Structure of the Economy
At independence the economy was predominantly agrarian. Most of the population was employed in agriculture, and most of those people were very poor, existing by cropping their own small plots or supplying labor to other farms. Landownership, land rental, and sharecropping rights were complex, involving layers of intermediaries (see Land Use, ch. 7). Moreover, the structural economic problems inherited at independence were exacerbated by the costs associated with the partition of British India, which had resulted in about 12 million to 14 million refugees fleeing past each other across the new borders between India and Pakistan (see National Integration, ch. 1). The settlement of refugees was a considerable financial strain. Partition also divided complementary economic zones. Under the British, jute and cotton were grown in the eastern part of Bengal, the area that became East Pakistan (after 1971, Bangladesh), but processing took place mostly in the western part of Bengal, which became the Indian state of West Bengal in 1947. As a result, after independence India had to employ land previously used for food production to cultivate cotton and jute for its mills.
India's leaders--especially the first prime minister, Jawaharlal Nehru, who introduced the five-year plans--agreed that strong economic growth and measures to increase incomes and consumption among the poorest groups were necessary goals for the new nation. Government was assigned an important role in this process, and since 1951 a series of plans have guided the country's economic development. Although there was considerable growth in the 1950s, the long-term rates of growth were less positive than India's politicians desired and less than those of many other Asian countries. From FY 1951 to FY 1979, the economy grew at an average rate of about 3.1 percent a year in constant prices, or at an annual rate of 1.0 percent per capita (see table 16, Appendix). During this period, industry grew at an average rate of 4.5 percent a year, compared with an annual average of 3.0 percent for agriculture. Many factors contributed to the slowdown of the economy after the mid-1960s, but economists differ over the relative importance of those factors. Structural deficiencies, such as the need for institutional changes in agriculture and the inefficiency of much of the industrial sector, also contributed to economic stagnation. Wars with China in 1962 and with Pakistan in 1965 and 1971; a flood of refugees from East Pakistan in 1971; droughts in 1965, 1966, 1971, and 1972; currency devaluation in 1966; and the first world oil crisis, in 1973-74, all jolted the economy.
Growth since 1980
The rate of growth improved in the 1980s. From FY 1980 to FY 1989, the economy grew at an annual rate of 5.5 percent, or 3.3 percent on a per capita basis. Industry grew at an annual rate of 6.6 percent and agriculture at a rate of 3.6 percent. A high rate of investment was a major factor in improved economic growth. Investment went from about 19 percent of GDP in the early 1970s to nearly 25 percent in the early 1980s. India, however, required a higher rate of investment to attain comparable economic growth than did most other low-income developing countries, indicating a lower rate of return on investments. Part of the adverse Indian experience was explained by investment in large, long-gestating, capital-intensive projects, such as electric power, irrigation, and infrastructure. However, delayed completions, cost overruns, and under-use of capacity were contributing factors.
Private savings financed most of India's investment, but by the mid-1980s further growth in private savings was difficult because they were already at quite a high level. As a result, during the late 1980s India relied increasingly on borrowing from foreign sources (see Aid, this ch.). This trend led to a balance of payments crisis in 1990; in order to receive new loans, the government had no choice but to agree to further measures of economic liberalization. This commitment to economic reform was reaffirmed by the government that came to power in June 1991.
India's primary sector, including agriculture, forestry, fishing, mining, and quarrying, accounted for 32.8 percent of GDP in FY 1991 (see table 17, Appendix). The size of the agricultural sector and its vulnerability to the vagaries of the monsoon cause relatively large fluctuations in the sector's contribution to GDP from one year to another (see Crop Output, ch. 7).
In FY 1991, the contribution to GDP of industry, including manufacturing, construction, and utilities, was 27.4 percent; services, including trade, transportation, communications, real estate and finance, and public- and private-sector services, contributed 39.8 percent. The steady increase in the proportion of services in the national economy reflects increased market-determined processes, such as the spread of rural banking, and government activities, such as defense spending (see Agricultural Credit, ch. 7; Defense Spending, ch. 10).
Despite a sometimes disappointing rate of growth, the Indian economy was transformed between 1947 and the early 1990s. The number of kilowatt-hours of electricity generated, for example, increased more than fiftyfold. Steel production rose from 1.5 million tons a year to 14.7 million tons a year. The country produced space satellites and nuclear-power plants, and its scientists and engineers produced an atomic explosive device (see Major Research Organizations, this ch.; Space and Nuclear Programs, ch. 10). Life expectancy increased from twenty-seven years to fifty-nine years. Although the population increased by 485 million between 1951 and 1991, the availability of food grains per capita rose from 395 grams per day in FY 1950 to 466 grams in FY 1992 (see Structure and Dynamics, ch. 2).
However, considerable dualism remains in the Indian economy. Officials and economists make an important distinction between the formal and informal sectors of the economy. The informal, or unorganized, economy is largely rural and encompasses farming, fishing, forestry, and cottage industries. It also includes petty vendors and some small-scale mechanized industry in both rural and urban areas. The bulk of the population is employed in the informal economy, which contributes more than 50 percent of GDP. The formal economy consists of large units in the modern sector for which statistical data are relatively good. The modern sector includes large-scale manufacturing and mining, major financial and commercial businesses, and such public-sector enterprises as railroads, telecommunications, utilities, and government itself.
The greatest disappointment of economic development is the failure to reduce more substantially India's widespread poverty. Studies have suggested that income distribution changed little between independence and the early 1990s, although it is possible that the poorer half of the population improved its position slightly. Official estimates of the proportion of the population that lives below the poverty line tend to vary sharply from year to year because adverse economic conditions, especially rises in food prices, are capable of lowering the standard of living of many families who normally live just above the subsistence level. The Indian government's poverty line is based on an income sufficient to ensure access to minimum nutritional standards, and even most persons above the poverty line have low levels of consumption compared with much of the world.
Estimates in the late 1970s put the number of people who lived in poverty at 300 million, or nearly 50 percent of the population at the time. Poverty was reduced during the 1980s, and in FY 1989 it was estimated that about 26 percent of the population, or 220 million people, lived below the poverty line. Slower economic growth and higher inflation in FY 1990 and FY 1991 reversed this trend. In FY 1991, it was estimated that 332 million people, or 38 percent of the population, lived below the poverty line.
Farmers and other rural residents make up the large majority of India's poor. Some own very small amounts of land while others are field hands, seminomadic shepherds, or migrant workers. The urban poor include many construction workers and petty vendors. The bulk of the poor work, but low productivity and intermittent employment keep incomes low. Poverty is most prevalent in the states of Orissa, Bihar, Uttar Pradesh, and Madhya Pradesh, and least prevalent in Haryana, Punjab, Himachal Pradesh, and Jammu and Kashmir.
By the early 1990s, economic changes led to the growth in the number of Indians with significant economic resources. About 10 million Indians are considered upper class, and roughly 300 million are part of the rapidly increasing middle class. Typical middle-class occupations include owning a small business or being a corporate executive, lawyer, physician, white-collar worker, or land-owning farmer. In the 1980s, the growth of the middle class was reflected in the increased consumption of consumer durables, such as televisions, refrigerators, motorcycles, and automobiles. In the early 1990s, domestic and foreign businesses hoped to take advantage of India's economic liberalization to increase the range of consumer products offered to this market.
Housing and the ancillary utilities of sewer and water systems lag considerably behind the population's needs. India's cities have large shantytowns built of scrap or readily available natural materials erected on whatever space is available, including sidewalks. Such dwellings lack piped water, sewerage, and electricity. The government has attempted to build housing facilities and utilities for urban development, but the efforts have fallen far short of demand. Administrative controls and other aspects of government policy have discouraged many private investors from constructing housing units.
Liberalization in the Early 1990s
Increased borrowing from foreign sources in the late 1980s, which helped fuel economic growth, led to pressure on the balance of payments. The problem came to a head in August 1990 when Iraq invaded Kuwait, and the price of oil soon doubled. In addition, many Indian workers resident in Persian Gulf states either lost their jobs or returned home out of fear for their safety, thus reducing the flow of remittances (see Size and Composition of the Work Force, this ch.). The direct economic impact of the Persian Gulf conflict was exacerbated by domestic social and political developments. In the early 1990s, there was violence over two domestic issues: the reservation of a proportion of public-sector jobs for members of Scheduled Castes (see Glossary) and the Hindu-Muslim conflict at Ayodhya (see Public Worship, ch. 3; Political Issues, ch. 8). The central government fell in November 1990 and was succeeded by a minority government. The cumulative impact of these events shook international confidence in India's economic viability, and the country found it increasingly difficult to borrow internationally. As a result, India made various agreements with the International Monetary Fund (IMF--see Glossary) and other organizations that included commitments to speed up liberalization (see United Nations, ch. 9).
In the early 1990s, considerable progress was made in loosening government regulations, especially in the area of foreign trade. Many restrictions on private companies were lifted, and new areas were opened to private capital. However, India remains one of the world's most tightly regulated major economies. Many powerful vested interests, including private firms that have benefited from protectionism, labor unions, and much of the bureaucracy, oppose liberalization. There is also considerable concern that liberalization will reinforce class and regional economic disparities.
The balance of payments crisis of 1990 and subsequent policy changes led to a temporary decline in the GDP growth rate, which fell from 6.9 percent in FY 1989 to 4.9 percent in FY 1990 to 1.1 percent in FY 1991. In March 1995, the estimated growth rate for FY 1994 was 5.3 percent. Inflation peaked at 17 percent in FY 1991, fell to 9.5 percent in FY 1993, and then accelerated again, reaching 11 percent in late FY 1994. This increase was attributed to a sharp increase in prices and a shortfall in such critical sectors as sugar, cotton, and oilseeds. Many analysts agree that the poor suffer most from the increased inflation rate and reduced growth rate.
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