Over the past few years, India, the world’s largest (if also rowdiest) democracy, has matched its political freedoms with economic ones, unleashing a torrent of growth and wealth creation that is transforming the lives of millions. India's economic clout is beginning to make itself felt on the international stage. As “Time” magazine put it, “Western businessmen who have been losing sleep over China may be worrying about the wrong country. It is Indian corporations that are proving to be formidable competitors in the global, information-driven economy.”
 

Twenty years ago, the rest of the world saw India as a pauper. Now it is just as famous for its software engineers, Bollywood movie stars, literary giants and steel magnates.

For all this, India’s achievements fall far short of its potential. Many countries which are far smaller than India, which have little or no natural resources, which gained independence much later, have fared much better than India which has a large land mass, talented people and ample natural resources. What explains this?

The image of India as a poor country is widespread, but relatively recent. Historically, India was always famous as the richest region of the globe. Greek geographers accompanying Alexander on his invasion of India in 326 BC described it as a country where gold was dug by up by ants and guarded by griffins, and where precious jewels lay scattered on the ground like dust. At the height of Mughal Empire in the 17th century, Lahore was larger and richer than Constantinople and, with its two million inhabitants, dwarfed both London and Paris.

All that changed with the advent of European colonialism. In 1600, when the East India Company was founded, Britain was generating 1.8 percent of the world's GDP, while India was producing 22.5 percent, close to what USA does now. By 1870, at the peak of the Raj, Britain was generating 9.1 percent, while India had been reduced to a symbol of famine, poverty and deprivation.

When India regained independence in 1947, it was poor and relatively backward. Indians blamed this on the British and were certain that India would soon become a prosperous country again.

Their hopes were belied because Indian leaders drew wrong lessons from the colonial experience and pursued faulty policies which hampered economic growth. This explains why India’s performance falls far short of its promise. Some of these policies or their legacies persist even now and it is important to examine them.

British used trade as a means to drain wealth out of India. India’s export-import ratio was 172.5 percent in 1840-69, 148 percent in 1870-1912 and 133 percent in 1913-1938. From this, Indian leaders concluded that export orientation was a tool of colonial exploitation and that free trade was imperialists’ ploy to force their manufacture on India and crush the domestic industry.

They therefore opted for self-reliance and import substitution. They forgot that before the British came, India was a great trading power that used exports to become prosperous. Export orientation did not help India during the British Raj because the trade surplus was used to transfer wealth to Britain, instead of being reinvested in India. It need not have to be so in independent India.

As a result of faulty inward looking policies, India came to make goods that were costly and sub-standard, Indian industries became uncompetitive, India’s share in world trade declined from 2.2 percent in 1947 to 0.6 percent in 1980 and controls on import and capital became inevitable.

India was colonized by the East India Company. This led to another wrong notion among Indian leaders: foreign investment leads to colonial domination. For forty years, India took pride in keeping foreign investors away. This ‘East India Company syndrome’ was so deeply entrenched in their psyche that they ignored all evidence to the contrary. They sneered at Singapore, South Korea and Taiwan (“puppets of imperialism”) for inviting multinationals, which they thought would lead to enslavement and impoverishment. In fact, these countries prospered while India stayed poor; but Indian leaders invented a hundred excuses to pretend that their experience was not relevant to India.

The cumulative outcome of these policies brought India to the verge of bankruptcy in 1991, forcing a U-turn and a return to sensibleness. The economic resurgence seen since then needs no elaboration here.

Ironically, some of the faulty policies from the British era persist even today. India fared poorly under liberal policies of the British Raj mainly because the Raj neglected agriculture and primary education. Despite significant canal irrigation, food availability per head declined during British rule. This meant, besides poverty, lower employment potential in rural areas i.e. unemployment. The modern education that the British brought produced a thin upper crust of educated Indians, while the majority languished in illiteracy.

India has continued the British neglect of agriculture and primary education. India’s first prime minister Jawaharlal Nehru thought agriculture had little potential for poverty removal and was just a holding ground for surplus labour till industry provided more jobs. Only after his death, the Green Revolution showed that a dynamic agriculture was a most powerful tool for poverty removal and faster economic growth.

At present, the Green Revolution has run its course. Indian agriculture is once again characterized by low productivity. The government spends massively on misdirected subsidies on food and fertilisers, but the vital task of capital formation in agriculture is still neglected. Agriculture remains a risky, low-return enterprise. Many farmers are leaving it and many others are committing suicide in hundreds.

The share of agriculture in GDP has declined from 60 percent in 1947 to 17 percent now. Therefore, growth in agriculture is no longer important for the overall GDP numbers. However, more than half its people still depend on agriculture for their livelihood. So, rapid economic growth could have no meaning for rural poor, unless agriculture also participates in it.

Today, thanks to globalization, two main drivers of economic growth, advanced technology and capital, are amply available to India. To translate these into wealth and welfare, India needs skills, infrastructure and institutions. It does have all these, but still needs large doses of each of them.

Primary education is a sine qua non for rapid economic growth. How can a country benefit from technology if workers there cannot read instructions on a bag of fertilizer? Infrastructure necessitates investment. But investment will happen only under conditions that grant the investor—an MNC setting up a power plant, a family sending its children to school—adequate returns. Establishing those conditions is the task of economic policy.

Beyond right policies, India needs proper governance. Thousands of schools have no teachers or black boards. Government hospitals are perceived as death traps. Courts take decades to settle simple cases. For decades, Indian government has been spending heavily on entirely desirable projects such as primary education, agricultural extension, public health, job guarantee schemes etc. But it simply has no machinery to ensure accountability, to ensure that expenditure leads to commensurate outcomes.  

Slowly but surely, India is returning to the place it held as a global trade giant long before colonial powers arrived there. However, it still ranks 127th in human development rankings and is perceived as a corrupt country. It has miles to go before it gets anywhere near its ancient glory.

The author is Executive Editor, Corporate India, and lives in Mumbai