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Dec 1, 2018 | 11:00 GMT

5 mins read

World War I: A Turning Point for the Indian Economy

A goods train in India, circa 1914.
(HULTON ARCHIVE/Getty Images)
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By Niranjan Rajadhyaksha for Mint and the IDFC Institute

The centenary celebration of the end of World War I has mostly focused on its political impact, especially the implosion of multinational empires that led to the creation of new ethnic nations in Europe, as well as the communist capture of power in Russia. In India, the return of Punjabi soldiers after the end of the war also galvanized political activity against colonial rule in that province, which became the spark for wider protests.

Less attention has been lavished on the economic impact of the conflagration. World War I ended the first era of globalization. It was followed by three decades of economic misery thanks to the collapse of global trade, a rising tide of protectionism and deep recessions in several countries. The balance of global economic power began to shift as the United States and Japan made a deeper impact on the world economy.

World War I also proved to be a turning point for the Indian economy. The economic historian Tirthankar Roy has explained in his work how the British engagement in World War I had a complicated impact on India. There was a sharp increase in demand for Indian goods in Britain as production capabilities in Britain itself were diverted to the war effort. However, the disruption in shipping lanes because of the war also meant that Indian industry faced dislocations because of the shortage of inputs that were earlier imported from Britain and Germany. There was excess demand as well as supply bottlenecks.

One result was inflation. Industrial prices nearly doubled in the six years after 1914. Accelerating prices benefitted Indian industry, as was also the case during World War II a few decades later. Farm prices rose as well, but at a slower pace than industrial prices. The internal terms of trade moved against agriculture. This trend continued for most of the next few decades, and especially during the collapse in global commodity prices during the Great Depression. The rapid rise in industrial prices as well as improving internal terms of trade for Indian industry benefitted industrial enterprises.

However, that was not the entire story. The war years also saw a shift in colonial policy away from laissez faire to a more interventionist approach — a shift that had a profound effect on the subsequent policy framework. There were two primary forces driving this shift.

First, the British realized that their most important colony needed strategic industrial depth if it had to be successfully held during disruptions such as a world war. Second, the long nationalist campaign for the state to support Indian industrialization began to bear fruit. The colonial state finally accepted the need for a specific policy framework to support industrial investment in India.

In March 1916, Ibrahim Rahimtoola proposed in the Imperial Legislative Council that a committee should be appointed to examine what policies were needed to promote industrial development in India. The Viceroy accepted the proposal. There were four Indian members in the group that wrote the Indian Industrial Report that was made public in 1918, or 100 years ago. These Indian members were Fazulbhoy Currimbhoy, R.N. Mookerjee, D.J. Tata and Madan Mohan Malaviya.

The Indian Industrial Report recognized the need of state support for industrial growth, but also stopped short of the original demand by Rahimtoola that the power to impose import, export and excise duties to promote domestic industrial investment should be shifted from London to New Delhi. Fiscal autonomy was rejected, and the anodyne conclusion was: "A powerful and well-directed stimulus is needed to start the economic development of India along the path of progress. Such a stimulus can only be supplied by an organised system of technical, financial and administrative assistance."

More powerful than the official report itself was the scholarly dissent note written by Malaviya. He marshalled data from Indian economic history as well as the recent experience of late industrializers such as Germany and Japan to argue for a more meaningful government support for Indian industrial growth. This was at a time when mainstream Indian nationalism was enthusiastic about rapid industrialization, and a few years before the Gandhian idea of village self-sufficiency took hold of the public imagination. The dissent note written by Malaviya is a treat to read even 100 years later.

His protest was not wasted. The die had been cast. The next few years after 1918 would see the setting up of a Fiscal Commission to provide some element of fiscal autonomy for India as well as a Tariffs Commission that would offer temporary protection for a handful of industries that had been carefully identified based on the comparative advantage.

The coming three decades would be tough as the world economy stuttered. India also lost out to the Japanese in key areas such as textiles. However, what happened in the six years after 1914 had an impact over the longer term. The extraordinary profits earned during World War I provided the initial capital for several Indian industrial groups that would become dominant in the years to independence. The acceptance of state support for industrial development should be seen as the precursor of the more structured calls for national planning from political leaders as diverse as Jawaharlal Nehru, B.R. Ambedkar, V.D. Savarkar and Subhas Chandra Bose.

The initial success followed by the eventual failure of Indian planning is another story altogether.

Niranjan Rajadhyaksha is research director and senior fellow at IDFC Institute. Read Niranjan's previous Mint columns at www.livemint.com/cafeeconomics.

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