substantial foreign exchange earnings, contributing to the
country’s economic stability.
• It played a significant role in the growth of the service sector, boosting overall economic
performance.

3.17.2 Impacts on Allied Industries

The economic reforms also had notable impacts on industries allied to the service sector, such as:

1. Real Estate and Construction:

a. Infrastructure Development:
• The growth of the IT and BPO sectors led to increased demand for office spaces, driving
real estate development.
• Infrastructure projects like IT parks and commercial complexes boosted the construction
industry.

2. Urban Development:
a. Rapid urbanisation resulted from the expansion of service industries, leading to the
development of new cities and townships.
b. This urban growth created more opportunities for allied sectors like retail, hospitality, and
transportation.

3. Education and Training:

a. Skill Development:
• The demand for skilled professionals in IT, BPO, and other service industries led to the
growth of the education and training sector.
• Numerous institutes and training centres emerged, offering courses in IT, management,
and communication skills.

b. Higher Education:
• Universities and colleges introduced specialised programs to cater to the needs of the
evolving job market.
• Collaboration between educational institutions and industries ensured that the curriculum
met industry requirements.

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3.17.3 Impacts on Trade

The economic reforms significantly influenced trade practices and policies, leading to:

1. Increased Exports
a. Competitive Edge:
• The devaluation of the rupee and removal of export duties made Indian goods more
competitive in the global market.
• The IT and BPO sectors emerged as major export industries, contributing significantly to
the country’s export earnings.

b. Diverse Export Base:

• Alongside traditional goods, India began exporting services, which diversified its export
base.
• This shift reduced dependency on agricultural and low-value exports.

2. Foreign Investment
a. Attracting FDI:
• Liberalisation and policy reforms created a more attractive environment for foreign direct
investment (FDI).
• Increased FDI brought in capital, technology, and managerial expertise, fostering growth
in various sectors.

b. Trade Partnerships:
• India strengthened its trade relationships with other countries, becoming an active
member of the World Trade Organization (WTO).
• Bilateral and multilateral trade agreements facilitated smoother and more extensive trade
flows.

The economic reforms of the 1980s and 1990s were transformative for the Indian economy. The
focus on liberalisation, privatisation, and globalisation significantly impacted the service sector,
allied industries, and trade. These reforms fostered growth, modernisation, and global integration,
positioning India as a competitive player in the global market. The service sector, in particular,
emerged as a key driver of economic growth, generating employment, boosting exports, and
contributing to overall economic development.

3.18 Effects of the Economic Crisis on the Indian

Economy
In the early 1990s, India faced a severe economic crisis that led to the adoption of a new model of
development known as Liberalisation, Privatisation, and Globalisation (LPG). These reforms aimed to
open up the economy, reduce government control over industries, and integrate India into the global
market. The primary goals were to stimulate economic growth, increase employment opportunities,
and modernise various sectors such as agriculture and manufacturing.
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3.18.1 Impacts of Economic Reforms on growth and employment

1. Positive Impacts:
a. Economic Growth:
• Increased GDP:
The GDP growth rate increased significantly after the reforms. From an average of about
3.5% per year during the 1970s and 1980s, the growth rate increased to about 6-7% per year
in the 1990s and early 2000s.
• Foreign Investment:
The entry of foreign investors brought in capital, technology, and managerial expertise,
leading to higher productivity and growth.

b. Employment Patterns:
• Service Sector Boom:
The service sector, particularly IT and IT-enabled services, saw exponential growth,
creating numerous job opportunities.
• Formal Employment:
There was a shift towards more formal and organised employment, with better wages and
working conditions.

2. Negative Impacts:
a. Jobless Growth:
• Limited Employment in Manufacturing:
Despite economic growth, the manufacturing sector did not generate as many jobs
as expected. This led to concerns about “jobless growth,” where GDP grows without a
corresponding increase in employment.
• Informal Sector Dominance:
A large portion of the workforce remained in the informal sector, with low wages and job
insecurity.

b. Inequality:
• Rising Inequality:
Economic reforms led to increased income inequality, as the benefits of growth were not
evenly distributed. Urban areas and skilled workers benefited more than rural areas and
unskilled workers.

3.18.2 Impacts of Economic Reforms on Agriculture

1. Positive Impacts:
a. Increased Productivity:
• Modernisation:
Access to modern technologies, better irrigation facilities, and improved seeds and
fertilisers helped increase agricultural productivity.
• Crop Diversification:
Farmers began diversifying into high-value crops such as fruits, vegetables, and flowers,
which had higher returns compared to traditional crops.

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b. Market Access:
• Global Markets:
Liberalisation opened up international markets for Indian agricultural products, allowing
farmers to earn better prices.
• Private Investment:
Increased private sector investment in agriculture led to improvements in infrastructure
such as cold storage and transportation.

2. Negative Impacts:
a. Food Security:
• Price Volatility:
Exposure to global markets led to increased price volatility, which affected food security
and farmer incomes.
• Dependency on Imports:
In some cases, liberalisation led to a dependency on imported agricultural inputs, making
farmers vulnerable to international price fluctuations.

b. Farmer Distress:
• Debt and Suicides:
The shift towards commercial crops increased the cost of cultivation, leading to higher
debt levels among farmers. This has been linked to an increase in farmer suicides.
• Land Fragmentation:
Economic pressures and inheritance laws led to the fragmentation of agricultural land,
reducing the efficiency of farming operations.

3.18.3 Impacts of Economic Reforms on Manufacturing

1. Positive Impacts:
a. Growth and Expansion:
• New Players:
The entry of new domestic and foreign players brought competition, leading to better
quality products and services.
• Technology and Innovation:
Access to modern technologies and innovative practices improved productivity and
efficiency in manufacturing.

b. Global Integration:
• Exports:
The manufacturing sector saw a significant increase in exports, particularly in sectors like
textiles, automotive, and pharmaceuticals.
• Foreign Direct Investment (FDI):
FDI inflows brought capital, advanced technology, and managerial know-how, boosting the
sector’s growth.

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2. Negative Impacts:
a. Job Creation:
• Limited Employment:
Despite growth, the manufacturing sector did not create as many jobs as expected.
Automation and technological advancements reduced the need for manual labour.
• Skill Mismatch:
There was a mismatch between the skills of the workforce and the needs of the
manufacturing industry, leading to unemployment and underemployment.

b. Small and Medium Enterprises (SMEs):

• Competition:
SMEs faced tough competition from large domestic and international firms, leading to
closures and job losses.
• Access to Finance:
Smaller firms often struggle to access finance and modern technology, limiting their
growth potential.

The economic reforms of the 1990s brought significant changes to India’s economy. While they led
to higher growth rates, increased productivity, and greater integration with the global market, they
also brought challenges such as rising inequality, limited job creation in certain sectors, and distress
in agriculture. Understanding these impacts helps us appreciate the complexity of economic reforms
and their far-reaching effects on different sectors of the economy.

Check Your Progress 5

1. Which sector experienced exponential growth due to the economic reforms of the 1990s?
a. Agriculture c. Manufacturing
b. Service Sector d. Mining

2. What was a significant negative impact of economic reforms on the agriculture sector?
a. Increased productivity c. Price volatility and farmer distress
b. Crop diversification d. Improved irrigation facilities

3. What was one of the main reasons for “jobless growth” in the Indian economy after the reforms?
a. High foreign investment c. Growth in the service sector
b. Limited employment in manufacturing d. Increase in GDP

4. How did the entry of private players in the telecommunications sector impact the market?
a. Increased tariffs and reduced access
b. Rapid technological advancements and affordable services
c. Decreased competition and higher prices
d. Reduced mobile phone penetration

5. Describe two positive impacts of the economic reforms on the manufacturing sector.

6. Explain the concept of “rising inequality” as a negative impact of the economic reforms.

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7. Rajesh is a farmer in a small village in India. Before the economic reforms, he grew traditional
crops such as wheat and rice. With the liberalisation of the agricultural sector, Rajesh decided
to diversify his crops and started growing fruits and vegetables, which had higher market value.
However, he noticed significant price volatility and an increased cost of cultivation due to
dependence on imported seeds and fertilisers.
a. How did the economic reforms benefit Rajesh’s farming practices?
b. What challenges did Rajesh face due to the economic reforms?
c. Suggest two ways in which the government could help farmers like Rajesh cope with the
negative impacts of economic reforms.

3.19 Disinvestment of Public Enterprises

In the years following independence in 1947, India faced significant economic challenges. The
country lacked a strong industrial base and was heavily dependent on agriculture. To address these
issues, the government took on a central role in economic development by establishing public sector
enterprises (PSEs).

3.19.1 Importance of PSEs:

PSEs were crucial for several reasons:

1. Development of Infrastructure:
a. Lack of Private Investment:
Private sectors lacked the financial capability to invest in large infrastructure
projects. The government, through the public sector, stepped in to build vital
infrastructure such as steel plants, railways, and civil aviation.
b. Comprehensive Support:
Public sectors ensured there was no shortage of money, advanced technology, or
workforce, enabling large-scale industrial projects to be initiated and sustained.

2. Generation of Employment:
a. Job Creation:
Public sectors played a pivotal role in creating jobs, and addressing the significant
issue of unemployment. They provided stable employment opportunities,
contributing to economic stability and growth.
b. Worker Benefits:
Government jobs in the public sector came with better working and living
conditions, enhancing the quality of life for many workers.

3. Maintaining Regional Balance:

a. Balanced Development:
While private sectors often focused on industrial areas, public sectors ensured that
economic development reached all regions, including small towns and backward
areas.

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b. Supporting Infrastructure:
Public sectors provided essential services such as water supply, electricity, and
transportation to underdeveloped areas, promoting regional equality.

3.19.2 Goals of Establishing Public Sector Units (PSUs):

The primary goals of establishing PSUs were:
• Industrial Base Development: To create a strong industrial foundation in the country.
• Employment Improvement: To provide quality employment opportunities.
• Infrastructure Building: To develop the necessary infrastructure for economic growth.
• Economic Equality: To reduce inequalities and promote balanced economic development.
• Revenue Generation: To generate resources for the government, enhancing exports and reducing
imports.

3.19.3 Impact and Contribution of PSEs:

Public sectors contributed significantly to India’s economic upliftment through:
• Capital Formation: PSUs were a major source of capital in the economy, providing funds for
various development projects.
• Employment Opportunities: They created numerous job opportunities, contributing to social and
economic stability.
• Regional Development: Establishment of large companies and plants in different regions led to
the socio-economic development of those areas.
• Research and Development: PSUs invested in modern technology and equipment, fostering
innovation and increasing productivity.

3.19.4 Disinvestment of Public Enterprises

By the early 1990s, inefficiencies and unproductive management practices in many PSEs led to
significant financial losses. In response, the government introduced economic reforms, including
disinvestment, to improve the efficiency and performance of these enterprises.

Disinvestment refers to the process of selling government equity in public sector enterprises to
private entities. This strategy aimed to:

• Improve Efficiency: By bringing in private sector practices and financial discipline.

• Raise Funds: To generate funds for social programs, public health, and sanitation.
• Increase Competition: To make markets more competitive, thereby benefiting consumers with
better and cheaper products.

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3.19.5 Impacts of Disinvestment

1. Positive Impacts:
a. Efficiency and Financial Discipline:
Private sector involvement brought about better management and financial practices,
leading to improved performance of previously inefficient PSEs.
b. Revenue Generation:
The government was able to raise significant funds through disinvestment. For example, in
1991-92, the target for mobilising funds through disinvestment was Rs 2,500 crore, but the
government managed to raise Rs 3,040 crore.
c. Consumer Benefits:
Increased competition from private players led to better quality products at lower prices
for consumers.

2. Negative Impacts:
a. Undervalued Assets:
Critics argue that PSEs were often undervalued and sold at prices lower than their true
worth, leading to substantial losses for the government.
b. Use of Funds:
Instead of investing the proceeds from disinvestment into developing PSEs or social
infrastructure, the funds were often used to offset government revenue shortfalls.

3.19.6 Policy Changes and Measures

The government introduced several measures alongside disinvestment to support the public sector:

1. Memorandum of Understanding (MoU):

Performance Targets: PSUs were given specific targets to meet, and their performance was
regularly monitored. Successful units regained their positions and improved efficiency.

2. Closure of Sick Units:

Review and Restructuring: The Board of Industrial and Financial Reconstruction reviewed PSUs
to determine their viability. Non-viable units were closed down, with safety nets provided for the
affected workers.

The public sector played a critical role in India’s economic development from 1956 to 1990,
especially in infrastructure development, employment generation, and regional balance. However,
inefficiencies in many public enterprises led to significant financial losses, prompting economic
reforms and disinvestment in the 1990s. While disinvestment brought about efficiency and raised
funds, it also faced criticism for undervaluing assets and not using proceeds effectively. The changing
role of the public sector and the introduction of new policies have significantly influenced India’s
economic trajectory, making it more competitive and integrated into the global economy.

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Check Your Progress 6

1. Which of the following was a primary goal of establishing Public Sector Units (PSUs) in India?
a. To increase foreign investment
b. To reduce government control
c. To create a strong industrial foundation
d. To promote international trade

2. What does disinvestment refer to in the context of public enterprises?

a. Increasing government equity in public sector enterprises
b. Selling government equity in public sector enterprises to private entities
c. Merging public sector enterprises with private companies
d. Expanding public sector enterprises into new markets

3. Which of the following is a positive impact of disinvestment?

a. Increased inefficiency and financial losses
b. Undervaluation of assets
c. Improved efficiency and financial discipline
d. Decreased competition in the market

4. Explain the role of Public Sector Enterprises (PSEs) in promoting regional balance and
development.

5. Bharat Electronics Limited (BEL) is a prominent public sector enterprise in India. In the early
1990s, the government decided to disinvest a portion of its equity in BEL. The objective was to
improve efficiency and raise funds for public welfare programs. After disinvestment, BEL saw
changes in management practices, financial discipline, and market competition.
a. How did the disinvestment impact the efficiency and performance of Bharat Electronics
Limited (BEL)?
b. What were the financial implications of disinvestment for the government and BEL?
c. Discuss the potential positive and negative effects of disinvestment on employees and
consumers in the context of BEL.

3.20 Conclusion
The Indian economic and industrial planning journey, shaped by diverse economic philosophies and
practical exigencies, has evolved from a state-controlled model to a more liberalised and globally
integrated economy. The initial focus on heavy industrialisation and self-reliance laid a foundational
industrial base, while subsequent liberalisation and globalisation policies unleashed private sector
potential, enhanced competitiveness, and integrated India into the global economy.

Economic systems like capitalism, socialism, and mixed economies offer distinct advantages and
drawbacks, reflected in India’s varied approaches over the decades. The transition from heavy
regulation to liberalisation and privatisation under the LPG model in 1991 marked a significant
shift, addressing inefficiencies, attracting foreign investment, and fostering innovation. However,

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challenges such as income inequality, regional disparities, and sector-specific issues like agricultural
distress and limited manufacturing job creation remain.

Future industrial policies must balance state and private roles, foster competitive environments, and
prioritise sustainable and inclusive growth. Continuous evaluation and adaptation to global dynamics
and national priorities will be crucial for India’s ongoing economic development and resilience.

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04 Application and CUET Practice

Introduction
In this subunit, you will test your understanding of concepts learned in Subunits 1, 2 and 3 of this unit
by answering CUET-type Multiple Choice Questions (MCQs). There are 15 CUET-type MCQs for each
of “The British Raj and Pre-Independent India”, “Industrial Transition Before Independence (1860 -
1945)” and “Economic and Industrial Planning in India” to help you comprehensively revise concepts
and prepare for the CUET.

Recap of Subunit 1:
The British Raj and Pre-Independent India
1. Which of the following processes began transforming patterns of production and consumption in
South Asia at the end of the eighteenth century?
a. The Industrial Revolution and the rise of socialism
b. The rise of colonial rule and integration into world markets
c. The advent of technological advancements and globalisation
d. The expansion of the Silk Road and trade with Europe

2. What was a significant characteristic of India’s foreign trade during the colonial period?
a. A significant import surplus that led to a wealth influx
b. A significant export surplus at the expense of essential commodities
c. Balanced trade with a focus on luxury goods
d. A restriction to trade only with Asian countries

3. Who was notable for making significant estimates of India’s national and per capita income
during the colonial period?
a. Dadabhai Naoroji
b. William Digby
c. Findlay Shirras
d. V.K.R.V Rao

4. According to the passage, what was one of the main impacts of British colonialism on the
traditional village system in India?
a. Strengthening the self-sufficient village economy
b. Creating a mixed economy integrating British and Indian systems
c. Disrupting the traditional structure and exploiting resources
d. Introducing advanced agricultural techniques

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5. What was the primary initial objective of the East India Company for its trade with India?
a. To establish a market for British manufactured goods
b. To secure a supply of Indian goods like spices, cotton, and silk
c. To invest in Indian infrastructure and industries
d. To promote cultural exchange and mutual trade

6. What was one of India’s primary roles in the British economy during the 19th century after the
Industrial Revolution in England?
a. Exporting manufactured goods to Britain
b. Importing raw materials from Britain
c. Supplying raw materials and buying manufactured goods from Britain
d. Developing heavy industries independently

7. Which event marked the end of the East India Company’s monopoly in trade with India,
significantly increasing British cotton manufactures’ exports to India?
a. The introduction of railways in India
b. The Industrial Revolution in Britain
c. The end of the East India Company monopoly in 1813
d. The formation of the Indian National Congress in 1885

8. According to the 1880 Indian Famine Commission Report, what was identified as a major cause of
poverty among the Indian population?
a. The lack of modern transportation infrastructure
b. The over-dependence on agriculture as the sole occupation
c. The decline of traditional industries
d. The increase in raw material exports

9. How did British policies contribute to the destruction of traditional Indian industries?
a. By promoting local craftsmanship through government support
b. By imposing tariffs on British goods entering India
c. By providing subsidies to Indian artisans
d. By facilitating free entry of British goods into India and imposing tariffs on Indian
manufacturers entering Britain

10. Which of the following was NOT a factor that contributed to the ruin of Indian handicrafts and
traditional industries?
a. Oppression by the East India Company forcing craftsmen to sell goods below market prices
b. The rise of Indian rulers and their courts patronising local products
c. The export of raw materials raising the prices of raw materials for local craftsmen
d. The influx of machine-made goods from Britain

11. What was one major characteristic of British rule in India regarding the economic condition of
the people?
a. Widespread industrial development c. Prevalence of extreme poverty
b. Extensive agricultural advancements d. Significant technological innovation

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12. Which famine is considered the worst in Indian history until the Bengal famine of 1943?
a. The famine of 1860-61 in Western Uttar Pradesh
b. The famine of 1865-66 in Orissa, Bengal, Bihar, and Madras
c. The famine of 1876-78 in Madras, Mysore, Hyderabad, Maharashtra, Western Uttar Pradesh,
and Punjab
d. The famine of 1896-97 affecting over 9.5 crore people

13. Which of the following was NOT a cause of the Bengal famine of 1943?
a. Loss of rice imports from Burma
b. Hoarding and rationing of food grains
c. Efficient control of food grain distribution by the Bengal government
d. World War II conditions

14. According to Amartya Sen, what characteristic of the 1943 Bengal famine created disparities in
food accessibility?
a. Equal distribution of food supplies
b. Even expansion of incomes
c. Uneven expansion of incomes and purchasing power
d. Government-provided subsidies to all citizens

15. What was one outcome of the British colonial policies and economic exploitation in India?
a. Increased per capita income
b. Development of modern industries
c. Breakdown of traditional village structure
d. Decreased agricultural taxation

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Recap of Subunit 2:
Industrial Transition Before Independence
(1860 - 1945)
1. What was a significant factor in the decline of traditional handicrafts in colonial India?
a. Limited access to raw materials c. Introduction of machine-made goods
b. British policies favouring Indian artisans d. Increased demand from global markets

2. Which infrastructural development was crucial in integrating India into the global economy
during colonial rule?
a. Roadways c. Railways
b. Canals d. Airports

3. What contributed significantly to the drain of Indian wealth during colonial rule?
a. Favourable trade agreements with European countries
b. Government subsidies for Indigenous industries
c. Imposition of “Home Charges” and extraction of resources by the colonial administration
d. Investments in infrastructure projects to benefit local communities

4. What event played a key role in reversing the de-industrialisation trend in colonial India?
a. The American Civil War c. The Great Depression
b. The Swadeshi Movement d. The Crimean War

5. Which challenges were faced by the industrial sector in colonial India?

a. Limited access to capital c. Lack of competition from British imports
b. Favourable government policies d. Abundant resources

6. Which infrastructural development primarily served British interests by facilitating the

movement of raw materials and goods?
a. Railways c. Inland waterways
b. Roadways d. Ports

7. What movement promoted indigenous goods and contributed to industrial growth in colonial
India?
a. The Industrial Revolution c. The Swadeshi Movement
b. The Green Revolution d. The Capitalist Movement

8. Which Indian entrepreneur played a significant role in the establishment of the Indian National
Congress?
a. Ghanshyam Das Birla c. Lala Lajpat Rai
b. Jamnalal Bajaj d. Dadabhai Naoroji

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9. What was the primary focus of colonial infrastructure development like railways and ports in
India?
a. Facilitating trade between India and other countries
b. Enhancing connectivity within India
c. Supporting local industries
d. Promoting tourism

10. What industry saw a significant decline in employment after the crisis of 1929 in colonial India?
a. Jute industry c. Iron and steel industry
b. Textile industry d. Paper industry

11. How did the Swadeshi Movement impact Indian entrepreneurship during colonial rule?
a. It discouraged Indigenous entrepreneurship
b. It emphasised reliance on British goods
c. It promoted Indigenous goods and fostered industrial growth
d. It had no impact on industrial development

12. Which colonial infrastructure development significantly reduced trade costs and increased trade
flows in colonial India?
a. Roadways c. Railways
b. Canals d. Airports

13. What sector experienced fluctuations in employment patterns due to the shift from traditional
handicrafts to modern factories in colonial India?
a. Agriculture c. Mining
b. Services d. Manufacturing

14. Who played a crucial role in facilitating internal trade, financing agricultural activities, and
connecting remote regions to global markets in colonial India?
a. British merchants c. Indigenous merchant networks
b. European traders d. American investors

15. What was the primary motive behind the establishment of the Tata Iron and Steel Company
(TISCO) by Jamsetji Tata in colonial India?
a. To promote British industrial interests
b. To challenge the British monopoly in the steel industry
c. To support traditional handicrafts
d. To facilitate trade with European countries

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Recap of Subunit 3:
Economic and Industrial Planning in India
1. What is a key feature of capitalism?
a. State ownership of all resources
b. Centralised economic planning
c. Private property rights
d. Absence of market competition

2. Which of the following is a criticism of capitalism?

a. Lack of individual economic freedom
b. Centralised decision-making
c. Inefficient allocation of resources due to lack of profit motive
d. Potential for monopolies and market failures

3. Which statement best describes socialism?

a. The means of production are privately owned and controlled.
b. The means of production are owned or regulated by the community or state.
c. Prices and production are determined by market forces.
d. The primary motive for economic activity is profit.

4. What is a primary advantage of socialism?

a. Promotes economic equality and prevents exploitation of workers
b. Encourages competition and innovation
c. Minimises government intervention in the economy
d. Provides strong incentives for entrepreneurship

5. What characterises a mixed economy?

a. Complete government control over all economic activities
b. No government intervention in the economy
c. A blend of private sector freedom and government regulation
d. Exclusive focus on social welfare programs

6. Which is a critique of a mixed economy?

a. A total absence of market mechanisms
b. Lack of individual economic freedom
c. Potential for bureaucratic inefficiencies and overregulation
d. Focus on profit maximisation at the expense of social welfare

7. What was one of the primary goals of India’s Five-Year Plans?

a. Complete privatisation of all industries
b. Rapid industrialisation and economic growth
c. Minimal government involvement in the economy
d. Reliance on foreign aid and imports

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8. What was a major critique of India’s Five-Year Plans?

a. Excessive emphasis on agriculture over industry
b. Inefficiency due to overregulation and bureaucratic delays
c. Complete reliance on private sector growth
d. Neglect of regional development and social welfare

9. What was the primary objective of the Industrial Policy Statement of 1977 introduced by the
Janata Party government?
a. Enhance the role of the public sector in all industries
b. Increase import substitution and self-reliance
c. Reduce bureaucratic control and promote private enterprise
d. Introduce stricter industrial licensing requirements

10. Which of the following was a key feature of the Industrial Policy Statement of 1977?
a. Increased regulation of the private sector
b. Promotion of large-scale industries
c. Decentralisation and regional dispersal of industries
d. Reaffirmation of the public sector’s dominant role in strategic industries

11. Which political leader introduced the Industrial Policy of 1980?

a. Morarji Desai
b. Rajiv Gandhi
c. Indira Gandhi
d. Atal Bihari Vajpayee

12. What was a significant criticism of the Industrial Policy of 1980?

a. Excessive deregulation
b. Emphasis on large-scale industries over small-scale industries
c. Continuation of the licensing system
d. Neglect of technological modernisation

13. Which key change was introduced in the industrial licensing policy after the 1991 economic
reforms in India?
a. Introduction of more stringent licensing requirements
b. Abolition of the industrial licensing requirement for most industries
c. Expansion of industries reserved exclusively for the public sector
d. Continuation of the Monopolies and Restrictive Trade Practices (MRTP) Act

14. What was one of the primary impacts of the abolition of industrial licensing post-1991?
a. Decline in private sector participation
b. Increased bureaucratic control over industrial units
c. Encouragement of entrepreneurship and private sector participation
d. Decreased technological advancement and modernisation

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15. Compared to other emerging economies, how did India’s industrial performance after the 1991
reforms fare?
a. Significantly better than China’s industrial growth
b. Slower growth compared to Brazil’s industrial sector in the 1990s
c. Modest growth similar to South Africa
d. Impressive growth but lagging behind China in overall industrial output

Economics - Grade 12