In the 18th century, India was a chief actor in the global textile export market. However, by 1850, it had lost not only a substantial share of its export market but also the local Indian domestic market. Other than the textile industry, other local industries also suffered some decline.
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As a result, India was forced to undergo a secular de-industrialization. In 1750, India produced 25 percent of the worlds industrial output. Surprisingly, by 1900 it was only able to produce 2 percent.
Deindustrialization of India’s Economy
The decline of indigenous industry was associated with the British rule. The nationalists argued that competition with cheap British mill cloth drove Indians out of the handloom industry and into agriculture.
A few contended that this shift was an inevitable result of the cost advantages of British mechanized cotton spinning and weaving, while most pointed to low tariffs on British imports, implicitly suggesting that protection might have promoted the development of an indigenous mill industry. Indias de-industrialization is premised on two theories.
One theory contends that de-industrialization was driven majorly by the fall of the Mughal Empire that resulted in supply constraints in home manufacturing. The other theory suggests that the de-industrialization of Indias economy was a result of the British victory in foreign markets for cottage made manufactures, followed by its penetration in the India’s home market with cheap factory produced manufactures.
Therefore, India suffered negative globalization price shocks in key manufacturing goods. According to Roy (2002, p.4), the latter theory is common among Indian historians.
Decline of the Mughal Empire
The decline of The Mughal Empire stretched over a long period. The political and economic stability it had provided reached its lowest point in middle 18th century. This decline negatively impacted on India’s agricultural productivity. As a result, the grain prices increased compared to tradables like textiles.
The first widely known report of Indian de-industrialization seems to have come from Sir William Bentinck, the governor-general of India from 1833 to 1835. Somewhat later, in the New York Daily Tribune, Marx (1977) referred to “the British intruder who broke up the Indian handloom” (Harnetty 1991, p. 455).
There seems to be plenty of evidence of economic decay in India across the 18th century, and given the huge size of agriculture in all pre-industrial societies, the decay must have had its main source there.
This weak and crumbling empire invited invasions both from without and within. In addition, later historians have equated The Mughal Empire decline to its sharp downward trends in the economy of India while assuming that by the middle of the 18 century, the empire had reached its lowest ebb.
The empire was characterized by war and anarchy for long period with poor economic results being the outcome (Raychaudhuri 1983, p. 5).
As a result of the internal and external wars, regional trade and specialization within the sub continent was suppressed. Those Indian districts that had hither to specialized in textiles and other manufactures and had satisfied there food requirements by grain imports from districts with surplus, began feeling the pinch of rising grain prices.
The demise of the Mughal Empire created a supply shortage for grains in all parts of India resulting in improved wages (Raychaudhuri 1983, p. 6). It is this rise in wages that made India lose its 17th and 18th century competitive advantage as a long time supplier of foreign textile markets. With the arrival of the British, cheap manufactured products were brought into the local Indian market in large quantities (Habib 2002, p. 341).
The Globalization Shock Theory
The more popular of the two hypotheses being considered here is the one associated with what modern economists would now call globalization shocks. The rise in productivity in European industries spearheaded by Britain led to increased supply of textile and other manufactured goods in the world market. With the excess supply, prices of manufactures began to drop in the world markets.
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Britain started experiencing unfavorable terms of trade, its exports of manufactures significantly dropped relative to its imports (Mitchell & Deane 1962, p. 102). The drop in prices of textile products negatively affected India’s textile producers that were already well integrated into the world textile market.
Failing to keep up the factory-based productivity growth achieved abroad, the Indian textile industry took the price hit, became less profitable and contracted. De-industrialization followed. Due to the decline of trade barriers between India and her foreign markets especially Britain, prices of industrial products fell compared to Indian exports (Mohammed & Williamson 2004, p.18).
The supply of India’s manufactured goods was further driven down by high domestic transport costs, compared to overseas transport improvements. This resulted into high export prices in the home market.
These world market amalgamation tendencies were induced by transport revolutions and their outcome was a drop in the import sector and a boom in the export sector. Having defeated India in export markets by 1800, India’s de-industrialization was inevitable.
Indias Industrial Sector at the Time of its Independence 1947
At Independence in 1947, private foreign capital dominated the narrow industrial base in India. It was three quarters British-owned, concentrated mostly in extractive industries and trade, and managed by expatriate Europeans. The continued dominance of these colonial enterprises was largely opposed by the nationalists.
The small but growing Indian business houses envisioned a future in which foreign interests would be curtailed, and Indian industry and markets reserved for swadeshi (that is, domestic) capital. Early statements of government policy echoed these interests.
The Industrial Policy Resolution of 1948, while conceding that participation of foreign Capital and enterprise will be of value to the rapid industrialization of the country, demanded that the conditions under which it may participate be carefully regulated in the national interest.
The industrial policy of 1947 was largely meant to neutralise the negative effects of colonialism. After independence, India adopted a very ambitious plan for the development of the industrial sector. It developed policies that were friendly to new industries with the aim of expanding existing industries.
India undertook the following measures: protection from imports in order to allow Indian industries to engage in the manufacturing of a various products given the ready market for these products in India. For items that could not be found within India, they were imported through a strictly controlled import policy. In the second and third industrialization plan, great attention was directed towards the manufacture of industrial goods.
India was in need of machines that could aid the production of other machines. The country therefore encouraged the starting of small companies by providing support such as offering credit facilities, financial and infrastructural support, special incentives for setting up industries in backward areas and offer of different central excise tax levies for the small-scale sector among other forms of help.
Indias Recent Economic Growth
In the 1980s, India’s growth sped up from a moderate or slow rate prior to that decade and has since ranked among the highest in the world. According to Panagariya (2005, p. 5), the economic policy reforms in the 1990s were not key to India’s growth performance in that decade. He argues that India’s growth surge is properly understood as beginning in the 1980s, before the 1991 and subsequent economic reforms.
Based on a careful examination data, Panagariya reaches three conclusions about India’s growth experience in the last 25 years. That growth during the 1980s was inconsistent, with the last three years of that decade contributing 7.6 per cent annual growth, without which growth in the 1980s was only marginally better than that of the previous three decades.
That the high growth in the last three years of the 1980s was preceded or accompanied by significant economic reform, including trade and industrial policy liberalization. Lastly, growth in the 1980s was fuelled by expansionary policies that entailed accumulation of a large external debt and contributed to an economic crisis.
Panagariya’s conclusion from his review of policy changes and growth performance is that “the 1991 market reforms and subsequent liberalizing policy changes that helped sustain growth”. Ultimately, the positive impact of economic policy reforms seems to have been accepted.
For example, while Rodrik and Subramanian (2004b, p.35) use a growth accounting methodology to evaluate and project India’s growth performance, which de-emphasizes economic liberalization policies, they do not dismiss such policies.
In addition, they also attribute productive growth directly to reforms that removed the “shackles on the private sector”. The case of IT illustrates the positive impact of the 1990s reforms, with telecommunications reform and liberalization leading the way for that sector.
One of the best-known, most successful participants in this industry has documented the positive impact of liberalization, including general steps to ease the conduct of business (Murthy 2004, p12).
While Panagariya shows that average growth rates are very sensitive to how one divides the period. Under consideration, one might argue that the data itself should be allowed to reveal when growth acceleration occurred for India, rather than being determined subjectively.
Difference between Pro business and Pro market policies
Pro business policies are policy that results in the government being friendly toward certain sectors or businesses in the economy while ignoring others. For example, after independence, the Indian government gave various subsidies to local manufacturing industries to promote their growth.
On the contrary, pro market policies are based on Adam smiths concept of free market where companies and entrepreneurs are given the freedom to reflect and manufacture without government interference.
Institutional and Historical conditions that Account for the Chinese Approach to Economic Reforms
There were four reasons why the time was ripe for reform. First, the Cultural Revolution was very unpopular, and the party and the government had to distance themselves from the old regime and make changes to get the support of the people. Second, after years of experience in economic planning, government officials understood the shortcomings of the planning system and the need for change.
Third, successful economic development in other parts of Asia including Taiwan, Hong Kong, Singapore, and South Korea demonstrated to Chinese government officials and the Chinese people that a market economy works better than a planned economy.
This lesson was reinforced by the different rates of economic development between North and South Korea, and between countries in eastern and Western Europe. Fourth, for the reasons stated above, the Chinese people were ready for and would support economic reform.
Given these four reasons, was economic reform in 1978 inevitable? Yes. The first two reasons alone were sufficient to motivate the government to initiate reform. The Cultural Revolution made the government so unpopular that both it and the people badly wanted change. The direction of change was clear because economic planning was recognized to be a failure (Chow 2002, p. 47-48).
China started its reforms with the agricultural sector. Given the structure of the economy at that time, the agricultural sector was probably the appropriate place to begin. About 80 percent of the Chinese population worked in agriculture (Li et al. 1999, p. 25)
On the political side, the reforms had the support of both the Chinese people and of government officials. They had seen the failures of central planning and the excesses of the Cultural Revolution and therefore desired a different course. Certainly, there were elements of the Communist Party that were opposed to market reforms. The gradualness of the reforms themselves probably helped keep the opposition at bay.
The economy in the early stages was still substantially centrally controlled. Further, Deng’s leadership was critical in keeping the anti-reform forces from moving into a position where they could control policy. For example, he continually tried to downplay what was happening (Li et al. 1999, p. 130).
From the findings above, it can be concluded that India was a prosperous industrial economy before the advent of the imperialists. The de-industrialization that India underwent was largely as a result of colonialism. After her independence, it took serious reforms and is currently the leading economy in the provision of services.
On the other hand, China adopted a gradual process to industrialization because the citizens and leadership of the republic of china were afraid that a sudden shift to capitalism could erode all their lifetime gains they had acquired under Chinese socialism.
Though the pace of reforms was gradual, it has emerged as a powerful force in the manufacturing sector. Britain outshined and colonized them in the 18th century because it had a more developed human resource, superior organizational change and technology.
List of References
Chow, G 2002, China’s economic transformation, Blackwell Publishing, Oxford.
Habib, I 1975, Colonization of the Indian economy, 1757-1900, Blackwell Publishing, Oxford.
Harnetty, P 1991, Deindustrialization revisited: The handloom weavers of the central provinces of India c.1800-1947, Modern Asian Studies, vol. 23, no. 3, pp.455-510.
Li, S et al. 1999, WTO: China and the world, China Development Publishing Company, Beijing.
Marx, K 1977, Capital, Vintage Books, New York.
Mitchell, B & Deane, P 1962, Abstract of British historical statistics, Cambridge University Press, Cambridge.
Mohammed, R & Williamson, J 2004, Freight Rates and Productivity Gains in British Tramp Shipping 1869-1950, Explorations in Economic History, vol. 41, pp.173-203.
Murthy, N 2004, The impact of economic reforms on industry in India: A case study of the software industry, in India’s emerging economy: Performance and prospects in the 1990’s and beyond, MIT Press, Cambridge.
Panagariya, A 2005, The Triumph of India’s Market Reforms: The Record of the 1980s and 1990s, Policy Analysis, November 7, no. 554
Raychaudhuri, T 1983, The Cambridge economic history of India, II, Cambridge University Press, Cambridge.
Rodrik, D & Subramanian, A 2004b, Why India can grow at 7 per cent a year or more: Projections and reflections, Economic and Political Weekly, April 17.
Roy , T 2002, Economic History and Modern India: Redefining the Link, Journal of Economic Perspectives , vol. 16, pp. 109-30.