(a) Explain the main features of money and credit policies in India during the pre-Independence era. (20 marks) (b) What are the…

India’s pre-Independence monetary system was shaped less by domestic development than by imperial trade, exchange-rate stability and European capital. The Presidency Banks—Bank of Bengal, Bank of Bombay and Bank of Madras—were commercial and clearing banks, but credit concentrated on trade, government bills and European merchants. Their 1921 merger into the Imperial Bank of India strengthened centralised banking but did not remove the split between European and Indian money markets. European banks and the Imperial Bank worked in sterling-linked trade finance, while Indian traders, artisans and peasants depended on indigenous bankers, moneylenders and small native banks. Institutional credit to Indian traders was limited; rural credit exclusion was severe. Cooperative credit societies and land mortgage banks existed, but limited reach, capital and lending discipline left much rural borrowing informal and expensive.

After the rupee was tied to sterling, India experienced relative exchange-rate stabilization between 1893 and 1913, which helped trade but made the economy vulnerable to sterling cycles. The currency board system fixed the rupee’s value by holding sterling reserves and made the money supply passive to external balances rather than domestic credit needs. The Hilton Young Commission’s recommendations, especially the gold-sterling standard and a gold reserve, further anchored the rupee to external stability. The result was limited monetization: credit expansion was restrained, and the monetary system did not channel savings into productive rural or industrial investment.

Pre-reform sectoral shift Between the early 1950s and 1990-91, GNP composition shifted because planned industrialization deliberately raised manufacturing and services. Agriculture’s share fell from about 55% in the early 1950s to well below 45%—roughly 30-35%—by 1990-91, while industry and services rose. The Second and Third Five Year Plans emphasized capital goods, heavy industry and import substitution, creating public-sector dominance in steel, power, fertilizers and machinery. This capital formation pattern shifted output away from agriculture even where farm production grew. The Green Revolution raised foodgrain output, but its uneven regional impact—strong in Punjab, Haryana, western UP and parts of Tamil Nadu, weaker in rain-fed eastern regions—prevented broad-based agrarian transformation. Demographic transition and urbanization also mattered: rising labour force, migration to towns, and expanding public administration, education and transport services raised the services share. Thus the pre-reform shift reflected state-led industrial bias, uneven agricultural technology and changing labour absorption.

Post-reform agricultural deceleration After 1991, agricultural growth decelerated because the reform package reduced the state’s direct role in agriculture while exposing farmers to global markets. Public investment in irrigation, rural infrastructure and agricultural research fell relative to industrial and urban priorities. Input subsidy reforms and rationalization of administered prices weakened the earlier support structure, while trade liberalization exposed Indian farmers to global price volatility. WTO Agreement on Agriculture constraints limited the scope for border protection and some domestic support, making it harder to shield smallholders from cheap imports and volatile world prices. Declining terms of trade for agriculture followed: farm output prices rose less than industrial and service prices, reducing farmers’ real income. Infrastructure neglect—poor roads, storage, cold chains and market access—increased post-harvest losses and marketing costs. Technology fatigue in Green Revolution regions, with limited new breakthroughs, slowed yield growth, while environmental degradation, especially groundwater depletion in Punjab-Haryana, raised costs and damaged sustainability. Together, these factors slowed growth to around 2.5-3.0% in the 1990s and about 2.4% in the 2000s, below the earlier Green Revolution pace.

Thus, pre-Independence monetary constraints, planned industrialization and post-reform liberalization together produced uneven structural transformation: industrial and services shares rose, while agriculture remained dependent on public investment, technology and market protection.