Module 60. History of Indian Economy, Features, Economic Policy and Planning

The Indian economy has undergone significant transformations from a largely agrarian system in ancient times to a complex, mixed economy in the contemporary era. Over thousands of years, India’s economic landscape evolved through trade networks, colonial exploitation, socialist policies, and modern liberalisation, making it one of the fastest-growing major economies in the world today. The study of India’s economic history, structural features, and policy framework provides essential insight into its growth trajectory and challenges.

Historical Background of the Indian Economy

The history of the Indian economy can be broadly divided into ancient, medieval, colonial, and post-independence phases.
Ancient Period: India’s ancient economy (before the 12th century) was primarily agrarian but also supported flourishing trade and craftsmanship. The Mauryan and Gupta Empires established efficient administrative and taxation systems. The Silk Route and maritime trade linked India with Central Asia, the Roman Empire, and Southeast Asia. Commodities such as spices, textiles, and precious stones were major exports, establishing India as a global trading hub.
Medieval Period: During the Delhi Sultanate and Mughal eras (1206–1707), India maintained economic prosperity through agriculture, handicrafts, and trade. The Mughal period saw extensive land revenue systems such as the Zamindari and Ryotwari arrangements, alongside the expansion of towns and artisanal industries. However, the late Mughal decline disrupted economic stability.
Colonial Period: The advent of British colonial rule (1757–1947) transformed India into a dependent colonial economy. The British introduced commercial agriculture, railways, and modern industries, yet the benefits largely accrued to Britain. Deindustrialisation of traditional crafts, heavy taxation, and the drain of wealth led to widespread poverty and stagnation. The colonial economy was characterised by export of raw materials and import of manufactured goods, creating structural imbalances.
Post-Independence Period: After 1947, India adopted a planned economic model aimed at self-reliance and inclusive development. The economy was reorganised through the Planning Commission and the implementation of Five-Year Plans. Initial policies focused on public sector development, import substitution, and land reforms. The Liberalisation, Privatisation, and Globalisation (LPG) reforms of 1991 marked a major shift towards a market-oriented economy, encouraging private enterprise, foreign investment, and trade liberalisation.

Major Features of the Indian Economy

The Indian economy exhibits several distinctive characteristics that reflect its diversity, development challenges, and structural composition.

• Mixed Economy: India combines features of both capitalism and socialism, where both public and private sectors coexist. The state controls key industries such as defence and energy, while private enterprise drives growth in manufacturing and services.
• Agrarian Base: A significant portion of India’s population still depends on agriculture, although the sector’s contribution to GDP has declined over time.
• Demographic Dividend: With a large and youthful population, India enjoys potential for accelerated economic growth, provided employment and education are effectively managed.
• Regional Disparities: Economic development is uneven across states, with southern and western regions generally performing better than central and eastern parts.
• Service Sector Dominance: The service sector, especially IT, telecommunications, and finance, contributes over half of India’s GDP.
• Large Informal Sector: A considerable portion of economic activities occur in the unorganised sector, lacking formal regulation and social security benefits.
• Low Per Capita Income: Despite overall economic growth, India’s per capita income remains lower than many developed nations, reflecting persistent inequality.
• Dependency on Imports: India relies on imports for crude oil, technology, and certain raw materials, affecting its trade balance.

Economic Policy Framework in India

Economic policy in India refers to the set of measures and regulations adopted by the government to influence the direction and pace of economic development. Policies have evolved according to national priorities and global conditions.
1. Pre-Liberalisation Economic Policies (1947–1991): After independence, India’s leaders, guided by socialist ideals, sought to build a self-reliant economy through state-led planning. Key features included:

• Establishment of the Planning Commission (1950) for centralised planning.
• Launch of Five-Year Plans, starting with the First Plan (1951–56) focusing on agriculture and infrastructure.
• Expansion of the public sector in core industries.
• Implementation of industrial licensing (Licence Raj) to regulate private industry.
• Import substitution industrialisation to reduce dependency on foreign goods.

However, the system led to inefficiencies, low productivity, and limited competition, necessitating reforms.
2. Post-Liberalisation Economic Policies (1991 onwards): Facing a balance of payments crisis in 1991, India adopted the New Economic Policy (NEP) based on three pillars: Liberalisation, Privatisation, and Globalisation (LPG).

• Liberalisation: Removal of industrial licensing, reduction of tariffs, and deregulation of sectors.
• Privatisation: Disinvestment of public enterprises and encouragement of private participation.
• Globalisation: Integration with the global economy through trade liberalisation and foreign investment inflows.

These reforms revitalised growth, encouraged entrepreneurship, and integrated India into the world economy, though they also widened income disparities.

Economic Planning in India

Economic planning in India was introduced to ensure balanced and systematic development. It aimed to utilise resources efficiently and achieve socio-economic objectives.
Planning Commission Era (1950–2014): India’s planning followed the model proposed by Pandit Jawaharlal Nehru and inspired by Soviet centralised planning.

• First Five-Year Plan (1951–56): Focused on agriculture and irrigation.
• Second Plan (1956–61): Emphasised industrialisation (Mahalanobis Model).
• Third to Fifth Plans: Expanded to cover transport, self-reliance, and poverty alleviation.
• Sixth to Tenth Plans: Introduced rural development, employment generation, and economic liberalisation.

NITI Aayog (2015–present): The National Institution for Transforming India (NITI Aayog) replaced the Planning Commission in 2015, reflecting a shift from centralised planning to cooperative federalism. NITI Aayog focuses on strategic policy formulation, data-driven decision-making, and partnership with states to achieve the goals of sustainable and inclusive growth.

Contemporary Challenges and Prospects

Despite considerable progress, India faces enduring economic challenges:

• Unemployment and Underemployment: Job creation has lagged behind population growth.
• Income Inequality: Economic gains are unevenly distributed across classes and regions.
• Agrarian Distress: Low productivity, debt, and fragmented holdings affect farmers.
• Infrastructure Gaps: Deficiencies in transport, energy, and logistics hinder competitiveness.
• Environmental Degradation: Rapid industrialisation has led to pollution and resource depletion.

However, India’s economic prospects remain promising, supported by technological innovation, human capital, and policy reforms. Emerging sectors like renewable energy, digital economy, and manufacturing under ‘Make in India’ are expected to drive future growth.