Indian Economy on the Eve of Independence — Study Notes

1. Introduction

When India gained independence on 15 August 1947, it inherited an economy that had been shaped by nearly two centuries of British colonial rule. The British came to India as traders, but their economic policies - of extracting raw materials, selling manufactured goods from Britain, and remitting large incomes out of the country - left the Indian economy in a state of stagnation and decline. The primary motive of the colonial government was not the welfare of the Indian people but the benefit of the British economy.

By 1947, agriculture employed the overwhelming majority of the population but produced barely enough to feed the people; industry was small, backward and largely confined to consumer goods; the export trade consisted mainly of primary products; and the vast majority of the population lived in poverty, with low incomes, poor health and low literacy. The railways, ports, telegraph and other infrastructure built by the British were designed to serve colonial interests rather than Indian development.

This chapter provides a snapshot of the Indian economy on the eve of independence - its occupational structure, the state of agriculture, industry and foreign trade, the demographic and health situation, and the condition of the people in terms of poverty, education and infrastructure. This picture forms the baseline against which the progress of the Indian economy since independence is measured in the following chapters.

2. The State of Agriculture

At independence, agriculture was the backbone of the Indian economy, employing about 72 percent of the working population and contributing about 50 percent of the national income. Yet the sector was in a pitiable condition for several reasons:

1. Land tenure system: The zamindari system introduced by the Permanent Settlement of 1793 placed the actual cultivators (tenants) at the mercy of absentee landlords (zamindars). The zamindars collected exorbitant rents and had no interest in improving the land.
2. Low productivity: Agricultural yields were extremely low because of outdated methods, poor seeds, inadequate irrigation and ignorance of modern techniques.
3. Lack of irrigation: Only about 20 percent of the cultivated area was irrigated; the rest depended on the uncertain monsoons.
4. Commercialisation of agriculture: Farmers were forced to grow cash crops for export such as indigo, cotton, jute and tea, often at the cost of food crops, and were exploited by intermediaries and moneylenders.
5. Debt and exploitation: The peasants were burdened by heavy debts to moneylenders, which they could rarely repay, and faced poverty and insecurity.

The result was that Indian agriculture remained stagnant, with negligible growth in output, and famines occurred periodically, the Bengal Famine of 1943 being the most tragic, in which millions died.

3. The State of Industry

The industrial sector on the eve of independence was backward and structurally weak. The important features were:

1. Decline of traditional industries: Handicrafts and cottage industries, which once enjoyed world renown, were destroyed by the import of cheap British machine-made goods and by the discriminatory tariff policies of the colonial government.
2. Limited modern industry: Modern factory industry was confined to a few areas - textiles (cotton and jute), sugar, and some basic industries such as steel (Tata Iron and Steel Company set up in 1907), cement and paper. These were mostly controlled by Indian capital in consumer goods.
3. Neglect of heavy industry: The capital goods sector - machine tools, engineering, chemicals - remained almost non-existent, so India depended on imports for machinery and capital goods.
4. Concentration and ownership: Industry was concentrated in a few hands and in a few regions (Bombay, Calcutta, Ahmedabad), and foreign capital had a significant presence in tea, jute, mining and banking.
5. Weak infrastructure for industry: Power, transport and banking facilities were inadequate and oriented towards the needs of the colonial economy.

At independence, therefore, India's industrial base was too small to absorb the growing labour force or to produce the capital goods needed for development.

4. Foreign Trade

The colonial trade policy was designed to turn India into a supplier of raw materials and a market for British manufactured goods. The main features of India's foreign trade at independence were:

1. Exports of primary products: India exported raw materials - cotton, jute, tea, spices, oilseeds and minerals - and imported finished goods like cotton textiles, machinery and electrical goods.
2. Export surplus but exploitation: India ran a constant export surplus, but the surplus was not used to build productive capacity; instead, it was used to pay for the 'home charges' - the expenses of the British administration, army and interest on loans that the East India Company and the British government drained from India.
3. Dominance of Britain: The bulk of India's trade was with Britain, which had a virtual monopoly over it.
4. Neglect of export promotion: No effort was made to diversify exports or to improve the terms of trade.

5. Demographic Situation

The demographic features of India on the eve of independence were those of a typical underdeveloped economy:

1. High birth rate and high death rate: Both the birth rate (about 48 per thousand) and the death rate (about 36 per thousand) were very high, so population growth was modest.
2. Low life expectancy: Life expectancy at birth was only about 32 years.
3. Low literacy: The literacy rate was only about 16 percent, and female literacy was even lower, around 7 percent.
4. Poor health: Widespread poverty, malnutrition, inadequate medical facilities and frequent epidemics kept the general health of the population poor.
5. Dependence on agriculture: About three-fourths of the working population was engaged in agriculture, while industry and services were small.

The infant mortality rate was also very high (about 218 per thousand live births), reflecting the poor living conditions of the people.

6. Occupational Structure

The occupational structure on the eve of independence was highly lopsided. About 72 percent of the working population was engaged in agriculture, only about 10 to 11 percent in industry (manufacturing, mining and construction), and about 17 to 18 percent in services (trade, transport and other services). This dependence on a stagnant agriculture meant that the majority of the people depended on a low-productivity sector for their livelihood, and there was little diversification of the workforce.

The colonial economy did not bring about any significant structural change in the occupational distribution. This imbalance - too many people chasing too little land - was a major cause of rural poverty.

7. Condition of the People

The condition of the Indian people on the eve of independence was extremely poor:

1. Poverty: National income and per capita income were among the lowest in the world. It is estimated that the per capita income grew at less than 0.5 percent per annum during the colonial period.
2. Mass poverty in rural areas: A large part of the rural population lived below the subsistence level, dependent on moneylenders and landlords.
3. Unemployment and underemployment: Open unemployment and, more importantly, chronic underemployment (disguised unemployment) were widespread in agriculture.
4. Inadequate infrastructure: Railways, ports, post and telegraphs existed mainly to serve the export-import needs of the colonial economy; the vast rural areas were neglected. Roads, power and banking facilities were grossly inadequate.
5. Poor health and education: Health facilities were concentrated in cities, and education, with a literacy rate of 16 percent, was beyond the reach of most people.

In summary, the Indian economy at independence was a stagnant, backward and impoverished economy, with a shattered agricultural sector, a truncated industrial base, and a people burdened by poverty, ill-health and illiteracy.

Quick Revision Tables

Mind Map

Important Diagrams (SVG)

Diagram 1: Occupational Structure on the Eve of Independence

Diagram 2: The Drain of Wealth Under Colonial Rule

Common Mistakes

1. Believing that India's export surplus benefited India; the surplus was used to pay home charges and interest, draining wealth out of the country.
2. Forgetting that the zamindari system was introduced by the Permanent Settlement of 1793, making tenants vulnerable to exploitation.
3. Thinking that modern industry flourished under the British; heavy industry was almost absent and handicrafts were destroyed.
4. Confusing the shares: agriculture employed about 72 percent, industry about 10-11 percent and services about 17-18 percent of the workforce.
5. Believing the colonial infrastructure served the Indian people; railways and ports were built for the export-import needs of the colonial economy.
6. Assuming population growth was high before independence; both birth and death rates were high, so growth was modest.
7. Forgetting key figures such as literacy of 16 percent, life expectancy of about 32 years and infant mortality of about 218 per thousand.

Exam Tips

1. Describe the condition of agriculture at independence, highlighting the zamindari system and low productivity.
2. Explain the decline of handicrafts and the backwardness of industry under colonial rule.
3. Analyse the features of India's foreign trade and the concept of the drain of wealth.
4. State the demographic indicators: birth rate, death rate, literacy, life expectancy and infant mortality.
5. Describe the lopsided occupational structure with the 72-10-18 percent shares.
6. Explain the condition of the people - poverty, unemployment, poor health and inadequate infrastructure.
7. Mention that the Bengal Famine of 1943 symbolised the failure of colonial agriculture policy.

Conclusion

This chapter examined the state of the Indian economy on the eve of independence, which forms the starting point of the study of Indian economic development. We saw that agriculture, employing about 72 percent of the workforce, was stagnant under the zamindari system, with low productivity and dependence on the monsoons. Industry was small, with destroyed handicrafts and a negligible capital goods sector. Foreign trade was colonial in character - India exported raw materials and imported manufactured goods, and ran an export surplus that financed the drain of wealth to Britain. The demographic profile was that of an underdeveloped economy with high birth and death rates, low life expectancy and low literacy, and the masses suffered from poverty, unemployment, poor health and inadequate infrastructure. This grim baseline is the reference point for measuring the achievements and failures of development planning since 1950, the subject of the next chapter.