Unveiling India's Economic Odyssey
Unveiling India's Economic Odyssey
A Comprehensive Exploration of India's Economic Journey, Uncovering Colonial Legacy and Charting a Path to Global Economic Superpower Status
Although, on the outside, India may not look as promising as China. Whether you compare their infrastructure, cities, roads, quality of institutions, or anything else, India looks more like an undeveloped country, than a country that is rising to the top of the “economic food chain”. This, however, is not the full story of Indian economic development.
In this newsletter post, we will understand the history of India’s economic journey, its ups and downs, and the current trajectory of India’s economic development.
First things first, let’s try and understand this country of paradoxes. For almost two millennia, or to be more precise, 1700 years, India’s share of the global economy was around 25-32%, which is more than the entire Europe. With the British rule also came the rapid downfall of India’s economy.
Period of Colonialism
Before the colonialism, India was a global economic powerhouse. The American J.T. Sunderland has described India before the British rule in the following words: “India was a far greater industrial and manufacturing nation than any in Europe or Asia. Her textile goods were famous all over the civilized world, so were her exquisite jewelry and her precious stones, so were her pottery her porcelains and ceramics, and so were her fine works in metal, iron, steel, silver, and gold. She had great architecture equal in beauty to any in the world, she had great merchants, businessmen, bankers, and financiers. She was not only a great shipbuilding nation but had commerce and trade which extended to all civilized countries.” So, what has happened to this India that the J.T. Sunderland was describing?
Like any great power at that time, the British Empire had colonies, and one of those colonies was India. During the British rule, India was reduced to being a mere exporter of raw materials, like cotton and metal ore, so that the British could sell those products back to Indians at a premium. By 1947, the colonial deindustrialization of India was so big, that only 0,7% of India’s skilled labor was employed in any form of manufacturing. This meant that all these skilled workers had to go somewhere to work, so they all opted for the only viable sector, agriculture. Rural wages have created historical lows, and the land could not sustain the influx of new workers. Poor seasonal harvests and droughts have generated catastrophic famines and mass poverty.
As a result of this, the British Empire started to tax farmers and use them as the primary revenue source for the administration. The taxes imposed on farmers were extreme and were pegged at 50-80% of Gross Domestic Income, calculated before the harvest. This has resulted in a situation where the farmers have owned more in taxes than they have earned in income. By the late 19th Century, India was Britain’s largest source of revenue, the largest purchaser of exports, and a source of highly paid employment for British soldiers and civil servants, all paid by the imposed taxes.
Period of Independence
The problem of the Indian economy lies in the following, it never planned to be prosperous, only to be self-sufficient. Colonialism has left a very big mark on the collective consciousness of Indians, from which a large portion of bad decisions and economic policies have sprouted.
India's industrial landscape lacked mass production and specialization, leading to the fragmentation of industries without established best practices. With limited external competition due to isolationist policies, there was little impetus to strive for excellence. Consequently, India's pursuit of economic self-sufficiency ultimately eroded efficiency.
By the late 1940s, although not officially communist, India’s government has behaved as a communist country. The government has tried to control every aspect of India’s economy, including internal and external competition, all to achieve economic independence.
During the mid-20th century, India underwent a significant period of state intervention, with various industries falling under government control, such as railways, atomic energy, arms production, iron and steel, and telecommunications. Some privately owned industries were also nationalized, while price controls were implemented to safeguard citizens during this transition.
Despite experiencing growth akin to many other nations during the 1950s and 1960s, India's progress was hindered by these restrictive policies. In the 1960s, the country further isolated itself, expanding government influence over the economy. Such measures deterred foreign firms, limited large-scale investments, and stifled productivity and expansion efforts.
In the late 1980s, the prime minister initiated a series of reforms aimed at dismantling the complex network of government controls and opening India to the global market. Recognizing the inefficiencies plaguing the Indian economy, a faction of policymakers supported gradual liberalization. Investment ceilings were raised to accommodate more firms, price regulations were eased, and steps were taken to attract foreign capital.
However, despite efforts to bolster economic activity, India faced challenges in attracting necessary capital inflows, leading to a loss of confidence in the nation's economic stability. By the early 1990s, mounting debts and restricted access to foreign markets precipitated a crisis. In response, the finance minister initiated trade liberalization, reduced licensing requirements, and embarked on a transformative phase of liberalization, reshaping the nation's economic landscape.
The Future of the Indian Economy
For millennia, economic advancement followed a primarily linear trajectory closely tied to population expansion. Absent machinery or technological breakthroughs, an individual's productivity remained constrained by their time and available resources.
However, recent strides in technology and energy have catalyzed what is often termed the "hockey stick" effect. Initially observed in Western Europe and North America, this phenomenon is now unfolding across the globe. As the technological landscape levels, economies such as China and India, historically significant powerhouses, are experiencing a resurgence in their economic prowess, marking a significant shift in the global economic order.
India's growth trajectory has been undeniably remarkable, characterized by rates typical of low-income nations embracing capital accumulation and dismantling stringent market restrictions. In hindsight, much of India's success in the 1990s can be attributed to policymakers' decision to cease the self-inflicted damage caused by overly restrictive measures.
The emergence of India's IT sector and nascent developments in finance and infrastructure underscore its evolving economic landscape. More significantly, the reforms implemented appear to be entrenched, signaling a promising future. While India's economy still exhibits characteristics of a developing nation, its newfound openness coupled with its substantial size, sustained growth, and robust democratic framework augur limitless possibilities for the nation in the 21st century.
The Indian government's strategic emphasis on attracting foreign investment and bolstering manufacturing, notably through the Production Linked Incentive Scheme (PLIS), serves as a key mechanism for fostering economic expansion.
Introduced in 2020, the PLIS provides incentives such as tax rebates and streamlined licensing processes to both domestic and foreign investors. Morgan Stanley predicts that the manufacturing sector's contribution to India's GDP will ascend from its current 15.6% to 21% by 2031, potentially tripling manufacturing revenue from $447 billion to approximately $1,490 billion.
However, Morgan Stanley also acknowledges potential challenges to its forecast, including the prospect of a protracted global recession, given India's considerable reliance on international trade, with nearly 20% of its output directed towards exports. Moreover, the U.S. investment bank highlights risks such as the availability of skilled labor, geopolitical tensions, and policy missteps that may result from shifts in government dynamics, which could undermine India's economic trajectory.
India's successful spacecraft landing on the moon in 2023 marks a historic achievement, positioning the nation as only the fourth country to accomplish this feat, joining the ranks of the United States, China, and the former Soviet Union. This significant milestone underscores India's potential to emerge as a global superpower, not only in space exploration but also in economic prowess.
By showcasing its capabilities in lunar exploration and other technological advancements, India is solidifying its position as a formidable player not only in space exploration but also in economic spheres. This achievement not only instills national pride but also reinforces India's position as a rising force in the global economy, positioning it on the trajectory of becoming an economic superpower.