An Economic History of India

February 19th, 2009 at 11:21 pm David Frum | No Comments |

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In The Importance of Being Earnest, the tutor Miss Prism instructs her student Cecily to omit ÒThe Fall of the RupeeÓ from her reading in political economy:

It is somewhat too sensational. Even these metallic problems have their melodramatic side.

As often with Oscar WildeÕs jokes, this one goes deeper than it seems.

The rupee was indeed falling in the 1890s Ð and the consequences of the fall have generated more than a century of sensational and angry debate.

British India owed large debts in London. These debts were fixed in British pounds, which is to say, in gold.

The revenues to meet these debts derived primarily from taxes on land. These taxes were paid in rupees Ð and the rupee was a silver currency.

In the 1890s, the value of silver declined relative to the value of gold. IndiaÕs debt suddenly grew much more onerous.

How much suffering did this metallic melodrama cause? That is just one of the questions that Indian nationalists and free-market economists have debated for generations.

British India was, all acknowledge, a very poor country. Indian nationalists have long blamed this poverty on British misrule. The British, they say, smashed IndiaÕs flourishing indigenous industry and commerce, squeezed India for tax revenue, and reoriented IndiaÕs trade to their own advantage. They continue: Britain imposed an inappropriate free-trade policy on India, denying India the opportunity to follow Japan and develop its industry behind tariff walls.

That critique inspired Indian policy after 1947. Independent India turned to protectionism, state ownership, and activist government. Calcutta, the great trading center of British India, was despised and neglected. Bombay, site of textile and steel manufacturing for the home market, was favored and promoted.

After four decades of vigorous state-led development, India remained very nearly as poor as ever. Economists joked about the ÒHindu rate of growth,” not altogether fairly: The Indian economy did grow reasonably briskly in the 1950s and again in the 1980s. But India’s growth lagged far behind that of Japan and the other East Asian economies. And because India’s population also continued to grow rapidly, economic growth failed to translate into incomes per head for the vast majority of the Indian people.

A financial crisis in 1990-91 forced India to retreat from its post-independence policy of state-led self-sufficiency to return to the more open economics of the Raj. In recent years, the Indian economy has at last begin to grow in earnest, perhaps by as much as 6% per year – well short of China’s post-1990 growth, but sufficient to begin to lift large numbers of Indians out of poverty. Already it’s said that the Indian middle class exceeds the entire population of France.

IndiaÕs post-1990 progress has reignited the debate over Indian economic history. If state-led development failed in 1947, perhaps it would have failed in 1887 too? Maybe IndiaÕs 19th century poverty cannot be blamed on British rule. Maybe 18th century India was not as wealthy as Indian nationalists had nostalgically claimed.

IÕve become quite interested in these questions recently, and a couple of months ago sought guidance from NRO readers about major works in Indian economic history. Readers directed me to two books: Dietmar Rothermund’s An Economic History of India, presenting the classic nationalist point of view, and RR Tomlinson’s The Economy of Modern India , which questions that nationalist view.

Rothermund’s Economic History comes to this competition with one huge crushing disadvantage: It is a book so crushingly, staggeringly boring that it takes fierce, persistent willpower even to keep oneÕs one fixed on the page. This is the kind of book that chills the heart and blights the spirit. Oh the piles of late 19th century textile statistics! And the intricate discussion of bimetallism! And the utter refusal to acknowledge that economics might possibly have anything to do with any actual human beings!

TomlinsonÕs Economy of Modern India does not exactly sparkle. But it can be read without toothpicks to prop open the eyelids.

Both books do ultimately endorse state-led development, Tomlinson more hesitantly than Rothermund. And while I will continue searching for a more fully adequate and interesting book, the two together did stimulate some personal reflections on India’s economic past and future.

1) Clearly one of India’s big problems has been an inability to use investment efficiently. By the 1980s, India was investing 25% of its GDP – a staggering input, which seems to have bought very little output. This problem dates back to the Raj. The British built India a vast railway network – Japan would not have anything like it until the 20th century – and yet there is little evidence that the network spurred economic growth or called forth much in the way of supporting industry.

Question: Has modern India become a better user of investment? If not, a lot of hedge funds are going t to be very disappointed.

2) Observers since Pliny have noted the Indian preference for hoarding wealth in the form of precious metals. Modern economists call this a high liquidity preference. The pain of the Great Depression forced many Indian families to sell their jewelry – and for a time, gold ranked as one of India’s top exports. The desire of individual Indians to hold their wealth in metallic form explains why India’s political leaders have so often looked to the state as the investor of first resort. But given the Indian state’s poor track record, people who hope to accelerate Indian growth have to wonder: what will it take to get Indians to invest in their own country?

3) The British charged the Indians not only for the cost of railway building, but also for the cost of government and defense. It was the Indian taxpayer, for example, who shouldered much of the cost of the British war in Mesopotamia in the 1920s. To our eyes, this looks like straight out exploitation. But was it? Government costs money, and itÕs not as if the Mughals worked for free. A very plausible argument can be made that the British Raj delivered more security and stability to more of the subcontinent at a lower price than any previous Indian state. Or, for that matter, than the successor regimes of India, Pakistan, Bangladesh, Burma, and Sri Lanka have delivered.

4) Has India, despite its impressive recent growth statistics, truly transcended its unhappy economic history? There are reasons to worry. The Indian state continues to fail to provide the preconditions of sustained growth. Like the Raj before it, independent India does a poor job of educating its citizens and sustaining public health. Unlike the Raj, independent India is pervaded by corruption. And unlike China, where corruption often at least has the benefit of buying business freedom from the satate, Indian corruption enables established businesses to pay the state to harass and shut down competitors. India remains an unfavored destination for foreign investment.

5) Many Americans see India as a democratic counterweight to China. Others warn that deep institutional and cultural obstacles will prevent India from ever playing such a role. I think many of us would like to form our own judgments on this important question. Neither Rottermund nor Tomlinson offers the material with which to do so.

In short: for the reader looking to read one book on the Indian economy – well, neither of these is it.

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