June 19, 2021economicshistory

Moving Indians out of agriculture

It has almost been 150 years since we recognised that to achieve sustained economic growth Indians must shift from agriculture to industry.


When researching for a paper that I was asked to write by the editors of the Indian Public Policy Review, I had the occassion to read in detail some of the debates on economics that occurred in the 1880s. The emerging narrative then was one of how colonial exploitation was responsible for the massive incidence of poverty in the country. This narrative — shaped by intellectuals in Bombay Presidency and Bengal — was later crystallised by Dadabhai Naoroji as the drain theory” of unrequited transfers of wealth and tribute from India to Britain.

A History of Indian Economic Thought

Mahadev Govind Ranade had a different opinion as the following quotes — extracted from Ajit Dasgupta’s A History of Indian Economic Thought– make clear.

Ranade regarded poverty as a legacy from the pre-British era. It is, he suggests, not of yesterday, and is not the result solely of foreign conquest and competition. It is an old, old inheritance’ The question of whether poverty in the nineteenth century was more widespread or intense than that which had existed in earlier times, remained for Ranade an open question but not an interesting one. It concerned specialist historians rather than economists:

The question of our comparative improvement or decline under foreign rule is similarly a question of antiquarian history. The practical question for us all to lay to heart is not the relative, but the absolute poverty and the present helplessness of the country generally.

This poverty, according to Ranade, was due to overdependence on agriculture. Quoting from Dasgupta again:

(The overdependence) had occurred as a result of increasing economic contact with the outside world. Freedom of exchange and competition from the products of modern manufacturing industries had led to a decline of output and employment in indigenous craft industries. Because the machine-made, imported goods were cheaper than the corresponding products of domestic handicraft, the decline itself was inevitable. Even if the government of India had not helped the process in any way British merchants and manufacturers would eventually have asserted their predominance in the Indian market (‘The Economic Results of the Public Works Policy’, SJ October 1884).

An example of such action that Ranade gives is the sudden and complete removal of customs duties on cotton, silk and woollen manufacturers and on wrought metals, which threw out of employment a very large number of skilled artisans. They were compelled to compete in the labour-market with poorly paid agricultural workers.

There were a few developments, for example, the growth of seaports and military and railway stations, which had the opposite effect but they were too weak to counterbalance the economic forces tending towards ruralisation.

There were a few developments, for example, the growth of seaports and military and railway stations, which had the opposite effect but they were too weak to counterbalance the economic forces tending towards ruralisation

So, almost 150 years ago Ranade arrived at the following conclusion: that a substantial increase in industrial employment and output is therefore a necessary condition for sustained economic growth to occur.”

A History of Indian Economic Thought

Why then did it not happen? In colonial times, the British government was not really interested in promoting industrialisation in India. This could be because it didn’t want to, or — as Tirthankar Roy argues — it could be because the colonial state did not have the capacity for it. Gandhi’s influence on the freedom struggle and on the policies of the newly independent Indian Republic discouraged — to put it mildly — industrialisation and urbanisation. The shadow of the Gandhian narrative — imbuing rural areas and activities with moral colour — clouds public perception and policy to this day. Nehru’s pro-industry policies must be seen as valiant, given the prevailing opinion in the Congress leadership at that time. The Left had a baleful influence too: by turning industrial relations into a class struggle, they exacerbated the problem by making industrialisation more difficult.

Industrialisation has thus mostly occurred in defiance, in stealth and many times almost apologetically. Its governance too has been confused and weak, as the people who make rules are cut of the same cloth as the people at large. Without clear principles and objectives, regulations were first designed, and have subsequently ended up as, as instruments of control and rent-seeking. Managing rankings in World Bank’s Ease of Doing Business indicators has improved matters only at the margin. Many entrepreneurs are shifting to friendlier shores.

The UPA government’s decision to implement a national employment guarantee scheme was essentially an admission of defeat: we cannot find ways to create non-agricultural employment for hundreds of millions of people, so here’s a way we can prevent them from crowding into our cities and becoming the urban unemployed.” It’s not surprising that NREGA is popular and useful, or that it has helped in alleviating the suffering during the pandemic crisis. It provides pain relief, but does nothing to address the structural problem of the Indian economy that Ranade so perspicaciously identified.

Today when I talk about the need to create 20 million jobs a year — and why big manufacturing is part of the answer — I get a pushback citing robotics, automation, climate change, land acquisition problems and so on to explain why India cannot/should not industrialise. I fear we have a Stockholm Syndrome with respect to agriculture. Yet, in 2021 as in 1880, finding a way out of agriculture and creating massive industrial employment in an equitable, environmentally-sustainable way remains India’s biggest economic challenge.

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