India has the second largest population in the world with just over a billion people with the fifth largest GDP. Two hundred years of British rule has been a major factor in India’s legal, educational, political and economic systems. They have a “common law” legal system, the English language is taught as a second language in schools across the country and as such they have many students that attend universities in England or America. They are very modern, and influenced heavily by western culture and products. Their political system is democratic; however, it is modeled after British parliament.

India is a product of colonialism. It is very rich in resources and very attractive to the imperial powers. The conquering of India focused mainly on natural resources. The strategy was to obtain these resources from a colony rather than buying them from another colonial power, and they also sought revenue by running trade surpluses with their own colonies. This had a major impact on the Indian people, since the focus on natural resources prevented their industrial growth, forcing them to import manufactured products.

The British were not the only colonial power to hold stake in India, Portugal was the first to establish possession of western India. They were soon followed by the Dutch East India Company along with the British and French trading companies. The British, however, soon established majority control of the country, creating a market for their manufactured goods while they removed raw materials for export to England.

The East India Company became more than just a trading venture; the British soon came to become the ruling power of India. Their thirst for wealth could not be quenched; rule was seized through the spilling of blood and suppression of the Indian people. By the end of the seventeenth century, India became the focal point of the trading company. The company soon evolved into a form of government, ruling over individual commercial settlements and provinces. Armies were created to suppress any uprising and protect the commercial interests within the territories. The primary function of these governments was the collection of taxes; one third of the output of the land was given to the government, working its way through intermediaries who took portions for themselves.

In 1858, however, authority over India was transferred from the East India Company to the British crown. The policies of the British in India were determined by upper crest English industrialists, and thus India’s resources were exploited to support Britain and its other colonies around the world.
In 1947 India gained independence from England. Although the British instituted reforms to help the Indian people and give them more autonomy, these were not enough to satisfy the need for independence. After WWII it was inevitable that England would have to give India independence. India was split into two regions based on religion, Islamic Pakistan and Hindu India.

Fortunately for India, the British established a good infrastructure: railroads, truck routes, modernized communication system and an extensive port infrastructure. Additionally, the English language provided cultural and political unification as well as advancing trade with other English-speaking countries. The British also left a solid educational system, particularly in the large cities where universities were established during the nineteenth century. Despite these blessings, problems still remained; the distribution of income was drastically split with 80% of the wealth held by 2% of the population. While the major cities were doing well, rural farm communities were still very poor and uneducated. They were practicing farming techniques that had been greatly outdated. At the time of independence, the economy was primarily agricultural since the majority of Indians lived in rural farming areas. Adding to the strain was the fact that previous to independence, the British had exploited their textile resources, forcing the government to reallocate land for the production of such resources.

India instituted many five-year economic plans to improve its industrial and agricultural sectors. Although the rate of growth during the 1950’s was positive, it was not growing as fast as the politicians had anticipated. From 1951-1979 industry grew at an average of 4.5% per year, while agriculture grew at a rate of 3%. Inefficiencies existed in both the agricultural and industrial sectors and as a result technological growth became imperative. Additionally, large investment was required to develop a modern industrial infrastructure, and therefore foreign capital was required. India became an attractive investment despite its low rate of growth; however, a larger rate of investment was required than in comparable developing countries and thus resulted in a lower rate of return. This can be partially explained by the fact that most investment was held in slow-growth, capital intensive sectors such as electric power and irrigation.

By the 1970’s India’s population was growing at about 2% per year, higher than economic plans had estimated. The five-year plan at the time had indicated a shift in industrial output to agricultural products such as fertilizer and farm equipment. The emphasis on agriculture was in reaction to famine and the rapid population growth. The objective of these five-year plans were focused on developing a modern agricultural base, more dynamic, competitive industrial base, reduce unemployment, balance the distribution of income, and create a more equal Indian society.

India received much in the form of foreign aid from the US, Soviet Union, and World Bank providing roughly $13 billion in financing between 1951 and 1967. However, as was stated before, expected rates of growth far exceeded actual rates, and the result was an increasing dependence on foreign aid.
After the elections of 1971, Jawaharlal Nehru sought a shift into socialism. He rejected capitalism and chose to focus on the social well-being of all Indian’s. However, he sought to transfer the system through a democratic process rather than through a Marxist bloodbath. He stressed economic planning, and as his party became the dominant power in India, centralization of industry was the means to begin economic resource planning. Commercial banks, insurance companies, the coal industry, textile industry, and parts of the agricultural industry were all nationalized. This allowed the government to control the output and economic distribution of these materials.

During the 70’s, the government had about a 95% share of many industries, including manufacturing (paper, chemicals, drugs, petroleum, electricity, metals, transportation equipment, and fertilizer), minerals (fuels, metals and nonmetals), banking, insurance, transportation and communication, and commercial energy. Employment was high as well, with 70% of Indians employed in the public sector and 30% in the private sector. However, nationalization did not come without consequences. There were restrictions placed on the private sector that stifled its growth. Inflation and food shortages caused unrest and strikes in the public sector. The Indian people were growing tired of the nationalization of their various trades, and despite promises to discontinue nationalization policies the government continued its efforts and soon gained control of 95% of industry in India.
After 1975 in through the 1980’s there was not much change in the economic structure. The public sector remained larger and more favored than the private sector. However, in the mid 1980’s the private sector saw a relaxation of former restrictions, which unfortunately did not change the amount of government control over the economy.

The slow growth of the economy between 1950 and 1990 can be attributed mainly to nationalization policies. Industry was controlled by the state, which regulated market entry and import competition, required special licenses for various business activities, and controlled many aspects of investment and production. These restrictions reduced competition and therefore decreased the innovative capacity of these industries. India also failed in expanding foreign trade, choosing to focus more on domestic economic planning, protecting the home market with high tariffs and import quotas. Additionally, the large public sector, much like in Russia, reduced the overall efficiency of industry. Controlled production and over-planning caused the planners to overlook inefficiencies in production. There was no profit motive in nationalized industry, which has been proven in the lessons of fallen socialist empires.

The 1990’s presented a whole different story for India. With the collapse of the Soviet Union, a close financial ally of India, they were left on their own when Russia was forced allocate resources to its own renewal. Additionally, India’s international credit rating fell considerably as they were heavily dependant on foreign investment. This required the restructuring of the economy and looser restrictions on foreign trade. India had to open up its borders wider than ever before to appeal on the world market. Tax reforms were necessary to generate revenue and stimulate economic growth. Tax incentives encouraged savings and investment. Corporate taxes were reduced to stimulate the private sector, as was the personal income tax. A capital gains tax was introduced to generate revenue from new investing activities.

Private and foreign banks were allowed to enter the banking market in 1993. These banks find it hard to compete with public sector banks since the state will provide financial assistance for bad loans in a public sector bank. State controls on banking are somewhat more stringent now, requiring banks to lend a minimum of 40% to agriculture, small-scale industry, and the export sector.

Although restrictions were loosened in the 90’s, India remains one of the world’s most tightly regulated economies. Despite that fact, it is still a progressive economy. They enjoy higher living standards than ever before, literacy rates are improving, and there is more access to proper medical care.
The Indian economy employs roughly 472 million people, the majority of which (60%) work in the agricultural sector, while 23% work in services and 17% work in industry. Of the total workforce, women make up roughly 32%. There are a large number of children employed in India, particularly in the agricultural sector but also in small-scale textiles such as carpet weaving, in small businesses, and also as servants in private homes. Child labor is illegal in India, however focus is primarily on the more dangerous industrial sectors; they are not wholly concerned with children working on farms. It is difficult to estimate the unemployment rate because much of the employment in India is seasonal. However, according to the CIA World Fact Book, the unemployment rate is 9.5%.

The current state of the Indian economy is very bright. They enjoy a satisfactory GDP growth rate of roughly 8.3%. They are benefiting from a hot-button issue in the US known as “outsourcing.” Despite the controversy, US companies are employing thousands of people and paying them very well by Indian standards. It is to their best interest that US companies continue to outsource labor to India. They are also benefiting on the large number of well-educated citizens and the fluency of the English language throughout the country. They are quickly becoming a major player in the export of software and consulting services. While this outlook is bright, many economists worry that the public sector debt (closing in on 60% of GDP) may cause problems for India in the future.

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