AN INSIGHT INTO THE

INDIAN ECONOMY

ABHISHEK NARASIMHA
Research Associate and Faculty

26-11-2015

(c)Abhishek Narasimha KIAMS

Overview
Economic History of India
Ancient Times till 1707 AD
The British Raj
Pre Liberalization India (1947-1991)
Post Liberalization India (1991-present)

Macroeconomic Indicators of India

Sectors in the Indian Economy and their contribution to GDP
Economic Issues with Indian Society
Poverty related issues
Agriculture
Corruption
Education
Regional Imbalance

The Road Ahead

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(c)Abhishek Narasimha KIAMS

ECONOMIC HISTORY: ANCIENT TIMES TILL 1707 AD

Early trade in ancient India was characterised by the rise of city states along the Indus Valley
Civilization, here the citizens practiced agriculture, domesticated animals, made tools and sharp
weapons from copper, gold and tin and traded in terracotta pots, beads, gold and silver, they
used ships to sell gold jewellery and copper to Mesopotamia
After the Aryan conquests in 1500 BC, political groupings into small kingdoms called Mahajan
Padas became more pronounced during 500 BC, the Mahajan Padas developed trade through
punch marked silver coins
Improvements in Indian economy occurred during the Mauryan dynasty, the Mauryans united
most of Indian subcontinent with political unity and military security allowing for a common
economic system with enhanced trade and commerce which increased agricultural productivity
The empire spent considerable amount in building roads and maintaining them throughout India
Merchant guilds called Sreni which are documented in the Arthsastra were instrumental in trade
and commerce
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ECONOMIC HISTORY: ANCIENT TIMES TILL 1707 AD

India dominated global commerce and trade through trading communities along the Arabian sea and
Bay of Bengal trading spices, aromatic woods, muslin cloth and dyes with the Arab world and South
East Asia
Overland trade through Gangetic basin and Indus river valley was used to access the silk route
From 12th Century onwards most of the Hindu trading communities were replaced with Zoroastrians,
Muslims and Jews as primary traders
During the Mughal period large parts of South Asia were brought into their domain resulting in a
centralised administration, uniform tax and customs system working on welfare while buttressing
internal and external trade, therefore India was unified and prosperous despite having a traditional
agrarian economy
India has been estimated to be the largest economy of the ancient and medieval world controlling
between 1/3rd and 1/4th of the total global wealth
However economic analysis of India from a historic perspective neglects parameters like wealth
distribution among people, domination of upper castes and anthropology
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SILK ROUTE AND ANCIENT MARTIME ROUTE (LEFT)

& SANSKRIT INSCRIPTION IN AZERBAIJAN (RIGHT)

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ECONOMIC HISTORY: THE BRITISH RAJ

The power of the British in India expanded gradually from 1757 through East India Company and from
1857 through the British Empire spelling doom to the Indian economy
After gaining the right to collect revenue in 1765, the East India Company stopped importing gold and
silver to pay for goods being shipped abroad, they created fixed exchange rates and standardization of
coinage
The British forced Indian farmers to cultivate cash crops thereby leading to commercialization of
agriculture and reduction in cultivation of food crops which resulted in internecine famines
The industrial gains made during the 19th century in Great Britain were used to exploit the resources of
India thus by 1860 India became an exporter of raw materials and an importer of finished goods
The policies of the British stabilized law and order through a subservient bureaucracy but stifled
economic development, creating infrastructure to exploit natural resources like railways and telegraph
Indias share from 27% of world GDP in 1700 was reduced to 3% in 1950, the British had left behind a
nation wrecked by famine, poverty, unemployment, malnutrition and illiteracy

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ECONOMIC HISTORY: PRE LIBERALIZATION ERA (1947-1991)

When India became independent in 1947 it decided to go in for parliamentary democracy with a
centrally planned Nehruvian socialist model
Most of the key industries were nationalized and certain private sector companies were allowed to
operate if they got licenses to do business, however their production, quality, distribution and
costs were determined by the government
Private property was protected while there was state ownership of the means of production,
profits and exports were replaced by import substitution industrialization to create self sufficiency
This created high current account deficit and enormous government spending often creating high
fiscal deficit, as a result the government issued bonds to Reserve Bank of India which increased
the money supply leading to continuous inflation
In 1965 India was faced with chronic food shortages and foreign aid was withdrawn, hence India
decided to create a Green Revolution which made it self sufficient in food by 1980s
Indias GDP grew at 3.5% from 1947 to 1991 and its growth rate was called Hindu Rate of Growth
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PER CAPITA INCOME (NOMINAL) LEVELS OF

VARIOUS COUNTRIES
1938

1990

Austria

$ 1800

$ 19200

Czechoslovakia

$ 1800

$ 3100

Italy

$ 1300

$ 16800

Greece

$ 800

$ 6000

Peoples Republic of
Hungary

$ 1100

$ 2800

Peoples Republic of
Bulgaria

$ 700

$ 2200

India

$ 30

$ 363

South Korea

$ 50

$ 5860

Vietnam
$ 40
$ 366
The following table shows that countries which aligned themselves with the
Western Block during Cold War showed greater growth in PCI than countries
which were aligned with the Eastern Bloc
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ECONOMIC HISTORY: LIBERALIZATION ERA (1991-Present)

Following the breakup of USSR, Indias significant trading partner and shortage of oil
supply during the Gulf War, Indias fiscal deficit soared while its foreign exchange
reserves dwindled
Indian PM Chandrashekhar of Janata Dal decided to take a bailout package from IMF of
$ 1.86 billion in exchange for gold reserves wherein IMF wanted economic reforms
After the 1991 Lok Sabha elections, PM Narasimha Rao along with Finance Minister
Manmohan Singh initiated economic liberalization, tariffs and interest rates were
reduced with abolishment of licenses and public monopolies, the government allowed
FDI in many sectors
Since then the thrust of liberalization has remained the same although no government
has taken on any of the powerful lobbies like labour unions and farmers to reform
labour laws, renounce agricultural subsidies or ease business regulations
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ECONOMIC HISTORY: LIBERALIZATION ERA (1991-Present)

By the advent of the 21st Century, India has become a free market economy with substantial
reduction in state control of the economy this has resulted in increase in life expectancy,
literacy, reduction in infant mortality although urban residents have benefitted more than rural
ones

India in real GDP terms is slated to be the second largest economy by 2050

However, India is amongst the worst countries in the world when it comes to starting
businesses and dealing with bureaucratic permits while in terms of obtaining credit, protecting
investors and general operations it is ranked favourably

From a GDP of 267.52 billion dollars in 1991 the GDP has increased to 2.2 trillion dollars in 2014
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INDIA: MACROECONOMIC INDICATORS

GDP (Nominal): $ 2.182 trillion

Inflation

GDP (PPP): $ 8.02 trillion

CPI: 5.0%

GDP Growth (2015): 7.4 %

WPI: 4.54%

PCI (Nominal) : $ 1700

Population Below Poverty Line

PCI (PPP): $ 6209

Rangarajan Panel: 29.5 %

% GDP Contribution by sector

RBI: 22 %

Agriculture: 17 %

World Bank: 179.6 million

Industry: 26 %

Gini Coefficient: 33.8(low)

Services: 57 %
Labour Force by Occupation
Agriculture: 49 %
Industry: 20%
Services: 31%
Credit Rating: BBB+
Forex: $ 352.365 billion
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Ease of Doing Business: 130th

Exports: $ 462.4 billion
Imports: $ 616.7 billion
Major Trading Partners: USA, EU,
UAE, China and Saudi Arabia
Public Debt: 64.9 % of GDP
Budget Deficit: 3.9 % of GDP
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CONSTITUENTS OF INDIAN ECONOMY: AGRICULTURE

In 1950, agriculture contributed over 50% of the GDP of India however after the economic reforms of
1991 and the subsequent economic growth, agriculture only contributed 13.7 % of Indian GDP in
2013
However 49 % of the workforce in India is employed in agriculture therefore it plays a significant role
in the Indian economy even though the workforce from the agriculture sector is moving into the
industry and services sector on account of rapid industrialization
India is ranked 2nd in terms of farm output and crop yield per unit area has grown steadily from 1950,
due to five year plans and improvement in irrigation, technology, subsidies, provision of agricultural
credit and green revolution
India is the largest producer of milk, jute and pulses and it is the second largest producer of wheat
and rice while India is also the third largest producer of fish
However, the yield per hectare in India is 50 % of the developed world and only 40 % of the
cultivated land is irrigated making farmers depend on monsoons, moreover majority of the farmers
are smallholders
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CONSTITUENTS OF INDIAN ECONOMY: INDUSTRY

According to the World Bank, India is the 8 th largest producer of manufactured goods in the
world
Indias industrial sector underwent significant changes as a result of the economic
liberalization in 1991 which removed subsidies, tariffs, taxes, lowered interest rates, brought in
foreign competition and allowed companies to make profit and carry out exports
There have also been subsequent improvements in infrastructure, logistics, availability of
cheap high skilled moderately educated labour and cost effective technologies
Certain subsectors like Petroleum Products and Chemicals, Automobile, Heavy Industry,
Precision Engineering, Gem Polishing, Jewellery Manufacturing, Textiles and Pharmaceuticals
have blossomed
However major issues include easing land acquisition, reforming labour laws, improving
infrastructure, focussing on semiconductor and electronics manufacturing and making mining
policies more transparent
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CONSTITUENTS OF INDIAN ECONOMY: SERVICES

In 1950, services only accounted for 15 % of the Indian GDP, however by 2013 services account
for 64.8 % of the Indian GDP
India is the 12th largest provider of services in the world by nominal value and it is the 4 th largest
provider of services in the world by Purchasing Power Value
The IT and BPO industry in India has boosted the services sector, resulting in generation of
foreign exchange and creation of a new middle class
The IT industry has grown due to availability of low cost, highly skilled educated and fluent
English speaking workers on the supply side and foreign customers who are interested in
services from India on the demand side
Other subsectors in the services sector include infrastructure, retail, banking and power
Service sector improvements can be brought about by organizing retail, penetrating IT services
in rural areas, proliferation of banking services in the hinterland and developing electricity from
renewable energy sources
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CONTRIBUTION OF VARIOUS SECTORS TO

INDIAN ECONOMY SINCE ITS INDEPENDENCE

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ECONOMIC ISSUES: POVERTY

India has made tremendous strides in reducing poverty rapidly, in 2005 according to World Bank with poverty line
below $ 1.25 PPP, India had 400 million people below poverty line however in 2014, India has 179 million people
below the poverty line defined by a threshold of $ 1.8 PPP
Despite such success 53 % of the households in India lack access to sanitation, several commentators have called
in for corporate and government help in order to solve this problem as well as create awareness among rural
populations on the necessity of sanitation
Unemployment in India on paper is low but India suffers from underemployment due to seasonal jobs and a
significant populace being involved in agriculture
Despite reducing malnutrition, India has 61 million malnourished children, Rohini Mukherjee of Naadi Foundation
attributes this to lack of awareness about proper diet and eating what is irrelevant while there have been several
critics who attribute this to faulty height and weight standards which are more suited to European children since
Kerala which has high Human Development Index and life expectancy matching EU countries seems to have worse
level of malnutrition than Sub Saharan Africa thus there is a clamour for creating adaptive height and weight
standards
India has made significant progress in removing child labour with less than 2 % of children being involved in
industries and 8 % of children working in the fields to assist their parents in agriculture
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ECONOMIC ISSUES: AGRICULTURE

Despite achieving self sufficiency, India is far behind its true potential with the right kind of
technology and policies it could feed the whole world
Poor rural roads affect the timely supply of inputs to the farm and timely transfer of outputs from
the farms
The land reform of the 1950s coupled with protection of farmer interests has created several
small farms wherein technological improvements in production are not feasible
Inadequate irrigation systems lead to crop failures due to droughts or floods, there is also a lack of
cold storage, organized retail and an absence of competitive buyers leading to reduction in the
potential of the farmer to sell cash or commercial crops
The farmer only receives 20 % of the price the consumer pays while in North America or Western
Europe it is around 60-75 %
Indian agricultural policy should focus on improving irrigation facilities, flood control, roads,
knowledge transfer, organizing retail, cold storage to improve agricultural output and rural income
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ECONOMIC ISSUES: CORRUPTION

In 2008, 40 % of the people surveyed by Transparency International admitted to paying
bribes or peddling influence in order to get work done in a government office
Causes of corruption include excessive regulation, approval requirements, mandated
spending programs (MNREGA), bureaucracy with discretionary powers, lack of transparent
laws and processes, complicated tax systems and monopoly of certain goods and services
under government officials
The Right to Information (RTI) in 2005 has helped unearth many scams in the mass media
like 2G, CWG, Cash for Votes and Coalgate highlighting corruption in sectors like mining,
infrastructure, power and energy
Road blocks force truckers to pay bribes at checkpoints and delay passage time, there is
heavy corruption in subsidy programs and aid programs as only 40 % of the aid reaches the
intended targets, rest of it is pocketed by corrupt bureaucrats in the name of hoax and ghost
recipients or sold in the black market while some of it is given to those above poverty
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ECONOMIC ISSUES: EDUCATION

From a literacy rate of 18 % in 1951, Indias literacy rate has more than quadrupled to 74 % in 2011
The 86th Amendment Act in 2002 called for universal education of every child since then the
government has taken significant measures to ensure high enrolment rates
While there have been quantitative improvements there have been qualitative criticisms
Most of the schools lack toilets, dont have blackboards and high rate of absenteeism among the
teachers even though the enrolment rate is 96.5 %, half of the students cannot read at the basic
level, 60 % are unable to do basic division and half dropped out at the age of 14
At tertiary level there are world class institutes setup by the government like IITs, JNU and IIM but
they only prepare graduates for jobs rather than promoting research therefore there is a need to
create more institutions promoting research and get corporate collaboration to improve educationindustry interface
Literacy rates and educational opportunities vary with region, gender, urban or rural setting, caste
and social groups
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ECONOMIC ISSUES: REGIONAL IMBALANCE

Regional imbalance signifies variation in per capita income, education, quality of life, infrastructure, health
care and law and order from state to state as one moves through India
Regional imbalance is attributed to the British since they developed cities along the coast and developed
sufficient infrastructure to exploit the natural resources in the interior
After independence the Indian government tried to remove the regional imbalance through five year plans by
building industries in the lesser developed provinces but they were not profitable hence there was no benefit
After liberalization the advanced and better off states with greater educated workforce and better developed
infrastructure have benefitted and attracted investments in the manufacturing and services sector thereby
creating a pull
The weaker states have provided the workforce thereby creating a push which has led to greater rural urban
divide and greater urban inequality however poorer states like Rajasthan are competing to develop alternate
sectors like tourism while Bihar has eased corruption to bridge the divide
Despite the regional imbalance, it is creditable for India to have a low Gini Coefficient of 33.9 which
represents highly equitable income distribution among developing nations in Latin America, Asia and Africa

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UNEVEN DISTRIBUTION OF PCI (Left) & POVERTY

LEVELS THROUGH VARIOUS STATES IN INDIA

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THE ROAD AHEAD

It is remarkable how India despite its ethnic, racial, regional, lingual and religious diversity has
functioned as a continuous democracy since independence from the British
The state of affairs in countries like Libya, Egypt and Syria where Arab Spring had taken place,
has shown difficulty in maintaining democracy which makes India all the more creditable
Since independence India has worked to first create food security and after the economic
reforms of 1991 has become a developing world superpower with a population of 1.25 billion
people, the third largest economy by PPP basis and the fourth strongest army on the verge of
becoming a global superpower
However, there are a few glitches within its system which it must attend to if it has to create
sustainable development
Rather than doling out redundant subsidies on diesel and propagating amphibious schemes
like MNREGA, the government should focus on providing good quality free education and
health care constituting 6 % of GDP
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THE ROAD AHEAD

India has also seen the rise of huge conglomerates like Reliance, Tata and Birla having an
annual turnover which is higher than the GDP of countries like Maldives, it is their prerogative
to tackle social issues like poverty, inadequate sanitation, improvement in health care and
quality education
A flexible tax system with equal taxation powers to the state and centre along with revenue
powers by municipal corporations and zilla parishads would help in solving national problems
locally as well as strengthening the provisions of the 73 rd and 74th amendment thereby
strengthening the local bodies
Such a taxation system would make states richer and prevent hierarchical distribution of
wealth with better power to create solutions which are in resonance to the local needs
Just as how the IT revolution in 2000s made India into a rapidly growing nation, a revolution
in the manufacturing sector and particularly in the semiconductor industry is needed to
create more permanent jobs and shift population from agriculture to manufacturing
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THE ROAD AHEAD

The government must reform labour laws, make business processes easier and invest in
improving infrastructure while working with businesses to improve the economy like being
involved in low cost hygienic housing for migrant workers in cities
Indian democracy during the License Raj was driven by interest groups which included
bureaucrats, farmers, labour unions and caste associations
However after the economic liberalization in 1991 there are two new interest groups namely
the middle class and rich industrialists from family conglomerates to entrepreneurs which are
clashing with the conventional interest groups
As India becomes more globalized and has higher GDP growth, the newer interest groups
would become more pronounced forcing elected governments to relook at some of the
obdurate policies thereby liberalizing the economic order
For India to blossom by 2030 it must increase its human development index by 0.010 every
year and keep its ecological footprint under 1.5 hectares per person per year
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THANK YOU
2008

2014

2020

2030

2040

Germany

4.2

3.8

3.4

2.8

2.3

USA

20.4

19.2

17.6

15.3

13.9

Japan

6.2

5.6

4.7

3.7

2.9

China

11.3

16.3

22.2

30.9

37.4

India

4.9

6.3

8.5

14.3

20.8

This table shows the % share in the global wealth a country is expected to have
in terms of PPP given by World Bank
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