Viksit Bharat: A Deep Dive into India's Economic Transformation

India's economic history since achieving independence in 1947 is an amazing story of change, resiliency, and expansion. With over two centuries of British colonial rule, the recently independent nation had many obstacles to overcome. With low levels of industrialisation, widespread poverty, and a large population of unskilled labour, the economy was primarily dependent on agriculture.

The nation initially struggled with food shortages, illiteracy, and even had a lack of basic utilities, followed by inadequate infrastructure. Nevertheless, despite these great challenges, India set out on an economic development path that would eventually turn it into one of the biggest and most dynamic economies in the world. Here is a complete overview of how India's economy has grown since its independence.

India's GDP Over the Years (Source: Macrotrends)

The Early Years and Strategies

India chose a mixed economy model in the early years after independence as Jawaharlal Nehru, the nation's first prime minister, was influenced by socialist ideas when India introduced its First Five-Year Plan in 1951. The Planning Commission was established in March 1950, indicating the beginning of the process. The first five-year plan was drafted by the economist K.N. Raj.

The Commission's job was to further the government's objectives of raising the national quality of life as quickly as possible. This included increasing productivity, making effective use of the nation's resources, and giving every person access to the workforce. The Planning Commission was in charge of determining development priorities as well as evaluating the country's resources, correcting any inadequacies, and creating plans for their balanced and ideal usage.

Source: Hansraj College

After the Five-Year Plans were introduced, the government assumed a key role in the planning and regulation of economic activities. Through state-led measures, these strategies aimed to increase industrialisation, decrease reliance on imports, and enhance self-sufficiency. The earliest plans concentrated on developing the nation's infrastructure, with large-scale irrigation projects to increase agricultural production as well as substantial expenditures in heavy industries and public sector businesses.

The First Five Year Plan draft mentions: “Though the Five Year Plan is not all-inclusive in scope, it does attempt to establish control at strategic points in the system which would make it possible to influence a much larger field of activity. In agriculture, cottage industries, and large-scale industries which fall largely within the private sector, the aim of the Plan is to establish during the next few years suitable machinery through which, in increasing measure, the community will be able to exercise a certain measure of control over the rate and pattern of its economic and social development.”  

According to International Monetary Fund (IMF) e-library, "During the First Plan period, national income was expected to rise by 11–12 per cent; the actual increase was over 18 per cent, despite a shortfall in Plan outlays. The success of the First Plan, under conditions of economic and financial stability, prompted more ambitious goals and a bolder approach in formulating the Second Plan."

The Green Revolution and Change of Strategies in 1960

Although India's initial development goals were very ambitious, they did not succeed in a number of important sectors. One of the main pillars of the economy, the agriculture sector, suffered many difficulties. Initiatives for land reform, which aimed to empower farmers and redistribute wealth, were hindered by bureaucratic roadblocks and political opposition. Consequently, the land was only partially dispersed, which reduced the effect on rural livelihoods. 

When the nation went through a serious food crisis in the middle of the 1960s, the effects of ignoring agriculture were made very clear. This undermined the government's claims of self-reliance by requiring enormous imports of grain. The crisis highlighted the error of giving industrialisation priority above the growth of agriculture.

For this reason, the Green Revolution of the 1960s and 1970s marked a significant turning point in India's economic development. India introduced high-yielding variety seeds, innovative agricultural practices, increased use of chemical fertilisers, and irrigation in response to persistent food shortages and the risk of famine. 

With the help of this agricultural revolution, agricultural output significantly increased, especially that of wheat and rice, and India went from being a food-deficit country to one with an abundant supply of food. In addition to ensuring food security, the Green Revolution stabilised the rural economy and set the stage for future economic changes.

Stagnation in 1970

The 1970s was a period of significant economic challenges for India. The country experienced a period of stagnation marked by low growth rates, rising inflation, and a deteriorating balance of payments position. This economic malaise was a culmination of several factors:   

Factors Contributing to Stagnation:

• Green Revolution Stalling: While the Green Revolution of the 1960s had significantly boosted agricultural production, its momentum started to wane in the 1970s. Factors such as declining soil fertility, water scarcity, and price fluctuations affected agricultural output.
• Industrial Slowdown: The industrial sector, which was expected to be the growth engine, faced numerous challenges. The licensing raj, bureaucratic red tape, and power shortages hampered industrial growth. Public sector enterprises, which were expected to play a leading role, often faced inefficiencies and losses.
• Global Oil Crisis: The 1973 oil crisis had a severe impact on India's economy. As a net importer of oil, India faced a significant increase in its import bill, leading to a balance of payments crisis.
• Population Growth: The rapid population growth put pressure on resources and infrastructure, hindering economic development.
• Political Instability: Frequent changes in government and political instability created an environment of uncertainty, discouraging investment and economic activity.

India's Economy in the 1980s: A Decade of Growth and Challenges

For India, the 1980s were a time of rapid economic expansion. Over the course of this decade, the economy grew at an annual pace of 5.5 percent, which translated to 3.3 percent growth per capita. This was a huge advancement over the preceding decades.

The industry became the main driver of growth, growing at a strong 6.6% annual rate. Despite growing more slowly, agriculture was still able to maintain a constant growth rate of 3.6%. Investment surged from roughly 19 percent of GDP in the early 1970s to almost 25 percent in the early 1980s, which was the main driver of this economic surge.

Initially, the main source of funding for investments was domestic savings. However, due to their already high levels by the mid-1980s, the potential for future expansion of private savings became limited. That is why India began to rely heavily on foreign borrowing to maintain the rate of investment. Although this tactic helped the economy for a while, it ultimately resulted in a balance of payments crisis in 1990.

India was obliged to renegotiate its economic policy as a result of the crisis. The government was forced to accept a number of economic liberalization policies to get fresh funds. This was the turning point since the new administration in June 1991 restated the nation's commitment to economic reforms.

Essentially, the 1980s witnessed a period of economic expansion in India, driven by increased investment. However, the reliance on foreign borrowing to sustain this growth proved unsustainable, ultimately culminating in a crisis that paved the way for more radical economic reforms.

The Forbes mentions: “But in the 1980s, this growth rate catapulted to 5.6 percent; go to the BSE Sensex and watch it soar during this decade. Ditto with the Index of Industrial Production. Something was happening, though few knew what or how, at least initially.”

The 1990s and 2000s marked a pivotal period in India's economic history, characterized by a dramatic shift from a centrally planned to a market-oriented economy.

The decade witnessed a series of bold reforms that unleashed the potential of the Indian economy and laid the foundation for its emergence as a global economic powerhouse.  

India's Economic Transformation: The 1990s and 2000s

The 1991 Reforms: A Catalyst for Change
The early 1990s were a period of economic crisis for India. A balance of payments crisis forced the government to seek a bailout from the International Monetary Fund (IMF). In response, the government initiated a series of structural reforms, collectively known as the New Economic Policy (NEP).  

Key features of the NEP included:

• Liberalisation: Reduction of import tariffs, deregulation of industries, and removal of licensing requirements to promote competition.  
• Privatisation: Disinvestment of public sector enterprises and encouragement of private sector participation in various sectors.  
• Globalisation: Opening up the economy to foreign investment and trade.  
• Fiscal and Monetary Reforms: Rationalisation of the tax system, reduction of fiscal deficit, and monetary policy reforms to control inflation.  

These reforms were aimed at creating a business-friendly environment, attracting foreign investment, and promoting exports.

• The 1990s and 2000s witnessed a remarkable transformation of the Indian economy. The reforms led to a significant increase in economic growth rates, with the country averaging around 6-7% GDP growth during this period.  
• Services Sector Boom: The services sector emerged as the growth engine, contributing significantly to GDP and employment generation. Information technology (IT) and business process outsourcing (BPO) became major export earners.
• Industrial Resurgence: The manufacturing sector also witnessed a revival, driven by increased investment, both domestic and foreign. The automobile, telecom, and consumer goods sectors experienced rapid growth.
• Agricultural Progress: While agriculture's share in GDP declined, it continued to be the mainstay of the rural economy. The Green Revolution gains were consolidated, and there was a shift towards high-value crops.
• Infrastructure Development: Recognising the importance of infrastructure for sustained growth, the government invested in power, transportation, and telecommunications.

Challenges and Opportunities

Despite the impressive economic growth, India faced several challenges during this period:

• Poverty and Inequality: While poverty rates declined, the pace of reduction was slow, and income inequality widened.
• Infrastructure Gaps: Despite significant investments, infrastructure development lagged behind the needs of a growing economy.
• Agricultural Stagnation: The growth in agriculture was uneven, and the sector remained vulnerable to shocks like droughts and floods.
• Unemployment: The rising population created a challenge in terms of job creation, particularly for skilled labour.

The Indian Economy in the 21st Century

Source: Worldometer

India entered the 21st century with renewed optimism. The IT boom propelled the country to global prominence, creating employment opportunities and generating substantial foreign exchange. However, challenges such as infrastructure bottlenecks, poverty, and inequality persisted.

Key trends in the 21st century include:

• Demographic Dividend: India's young population offers a significant demographic advantage for economic growth.   
• Rise of the Middle Class: A growing middle class has fueled consumer spending and demand for goods and services.
• Focus on Infrastructure: Massive investments in transportation, energy, and digital infrastructure are underway.
• Make in India Initiative: The government aims to promote manufacturing and create jobs.   

Challenges and Opportunities

While India has achieved remarkable progress, challenges remain. These include:   

• Unemployment: Despite economic growth, unemployment, especially among youth, remains a concern.   
• Inequality: The gap between the rich and poor persists, impacting social cohesion.
• Infrastructure Gaps: While significant investments are being made, infrastructure development needs to be accelerated.
• Agricultural Productivity: The agriculture sector needs to be modernised to increase productivity and incomes.

India's economic future holds immense promise. With its vast market, skilled workforce, and entrepreneurial spirit, the country has the potential to become a global economic powerhouse. However, addressing the challenges and implementing sound policies will be crucial for realising this potential.

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