Macroeconomics

Catching up: India’s transition from a colonial economy

  • Blog Post Date22 February, 2018
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The decline and stagnation of the Indian economy was reversed after independence. This column suggests although productivity in agriculture and industry rose after 1947, it was the service sector that led Indian growth. A strong focus on higher education under colonial policy created an advantage for the service sector, but slow expansion in primary education was a disadvantage relative to the high-growth East Asian economies.

Indian independence led to a major change in the direction of economic policy. From a globalised economy integrated into the British Empire, the next 30 years saw a retreat from policies of free trade and capital flows. The newly independent State embraced the idea of development through industrialisation. In an economy where capital was scarce and entrepreneurship was concentrated in a few communities, the State stepped in to fill the gap. India was not unusual in this. Many parts of the underdeveloped world moved towards protectionist policies to develop an industrial sector. This was not simply the infant industry argument, which had characterised industrialisation in the US and Europe in the 19th century. The role of the State in the second half of the 20th century, was developmental and directly interventionist. In the short term, it raised the rate of growth in many countries. The medium- and long-term effects depended on policies towards integration into a global economy. While East Asian countries moved quickly to policies of export promotion, the Indian economy remained protectionist with adverse consequences for growth.

A dirigiste State in India adopted five-year plans to transform a colonial economy to a self-sufficient one. Studies of the Indian economy under planning see India as a failure in comparison to the East Asian successes (Figure 1). The catching up was slow and the annual growth rate of less than 2% during 1950-80 came to be known as the ‘Hindu rate of growth’. The economy was overburdened with regulation and inefficiencies pulled down productivity growth. To the economic historian this is a turning point in ‘falling behind’. Table 1 shows the change from 1950. The stagnation of the colonial era ended and as Balakrishnan (2010) labels the period Nehruvian growth, “the moribund economy quickened”. Delong (2001) argues that despite the loss of efficiency, the increase in resource mobilization has a positive effect. Gross domestic capital formation rose from 6-7% of GDP (gross domestic product) before 1940 to 13% in 1951, rising to 20% in the 1970s. Indian output per worker relative to the UK shows a reversal from 1950. (Figure 2) Productivity disadvantage of services with respect to the UK declined over time, while that in industry increased after 1950.

Figure 2. Changes in per capita GDP, 1910-2000, in International Geary-Khamis 1990 $

Note: The Geary–Khamis $, commonly known as the international dollar, is a hypothetical unit of currency that has the same purchasing power parity that the US$ had in the US at a given point in time.

Table 1. Changes in annual growth rate in per capita GDP (%)

Year Per capita GDP
1870-1885* 0.5
1885-1900* 0.8
1900-1947 0.1
1950-1980 1.4
1980-1990 3.0
1990-2000 4.1
1950-2000 1.9

Source: * Heston (1983) table 4.5; Sivasubramonian (2000) table 6.11.

Figure 2. Sectoral productivity differences with UK (% India/UK)

Source: Broadberry and Gupta (2010)

Rise and fall of regulation

The first plan focussed on building infrastructure. The second plan (1956-1961) adopted a Soviet-style model of industrialisation. The emerging capitalist class in 1950 was represented by the social networks in trade and industry. Many sections of the business interests had supported the Congress in the struggle for independence and in the drawing up of the Bombay Plan of 1944 that sketched the picture of economic development at the end of colonial rule. It indicated that the private sector was not altogether hostile to government involvement.

The objectives were achieved through regulating trade and industrial investment through quantitative controls. One of the criticisms the plans faced was the continued neglect of agriculture. Although the first plan had invested in agricultural infrastructure and a few large-scale irrigation projects, agricultural productivity was low and the fortunes of agriculture relied on monsoon rains. With the introduction of high-yielding varieties of seeds and the green revolution from the mid-1960s, agricultural productivity began to rise. Yield per acre doubled in rice production and tripled in wheat production between 1955 and 1990, increasing per capita availability of cereals. The rate of growth of output per worker, though much higher than in the colonial period, was lower than in industry and services.

The Hindu rate of growth changed in the 1980s, following dismantling of the regulatory system with a gradual removal of industrial licensing and replacement of import quotas with tariffs. Both policies opened up opportunities for the private sector. These reforms have been described as ‘pro-business’ and the reforms of the 1990s as ‘pro market’ (Rodrik and Subramanian 2005).

Per capita GDP growth doubled from 1980 and rose above 4% per year after 1990. Estimates of structural break in GDP from 1950 to 2000 find 1979-1980 as the break point. A long-run perspective analysing growth from 1900 to 2000, puts the structural break in GDP growth at 1952 and confirms that the transition from the colonial economy coincided with a reversal of falling behind.

The path of Indian economic growth has not followed the standard pattern of structural change. In the industrialised countries, the share of industry in GDP and employment increased as the share of agriculture declined. Industry in India did not emerge as the largest sector at any time both in terms of output and employment. More importantly, India’s growth since 1980 has been led by services.

Long-run effects of colonial policy

Colonisation left a deep imprint on the development of the post-colonial decades. In 1980, there were systematic differences in agricultural productivity between landlord and non-landlord regions of colonial India (Banerjee and Iyer 2005). The effect of regional variation in education spending in 1911 was visible until 1971 (Chaudhary and Garg 2015). Western India had an advantage over the East. High share of secondary and tertiary education in education spending also remained a feature of the education system with implications for human capital of the workforce. This was an advantage to the service sector and may explain the high productivity in the sector. The 2001 Census shows a concentration of workers with secondary and tertiary education in services. Agriculture had the largest number of workers without basic education. Surprisingly, a large proportion of industrial workers also lacked primary education.

Comparisons with East Asia

South Korea and Taiwan emerged from Japanese colonisation in the middle of the 20th century and moved to a high-growth regime. These economies did not look significantly different from India in 1910 in terms of per capita GDP. But Japan as a coloniser, adopted different policies. As exporters of rice to Japan, Korea and Taiwan adopted Japanese varieties of rice for cultivation. This went with improvements in the infrastructure for rice cultivation. Over 80% of land under cultivation was irrigated in Taiwan and 68% in Korea by 1939 (Booth 2007). Agricultural productivity increased during Japanese rule. Per capita GDP also increased in both countries from 1910. Where the East Asian countries differed from India was not in industry, but in agriculture and human capital.

Neither Korea nor Taiwan had attained universal primary education in 1950, but primary school enrolment was the focus of education policy. At the time of independence, Korea and Taiwan, had significantly higher primary school enrolment – over 30% in Korea and over 60% in Taiwan – compared to 14% in India in 1940. When colonial rule ended, South and East Asia had different initial conditions for economic growth.

A comparison of the sectors shows that the share of manufacturing in Korea in 1940 was similar to that in India (Table 3). Most of Japanese investment in industry was in northern Korea. The share of manufacturing doubled in South Korea between 1960 and 1980. The share of agriculture in GDP declined faster from 1910.

Table 2. Changes in sectoral shares in India and Korea, 1910-2000

Year Primary Manufacturing* Tertiary
India Korea India Korea India Korea
1910 64.5 67.8 11.4 4.4 23.5 25.5
1940 53.7 42 13.6 13.7 32 32
1960 46.8 39.6 14.5 12.1 30.2 41.4
1980 33.2 16.0 19.9 24.6 38.2 48.0
2000 22.6 4.6 23.4 28.3 45.5 57.3

Source: Sivasubramonian (2000) for India; Kim (2012) for Korea. Notes: (i) 1910-1940 includes the combined regions of North and South Korea (ii) *Share of sectors other than manufacturing within the secondary sector are not reported.

A discussion of comparative economic performance of India and East Asia will be incomplete without a reference to the different policies adopted after decolonisation. Both Korea and Taiwan adopted policies toward import substitution in the 1950s, using multiple exchange rates and tariffs. However, the East Asian States also adopted policies to increase exports targeting specific sectors via subsidised credit and easy access to foreign exchange. Both countries followed an infant industry policy of protecting a domestic industry only in the ‘learning’ phase (Perkins and Tang 2017). Industries such as petrochemicals, shipbuilding, and automobiles in South Korea, and electronics in Taiwan, gained competitive advantage in the international market following the regulatory role of the State. Where India failed under the heavy hand of regulation and protection of the home market, the East Asian States built a competitive manufacturing industry. Human capital has been a crucial difference. In South Korea and Taiwan, the average years of education of the workforce rose from 3.2 in 1960 to over 8 in 1994; in India, the change was from 1.3 to 3.4 (Collins et al. 1996). The long-run consequences of colonial policy may have contributed to the different paths of development in South and East Asia.

This article is based on the Tawney lecture delivered to the Economic History Society Meeting of 2017, to be published in the Economic History Review.

The previous part of this column focusses on why India fell behind during the colonial rule.

Further Reading

  • Balakrishnan, P (2010), Economic Growth in India, Oxford University Press, Delhi.
  • Banerjee, Abhijit and Lakshmi Iyer (2005), “History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India”, American Economic Review, 95(4):1190-213. Available here.
  • Broadberry, Stephen N and Bishnupriya Gupta (2010), “The Historical Roots of India’s Service-Led development: A Sectoral Analysis of Anglo-Indian Productivity Differences, 1870-2000”, Explorations in Economic History, 47(3): 264-278.
  • Chaudhary, Latika and Manuj Garg (2015), “Does history matter? Colonial education investments in India”, The Economic History Review, 68(3):937-961.
  • Collins, Susan M, Barry P Bosworth and Dani Rodrik (1996), “Economic growth in East Asia: Accumulation versus assimilation”, Brookings papers on economic activity, 1996(2):135-203.
  • Gupta, B (2018), ‘Falling Behind and Catching up: India’s Transition from a Colonial Economy’, Centre for Competitive Advantage in the Global Economy (CAGE), University of Warwick Working Paper No. 355.
  • Heston, A (1983), ‘National Income’, in D Kumar and M Desai (eds.), The Cambridge Economic History of India, Volume 2: c.1757-c.1970, Cambridge University Press, Cambridge, 463-532.
  • Kim, NN (ed.) (2012), National Accounts of Korea 1911-2010, Seoul National University Press, Seoul.
  • Perkins, DH and JP Tang (2017), “East Asian Industrial Pioneers: Japan, Korea and Taiwan”, in KH O’Rourke and JG Williamson (eds.), The Spread of Modern Industry to the Periphery since 1871, Oxford University Press.
  • Rodrik, Dani and Arvind Subramanian (2005), “From Hindu Growth to Productivity Surge: The Mystery of the Indian Growth Transition”, IMF Staff Papers, 52(2):193-228. Available here.
  • Sivasubramonian, S (2000), The National Income of India in the Twentieth Century, Oxford University Press, New Delhi.
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