ICAI Notes- Indian Economy | Business Economics for CA Foundation PDF Download

 Page 1


LEARNING OUTCOMES 
 
  
 
 
After studying this Chapter, you will be able to – 
? Describe the state of affairs of the pre British Indian economy 
? Give an account of the Indian economic phenomena during the 
British rule 
? Illustrate the turning points in the growth trajectory of India 
? Explain the major reform initiatives post-independence and assess 
their impact 
? Appreciate the role of NITI Aayog 
? Portray the current status of the economy sector wise 
10.1 STATUS OF INDIAN ECONOMY: PRE  
INDEPENDENCE PERIOD (1850 -1947) 
Between the first and the seventeenth century AD, India is believed to have had the largest 
economy of the ancient and the medieval world. It was prosperous and self-reliant and is 
believed to have controlled between one third and one fourth of the world's wealth. The 
economy consisted of self-sufficient villages as well as cities which were centres of commerce, 
INDIAN ECONOMY 
 
CHAPTER 
10 
© The Institute of Chartered Accountants of India
Page 2


LEARNING OUTCOMES 
 
  
 
 
After studying this Chapter, you will be able to – 
? Describe the state of affairs of the pre British Indian economy 
? Give an account of the Indian economic phenomena during the 
British rule 
? Illustrate the turning points in the growth trajectory of India 
? Explain the major reform initiatives post-independence and assess 
their impact 
? Appreciate the role of NITI Aayog 
? Portray the current status of the economy sector wise 
10.1 STATUS OF INDIAN ECONOMY: PRE  
INDEPENDENCE PERIOD (1850 -1947) 
Between the first and the seventeenth century AD, India is believed to have had the largest 
economy of the ancient and the medieval world. It was prosperous and self-reliant and is 
believed to have controlled between one third and one fourth of the world's wealth. The 
economy consisted of self-sufficient villages as well as cities which were centres of commerce, 
INDIAN ECONOMY 
 
CHAPTER 
10 
© The Institute of Chartered Accountants of India
  
 
BUSINESS ECONOMICS 
a
10.2 
pilgrimage and administration. Compared to villages, cities presented more opportunities for 
diverse occupations, trades and gainful economic activities.  
Simple division of labour intertwined with attributes such as race, class, and gender was the 
basis of the structure of the villages and acted as a built-in mechanism of economic and social 
differentiation. Though agriculture was the dominant occupation and the main source of 
livelihood for majority of people, the country had a highly skilled set of artisans and craftsmen 
who produced manufactures, handicrafts and textiles of superior quality and fineness for the 
worldwide market.  
Box.1 Ancient Economic Philosophy of India 
The earliest known treatise on ancient Indian economic philosophy is ‘Arthashastra’ the 
pioneering work attributed to Kautilya (Chanakya) (321–296 BCE)Arthashastra is recognized 
as one of the most important works on statecraft in the genre of political philosophy. It is 
believed to be a kind of handbook for King Chandragupta Maurya, the founder of Mauryan 
empire, containing directives as to how to reign over the  kingdom and encouraging direct 
action in addressing political concerns without regard for ethical considerations. 
Artha is not wealth alone; rather it encompasses all aspects of the material well-being of 
individuals. Arthashastra is the science of ‘artha’ or material prosperity, or “the means of 
subsistence of humanity,” which is, primarily, ‘wealth’ and, secondarily, ‘the land’. The major 
focus of the work is on the means of fruitfully maintaining and using land. Kautilya emphasizes 
the importance of robust agricultural initiatives for an abundant harvest which will go toward 
filling the state's treasury. Taxes, which were charged equal for private and state-owned 
businesses, must be fair to all and should be easily understood by the king's subjects.  
Being a multidisciplinary discourse on areas such as politics, economics, military strategy, 
diplomacy, function of the state, and the social organization, Kautilya’s writings relate to 
statecraft, political science, economic policy and military strategy.True kingship is defined as 
a ruler's subordination of his own desires and ambitions to the good of his people; i.e. a king's 
policies should reflect a concern for the greatest good of the greatest number of his subjects. 
The preservation and advancement of this good was comprised of seven vital elements, 
namely the King, Ministers, Farmlands, Fortresses, Treasury, Military and the Allies. 
The advent of the Europeans and the British marked a shift in the economic history of India. 
The period of British rule can be divided into two sub periods: 
1. The rule of East India Company from 1757 to 1858 
2. British government in India from 1858 to 1947 
The historical legacy of British colonialism is an important starting point to illustrate the 
development path of India. With the onset of Industrial revolution in the latter half of the 18
th
 
© The Institute of Chartered Accountants of India
Page 3


LEARNING OUTCOMES 
 
  
 
 
After studying this Chapter, you will be able to – 
? Describe the state of affairs of the pre British Indian economy 
? Give an account of the Indian economic phenomena during the 
British rule 
? Illustrate the turning points in the growth trajectory of India 
? Explain the major reform initiatives post-independence and assess 
their impact 
? Appreciate the role of NITI Aayog 
? Portray the current status of the economy sector wise 
10.1 STATUS OF INDIAN ECONOMY: PRE  
INDEPENDENCE PERIOD (1850 -1947) 
Between the first and the seventeenth century AD, India is believed to have had the largest 
economy of the ancient and the medieval world. It was prosperous and self-reliant and is 
believed to have controlled between one third and one fourth of the world's wealth. The 
economy consisted of self-sufficient villages as well as cities which were centres of commerce, 
INDIAN ECONOMY 
 
CHAPTER 
10 
© The Institute of Chartered Accountants of India
  
 
BUSINESS ECONOMICS 
a
10.2 
pilgrimage and administration. Compared to villages, cities presented more opportunities for 
diverse occupations, trades and gainful economic activities.  
Simple division of labour intertwined with attributes such as race, class, and gender was the 
basis of the structure of the villages and acted as a built-in mechanism of economic and social 
differentiation. Though agriculture was the dominant occupation and the main source of 
livelihood for majority of people, the country had a highly skilled set of artisans and craftsmen 
who produced manufactures, handicrafts and textiles of superior quality and fineness for the 
worldwide market.  
Box.1 Ancient Economic Philosophy of India 
The earliest known treatise on ancient Indian economic philosophy is ‘Arthashastra’ the 
pioneering work attributed to Kautilya (Chanakya) (321–296 BCE)Arthashastra is recognized 
as one of the most important works on statecraft in the genre of political philosophy. It is 
believed to be a kind of handbook for King Chandragupta Maurya, the founder of Mauryan 
empire, containing directives as to how to reign over the  kingdom and encouraging direct 
action in addressing political concerns without regard for ethical considerations. 
Artha is not wealth alone; rather it encompasses all aspects of the material well-being of 
individuals. Arthashastra is the science of ‘artha’ or material prosperity, or “the means of 
subsistence of humanity,” which is, primarily, ‘wealth’ and, secondarily, ‘the land’. The major 
focus of the work is on the means of fruitfully maintaining and using land. Kautilya emphasizes 
the importance of robust agricultural initiatives for an abundant harvest which will go toward 
filling the state's treasury. Taxes, which were charged equal for private and state-owned 
businesses, must be fair to all and should be easily understood by the king's subjects.  
Being a multidisciplinary discourse on areas such as politics, economics, military strategy, 
diplomacy, function of the state, and the social organization, Kautilya’s writings relate to 
statecraft, political science, economic policy and military strategy.True kingship is defined as 
a ruler's subordination of his own desires and ambitions to the good of his people; i.e. a king's 
policies should reflect a concern for the greatest good of the greatest number of his subjects. 
The preservation and advancement of this good was comprised of seven vital elements, 
namely the King, Ministers, Farmlands, Fortresses, Treasury, Military and the Allies. 
The advent of the Europeans and the British marked a shift in the economic history of India. 
The period of British rule can be divided into two sub periods: 
1. The rule of East India Company from 1757 to 1858 
2. British government in India from 1858 to 1947 
The historical legacy of British colonialism is an important starting point to illustrate the 
development path of India. With the onset of Industrial revolution in the latter half of the 18
th
 
© The Institute of Chartered Accountants of India
 
INDIAN ECONOMY 
 
 
10.3 
century, the manufacturing capabilities of Britain increased manifold, and consequently there 
arose the need to augment raw material supply as well as the need for finding markets for 
finished goods. This led to a virtual reversal of the nature of India’s foreign trade from an 
exporter of manufactures to an exporter of raw materials.  
The Indian exports of finished goods were subjected to heavy tariffs and the imports were 
charged lower tariffs under the policy of discriminatory tariffs followed by the British. This 
made the exports of finished goods relatively costlier and the imports cheaper. In this 
backdrop, the Indian goods lost their competitiveness. Consequently, the external as well as 
the domestic demand for indigenous products fell sharply culminating in the destruction of 
Indian handicrafts and manufactures. The destruction of Indian manufactures, mainly due to 
the hostile imperial policies to serve the British interests and the competition from machine-
made goods, had far reaching adverse consequences on the Indian manufacturing sector.  The 
problem was aggravated by the shift in patterns of demand by domestic consumers favouring 
foreign goods as many Indians wanted to affiliate themselves with western culture and ways 
of life.  
The damage done to the long established production structure had far reaching economic 
and social consequences as it destroyed the internal balance of the traditional village 
economy which was characterized by the harmonious blending of agriculture and handicrafts. 
These were manifest as: 
1. Large scale unemployment and absence of alternate sources of employment which 
forced many to depend on agriculture for livelihood 
2. The increased pressure on land caused sub division and fragmentation of land 
holdings, subsistence farming, reduced agricultural productivity and poverty.  
3. The imports of cheap machine made goods from Britain and an overt shift of tastes 
and fashion of Indians in favour of imported goods made the survival of domestic 
industries all the more difficult. 
4. The systems of land tenure, especially the zamindari system created a class of people 
whose interests were focused on perpetuating the British rule.    
5. Excessive pressure on land increased the demand for land under tenancy, and the 
zamindars got the opportunity to extract excessive rents and other payments 
6. Absentee landlordism, high indebtedness of agriculturists, growth of a class of 
exploitative money lenders and low attention to productivity enhancing measures led 
to a virtual collapse of Indian agriculture. 
We shall now have a look into the stagnated nature of industrialisation during the colonial 
era. Factory-based production did not exist in India before 1850.The ‘Modern’ industrial 
© The Institute of Chartered Accountants of India
Page 4


LEARNING OUTCOMES 
 
  
 
 
After studying this Chapter, you will be able to – 
? Describe the state of affairs of the pre British Indian economy 
? Give an account of the Indian economic phenomena during the 
British rule 
? Illustrate the turning points in the growth trajectory of India 
? Explain the major reform initiatives post-independence and assess 
their impact 
? Appreciate the role of NITI Aayog 
? Portray the current status of the economy sector wise 
10.1 STATUS OF INDIAN ECONOMY: PRE  
INDEPENDENCE PERIOD (1850 -1947) 
Between the first and the seventeenth century AD, India is believed to have had the largest 
economy of the ancient and the medieval world. It was prosperous and self-reliant and is 
believed to have controlled between one third and one fourth of the world's wealth. The 
economy consisted of self-sufficient villages as well as cities which were centres of commerce, 
INDIAN ECONOMY 
 
CHAPTER 
10 
© The Institute of Chartered Accountants of India
  
 
BUSINESS ECONOMICS 
a
10.2 
pilgrimage and administration. Compared to villages, cities presented more opportunities for 
diverse occupations, trades and gainful economic activities.  
Simple division of labour intertwined with attributes such as race, class, and gender was the 
basis of the structure of the villages and acted as a built-in mechanism of economic and social 
differentiation. Though agriculture was the dominant occupation and the main source of 
livelihood for majority of people, the country had a highly skilled set of artisans and craftsmen 
who produced manufactures, handicrafts and textiles of superior quality and fineness for the 
worldwide market.  
Box.1 Ancient Economic Philosophy of India 
The earliest known treatise on ancient Indian economic philosophy is ‘Arthashastra’ the 
pioneering work attributed to Kautilya (Chanakya) (321–296 BCE)Arthashastra is recognized 
as one of the most important works on statecraft in the genre of political philosophy. It is 
believed to be a kind of handbook for King Chandragupta Maurya, the founder of Mauryan 
empire, containing directives as to how to reign over the  kingdom and encouraging direct 
action in addressing political concerns without regard for ethical considerations. 
Artha is not wealth alone; rather it encompasses all aspects of the material well-being of 
individuals. Arthashastra is the science of ‘artha’ or material prosperity, or “the means of 
subsistence of humanity,” which is, primarily, ‘wealth’ and, secondarily, ‘the land’. The major 
focus of the work is on the means of fruitfully maintaining and using land. Kautilya emphasizes 
the importance of robust agricultural initiatives for an abundant harvest which will go toward 
filling the state's treasury. Taxes, which were charged equal for private and state-owned 
businesses, must be fair to all and should be easily understood by the king's subjects.  
Being a multidisciplinary discourse on areas such as politics, economics, military strategy, 
diplomacy, function of the state, and the social organization, Kautilya’s writings relate to 
statecraft, political science, economic policy and military strategy.True kingship is defined as 
a ruler's subordination of his own desires and ambitions to the good of his people; i.e. a king's 
policies should reflect a concern for the greatest good of the greatest number of his subjects. 
The preservation and advancement of this good was comprised of seven vital elements, 
namely the King, Ministers, Farmlands, Fortresses, Treasury, Military and the Allies. 
The advent of the Europeans and the British marked a shift in the economic history of India. 
The period of British rule can be divided into two sub periods: 
1. The rule of East India Company from 1757 to 1858 
2. British government in India from 1858 to 1947 
The historical legacy of British colonialism is an important starting point to illustrate the 
development path of India. With the onset of Industrial revolution in the latter half of the 18
th
 
© The Institute of Chartered Accountants of India
 
INDIAN ECONOMY 
 
 
10.3 
century, the manufacturing capabilities of Britain increased manifold, and consequently there 
arose the need to augment raw material supply as well as the need for finding markets for 
finished goods. This led to a virtual reversal of the nature of India’s foreign trade from an 
exporter of manufactures to an exporter of raw materials.  
The Indian exports of finished goods were subjected to heavy tariffs and the imports were 
charged lower tariffs under the policy of discriminatory tariffs followed by the British. This 
made the exports of finished goods relatively costlier and the imports cheaper. In this 
backdrop, the Indian goods lost their competitiveness. Consequently, the external as well as 
the domestic demand for indigenous products fell sharply culminating in the destruction of 
Indian handicrafts and manufactures. The destruction of Indian manufactures, mainly due to 
the hostile imperial policies to serve the British interests and the competition from machine-
made goods, had far reaching adverse consequences on the Indian manufacturing sector.  The 
problem was aggravated by the shift in patterns of demand by domestic consumers favouring 
foreign goods as many Indians wanted to affiliate themselves with western culture and ways 
of life.  
The damage done to the long established production structure had far reaching economic 
and social consequences as it destroyed the internal balance of the traditional village 
economy which was characterized by the harmonious blending of agriculture and handicrafts. 
These were manifest as: 
1. Large scale unemployment and absence of alternate sources of employment which 
forced many to depend on agriculture for livelihood 
2. The increased pressure on land caused sub division and fragmentation of land 
holdings, subsistence farming, reduced agricultural productivity and poverty.  
3. The imports of cheap machine made goods from Britain and an overt shift of tastes 
and fashion of Indians in favour of imported goods made the survival of domestic 
industries all the more difficult. 
4. The systems of land tenure, especially the zamindari system created a class of people 
whose interests were focused on perpetuating the British rule.    
5. Excessive pressure on land increased the demand for land under tenancy, and the 
zamindars got the opportunity to extract excessive rents and other payments 
6. Absentee landlordism, high indebtedness of agriculturists, growth of a class of 
exploitative money lenders and low attention to productivity enhancing measures led 
to a virtual collapse of Indian agriculture. 
We shall now have a look into the stagnated nature of industrialisation during the colonial 
era. Factory-based production did not exist in India before 1850.The ‘Modern’ industrial 
© The Institute of Chartered Accountants of India
  
 
BUSINESS ECONOMICS 
a
10.4 
enterprises in colonial India started to grow in the mid-19th century. The cotton milling 
business grew steadily throughout the second half of the 19th century, and achieved high 
international competitiveness. The cotton mill industry in India had 9 million spindles in the 
1930s, which placed India in the fifth position globally in terms of number of spindles.  
Jute mills also expanded rapidly in and around Calcutta in response to a mounting global 
demand for ropes and other products, and Indian jute occupied a large share of the 
international market by the late 19th century. At the end of the 19th century, the Indian jute 
mill industry was the largest in the world in terms of the amount of raw jute consumed in 
production. In addition, brewing, paper-milling, leather-making, matches, and rice-milling 
industries also developed during the century. Heavy industries such as the iron industry were 
also established as early as 1814 by British capital. India’s iron industry was ranked eighth in 
the world in terms of output in 1930. Due to progress in modern industrial enterprises, some 
industries even reached global standards by the beginning of the 20th century. Just before 
the Great Depression, India was ranked as the twelfth largest industrialised country measured 
by the value of manufactured products. 
The producer goods industries, however, did not show high levels of expansion. Perhaps, the 
most important of the factors that led to this state of affairs was the pressure exerted by the 
English producers in matters of policy formulation to positively discourage the development 
of industries which were likely to compete with those of the English producers. 
India’s industrial growth was insufficient to bring in a general transformation in its economic 
structure. The share in the net domestic product (NDP) of the manufacturing sector (excluding 
small scale and cottage industries) had barely reached 7% even in 1946.Considering its slow 
progress, the share of factory employment in India was also small (i.e. 0.4% of the total 
population in 1900 and 1.4% in 1941). 
10.2 INDIAN ECONOMY: POST-INDEPENDENCE (1947- 
1991) 
At the time of independence, India was overwhelmingly rural inhabited by mostly illiterate 
people who were exceedingly poor. We had a deeply stratified society characterized by 
extreme heterogeneity on many counts. With the literacy rate just above 18 percent and barely 
32 years of life expectancy in 1951, India’s poverty was not just in terms of income alone, but 
also in terms of human capital,  
For historical reasons, the Nehruvian model which supported social and economic 
redistribution and industrialization directed by the state came to dominate the post-
Independence Indian economic policy. Centralized economic planning and direction was at 
the core of India’s development strategy and the economic policies were crafted to 
© The Institute of Chartered Accountants of India
Page 5


LEARNING OUTCOMES 
 
  
 
 
After studying this Chapter, you will be able to – 
? Describe the state of affairs of the pre British Indian economy 
? Give an account of the Indian economic phenomena during the 
British rule 
? Illustrate the turning points in the growth trajectory of India 
? Explain the major reform initiatives post-independence and assess 
their impact 
? Appreciate the role of NITI Aayog 
? Portray the current status of the economy sector wise 
10.1 STATUS OF INDIAN ECONOMY: PRE  
INDEPENDENCE PERIOD (1850 -1947) 
Between the first and the seventeenth century AD, India is believed to have had the largest 
economy of the ancient and the medieval world. It was prosperous and self-reliant and is 
believed to have controlled between one third and one fourth of the world's wealth. The 
economy consisted of self-sufficient villages as well as cities which were centres of commerce, 
INDIAN ECONOMY 
 
CHAPTER 
10 
© The Institute of Chartered Accountants of India
  
 
BUSINESS ECONOMICS 
a
10.2 
pilgrimage and administration. Compared to villages, cities presented more opportunities for 
diverse occupations, trades and gainful economic activities.  
Simple division of labour intertwined with attributes such as race, class, and gender was the 
basis of the structure of the villages and acted as a built-in mechanism of economic and social 
differentiation. Though agriculture was the dominant occupation and the main source of 
livelihood for majority of people, the country had a highly skilled set of artisans and craftsmen 
who produced manufactures, handicrafts and textiles of superior quality and fineness for the 
worldwide market.  
Box.1 Ancient Economic Philosophy of India 
The earliest known treatise on ancient Indian economic philosophy is ‘Arthashastra’ the 
pioneering work attributed to Kautilya (Chanakya) (321–296 BCE)Arthashastra is recognized 
as one of the most important works on statecraft in the genre of political philosophy. It is 
believed to be a kind of handbook for King Chandragupta Maurya, the founder of Mauryan 
empire, containing directives as to how to reign over the  kingdom and encouraging direct 
action in addressing political concerns without regard for ethical considerations. 
Artha is not wealth alone; rather it encompasses all aspects of the material well-being of 
individuals. Arthashastra is the science of ‘artha’ or material prosperity, or “the means of 
subsistence of humanity,” which is, primarily, ‘wealth’ and, secondarily, ‘the land’. The major 
focus of the work is on the means of fruitfully maintaining and using land. Kautilya emphasizes 
the importance of robust agricultural initiatives for an abundant harvest which will go toward 
filling the state's treasury. Taxes, which were charged equal for private and state-owned 
businesses, must be fair to all and should be easily understood by the king's subjects.  
Being a multidisciplinary discourse on areas such as politics, economics, military strategy, 
diplomacy, function of the state, and the social organization, Kautilya’s writings relate to 
statecraft, political science, economic policy and military strategy.True kingship is defined as 
a ruler's subordination of his own desires and ambitions to the good of his people; i.e. a king's 
policies should reflect a concern for the greatest good of the greatest number of his subjects. 
The preservation and advancement of this good was comprised of seven vital elements, 
namely the King, Ministers, Farmlands, Fortresses, Treasury, Military and the Allies. 
The advent of the Europeans and the British marked a shift in the economic history of India. 
The period of British rule can be divided into two sub periods: 
1. The rule of East India Company from 1757 to 1858 
2. British government in India from 1858 to 1947 
The historical legacy of British colonialism is an important starting point to illustrate the 
development path of India. With the onset of Industrial revolution in the latter half of the 18
th
 
© The Institute of Chartered Accountants of India
 
INDIAN ECONOMY 
 
 
10.3 
century, the manufacturing capabilities of Britain increased manifold, and consequently there 
arose the need to augment raw material supply as well as the need for finding markets for 
finished goods. This led to a virtual reversal of the nature of India’s foreign trade from an 
exporter of manufactures to an exporter of raw materials.  
The Indian exports of finished goods were subjected to heavy tariffs and the imports were 
charged lower tariffs under the policy of discriminatory tariffs followed by the British. This 
made the exports of finished goods relatively costlier and the imports cheaper. In this 
backdrop, the Indian goods lost their competitiveness. Consequently, the external as well as 
the domestic demand for indigenous products fell sharply culminating in the destruction of 
Indian handicrafts and manufactures. The destruction of Indian manufactures, mainly due to 
the hostile imperial policies to serve the British interests and the competition from machine-
made goods, had far reaching adverse consequences on the Indian manufacturing sector.  The 
problem was aggravated by the shift in patterns of demand by domestic consumers favouring 
foreign goods as many Indians wanted to affiliate themselves with western culture and ways 
of life.  
The damage done to the long established production structure had far reaching economic 
and social consequences as it destroyed the internal balance of the traditional village 
economy which was characterized by the harmonious blending of agriculture and handicrafts. 
These were manifest as: 
1. Large scale unemployment and absence of alternate sources of employment which 
forced many to depend on agriculture for livelihood 
2. The increased pressure on land caused sub division and fragmentation of land 
holdings, subsistence farming, reduced agricultural productivity and poverty.  
3. The imports of cheap machine made goods from Britain and an overt shift of tastes 
and fashion of Indians in favour of imported goods made the survival of domestic 
industries all the more difficult. 
4. The systems of land tenure, especially the zamindari system created a class of people 
whose interests were focused on perpetuating the British rule.    
5. Excessive pressure on land increased the demand for land under tenancy, and the 
zamindars got the opportunity to extract excessive rents and other payments 
6. Absentee landlordism, high indebtedness of agriculturists, growth of a class of 
exploitative money lenders and low attention to productivity enhancing measures led 
to a virtual collapse of Indian agriculture. 
We shall now have a look into the stagnated nature of industrialisation during the colonial 
era. Factory-based production did not exist in India before 1850.The ‘Modern’ industrial 
© The Institute of Chartered Accountants of India
  
 
BUSINESS ECONOMICS 
a
10.4 
enterprises in colonial India started to grow in the mid-19th century. The cotton milling 
business grew steadily throughout the second half of the 19th century, and achieved high 
international competitiveness. The cotton mill industry in India had 9 million spindles in the 
1930s, which placed India in the fifth position globally in terms of number of spindles.  
Jute mills also expanded rapidly in and around Calcutta in response to a mounting global 
demand for ropes and other products, and Indian jute occupied a large share of the 
international market by the late 19th century. At the end of the 19th century, the Indian jute 
mill industry was the largest in the world in terms of the amount of raw jute consumed in 
production. In addition, brewing, paper-milling, leather-making, matches, and rice-milling 
industries also developed during the century. Heavy industries such as the iron industry were 
also established as early as 1814 by British capital. India’s iron industry was ranked eighth in 
the world in terms of output in 1930. Due to progress in modern industrial enterprises, some 
industries even reached global standards by the beginning of the 20th century. Just before 
the Great Depression, India was ranked as the twelfth largest industrialised country measured 
by the value of manufactured products. 
The producer goods industries, however, did not show high levels of expansion. Perhaps, the 
most important of the factors that led to this state of affairs was the pressure exerted by the 
English producers in matters of policy formulation to positively discourage the development 
of industries which were likely to compete with those of the English producers. 
India’s industrial growth was insufficient to bring in a general transformation in its economic 
structure. The share in the net domestic product (NDP) of the manufacturing sector (excluding 
small scale and cottage industries) had barely reached 7% even in 1946.Considering its slow 
progress, the share of factory employment in India was also small (i.e. 0.4% of the total 
population in 1900 and 1.4% in 1941). 
10.2 INDIAN ECONOMY: POST-INDEPENDENCE (1947- 
1991) 
At the time of independence, India was overwhelmingly rural inhabited by mostly illiterate 
people who were exceedingly poor. We had a deeply stratified society characterized by 
extreme heterogeneity on many counts. With the literacy rate just above 18 percent and barely 
32 years of life expectancy in 1951, India’s poverty was not just in terms of income alone, but 
also in terms of human capital,  
For historical reasons, the Nehruvian model which supported social and economic 
redistribution and industrialization directed by the state came to dominate the post-
Independence Indian economic policy. Centralized economic planning and direction was at 
the core of India’s development strategy and the economic policies were crafted to 
© The Institute of Chartered Accountants of India
 
INDIAN ECONOMY 
 
 
10.5 
accomplish rapid economic growth accompanied by equity and distributive justice. The 
Planning Commission of India was established to meticulously plan for the economic 
development of the nation in line with the socialistic strategy. This was carried through the 
five-year plans which were developed, implemented and monitored by the Planning 
Commission.  
It is pertinent here to have a look at the ideology of industrialization prevailed in the early 
days of independence. India’s political leadership was keen on establishing an economic 
system in which the central government would have authority to design the economic strategy 
and to carry out the necessary investments in coordination with the private sector. Rapid 
industrialization of the economy was the cornerstone of Nehru’s development strategy. The 
concept of ‘planned modernization’ meant a systematic planning to support industrialization. 
The bureaucrats and the technocrats envisioned a substantially significant role for the state in 
industrialisation.  
The Industrial Policy Resolution (1948) envisaged an expanded role for the public sector and 
licensing to the private sector. It granted state monopoly for strategic areas such as atomic 
energy, arms and ammunition and railways. Also, the rights to new investments in basic 
Industries were exclusively given to the state. 
The policies in 1950’s were guided by two economic philosophies:  
1. The then prime minister Nehru’s visualization to build a socialistic society with 
emphasis on heavy industry, and 
2. The Gandhian philosophy of small scale and cottage industry and village republics  
The Industrial Policy Resolution of 1956 though provided a comprehensive framework for 
industrial development, was lopsided as its guiding principle supported enormous expansion of 
the scope of the public sector. A natural outcome of the undue priority for public sector was 
the dampening of private initiative and enterprise. For obvious reasons, private investments 
were discouraged and this had long-lasting negative consequences for industrial growth.  
India followed an open foreign investment policy and a relatively open trade policy until the 
late 1950s.A balance of payments crisis emerged in 1958 causing concerns regarding foreign 
exchange depletion. Consequently, there emerged a gradual tightening of trade and 
reduction in investment-licensing of new investments requiring imports of capital goods. The 
comprehensive import controls were maintained until 1966. 
In the first three decades after independence (1950–80), India’s average annual rate of growth 
of GDP- often referred to as the ‘Hindu growth rate’- was a modest 3.5 percent. While 
agriculture was not neglected, the thrust of the first decade and a half was on capital goods—
capital-intensive projects such as dams, power plants, and heavy industrialization—rather than 
consumer goods.  
© The Institute of Chartered Accountants of India