Origins of a Fragmented-Multiclass State and a Sluggish Economy

Origins of a Fragmented-Multiclass State and a Sluggish EconomyPresented by Aamir Aijaz Memon (M160032)Rehan Qurban Shaikh (M160034)Ranjeet Santwani (M160036)1

India Today: An OverviewExperiencing Sluggish growth

Fragmented Multi-class State

Replacement from Colonial Free market to Interventionist state.

Improvement: Stagnant to Modest Economic growth and Industrialization

State Inefficiencies: retarded rate and pattern of industrialization

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Historical background

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16th and 17th Century: Mughal Empire Personalistic and Patrimonial state

Control over large parts of northern and central India.

Pre-Modern agrarian bureaucracy, Systematic court administration

Extraction of heavy taxes from largely agrarian society

Little incentive to invest in Agriculture, low productivity

Fall of Empire: religious wars, court incompetence, greedy factionalism and traditional invasion.

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18th Century: East India CompanyEnd of 17th century: Disguise of East India Company

Conquered through Armies, Technology and organizational skills

Influence of British crown and British parliament facilitated by the largest army of Asia

Centralized revenue administration, civil servants

Arrangements with influential Zamindars and local Princes

Development of Infrastructure: Postal system, Telegraph and Railways 5

Mutiny of 1857(War of Independence)Indian Princes and Soldiers rebelled against British rule

Turning point in construction of colonial system

Military victory against rebelling Indian princes

Later became Junior partners in the colonial ruling alliance

Indian formally became a colony as British crown took over from the east India company

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Colonial State (1857-1947)Desired Colonial State:No more mutinies Understanding limits to despotsGood Governance

Formative Period: Institutionalized Army and Civil Service

Slow bureaucratic Administration

Late 19th Century: Nationalist Opposition

Political context changed significantly

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Exercise of PowerBureaucratic and despotic state backed by coercive force

Control centralized in London, Implemented by viceroy in India

Non-Liberalism; Courts and legal system introduced

Laissez Fare and Free trade; open economies

No Industrial policy, no industrial technology and no industrial growth

Limited State control, local allies and fragmented state power

Nationalist Movement: Divide and Rule

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ArmyThe reorganization of the army-aim of avoiding future mutinies

Proportion of British soldiers to Indian increased, Concentrated soldiers from regions and social strata considered to be more loyal to British

Armed Police force, shield away Nationalists opposition

Ideology and institutions of civilian control over the military

Today, highly professional army with hierarchies

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Civil Service Indian Civil Service, In 1892 introduced exam based civil service system

Heart of colonial state, collecting revenues, maintaining order and executing government policies

ICS was minuscule ruling elite class (mostly British), steel frame

Indians entry after first world war, limited supply of qualified British

1922 possibility to take exam in India, 1939: Quota Half-Half

Contribution to State Formation of India

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The Nationalist Movement Significant Mass Movement against Colonialism (British)

Indian National Congress (INC) was one of the strong nationalist groups in India.

INC was against British, and contributed in the formation of democracy.

Congress fought against the Raj, but it also progressively becoming Raj. 11

The Nationalist Movement INC changed some of its political context compared to colonialist India after the pressure from some nationalist.

Most of bureaucracy. Army, Judiciary etc. remained same as colonialists.

Most of the members of INC were from Intraelite and elite classes.

Therefore India became the country with the combination of modernization (due to nationalists) and colonialist (due to British influence). 12

The Political Economy of Limited IndustrializationThe agriculture productivity of India at the time of independence was much lower as compared to Mughal period.

The factory production was merely around 7% of the total production.

Economic growth in first half of the 20th century. 1% per annum economic growthStagnant or even declining per capita income13

The Political Economy of Limited IndustrializationHalf of the British rules budget was spent on government expenditure, 10% on infrastructure; and very little on the education.

British discouraged the economy to grow through its unfair taxation systems.Indian agrarian elite was exempted to pay taxes.Along with the Free Markets

British didnt established the industries in India, although British itself was heavily industrialized.

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The Political Economy of Limited IndustrializationIndustrialization started in the second half of the nineteenth century.

Most of it was concentrated in Calcutta and Bombay by Englishmen and Traders.

However, there were a lot of difficulties like:Scarcity of Capital 3% savings and 7% total capitalInefficient Labor with no any technical knowledgeLimited transportation No institutions to channel the funds Very low growth

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The Political Economy of Limited IndustrializationMost of the savings was held by Agrarian Elites; who used to charge high borrowing rate.

The demand for the manufactured goods were very low (Average per capita)

Most of the products were substituted with cheap imported goods.

Most of the industries were related to exporting the raw materials and importing of manufactured goods from British.

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The Political Economy of Limited IndustrializationKeeping Indian rupee overvalued deliberately to keep control on expenditures of GBP also hindered industrialization.

Reducing Demand and then Reducing Investment

Role of InstitutionsNo banks were developed No savings in rural areasBritish managing agencies ScottishNo investment in Labour

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The Political Economy of Limited IndustrializationThe local elites like Tata family established the textile and steel industries in India during world wars.

The cost of establishing the industry in India was very low, due to free market and very cheap labor.

Britishers were not setting up the industry, because the exporters were also their fellow Britishers.

The tax on Non-British imports also helped in developing Industrialization in India.

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Protected IndustrialismThe overall growth rate of India had been very volatile Over 7% to less than 4% from 1965 80

It stabled at 6% from 1980 2000.

The five decades after independence brought the structural changes in India.Industrial production contributed one quarter of the overall GDP.Service sector contributed one half of overall GDP.

Three phases of political economy of modern India19

Nehru EraIndias nationalists used to discourage foreign companies to come to India, while socialists created difficult relationships with Indian Entrepreneurs.

Nehru Era suggested two conclusions

As discussed that India is the combination of colonialist and democratic state.

Most of it was colonial at Nehrus time, but Nehru made alliances with little land owners instead of larger ones.

Second, He placed democracy as high priority, and gathered power from regional elites, while ensuring equality for poors.20

Nehru EraNehru improved the agriculture of India by institutionalizing it.It was done through many land reformsEducation of Peasants and Labor Redistribution of Land

Soon the focus moved to heavy industrialization at the expense of agriculture.

This rapidly increased the Public savings and Investment

However, Late profit giving Industries; Private Investment was not boosting in heavy industry like Steel and Textile.21

The Indira Gandhi ERAPopulist and deinstitutionalized The gap between states developmental capacities and economic goals widenSlogan Poverty AlleviationOld elite as enemies of the poorPersonalization of powerMissed economic opportunitiesAgricultural revolutionNationalization of banksDecline in public investment and corporate investment22

The Probusiness driftEmergence of BJPTo liberalize the statist economy6% p.a growth 1980 to 2000Growth in private investmentTax cuts and flexible policesIMF debt and decline of public investmentsRise of computer industry (Rajiv Ghandhi)23

Emerging CompaniesCompanies emerging just before independence:BirlaDalmiaWalchandShri RamThaparSinghanias

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Thank You26