Characteristics of Indian Economy : Before and After Independence

Urban Indian economy after 1858

During this period, the Indian economy essentially remained stagnant, growing at the same rate (1.2%) as the population.  India also experienced deindustrialization during this period. Compared to the Mughal era, India during the British colonial era had a lower per-capita income, a large decline in the secondary sector, and lower levels of urbanization. India’s share of the world economy and share of global industrial output declined significantly during British rule.

Some of the important features of Indian urban economy during this period are as follows:


In the seventeenth century, India was a relatively urbanised and commercialised nation with a buoyant export trade, devoted largely to cotton textiles, but also including silk, spices, and rice. India was the world’s main producer of cotton textiles and had a substantial export trade to Britain, as well as many other European countries, via the East India Company. Yet as the British cotton industry underwent a technological revolution during the late 18th to early 19th centuries, the Indian industry stagnated and deindustrialized. India also underwent a period of deindustrialization in the latter half of the 18th century as an indirect outcome of the collapse of the Mughal Empire.  Even as late as 1772, Henry Patullo, in the course of his comments on the economic resources of Bengal, could claim confidently that the demand for Indian textiles could never reduce, since no other nation could equal or rival it in quality. However, by the beginning of the nineteenth century, a beginning of a long history of decline of textile exports is observed .

A commonly cited legend is that in the early 19th century, the East India Company (EIC), had cut off the hands of hundreds of weavers in Bengal in order to destroy the indigenous weaving industry in favour of British textile imports (some anecdotal accounts say the thumbs of the weavers of Dacca were removed). However this is generally considered to be a myth, originating from William Bolts’ 1772 account where he alleges that several weavers had cut off their own thumbs in protest at poor working conditions. Several historians have suggested that that the lack of industrialization was because India was still a largely agricultural nation with low wages levels, arguing that wages were high in Britain so cotton producers had the incentive to invent and purchase expensive new labour-saving technologies, and that wages levels were low in India so producers preferred to increase output by hiring more workers rather than investing in technology. Several economic historians have criticized this argument, such as Prasannan Parthasarathi who pointed to earnings data that show real wages in 18th-century Bengal and Mysore were higher than in Britain. Workers in the textile industry, for example, earned more in Bengal and Mysore than they did in Britain, while agricultural labour in Britain had to work longer hours to earn the same amount as in Mysore. According to evidence cited by the economic historians Immanuel Wallerstein, Irfan Habib, Percival Spear, and Ashok Desai, per-capita agricultural output and standards of consumption in 17th-century Mughal India was higher than in 17th-century Europe and early 20th-century British India.

British control of trade, and exports of cheap Manchester cotton are cited as significant factors, though Indian textiles had still maintained a competitive price advantage compared to British textiles up until the 19th century. Several historians point to the colonization of India as a major factor in both India’s deindustrialization and Britain’s Industrial Revolution. British colonization forced open the large Indian market to British goods, which could be sold in India without any tariffs or duties, compared to local Indian producers who were heavily taxed, while in Britain protectionist policies such as bans and high tariffs were implemented to restrict Indian textiles from being sold there, whereas raw cotton was imported from India without tariffs to British factories which manufactured textiles from Indian cotton. British economic policies gave them a monopoly over India’s large market and raw material such as cotton. India served as both a significant supplier of raw goods to British manufacturers and a large captive market for British manufactured goods.

Decrease in the share of world GDP

India’s share of the world economy went from 24.4% in 1700 to 4.2% in 1950. India’s GDP (PPP) per capita was stagnant during the Mughal Empire and began to decline prior to the onset of British rule.India’s share of global industrial output also declined from 25% in 1750 down to 2% in 1900. At the same time, the United Kingdom’s share of the world economy rose from 2.9% in 1700 up to 9% in 1870,and Britain replaced India as the world’s largest textile manufacturer in the 19th century. Mughal India also had a higher per-capita income in the late 16th century than British India had in the early 20th century, and the secondary sector contributed a higher percentage to the Mughal economy (18.2%) than it did to the economy of early 20th-century British India (11.2%). In terms of urbanization, Mughal India also had a higher percentage of its population (15%) living in urban centers in 1600 than British India did in the 19th century.

number of modern economic historians have blamed the colonial rule for the dismal state of India’s economy, with investment in Indian industries limited since it was a colony. Under British rule, India experienced deindustrialization, the decline of India’s native manufacturing industries. The economic policies of the British Raj caused a severe decline in the handicrafts and handloom sectors, with reduced demand and dipping employment; the yarn output of the handloom industry, for example, declined from 419 million pounds in 1850 down to 240 million pounds in 1900. Due to the colonial policies of the British, the result was a significant transfer of capital from India to England, which led to a massive drain of revenue rather than any systematic effort at modernisation of the domestic economy.

Development of Railway

British investors built a modern railway system in the late 19th century—it became the then fourth largest in the world and was renowned for quality of construction and service. The government was supportive, realising its value for military use, as well as its value for economic growth. All the funding and management came from private British companies. The railways at first were privately owned and operated, and run by British administrators, engineers and skilled craftsmen. At first, only the unskilled workers were Indians. A plan for a rail system in India was first put forward in 1832. The first train in India ran from Red Hills to Chintadripet bridge in Madras in 1837. It was called Red Hill Railway. It was used for freight transport only. Few more short lines were built in 1830s and 1840s but they did not interconnect and were used for freight transport only. The East India Company (and later the colonial government) encouraged new railway companies backed by private investors under a scheme that would provide land and guarantee an annual return of up to five percent during the initial years of operation. The companies were to build and operate the lines under a 99-year lease, with the government having the option to buy them earlier. In 1854 Governor-General Lord Dalhousie formulated a plan to construct a network of trunk lines connecting the principal regions of India. Encouraged by the government guarantees, investment flowed in and a series of new rail companies were established, leading to rapid expansion of the rail system in India.

In 1853, the first passenger train service was inaugurated between Bori Bunder in Bombay and Thane, covering a distance of 34 km. The route mileage of this network increased from 1,349 km in 1860 to 25,495 km. in 1880 – mostly radiating inland from the three major port cities of Bombay, Madras, and Calcutta. Most of the railway construction was done by Indian companies supervised by British engineers. The system was heavily built, in terms of sturdy tracks and strong bridges. Soon several large princely states built their own rail systems and the network spread to almost all the regions in India. By 1900 India had a full range of rail services with diverse ownership and management, operating on broad, metre and narrow gauge networks.


The Great Depression The worldwide Great Depression of 1929 had a small direct impact on India, with relatively little impact on the modern secondary sector. The government did little to alleviate distress, and was focused mostly on shipping gold to Britain. The worst consequences involved deflation, which increased the burden of the debt on villagers while lowering the cost of living. In terms of volume of total economic output, there was no decline between 1929 and 1934. Falling prices for jute (and also wheat) hurt larger growers. The worst hit sector was jute, based in Bengal, which was an important element in overseas trade; it had prospered in the 1920s but was hard hit in the 1930s. In terms of employment, there was some decline, while agriculture and small-scale industry also exhibited gains.The most successful new industry was sugar, which had meteoric growth in the 1930s.

Economic development since independence objectives and achievements of planning

Objectives of Planning

Economic Growth and Development

Every five-year plan had a growth target that had to be achieved by the end of the planning period. In order to bring about an improvement in standard of living of the people, the per capita income has to rise. A rise in per capita income is necessary to overcome the problems of poverty and its effects.

Increase in Employment

The developing economies generally suffer from open unemployment and disguised unemployment. India is no exception to it. Slow growth of the agricultural sector and lack of investments in the industrial sector are major causes for high levels of unemployment in the country. Measures have been taken in every five- year plan to create employment opportunities, thereby, increasing labor productivity.

Increase in Investment

Economic growth cannot be achieved unless adequate investments are made to bring about an increase in output capacity. Investments help in creating employment opportunities. One of the objectives of planning is, thus, to push up the rate of investment to ensure smooth flow of capital to various sectors of the economy.

Social Justice and Equity

The five-year plans also focused on reducing inequalities in the distribution of income in order to ensure social justice. Prevalence of inequalities in the economy results in exploitation of the poor wherein the rich become richer and the poor become poorer.

Balanced Regional Development

In India, there exists a wide gap in the development of different states and regions. While Gujarat, Tamil Nadu, Maharashtra etc., enjoy high levels of development, there are states like Bihar, Odisha, Nagaland etc., which remain backward. Planning aims at bringing about a balanced regional development by diverting more resources to the poor and backward regions.


Modernisation refers to a shift in the composition of output, innovation and advancement in technology. Modernisation helps an economy to advance at a faster pace and compete with the developed nations of the world. The objective of planning is to encourage and incentivise investments into various sectors of the economy, especially the industrial sector, to help them adopt new technologies and thus, increase efficiency.



First Five-Year Plan:

It was formulated for the period 1951-56, when India was confronting the problems of huge influx of refugees, food shortage and severe inflation. The plan, thus, focused on the primary sector, that is, the agricultural sector to increase the food production in India to overcome the crisis.

The monsoon was favorable to agriculture in those years and therefore, the production increased. The first five-year plan was quite successful as the targeted growth rate was 2.1 percent and the achieved growth rate was 3.6 percent.

Second Five-Year Plan:

It was formulated for the period 1956-61 and it focused on rapid industrialisation. The plan aimed at the development of heavy and basic industries and conceived that agricultural sector could be given lower priority as it has been able to achieve its targets in the previous plan. The second plan achieved only a moderate success due to the severe shortage of foreign exchange on account of huge imports to meet the requirements of the industrial sector. The actual growth rate achieved in the plan was 4.3 percent against the target of 4.5 percent.

Third Five-Year Plan:

It was formulated for the period 1961-66. The third five- year plan was prepared with the mindset that India has entered the ‘take-off stage’ and it is time for it to become a self-reliant and self-generating economy. The plan gave priority to both agriculture as well as the industrial sector.

However, the Indo-China conflict in 1962 and the Indo-Pakistan conflict in 1965 made the plan a complete failure as huge amount of expenditure had to be allocated to meet the defence requirements. The actual growth rate achieved in the plan was 2.8 percent as against the target of 5.6 percent.

The failure of the third plan led to the formulation of three annual plans for the years 1966-67, 1967-68 and 1968-69, before the launch of the fourth plan. The period from 1966 to 1969 was, therefore, termed as “Plan Holiday”. It was during this period that green revolution was introduced to overcome the food crisis. Green revolution advocated the use of high-yielding variety of seeds, fertilizers, pesticides and extensive use of irrigation.

Fourth Five-Year Plan:

It was formulated for the period 1969-74 and had two basic objectives growth with stability and progressive achievement of self-reliance. It stressed upon the growth of the agricultural sector and it was during this period that various family planning measures were introduced to control the rising population.

While the plan aimed at a highly ambitious growth rate of 5.7 per cent, it could achieve only 3.3 percent. This failure could be attributed to the huge influx of refugees from Bangladesh and the Indo-Pakistan war in 1972.

Fifth Five-Year Plan:

It was formulated for the period 1974-79 and proposed two main objectives removal of poverty and attainment of self-reliance. The plan aimed at achieving its objectives by achieving high growth rate, equitable distribution of income and increase in domestic savings. However, the plan was an utter failure due to high levels of inflation.

With the Janta Government taking over the power, the plan was terminated in 1978. The growth rate achieved during this period was 4.8 percent as against the target of 4.4 percent.

The Janta Government formulated the sixth five-year plan for the period 1978-83 with the objective of creating employment opportunities. The Janta Government, to its misfortune, lasted only for two years and was replaced by the Congress Government that came up with a different plan.

The Planning Commission, in the meanwhile, introduced the ‘Rolling Plan’ in 1978, which is said to incorporate three kinds of plans first plan for the current year, second plan for a specific period of 3, 4 or 5 years, according to the needs of the Indian economy and the third plan, for a longer term like 10, 15 or 20 years.

The rolling plan was, however, subjected to many criticisms and was later abandoned with Congress Government coming up with the sixth five-year plan.

Sixth Five-Year Plan:

It was introduced by the Congress Government for the period 1980-85. It was based on Nehru’s model of growth and aimed at a direct attack on the problem of poverty by creating conditions for increasing employment opportunities. Many employment generation schemes such as Training of Rural Youth for Self Employment (TRYSEM) and Integrated Rural Development Programme (IRDP) were introduced.

Though the plan progressed as perceived by the planners during the first four years, a severe famine occurred in the fifth year i.e., 1984-85. Therefore, the agricultural output declined drastically. However, the economy still managed to grow at 5.7 percent as against the target of 5.2 percent.

Seventh Five-Year Plan:

It was formulated for the period 1985-1990 and it aimed at accelerating food grain production, creating employment opportunities and raising labor productivity. The focus of the plan was on ‘food, work and productivity’. The plan was quite successful and recorded a growth rate of 6 per cent as against the targeted growth rate of 5 per cent.

Eighth Five-Year Plan:

This plan could not be formulated in 1990 due to uncertain political situation at the centre. Therefore, two annual plans for the years 1990-91 and 1991-92 were formulated. During 1991, India had to face severe balance of payment crisis. The debt burden was mounting and the fiscal deficit was widening.

The inflation level was rising and the industrial sector was going through a recession. Because of this crisis and the pressure from International Organisations such as IMF, the government led by P.V. Narasimha Rao introduced the economic reforms in 1991, post which the eighth plan was launched in 1992 for the period 1992-97 reflecting the reforms with various structural adjustment policies.

The role of the private sector increased and several liberalisation measures were introduced. As a result, the growth rate was the highest as compared to the previous plans. The eighth plan achieved a growth rate of 6.8 percent as against the targeted growth rate of 5.6 percent.

Ninth Five-Year Plan:

It was formulated for the period 1997-2002 and its aim was to achieve “growth with social justice and equality”. The plan recognised the critical role of the state in the social sectors such as health care, education and infrastructure, since the market forces, by themselves, may not make these areas attractive to the private sector.

The plan stressed upon the need for public investment in these areas. The ninth plan aimed at a GDP growth rate of 7 percent. However, due to poor performance of the economy during 1997-98, the growth target was revised to 6.5 percent. Yet, the target could not be achieved and the economy grew only at a rate of 5.4 percent.

Tenth Five-Year Plan:

It was formulated for the period 2002-2007. It was realised that the development goals cannot be achieved by targeting the economic growth alone. Therefore, the tenth five year plan set forth measurable targets on development indicators such as infant mortality rate, literacy, access to electricity, sanitation facilities, sustainable food production and environment.

The tenth plan targeted a growth rate of 8 percent. Further, it laid down targets for each state to ensure balanced development. The tenth plan was, however, not successful in terms of poverty reduction, generating employment opportunities and performance of agricultural sector. Many poor states faced decelerating growth.

Thus, the plan was not successful in bringing about balanced regional development as well. The plan also failed to achieve its target on infant mortality and maternal mortality rate. The tenth plan recorded a growth rate of 7.6 percent as against the targeted growth rate of 8 percent.

Eleventh Five-Year Plan:

It was formulated for the period 2007-2012 and the plan document was titled “Towards faster and more inclusive growth”. With the objective of achieving fast and inclusive growth, the eleventh plan had set targets for various socio-economic indicators.

It aimed at achieving a GDP growth rate of 9 percent, agricultural growth rate of 4 percent, generating 58 million employment opportunities, increase in wages of unskilled laborers, reduction in poverty by 10 percent, reduction in drop-out rate, increasing literacy to 85 percent, reducing gender gap, infant mortality rate and total fertility rate, reducing malnutrition among children, provision of safe drinking water, improvement in sex ratio, development of infrastructure and communication.


Twelfth Five-Year Plan


It was formulated for the period 2012-2017 and it focused on achieving faster, inclusive and sustainable growth. It aimed at achieving an inclusive growth by reducing poverty, reducing inequality, empowering people and by bringing in balanced regional development. The goals towards sustainable development focused on environmental sustain ability, improvements in health and education sector and development of physical infrastructure such as transport, telecommunication, power etc.  It had set a growth target of 8 percent and had set monitor able targets for poverty, education, health, infrastructure, environment and sustainability. It also aimed at providing banking services to 90 percent of the households and introduced Adhaar based direct cash transfer of subsidies and welfare payments.  The Planning Commission was replaced by the think tank called NITI Aayog (National Institution for Transforming India). The appraisal of the twelfth five year plan is now the responsibility of the NITI Aayog. Further, it has also been stated by the Vice Chairman of the NITI Aayog, Mr. Arvind Panagariya that the five year plans would now terminate with the end of the twelfth five-year plan and would be replaced by three documents.


Basic characteristics of Indian Economy as a developing economy

Low per capita income: 

In India, the national income and per capita income is very low and it is considered as one of the basic features of underdevelopment. As per World Bank estimates, the per capita income of India stood at only $ 1900 in 2017.

Excessive dependence of agriculture and primary producing

Indian economy is characterised by too much dependence on agriculture and thus it is primary producing. Out of the total working population of our country, a very high proportion of it is engaged in agriculture and allied activities, which contributed a large share in the national income of our country.

In 2018, nearly 50 per cent of the total working population of our country was engaged in agriculture and allied activities and was contributing about 18.0 per cent of the total national income.

High rate of population growth

India is maintaining a very high rate of growth of population since 1950. Thus the pressure of population in our country is very heavy. This has resulted from a very high level of birth rates coupled with a falling level of death rates prevailing in our country.

In India, the rate of growth of population has been gradually increasing from 1.31 per cent annually during 1941-50 to 2.5 per cent annually during 1971-81 to 2.11 per cent annually during 1981-91 and then finally to 1.77 per cent during 2001-2011.

Thus whatever development that has been achieved in the country, it is being swallowed up by the increased population. Moreover, this high rate of growth of population necessitates a higher rate of economic growth just for maintaining the same standard of living.

Existence of chronic unemployment and under-employment

Rapid growth of population coupled with inadequate growth of secondary and tertiary occupations are responsible for the occurrence of chronic unemployment and under-employment problem in our country. In India, unemployment is structural one, unlike in developed countries, which is of cyclical type.

Here unemployment in India is the result of deficiency of capital. Indian industries are not getting adequate amount of capital for its necessary expansion so as to absorb the entire surplus labour force into it.

Poor rate of capital formation

Capital deficiency is one of the characteristic features of the Indian economy. Both the amount of capital available per head and the present rate of capital formation in India is very low. Consumption of crude steel and energy are the two important indicators of low capital per head in the under-developed countries like India.

Inequality in the distribution of wealth

Another important characteristic of the Indian economy is the mal-distribution of wealth. The report of the Reserve Bank of India reveals that nearly 20 per cent of the households owing less than Rs 1000 worth of assets possess only 0.7 per cent of the total assets.

Low level of technology

Prevalence of low level of technology is one of the important characteristics of an underdeveloped economy like India. The economy of our country is thus suffering from technological backwardness. Obsolete techniques of production are largely being applied in both the agricultural and industrial sectors of our country.

Under-utilisation of natural resources

In respect of natural endowments India is considered as a very rich country. Various types of natural resources, viz., land, water, minerals, forest and power resources are available in sufficient quantity in the various parts of the country.

But due to its various inherent problems like inaccessible region, primitive techniques, shortage of capital and small extent of the market such huge resources remained largely under-utilised. A huge quantity of mineral and forest resources of India still remains largely unexplored.

Lack of infrastructure

Lack of infrastructural facilities is one of the serious problems from which the Indian economy has been suffering till today. These infrastructural facilities include transportation and communication facilities, electricity generation and distribution, banking and credit facilities, economic organisation, health and educational institutes etc.

The two most vital sectors, i.e. agriculture and industry could not make much headway in the absence of proper infrastructural facilities in the country. Moreover, due to the absence of proper infrastructural facilities, development potential of different regions of the country largely remains under-utilised.

Low level of living

The standard of living of Indian people in general is considered as very low. Nearly 25 to 40 per cent of the population in India suffers from malnutrition. The average protein content in the Indian diet is about 49 grams only per day in comparison to that of more than double the level in the developed countries of the world.

Poor quality of human capital

Indian economy is suffering from its poor quality of human capital. Mass illiteracy is the root of this problem and illiteracy at the same time is retarding the process of economic growth of our country. As per 2011 census, 74 per cent of the total population of India is literate and the rest 26 per cent still remains illiterate.

Inadequate development of economic organization

Poor economic organisation is another important characteristic of the Indian economy. For attaining economic development at a satisfactory rate certain institutions are very much essential. As for example, for mobilisation of savings and to meet other financial needs, more particularly in the rural (areas, development of certain financial institutions are very much essential.

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