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The 21st century has seen a huge shift in the Indian economy. India achieved its independence (1947). And India's new independence leaders were firm believers in a glorious socialist future Combined with this outlook and generous Soviet aid packages, India pursued a Soviet-influenced model (1947-91). This included high protectionist tariffs, with extensive Sovietization, including nationalization, creation of new state-owned companies, state intervention, demand-side economics, state ownership of natural resources, burdensome regulation, and a huge, expensive and stifling bureaucracy. India became known as the License Raj. 【Chandrasekhar, et. al.】 It took a real shock to challenge the stattist mindset and embrace markets. And several shocks came at the same time. The success of the Asian Tigers began the debate, especially when Communist China embraced market forces with spectacular results. Then came the dual shock of a severe balance of payments crisis and the implosion of the Soviet Union (1991). Indian leaders in the 1990s finally decided to embrace market forces. The economy of India has remained a mixed economy, but is making a transition from massive government planning and state-owned corporations to more of market economy, albeit still with substantial public sector involvement in important sectors. 【Kaushik】 And in the midst of this, India replaced China as the world's most populace country (2020s). The result of the free market economic reforms of the 1990s has been an enormous expansion of the Indian economy and growth of a prosperous middle class. India has become the world's fifth-largest economy in GDP terms and the third-largest in terms of purchasing power parity. India's economy today is probably the most diverse in the world. There is traditional village farming almost untouched by the modern world along with modern agriculture. There is handicrafts production alongside modern industries. There is also a large, increasingly sophisticated services sector. Much of the growth of the economy in recent years has come in the services sector which is responsible for about half of GDP while using less than one third of the labor force. About half of the work force is still in agriculture, and highly inefficient. Productivity is a small fraction of that in developed countries. A major factor here is the huge number of small holdings. A major aspect of India's economy is the country's extremely low level of per capita income. Only about $2,700 per capita, only about 20 percent of the world average. China which which India is often compared is nearly at the world average--if Chinese data is reliable. The importance of agriculture is why the United Progressive Alliance (UPA) which dominated Indian politics in the early 21st century fashioned a rural economic development effort to build basic infrastructure which was designed to better rural life styles and to reduce rural poverty. The major political parties, both Congress at first as part of the UDP and then the Bharatiya Janata Party (BJP) which replaced the UPA (2014) have reduced controls on once highly restrictive foreign trade and investment regulations. Limits in on foreign direct investment were allowed even in some key sectors (telecommunications). While great improvements have been made, India is hardly an open economy. High tariffs remain in politically sensitive areas (especially agriculture). Gradual progress has been made on further economic reforms, but there are still limits on foreign access to India's vast and expanding market inhibiting needed foreign investment. Privatization of government-owned companies. Despite the huge progress that has been made, there is still substantial populist sentiment resisting free market reforms and important initiatives. This seems to have been a factor in Prime-minister Modi disappointing election results (June 2024).
Many Indians attribute their economic problems to the British colonial era. This may have been a factor, but the fact that independence did not improve the lives of many Indians and Britain as well as other European colonial powers did improve economically during the de-colonial post World War II era, brings some of that dynamic into question. One Brirish economist see a very stable level of per capita income in India during the Mugal, British East India Company, and Raj eras (1700-1950). 【Madison】 There is a general consensus that per cpita income stagnated during the British colonial era, but other authors maintain that there was a much higher levels of per capita income during the Mugal era. 【Bairoch】 Indian economists in particular tend to agree with Bairoch.
India achieved its independence without a war of independence (1947). And India's new independence leaders were form believers in a glorious socialist future Combined with this outlook and generous Soviet aid packages, India pursued a Soviet-influenced model (1947-91). This included high protectionist tariffs, with extensive Sovietization, including nationalization, creation of new state-owned companies, state intervention, demand-side economics, state ownership of natural resources, burdensome regulation, and a huge, expensive and stifling bureaucracy. India became known as the License Raj. 【Chandrasekhar, et. al.】 It took a real shock to challenge the statist mindset and embrace markets. And several shocks came at the same time.
The success of the Asian Tigers began the economic debate among developing , especially when Communist China embraced market forces with spectacular results. Then came the dual shock of a severe balance of payments crisis and the implosion of the Soviet Union (1991). Indian leaders in the 1990s finally decided to embrace market forces. A major step was privatizing many state companies. Here an especially important industry was India's massive steel industry, now the second largest in the world. At the time, the steel industry was the center piece of any industrial economy. The Soviets had played an important role in expanding the steel industry (1950s). The Soviets were massive producers of steel, but not the most technologically advanced and certainly not geared toward profitability. With the growth of socialist thought in America profitability as taken on negative connotations. Railing against profits is ine of President Biden's favorite themes. But without profits, there is no tax revenue for the Government, little innovation, high wages, and expanded job opportunities. The economy of India has remained a mixed economy, but is making a gradual transition from massive government planning and state-owned corporations to more of market economy, albeit still with substantial public sector involvement in important sectors. 【Kaushik】
The result of the free market economic reforms of the 1990s has been an enormous expansion of the Indian economy and growth of a prosperous middle class. India has become the world's fifth-largest economy in GDP terms and the third-largest in terms of purchasing power parity. India's economy today is probably the most diverse in the world. There is traditional village farming almost untouched by the modern world along with modern agriculture. There is handicrafts production alongside modern industries. There is also a large, increasingly sophisticated services sector. Much of the growth of the economy in recent years has come in the services sector which is responsible for about half of GDP while using less than one third of the labor force. And in the midst of this, India replaced China as the world's most populace country (2020s). We begin to see substantial levels of economic growth as a result of the market reforms (late -1990s). Growth hit 7 percent (1997). India has averaged economic growth of 6-7 percent in the 21st century (2000-20), although the Covid Pandemic was an outlier (2020). 【MOSPI】
Despite market reforms. India still has a very substantial public sector. As in China, The high growth levels come almost entirely from the private sector. There are some 1,900 public sector companies. 【Sankhe, et.al】 The Indian Government owns and operates the rail system and the highways. Much of the Indian economy was nationalized after independence in the belief that they could be made more efficient and generate more income for the general public. Of course just the opposite happened. The Indian Government thus has a majority stake in banking, insurance, dairy, fertilizers and chemicals, airports, nuclear, mining, digitization, defense, steel, rare earths, water, electricity, oil and gas industries and power plants. There is also substantial control over digitization, Broadband, telecommunication, space, port, and shipping industries. The Government did control the important steel, industry,the second largest in the world, but it was privatized as part of the free market reforms (1900-91).
A major aspect of India's economy is the country's extremely low level of per capita income. Only about $2,700 per capita, only about 20 percent of the world average. China which which India is often compared is nearly at the world average--if Chinese data is to be believed--a tenuous proposition. We note extensive discussion of the Indian economy both domestically and given the importance of India in international fora. One subject not extensively discussed is why the country's per capita income i so low. While there are no doubt a range of issues we believe the major factors are 1) the huge agricultural sector and 2) India's era of socialist policies and continued importance of the public sector. We note various efforts to define and redefine poverty. Some are the work of government with the alterior motive of being able to say they have made progress in reducing poverty. Some are the work of socialist influenced authors unwilling to admit the huge role of capitalism in reducing poverty. Per capita income is not a perfect metric of poverty, but ant definition of poverty that does not include per capita income as a core metric has to be viewed with suspicion. Indian governments have reported huge progress in reducing poverty. And a great deal of that is true, but we suspect at least some comes as a result redefining poverty.
About half of the work force is still in agriculture, and highly inefficient. Productivity is a small fraction of that in developed countries. A major factor here is the huge number of small holdings. The importance of agriculture is why the United Progressive Alliance (UPA) which dominated Indian politics in the early 21st century fashioned a rural economic development effort to build basic infrastructure which was designed to better rural life styles and to reduce rural poverty. While conditions have improved in recent years, the vast majority of the problem exists in rural areas. This where tribal peoples predominately live who are part of the problem. But another part of the problem is a range of socialist reforms. With independence came land reform. There was no national land reform program. This became a state effort and thus land reform programs were varied. The most wide spread and often lauded program was that of Communist controlled Kerala. Their land reform program distributed land with plots no larger than 5 acres. Now this succeed in providing land to a huge number of landless peasants, it created a serious problem. Farms no larger than 5 acres are not economically viable. They are enough for subsistence agriculture, feeding the family, but they do not produce much of a surplus and they do not provide enough land for the owner to mechanize and adopt other modern methods to increase production and lower production costs. The average American farm is about 450 acres. The American farmer with this area cab afford electrification, tractors, harvesters, and other equipment which enables him to produce large quantities of food at low cost. The inland farmer with a maximum of 5 acres can don none of that. In addition, there is huge political support for this system. Farmers are not about to give up their 5 acres and is huge resistance to any change in the system. These farmers lobby for increased aid, but there is simply no way to make a 5 acre farm efficient.
The major political parties, both Congress at first as then as part of the UDP and then the Bharatiya Janata Party (BJP) which replaced the UPA (2014) have participated in the liberalization process. They reduced controls on once highly restrictive foreign trade and investment regulations. Limits in on foreign direct investment were allowed even in some key sectors (telecommunications). While great improvements have been made, India is hardly an open economy. High tariffs remain in politically sensitive areas (especially agriculture).
India has may resources. Energy is not one of them. The country's single largest import is energy, especially oil ad to a lesser extent natural gas. Incrseas in prices can significantly impact the Indian economy and growth rates. India does have coal. Some 70 percent of India's energy production comes from coal. And while India does have coal, it still has to imprt coal. And coal is the worse of the fossil fuel in terms. India has become the third largest emitter of greenhouse gases behind China and the United States. China is by far the klargest emitter, nearly four times that of India. The United states has begin to reduce emissions. China and India continue to increase. The result is horrible air pollution in he major cuties, especially Mumbai.
India is a densely populated country, one of the most densely populated in the world. The country already has the world's largest population. And that population continues to grow. India like China attempted to control population growth, mist notably under Indira Gandhi (1980s). India is, however, a democracy. And the one-child policy that China aggressively implemented was not possible in India.
It is a question as to just how many people the Indian land mass can sustain with existing technology. Thanks to the American-generated Green Revolution, India is now self sufficient in food, but some authors estimate that with the growing population, India will have to begin importing food by 2030. Technological advances seem unlikely given the structure of Indian agriculture with large numbers of very small inefficient plots. Efficiency is only part of the problem. A major part of the problem is water. China is having a similar problem. They are redirecting water from the wet south to the dry north. India does not have that option. And it faces the reality that some of India's major rivers flow south from the Chinese-controlled Tibetan highlands. The most important is the Brahmaputra which China has begun to dam. Bit it is not just water for agriculture that is important. There are already whole cities that have run out of water and it has to be trucked in to supply the population. Desalinization is an option. Wealthy countries like Saudi Arabia and Israel can afford it. India can not. .
Subsidies are a growing part of national government spending. The largest are for food, petroleum, and fertilizer.
Gradual progress has been made on further economic reforms, but there are still limits on foreign access to India's vast and expanding market inhibiting needed foreign investment. Many state-owned industries like the steel industry have been privatized, by the country still has a sizeable state sector. There has been a significant expansion of manufacturing although not at the Chinese level Chairman Xi's embrace of Wolf Diplomacy has caused western companies to seek alternatives to China. India is a beneficiary of this, although India is by no means an open economy thus restricting benefits that might accrue. es through late 2008. India has become a factor in the high tech industries. Here education system has produced skilled men and women that offer software services and workers. The fact that English is a kind of defacto national language is a factor in the country's success. Despite the huge progress that India has made, there is still substantial populist sentiment resisting free market reforms and important initiatives. This seems to have been a factor in Prime-minister Modi's disappointing election results (June 2024).
Bairoch, Paul (1995). Economics and World History: Myths and Paradoxes (University of Chicago Press: 1995)..
Chandrasekhar, C. P., Chang Kyung-Sup, Ben Chang, Ben Fine, and Linda Weiss (eds.) "From Dirigisme to Neoliberalism: Aspects of the Political Economy of the Transition in India" in Developmental Politics in Transition: The Neoliberal Era and Beyond International Political Economy Series (London: Palgrave Macmillan, 2012), pp. 140–65).
Ministry of Statistics and Programme Implementation (MOSPI). Government of India. The data has been worked up for the Wikipedia page on the Economy of India showing exponential growth in the first decades of the 21st century.
Kaushik, Surendra K. "India's Evolving Economic Model: A Perspective on Economic and Financial Reforms," The American Journal of Economics and Sociology Vol. 56, No. 1 (1997), pp. 69–84.
Kelegama, Saman and Kirit Parikh. Political Economy of Growth and Reforms in South Asia (2000).
Maddison, Angus. Contours of the World Economy I-2030AD (Oxford University Press: 2007).
Sankhe, Shirish, Anu Madgavkar, Gautam Kumra, Jonathan Woetzel, Sven Smit, and Kanmani Chockalingam. India's Turning Point: An Economic to Spur Growth and Jobs (McKinsey Global Institute: 2020)..
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