The post independence era Indian economy from 1947 to 1991 was a mixed economy with an inward looking, centrally planned, interventionist policies and import substituting economic model that failed to take advantage of the post war expansion of trade and that nationalized many sectors of its economy. India s share of global trade fell from 1.3 Percent in 1953 to 0.5 Percent in 1983. This model contributed to widespread inefficiencies and corruption, and it was poorly implemented.
After a fiscal crisis in 1991, India has increasingly adopted free market principles and liberalised its economy to international trade. These reforms were started by former Finance minister Manmohan Singh under the guidance of Prime Minister P.V.Narasimha Rao. They eliminated much of Licence Raj, a pre and post British era mechanism of strict government controls on setting up new industry. Following these economic reforms, and a strong focus on developing national infrastructure such as the Golden Quadrilateral project by former Prime Minister Atal Bihari Vajpayee, the country s economic growth progressed at a rapid pace, with relatively large increases in per capita incomes. The south western state of Maharashtra contributes the highest towards India s GDP among all states, while Bihar is among its poorest states in terms of GNI per capita. Mumbai,Maharashtra is known as the trade and financial capital of India.
Further north, the Saurashtra and Bengal coasts played an important role in maritime trade, and the Gangetic plains and the Indus valley housed several centres of river borne commerce. Most overland trade was carried out via the Khyber Pass connecting the Punjab region with Afghanistan and onward to the Middle East and Central Asia. Although many kingdoms and rulers issued coins, barter was prevalent. Villages paid a portion of their agricultural produce as revenue to the rulers, while their craftsmen received a part of the crops at harvest time for their services.
Sean Harkin estimates China and India may have accounted for 60 to 70 percent of world GDP in the 17th century.
Assessment of India s pre colonial economy is mostly qualitative, owing to the lack of quantitative information. The Mughal economy functioned on an elaborate system of coined currency, land revenue and trade. Gold, silver and copper coins were issued by the royal mints which functioned on the basis of free coinage. The political stability and uniform revenue policy resulting from a centralised administration under the Mughals, coupled with a well developed internal trade network, ensured that India, before the arrival of the British, was to a large extent economically unified, despite having a traditional agrarian economy characterised by a predominance of subsistence agriculture dependent on primitive technology. After the decline of the Mughals, western, central and parts of south and north India were integrated and administered by the Maratha Empire. After the loss at the Third Battle of Panipat, the Maratha Empire disintegrated into several confederate states, and the resulting political instability and armed conflict severely affected economic life in several parts of the country, although this was compensated for to some extent by localised prosperity in the new provincial kingdoms. By the end of the eighteenth century, the British East India Company entered the Indian political theatre and established its dominance over other European powers. This marked a determinative shift in India s trade, and a less powerful impact on the rest of the economy.
India s colonisation by the British created an institutional environment that, on paper, guaranteed property rights among the colonisers, encouraged free trade, and created a single currency with fixed exchange rates, standardised weights and measures and capital markets. It also established a system of railways and telegraphs, a civil service that aimed to be free from political interference, a common law and an adversarial legal system. This coincided with major changes in the world economy industrialisation, and significant growth in production and trade. However, at the end of colonial rule, India inherited an economy that was one of the poorest in the developing world, with industrial development stalled, agriculture unable to feed a rapidly growing population, a largely illiterate and unskilled labour force, and extremely inadequate infrastructure.
The 1872 census revealed that 91.3 Percent of the population of the region constituting present day India resided in villages, and urbanisation generally remained sluggish until the 1920s, due to the lack of industrialisation and absence of adequate transportation. Subsequently, the policy of discriminating protection where certain important industries were given financial protection by the state , coupled with the Second World War, saw the development and dispersal of industries, encouraging rural urban migration, and in particular the large port cities of Bombay, Calcutta and Madras grew rapidly. Despite this, only one sixth of India s population lived in cities by 1951.
The impact of British occupation on India s economy is a controversial topic. Leaders of the Indian independence movement and economic historians have blamed colonial occupation for the dismal state of India s economy in its aftermath and argued that financial strength required for industrial development in Europe was derived from the wealth taken from colonies in Asia and Africa. At the same time, right wing historians have countered that India s low economic performance was due to various sectors being in a state of growth and decline due to changes brought in by colonialism and a world that was moving towards industrialisation and economic integration.
Jawaharlal Nehru, the first prime minister of India, along with the statistician Prasanta Chandra Mahalanobis, formulated and oversaw economic policy during the initial years of the country s independence. They expected favourable outcomes from their strategy, involving the rapid development of heavy industry by both public and private sectors, and based on direct and indirect state intervention, rather than the more extreme Soviet style central command system. The policy of concentrating simultaneously on capital and technology intensive heavy industry and subsidising manual, low skill cottage industries was criticised by economist Milton Friedman, who thought it would waste capital and labour, and retard the development of small manufacturers. The rate of growth of the Indian economy in the first three decades after independence was derisively referred to as the Hindu rate of growth by economists, because of the unfavourable comparison with growth rates in other Asian countries.
Since 1965, the use of high yielding varieties of seeds, increased fertilisers and improved irrigation facilities collectively contributed to the Green Revolution in India, which improved the condition of agriculture by increasing crop productivity, improving crop patterns and strengthening forward and backward linkages between agriculture and industry. However, it has also been criticised as an unsustainable effort, resulting in the growth of capitalistic farming, ignoring institutional reforms and widening income disparities.
Subsequently the Emergency and Garibi Hatao concept under which income tax levels at one point rose to a maximum of 97.5 Percent, a record in the world for non communist economies, started diluting the earlier efforts.
In response, Prime Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated the economic liberalisation of 1991. The reforms did away with the Licence Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall thrust of liberalisation has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws and reducing agricultural subsidies. By the turn of the 21st century, India had progressed towards a free market economy, with a substantial reduction in state control of the economy and increased financial liberalisation. This has been accompanied by increases in life expectancy, literacy rates and food security, although urban residents have benefited more than agricultural residents.
While the credit rating of India was hit by its nuclear weapons tests in 1998, it has since been raised to investment level in 2003 by S&P and Moody s. India enjoyed high growth rates for a period from 2003 to 2007 with growth averaging 9 Percent during this period. Growth then moderated due to the global financial crisis starting in 2008. In 2003, Goldman Sachs predicted that India s GDP in current prices would overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035, making it the third largest economy of the world, behind the US and China. India is often seen by most economists as a rising economic superpower and is believed to play a major role in the global economy in the 21st century.
Starting in 2012, India entered a period of more anaemic growth, with growth slowing down to 4.4 Percent. Other economic problems also became apparent a plunging Indian rupee, a persistent high current account deficit and slow industrial growth. Hit by the U.S. Federal Reserve s decision to taper quantitative easing, foreign investors had been rapidly pulling out money from India though this has now reversed with the Stock market at near all time high and the current account deficit narrowing substantially.
India is ranked at 134 out of 189, overall, in World Bank s 2013 ease of doing business index. However, this score masks the underlying data in terms of starting a business, dealing with bureaucratic permits and enforcing contracts, it is ranked among the 10 worst in the world; while in terms of protecting investors, general operations and other measures, India ranks very favorably among 189 countries.