TCS Daily

India Still Has a Ways to Go

By Nikhil Bhat - September 21, 2005 12:00 AM

A common refrain heard throughout India over the last half of the twentieth century was that the double-barreled British economic weapon of forced free trade and textile dumping sent India into a destitution from which she suffers to this day. Therefore, the only way to recover is to shut down the export industry and rebuild within a closed economy.

It's true that India's economy as a whole was three times larger than that of Britain in 1750 (before the Battle of Plassey established British East India's rule in Bengal), boosted by the red-hot textile industry. Indian textiles had 20% of the European market in 1700; India accounted for a quarter of worldwide manufacturing output at the time. The trickle-down effect existed then, as well. Documents show South Indian workers had a standard of living equal to that of southern English workers around 1750.

From the early days of the British Raj, there was a flood of cheap British cloth into India (using Indian raw materials). India's light manufacturing sector collapsed to a 5-6% market share, and India became little more than a raw materials base. The only constant factor throughout India's decline was British rule; therefore, conventional wisdom says the British were to blame. Leaders in the developing world, and their Marxist cheerleaders of dependency theory, use this case as a springboard to blame the West for all of their current ills.

However, a 2004 paper by the Harvard Institute of Economic Research titled "India's De-Industrialization Under British Rule" sheds new light on the matter. If the paper's analysis is any indication, the colonial masters were only partially and indirectly to blame for the disastrous collapse of the Indian manufacturing economy. The paper finds that two main factors explain India's economic fall from grace: the Mughal Empire's decline and the shock of globalization.

The Mughal Empire collapsed in the hundred years from 1650-1750, hastened by a number of restless regional warlords like the Maratha general Shivaji. Under the Mughal Empire, there was a period of internal peace within the North Indian region and external goodwill and trade abroad. A number of districts began to specialize in textile manufacturing by importing surplus grain from other districts. When the empire was replaced by numerous warring states, the central authority fell apart, making interregional trade more difficult. The relative wages of workers in thriving industries rose with the decline in grain surpluses in manufacturing regions, and the competitiveness of Indian exports declined, well before the British began their conquests.

The inability of the government to carry out its most essential tasks -- to ensure internal peace, security and the free internal movement of its citizens -- and the insistence on taxing the life out of landowners helped destroy the Indian economy. For the most part, the Indian government has been able to ensure domestic tranquility. Cutting taxation and government interference in general, on the other hand, has been a sticking point. It took a critical currency fiasco in 1991 to justify a top bracket rate cut from 90% to around 40%. Furthermore, draconian trade restrictions hampered India's key economic strength: trade in labor-intensive manufactured goods.

As the warring factions were subdued in the mostly-peaceful days of the British Raj, a perfect storm was brewing offshore. While labor costs (i.e., costs of foodstuffs) at home had stabilized, the prices of exports were plummeting, thanks to the increased productivity in an industrializing Europe and falling transport costs. The British did have the advantage of relatively stiff tariff protections, but India suffered less than peripheral non-Commonwealth nations in overall terms of trade. (Remember: export-happy South America was booming, and Argentina had a standard of living equal to that of Europe by 1900.)

The bigger issue for India was that she lagged behind in productivity growth. There was little the home rule government could do until 1947, but the forty years afterward have been utterly wasted. Productivity, that amount each one of us can produce using our talents, matters far more than any World Bank cash-infusion or debt-relief program. If a government wants to make its country wealthier, it must do all it can to ensure that its citizens can use their talents to the best of their ability. Yet, the Indian political elite did all they could to thwart their countrymen's self-driven innovation. As the authors point out:

[I]t looks like the external price shocks facing India were quite modest compared to the rest of the periphery. Yet, Indian historians complain the most about de-industrialization. Can we therefore conclude that domestic supply side conditions played a far more important role in accounting for de-industrialization in India than elsewhere?

Those supply-side conditions were never corrected. For all the present talk of reform and progress, the Indian state has yet to truly realize that the sea-salt-making, West-hating self-sufficiency movement is absurd at best and harmful at worst. Cutting one's nose to spite one's face is ineffective, and so is martyring one's citizenry to spite one's former colonial masters. India, like the rest of the developing world, will rise again, but only after she puts progress ahead of vengeance.

Nikhil Bhat recently spent time as a research intern at the Centre for Civil Society in New Delhi. He is currently working on an M.A. in Political Campaign Management at New York University, and holds a B.B.A. in Economics from the University of South Dakota, where he also aided in community economic development research.


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