Evolution of the Indian Economy | RBI Grade B Phase 2 Preparation - Bank Exams PDF Download

Economic Condition of India at Independence

• At the time of India's independence, the country's economy was in total chaos.
• India operated as a typical colonial economy, where its resources were used to benefit a foreign power, specifically the United Kingdom.
• Both the agricultural and industrial sectors were poorly structured, with the government playing a minimal role in the economy.
• In the 50 years leading up to independence, other parts of the world, including the UK, were experiencing rapid growth in agriculture and industry due to active government involvement.
• In contrast, India faced a one-sided transfer of investment capital to Britain, often referred to as the "drain of wealth."
• This unfair trade severely harmed India's commerce, trade, and its once-thriving handloom industry.
• The colonial government enacted policies that hindered India's growth.
• Throughout colonial rule, the government's economic vision was to increase India's ability to export raw materials while importing British manufactured goods, aiming to raise funds to cover the capital drain and military expenses.
• The social sector saw little attention from British rulers, negatively impacting the economy's productivity.
• Under British rule, India remained a nation of illiterate farmers, with only 17 percent literacy and a life expectancy of just 32.5 years at independence.
• The British also neglected industrialization in India; infrastructure was developed not for domestic industry but for extracting resources.
• Indian businessmen who did emerge during this time relied heavily on British financial capital, with many industries dominated by British companies, including shipping, banking, insurance, coal, plantations, and jute.
• The period before independence was marked by stagnation, with little to no improvements in production or productivity.
• The total real output in the early 20th century was estimated at less than 2 percent growth per year.
• Economic data shows that there was no per capita growth in India from 1600 to 1870, and only a meager 0.2 percent from 1870 to 1947, compared to 1 percent growth in the UK.
• Per capita incomes were very low, with ₹18 in 1899 and ₹39.5 in 1895, highlighting the severe poverty faced by the Indian people.
• Repeated famines and epidemics in the late 19th and early 20th centuries underscored the British government's neglect and the suffering of the Indian population.
• Political leaders and industrialists were well aware of the economic challenges that India would face after gaining independence.
• Surprisingly, these influential figures shared a common view on several key issues even before independence:
  • Direct Responsibility for Development: There was a strong agreement that the government should directly oversee economic development.
  • Role of the Public Sector: A robust public sector was deemed essential for the economy.
  • Development of Heavy Industries: There was a shared belief in the need to develop heavy industries for economic advancement.
  • Foreign Investment: Discouraging foreign investment was seen as crucial for protecting national interests.
  • Economic Planning: Recognizing the importance of systematic economic planning for guiding development.
• When India achieved independence, the government faced the daunting task of organizing an economy that was in a dire condition with little hope for improvement.
• There was a strong push for growth and development, driven by political leaders and national pride.
• The decisions made by these leaders at this time were critical in shaping India's future.
• Many important decisions that would affect India's economic direction were made by 1956, significantly impacting both the pre-reform and post-reform periods.
• To understand the current state and development of the Indian economy, it is essential to reflect on the factors and events that led to its evolution. 

Prime Moving Force: Agriculture Vs. Industry

The debate on whether agriculture or industry should have been India's prime moving force (PMF) for development is still a topic of discussion among experts. The government initially chose industry as the PMF, but some argue that agriculture could have been a better choice.
Every economy needs to develop by using its natural and human resources, but there are also social and political factors that influence this decision. At the time of independence, India had several challenges that made industrialization difficult, such as:

• Lack of Infrastructure: India had very few facilities like power, transportation, and communication that are essential for industrial growth.
• Absence of Basic Industries: There was a negligible presence of key industries such as iron and steel, cement, coal, crude oil, oil refining, and electricity, which are foundational for industrialization.
• Limited Capital: Both the government and private sector lacked the investible capital needed to kickstart industrial projects.
• Inadequate Technology: There was a lack of necessary technology, research, and development to support industrial activities.
• Skilled Manpower: The country did not have a skilled workforce ready to take on industrial jobs.
• Entrepreneurship: There was a lack of entrepreneurial spirit and initiative among the population.
• Market for Industrial Goods: There was no existing market for industrial products, making it difficult for industries to thrive.
• Socio-Psychological Factors: Various social and psychological factors acted as barriers to proper industrialization.

Given these challenges, agriculture could have been a more suitable PMF for India because:

• Fertile Land: India had ample fertile land suitable for cultivation.
• Ready Workforce: The human capital available did not require extensive training and could have been employed in agriculture with minimal organization.
• By focusing on agriculture, India could have ensured basic needs like food, shelter, and healthcare for the masses, which would have laid the groundwork for further development. Once these basic needs were met, the population would have had the purchasing power to support industrial growth. 
• China took a similar approach in 1949, focusing on its agricultural resources before transitioning to industrialization, which eventually made it a global industrial powerhouse. This raises questions about why India's leadership, particularly under Pandit Nehru, did not make a similar assessment and prioritize agriculture as the PMF. 
• Despite the influence of Gandhian ideals, which emphasized rural development and agriculture, the decision to prioritize industry reflects a different strategic choice. Nehru's vision, while influential, may not have aligned with the immediate realities of India's economic conditions. 
• The choice of industry over agriculture as the PMF remains a debated topic among experts, with different interpretations of India's economic history and decision-making processes at the time. Nehruvian Economics, named after Pandit Nehru, is still recognized today for its role in shaping India's economic policies and priorities in the early years of independence.

Agriculture vs. Industry: The Path Forward

• Agriculture seemed like the obvious choice for India’s primary sector due to its abundant cultivable land and human resources. However, Indian agriculture at the time was reliant on traditional tools and technology.
• Modernizing and eventually mechanizing agriculture would have been difficult without indigenous industrial support.

The Choice of Industry

• By choosing industry as the primary sector focus, India aimed to industrialize the economy while also modernizing agriculture.
• International Support for Industrialization: The global consensus, including organizations like the World Bank and the International Monetary Fund, favored industrialization as a path to faster growth and development.
• Countries opting for industrialization received support and were seen as potential future industrial exporters, while those focusing on agriculture were viewed as “backward.”
• In the 1990s, this perspective shifted, and emphasizing agriculture was no longer seen as a sign of backwardness.

Defense and Industrial Base

• The Second World War demonstrated the importance of defense power, which relies on a strong industrial base and technological capability.
• By prioritizing industry, India aimed to achieve multiple goals:
• Drive economic growth.
• Modernize agriculture rapidly.
• Build a robust defense capability.

Need for Social Change and Modernization

• Even before independence, there was a consensus among social scientists and nationalist leaders that India needed to modernize and break away from traditional practices.
• A scientific outlook and social change were deemed essential for progress, which influenced the political leadership to support industrialization wholeheartedly.

Industrialization’s Proven Efficacy

• By the time India gained independence, the benefits of industrialization were clear, and there was no doubt about its effectiveness as a path for national development.
• IntroductionPMF is an acronym used in the text to indicate the "Prime Mover Factor" which refers to the crucial element or sector that drives the economy. In the context of the Indian economy, the text discusses the shift in policy regarding the PMF from industry to agriculture.
• The text reflects on the historical perspective of India's political leadership and their inclination towards industrialization as the PMF for the economy. It suggests that the resource-related and temperamental realities of India were perhaps overlooked in the pursuit of a future vision of a developed and industrialized nation. 
• The text also mentions the changing global perception of agriculture in the 1990s, highlighting China's success in using agriculture as the PMF to strengthen its economy and transition to industrialization.
• Shift in Economic Thinking In 2002, a significant policy shift occurred in India when the government, guided by the Planning Commission, declared agriculture as the new PMF for the economy, replacing industry. This decision was part of the Tenth Plan (2002-07) and aimed to address three major challenges:
• Food Security: Increasing agricultural production was seen as essential for achieving food security and generating export surpluses in the globalized economy, especially under the World Trade Organization (WTO) regime.
• Poverty Alleviation: Emphasizing agriculture was expected to raise incomes in rural areas, create more employment opportunities, and stimulate growth in the rural economy.
• Timeliness of Recognition: While the global perception of agriculture had begun to shift in the mid-1990s, India recognized its importance as the PMF only in 2002. However, there is now a consensus among experts and policymakers about agriculture's vital role in the Indian economy.
• Agriculture's Role in the Economy Agriculture and allied activities continue to be a major source of livelihood for a significant portion of the Indian population, accounting for 54.5% of employment and contributing 18.8% to the Gross Value Added (GVA) of the economy.
• Industrial Growth and Delayed Agricultural Reforms The text notes that while India began to thrive in the industrial sector following economic reforms, reforms in the agriculture sector were initiated later, around the early 2000s. Three reasons for the delay in agricultural reforms are identified:
• Private Sector Involvement: Agriculture was always open to private sector participation, making it challenging to promote further privatization to encourage investments.
• Need for Corporate Investment: There was a necessity for corporate investment in agriculture to stimulate growth and development in the sector.
• Shift in Focus: The focus needed to shift towards making agriculture more attractive for corporate investment and private sector involvement to drive growth.
• The agricultural sector in India is currently facing significant challenges in terms of reform and modernization. There is a pressing need for a national agricultural market, yet political will among many states to implement the necessary Agricultural Produce Market Committee (APMC) reforms is lacking.

Corporate Investment and Land Acquisition

• Promoting corporate investment in the farm sector is hindered by the absence of an effective and transparent land acquisition law.
• The complexities of existing labor laws also pose a challenge to industrial farming and labor reforms.

Farm Mechanization and Research

• Farm mechanization is impeded by insufficient investment in related industries.
• There is a critical need for private sector investment in research and development, but the current environment is not conducive to such investment.

Supply Chain and Commodity Trading

• The agricultural sector lacks proper downstream and upstream requirements, as well as effective supply chain management for agri-goods.
• There is a need for the expansion of commodity trading in agricultural products.

Global Competition and Farm Viability

• Strengthening the farm sector to compete with agricultural sectors of developed countries is crucial, especially regarding subsidies and prices in a globalized economy.
• Making farming more remunerative is essential to address the contemporary farm crisis.

Federal Maturity and Awareness

• Experts suggest that achieving the right policy steps in the agricultural sector requires a high degree of federal maturity in India.
• Increased awareness among farmers, along with appropriate government support to prevent farm distress, will be instrumental in driving positive change.

Planned and Mixed Economy

After gaining independence, India was established as a planned and mixed economy. The political leadership had envisioned national planning even before independence, recognizing the need to address the regional and inter-regional disparities that had persisted for centuries. The dire poverty of the masses was a crucial factor prompting the government to opt for planning, enabling it to actively allocate and mobilize resources for equitable growth and development.

• Despite being constitutionally a federation of states, the planning process saw an increasing centralization of authority in the Union government, directing and regulating economic activities. This shift was influenced by global events such as the Great Depression and the post-World War II reconstruction, which highlighted the necessity of state intervention in the economy, contrasting with earlier notions of non-interference.
• Additionally, the economic successes of the Soviet Union and Eastern European countries during the mid-20th century further reinforced the idea of a strong state role in the economy to address market failures. For many newly independent developing nations, including India, economic planning became a viable means to mobilize resources and achieve prioritized objectives within a specified timeframe.
• The decision for a planned economy required clarity on its organizational nature—whether it would be a state or mixed economy—since planning was incompatible with a free market system. Inspired by Soviet planning, which was a command economy, the Indian model needed to be adapted to suit its democratic framework and existing private ownership. Prime Minister Jawaharlal Nehru, with his socialist inclinations, emerged as the dominant force behind planning in post-independence India.
• In the early discussions about India's economic planning, there was a need to clearly define the role of the state in the economy. This role would sometimes be similar to that in the Soviet Union and at other times be quite different. At that time (1947), France was an example of a capitalistic democratic system engaged in planning, having moved to a mixed economy by 1944-45. However, France had limited experience to offer Indian policymakers. 
• With a strong desire to accelerate economic growth, the planners in India set out to define the roles of the state and the market in the very first plan. The following lines reflect a forward-thinking approach and clearly outline the scope of the government's role in the economy compared to the private sector.

Role of State and Private Sector in Planning

• The planners believed in a balanced approach where both the state and the private sector had important roles to play. 
• They recognized that while the state would need to intervene in certain areas, the private sector should also be allowed to contribute significantly to production and distribution. This was a practical acknowledgment of the strengths and weaknesses of both sectors at that time.

Evolution of Ideas on State Intervention

• The ideas presented in India's First Plan were ahead of their time. In the following decades, particularly the 1950s and 1960s, there was a global trend favoring state intervention in the economy. 
• However, the experiences of East Asian economies, which achieved high growth rates with a different balance of state and market roles, later influenced the understanding of how to structure economic planning.

East Asian Miracle and Its Implications

• The East Asian Miracle, which demonstrated sustained high growth over three decades, sparked renewed discussions about the roles of the state and the market in economic development. 
• The conclusions drawn from this experience were similar to the views expressed in India’s First Plan. This later alignment showed the relevance and foresight of the initial planning ideas in India.

Planning Approach in a Democratic Setup

• Planning in a democratic context, as envisioned by the planners, meant minimizing the use of coercion or compulsion to realign productive forces. 
• The focus was on utilizing public sector resources for new investments rather than acquiring existing productive capacity. Public ownership of production means might be necessary in certain cases, while public regulation and control could be required in others.

Conclusion

• The early vision for India’s economic planning, as outlined in the First Plan, was about finding the right balance between state intervention and private sector initiative. This balance was crucial for guiding the economy towards sustainable growth while respecting the democratic framework within which planning was to occur. 
• The evolving global perspectives, particularly from successful East Asian economies, later reinforced and refined these initial ideas, showing their enduring relevance.
• In 1951, the true essence of India's mixed economy was outlined, but it underwent a detailed evolution during the 1950s. By the end of that decade, the concept of mixed economy had almost faded away, only to resurface in the mid-1980s and gain prominence in the early 1990s with the advent of economic reforms.
• During the reform process, the government began to modify planning and the functions of the Planning Commission, aiming to redefine the roles of the government and the private sector in the economy. This shift indicated India's increasing reliance on the private sector for promoting growth and development.
• In early 2015, significant changes occurred in India's planning framework when the government replaced the Planning Commission with NITI Aayog, a new economic think tank. This change aimed to overhaul the planning process and method in the country, reflecting India’s six decades of development planning experience.
• NITI Aayog's approach emphasizes cooperative federalism, a bottom-up strategy, holistic and inclusive development, and the need for an Indian model of development, aligning with the changing needs of the economy.

Atmanirbharta Push

Atmanirbhar Bharat Abhiyan aims to make India self-reliant post-COVID-19. It focuses on five key areas: Economy, Infrastructure, Systems, Demography, and Demand. Critics compare it to the old Make in India scheme, but experts see it as a response to the limitations of global supply chains revealed by the pandemic. The initiative also reflects India’s need to rethink its economic model, environmental relationship, and economic diplomacy.

Emphasis on the Public Sector

When India gained independence, there was a clear consensus among the dominant political leaders about the need for a strong and active role of the state in the economy. This led to the establishment of a vast framework of government-controlled enterprises known as public sector undertakings (PSUs).

Rationale Behind PSUs

• Infrastructural Needs: Every economy requires a solid foundation of infrastructure, including power, transportation, and communication. At the time of independence, India lacked these essential components. The private sector was not in a position to invest heavily in and develop these sectors due to the need for substantial capital, technology, skilled manpower, and entrepreneurship. Additionally, there was no market for such infrastructure as the purchasing capacity of the masses was low.
• Industrial Needs: For industrialization to occur, certain core industries, also known as basic or infrastructure industries, are essential. These include sectors like refinery products and electricity, which form the backbone of industrial activity. The government recognized the necessity of investing in these areas to kickstart the industrialization process.

Government's Role

• The government was seen as the only entity capable of managing the heavy investments required for infrastructure development and ensuring the distribution of these essential services to underprivileged areas. This led to the establishment of government monopolies in sectors like power, railways, aviation, and telecommunications.
• The initial focus on public sector investments was driven by the understanding that these sectors were crucial for the overall growth and development of the economy. The expansion of PSUs was viewed as a necessary step to lay the groundwork for a mixed economy where both public and private sectors could eventually thrive.

Basic Industries

The basic industries that are part of the core of the economy are as follows:

• Iron and Steel: 10.30 million tonnes
• Steel: 7.22 million tonnes
• Coal: 4.16 million tonnes
• Crude Oil: 3.62 million tonnes
• Natural Gas: 2.77 million tonnes
• Cement: 2.16 million tonnes
• Fertilisers: 1.06 million tonnes

The basic industries that were part of the core of the economy were responsible for providing the necessary raw materials and inputs for the industrial sector. The quantity produced in these industries was not sufficient to meet the needs of an industrializing nation like India. The private sector at the time lacked the capacity to expand these industries to the required levels. Therefore, it was essential for the government to take the lead in developing these basic industries.

The responsibility of developing the basic industries was taken up by the government because:

• Capital and Technology: Basic industries require a high level of capital, technology, and skilled manpower, which the private sector at the time could not provide.
• Market Demand: Even if the private sector could produce goods from basic industries, they would struggle to sell them due to the low purchasing power of consumers.
• Employment Generation: Public Sector Undertakings (PSUs) were seen as a crucial part of the employment generation strategy, addressing the socio-political need for job creation and poverty alleviation.
• Social Change: The government aimed to use PSUs to implement reservation policies in government jobs for weaker sections of society, promoting social equity and economic change.
• The government of India played a crucial role in the growth of the economy by establishing Public Sector Undertakings (PSUs) after gaining independence in 1947. These PSUs were meant to create a strong industrial base, generate employment, and eventually provide resources for social welfare programs. However, the initial expectations from these PSUs were overly optimistic, leading to challenges in meeting the demands of a growing population and economy.

Challenges in Setting Up PSUs

• Setting up PSUs in capital-intensive sectors was challenging for the government.
• The government relied on various sources to manage funds, including taxation, borrowing, and even printing money.
• High taxation and public indebtedness were justified by the government as necessary for providing employment to the Indian population.

The Trickle-Down Effect

• The government believed that PSUs would create a trickle-down effect, benefiting the masses and promoting overall growth and development.
• Employment in PSUs was seen as a way to spread wealth and opportunities, with PM Nehru referring to them as the "temples of modern India."

Overestimation of Job Creation

• The government committed to providing jobs to every household through PSUs without fully understanding the future labor force requirements.
• This led to an oversupply of labor in many PSUs, draining profits due to high salaries, wages, and pension obligations.

Profit and Social Sector Development

• The government aimed to use profits and dividends from PSUs to fund social goods like education, healthcare, and social security.
• However, many PSUs failed to generate the expected profits and started incurring losses, requiring regular budgetary support.

Rise of the Private Sector

• As PSUs laid the groundwork for infrastructure and basic industries, it paved the way for the emergence of private sector industries.
• Over time, private sector industries began to rise and contribute to the economy.

Role of PSUs in Development

The government of India, after gaining independence, envisioned a crucial role for Public Sector Undertakings (PSUs) in various developmental areas, including:

• Self-sufficiency: Ensuring the country could produce essential goods and services on its own.
• Balanced regional development: Promoting industrial growth in less developed regions to reduce regional disparities.
• Spread of small and ancillary industries: Encouraging the growth of smaller industries that support larger ones.
• Low and stable prices: Helping to maintain affordable prices for consumers.
• Long-term equilibrium in balance of payments: Achieving a stable balance of payments to avoid economic imbalances.

Initial Consensus on PSU Inefficiency

• By the mid-1980s, there was a global consensus, including from the International Monetary Fund (IMF) and the World Bank (WB), that PSUs were inefficient and underperforming. This belief was influenced by the Washington Consensus, which advocated for neo-liberal economic policies.
• As a result, many countries, including India, began privatizing and disinvesting PSUs during this period.

Shift in Perspective

• In the late 1990s, research indicated that private sector companies could also be inefficient and underperforming.
• By the mid-2000s, following events like the US subprime crisis, a new consensus emerged that the state or government did not need to exit the economy entirely. This marked a shift away from aggressive privatization of PSUs.

India's Approach to PSU Disinvestment

• India initially pursued a less ambitious disinvestment strategy, aiming to maintain controlling shares in divested PSUs.
• Starting from the 2016-17 financial year, the Indian government decided to restart strategic disinvestment, which could involve transferring ownership of PSUs to the private sector.
• This policy of disinvestment was first introduced in 2000 but was paused by the United Progressive Alliance (UPA) government in 2005.
• The current government has also allowed for the sale of increased shares of PSUs to foreign institutions, on par with domestic financial institutions.

Policy Advices and Implementation

• Policy recommendations regarding PSU disinvestment have been made in various Economic Surveys and the Union Budget for 2023-24.
• The government is increasingly acting on these policy advices to facilitate disinvestment and strategic changes in PSU ownership.

The recent focus on disinvestment should be understood in the context of several important contemporary realities:

• Promoting Investment: There is a pressing need to promote investment in the economy. Disinvestment can help attract private sector investment and stimulate economic growth.
• Government Prioritization: The government needs to reduce its involvement in undesirable areas of economic activity and expand into areas where private sector participation is lacking, such as welfare actions.
• Revenue Generation: Disinvestment can generate revenue through the sale of stakes, monetization of assets, and increased profits from public sector undertakings (PSUs).
• Enhanced Profit from PSUs: By selling majority stakes in PSUs, the government can relieve itself of the responsibilities of ownership while increasing its share of revenue from these companies. The new private owners are likely to enhance the profitability of the divested PSUs, benefiting the government in the long run.

Recent Developments in the Indian Economy (Up to 2025)

The Indian economy has undergone significant transformation since 2020, driven by the COVID-19 pandemic, subsequent recovery efforts, and strategic policy shifts. Below is a comprehensive update on recent developments as of 2025, tailored for UPSC students to reflect the latest economic trends, policies, and global positioning.

1. Economic Impact of COVID-19 and Recovery

The COVID-19 pandemic marked a turning point for India’s economy:

• GDP Contraction and Rebound: The economy contracted by 7.3% in 2020-21, one of the sharpest declines globally. This was followed by a robust recovery of 8.7% growth in 2021-22, fueled by government stimulus and pent-up demand.
• Stabilization by 2025: By 2025, GDP growth has settled at 6.5-7% annually, reflecting a steady but slower recovery. The pandemic accelerated digital adoption, reshaping sectors like IT and e-commerce, while exposing vulnerabilities in informal sectors and small businesses.

2. Major Policy Changes and Reforms

Post-2020, India introduced transformative policies to bolster economic resilience:

• Atmanirbhar Bharat Abhiyan: Launched in 2020, this self-reliance initiative has driven investments in domestic manufacturing, infrastructure, and key sectors like electronics and renewable energy. It includes stimulus packages worth over ₹20 lakh crore to support MSMEs, agriculture, and healthcare.
• Production-Linked Incentive (PLI) Schemes: These schemes have boosted manufacturing, particularly in mobile phones and pharmaceuticals, attracting companies like Apple and Samsung to expand operations in India.
• Labor and Agricultural Reforms: Labor code reforms aimed at flexibility were introduced, while the controversial 2020 farm laws were repealed in 2021 amid protests, underscoring the challenges of structural reform in politically sensitive sectors.

3. Current Economic Indicators

As of 2025, key economic metrics highlight both progress and persistent challenges:

• GDP Growth: Projected at 6.5-7%, indicating a stable post-pandemic trajectory.
• Inflation: After peaking in 2022-23 due to global supply chain shocks, inflation has moderated to 4.5%, managed through the Reserve Bank of India’s monetary tightening.
• Unemployment: Official rates have improved, but youth unemployment remains high, with the informal sector still recovering. Job creation efforts, such as the PLI schemes, aim to address this gap.

4. Sectoral Developments

The performance of key sectors has evolved significantly:

• Information Technology (IT): The IT sector has emerged as a global leader, with software exports contributing over 10% to GDP by 2025. The pandemic-driven shift to remote work and digital services has solidified its growth.
• Manufacturing: Despite PLI incentives, manufacturing’s GDP share remains below the targeted 25%, with challenges in scaling for global markets. However, electronics and pharma have shown promise.
• Agriculture: Contributing 15% to GDP, agriculture faces climate change and market volatility. Government schemes like MSP and rural income support remain focal points of policy.

5. Global Economic Context and India’s Positioning

India’s role in the global economy has strengthened:

• Supply Chain Shifts: Leveraging US-China tensions, India has positioned itself as an alternative manufacturing hub, particularly in electronics and pharmaceuticals.
• Trade Agreements: New pacts with the UAE, Australia, and enhanced Quad cooperation have boosted trade and geopolitical leverage.
• Challenges: Global disruptions, such as the Russia-Ukraine conflict, have impacted exports in textiles and footwear, while rising energy costs remain a concern.