An Outline Of Indian Economic History: Tracing Per-capita Income Through The Ages

The economic history of India is a subject that evokes strong reactions. It is a subject on which the reactions of both the Left and the Right are at odds with the mainstream view among academic economists. Let us briefly examine the principal reactions, articulated in simplified terms:

1. Mainstream view: India was a subsistence economy for much of its history until it started growing in the past few decades

2. Nationalist view (Right): Ancient India was a “golden bird” (sone ki chidiya), which was impoverished by Muslim and later British rule

3. Nationalist view (Left): Mughal India was a “golden bird” which was badly impoverished by the free trade of colonial period, and has recovered since independence.

While all three views have their merits, I am most critical of the third view. Before we examine the respective arguments, let us take a look at a macro-view of the Indian economy over the past 2,000 years as outlined by the research of Angus Maddison, the British economist, who best represents the mainstream view, which has the widest acceptance.

Examining Maddison’s Conclusions

Here is a chart from Maddison that plots Indian per-capita income since year 1820 in 1990 dollar terms.

The chart is based on the widely-cited paper published by Maddison in 2001 that can be accessed here.

How do the numbers look for periods prior to 1820? And what are Maddison’s estimates of India’s share of world gross domestic product (GDP) through the ages? Here’s a table that addresses these questions. The table has been updated up to 2017.

Now let us examine this closely. It is evident that Maddison’s numbers correspond to the “mainstream” view we articulated at the beginning of this piece. India was not much richer than a subsistence economy from the beginning of the Common Era right up to the time of Independence. The high share of world GDP until early nineteenth century merely reflected a similarly high share of the world’s population.

But the above conclusion of Maddison is not specific to India per se. His view is that right up to the Industrial Revolution of late eighteenth century, GDP shares merely reflected the share of world population in most geographies. This is very much in line with orthodox Malthusian thinking.

Here’s an examination of Maddison’s per-capita income estimates for different parts of the world in 1AD and 1000AD:

However, the above chart is problematic for a few reasons. Firstly, there appears to be an implicit Malthusian assumption. Indian per-capita GDP as well as the per-capita GDP of Western Europe in 1AD is estimated at $450, only marginally higher than that of North America the same year (at $400).

Now we all know that at the beginning of the Common Era, North America was a sparsely populated wilderness for the most part. In contrast, the Indian subcontinent was a society with large empires, considerable urbanisation, and copious literature. Western Europe was a part of the Roman Empire. Yet Maddison estimates the highly advanced states of China, India and Western Europe to be only marginally richer than North America.

In Maddison’s defence, he has acknowledged that these estimates involve considerable conjecture. He fixed the Chinese per-capita income at $450 in 0AD – a notch higher than subsistence income, and then assumed a similar income for other similarly complex societies like India and Western Europe. To quote him:

“Before 1500, the element of conjecture in the estimates is very large indeed. The $450 level of per capita income assumed here is sufficiently above subsistence to maintain the governing elite in some degree of luxury and to sustain a relatively elaborate system of governance. It seemed reasonable to assume that the level of per capita income (for rest of Asia) was similar to that in China and showed no great change from the first century to the year 1000.”

But this is not entirely convincing. Can societies with sufficient surpluses to produce works as large as Mahabharata, Ramayana, the Homeric epics, Bible, Dharma Shastra texts and numerous other works, be barely $50 richer than a subsistence economy like North America? There is room to be sceptical here.

Maddison’s estimates suggest a very strong adherence to the Malthusian maxim that is at odds with the historical memory and records of the societies in question. There definitely needs to be greater research to come up with better estimates for the periods preceding 1000 AD.

Post 1500: Contesting Narratives

Having discussed the reservations with the estimates for early India, let us turn our attention to more recent periods – the last 500 years. Here, Maddison has in fact been challenged by other economic historians. Let us compare the estimates of Broadberry, Bishnupriya, and Custodis (2014) with those of Maddison. As the table below indicates, the narratives from the two papers are vastly different.

As per Broadberry, Bishnupriya et al, there was a significant decline in per-capita income (PCI) between 1600 and 1800, the period of Mughal zenith. So, clearly the narrative from their research does not paint a very good story for Mughal India.

Take the year 1600, when Akbar’s empire covered all of North India, but not the South. The PCI is estimated to be $682. By 1700, the Mughal Empire covered the whole subcontinent. Yet the PCI is estimated to have declined to $622 – a significant decline. By 1800, the PCI further declined to $569. So, clearly the research points to a decline in the Indian economy that coincides with the heyday of the Mughal Empire and long before the establishment of British Raj. In fact, it is striking that the PCI estimation for 1600 at $682 is significantly higher than the estimation of $619 for 1950 by Maddison.

Regional Variation In Economic Prosperity

However, it is also worthwhile to bear in mind that these estimates are for the Indian subcontinent as a whole, and do not reflect the regional variation in prosperity that undoubtedly existed in most times in our history.

Mysore is a fine example of regional outliers that have always existed in Indian history. Based on the price and income data collected by Francis Buchanan during his travels in Mysore region in 1800-01, economist Sashi Sivaramakrishna estimated the per-capita income of Mysore to be five times subsistence level. As Maddison views $400 as the “subsistence level”, Sivaramakrishna’s conclusion leads us to a per-capita GDP of close to $2,000 for Mysore. That would make Mysore more than three times richer than the all-India estimate of $569 for 1800 given by Broadberry and Bishnupriya.

This is a fascinating conclusion, because we all know that even countries like United Kingdom and Netherlands had per-capita incomes in the range of $1,800 in the year 1800. So Sivaramakrishna’s research would suggest that the Mysore province was on par with UK and Netherlands in that period.

Leveraging Wages Data To Challenge Both Maddison And Broadberry/Bishnupriya

Besides the work of academics like Sivaramakrishna that underscores regional variation, there has also been an alternative view from Parthasarathi Prasannan that both Maddison and Broadberry, Bishnupriya et al have arguably under-estimated Indian per-capita GDP in the eighteenth century.

In his book – Why Europe Grew Rich and Asia Did Not: Global Economic Divergence, 1600-1850, Prasannan compares the wage earnings circa 1750 (measured in food grains) of weavers, spinners, and agricultural labour, for three separate regions – Britain, South India and Bengal.

Clearly, the above numbers challenge the conventional wisdom that Britain already had a very significant lead in income levels in the eighteenth century just prior to the Industrial revolution.

It is a riposte to the estimates of both Maddison and Broadberry/Bishnupriya. If we take the above wage data at face value, it is much harder to digest the mainstream view that British PCI in 1800 at $1,707 was three times the Indian PCI estimate of $569 (Broadberry et al) for the same year. Alternatively, one may argue that while both Maddison and Broadberry/Bishnupriya may be right about the general squalour of Mughal India, some regions in India (particularly parts of the Deccan and Bengal) were arguably much closer to the UK per-capita income levels than previously supposed.

The other observation from all the numbers so far is that they do not back the “nationalist” view held by both the Right and the Left in India that the Indian economy was somehow “impoverished” by the British Raj. These numbers clearly suggest that even if there was a decline, that decline started much earlier in the seventeenth century in the heyday of Mughal rule, some two centuries before the rise of the Raj.

But the Indian economy did arrest its decline and it began to grow again, circa 1870. We are on firmer ground on post-1850 numbers with less contention. So let’s look at the numbers over the past 150 years:

The numbers above are in part drawn from Maddison (till 1998) and then updated for 2011 and 2017 using World Bank data linked here.

So what is the takeaway here? Clearly, 1870 was an inflection point of sorts, when the economy started to grow again after several centuries of decline. But this growth was much too slow to the rapid growth in the West which was in its phase of the Industrial Revolution. In fact, the gap between India and UK was way bigger in 1998 than in 1870. While economic growth did resume in the late nineteenth century, it is also true that the rift between India and the West widened.

Post-Independence Era

The Indian regression relative to the West continued well after Independence. Even as late as 1998, the relative gap between US and Indian PCIs was far greater than it was in 1950. This regression, in part, explains the Indian disillusionment with the economic policies pursued post-Independence, first by Jawaharlal Nehru and later by his political successors.

While it is true that even the Nehruvian growth rates were arguably higher than the growth rates at any point in the past 500 years, they were totally out-of-step with the pace that was being set in the developed world. Now, why was this the case? It had a lot to do with the economic policies pursued and the arbitrary restrictions placed on economic activity. But we do need to make the distinction here between the Nehruvian era and the era of Indira Gandhi – two very distinct periods.

The Nehruvian period is best described as the era of “Licence Raj” – a planned economy set-up when companies often needed as many as eighty licences to start production. While economic activity remained in large measure in private hands, those hands were chained and hobbled by the state. The term “Licence Raj” was in fact coined by the great statesman C Rajagopalachari, who wrote in his Swarajya magazine:

“I want the corruptions of the Permit/Licence Raj to go. I want the officials appointed to administer laws and policies to be free from pressures of the bosses of the ruling party..I want real equal opportunities for all & no private monopolies created by the Permit/Licence Raj"

Nevertheless, this period was very different from the reign of Indira Gandhi, when state control went beyond the granting of licences. This succeeding period starting from the late 60s till the early 80s was when the state got into running several businesses. It was a period when large parts of the economy, including banks, were arbitrarily nationalised.

To better understand the distinct economic performance in the Nehruvian period and the Indira Gandhi era, let us examine the economic growth rates in the three sectors separately for three periods post-Independence:

• · Nehruvian period (1952-1966)
• · Indira Gandhi era (1967-1984)
• · Post Indira era (1985 till date)

What is important to note here is the massive decline in the growth rates in the industrial sector during the Indira years – 4.29 per cent as opposed to the 6.45 per cent growth during the Nehru years.

Now, why do we harp on the Industrial sector? It is important because the overall growth rates of the Indira Gandhi years look slightly better than those of the Nehru years due to the impressive performance of the agricultural sector – largely driven by the “Green Revolution” – a black swan one-time event. So, the overall growth rates can be misleading. It is the industrial sector’s growth rates that tell us how bad the Indira years truly were.

The growth rates have been relatively more impressive after 1985, but very high growth rates in excess of 8 per cent have been achieved only in a few select years, and not consistently over three decades as is the case in China. Even the process of economic reform has been in fits and starts.

The first round of major economic reform was in 1991 under P V Narasimha Rao when India did away with much of the old Licence Raj, reduced tariffs and liberalised trade. The second round was in the early 2000s under Atal Bihari Vajpayee, when the focus was more on reducing state control of businesses and disinvestment. But since then the reform process largely stalled under United Progressive Alliance rule, with some lukewarm efforts to revive the process under current Prime Minister Narendra Modi.

As we look ahead into the twenty-first century, we are humbled by the thought that in relative terms the gap between India and the West in particular is greater today than it was in 1820. Let us conclude on that sobering note.