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

(a) Money and credit policies in pre-Independence India

Policy was framed in London for British trade and sterling stability, not for Indian development.

(i) Coinage. Bimetallism with the gold mohur and silver rupee gave way to a silver standard after the Coinage Act of 1835. After 1873 silver's fall caused exchange losses on the "Home Charges", and the mints were closed to free silver coinage in 1893.

(ii) Exchange standard. On the Fowler Committee's advice (1898) the rupee was kept at 1s 4d through a gold exchange standard, with a token silver rupee and the Gold Standard Reserve held in London. Sales of Council Bills by the Secretary of State balanced trade. The Hilton Young Commission (1926) led to a 1s 6d ratio (Currency Act 1927), and after sterling left gold in 1931 the rupee was tied to sterling.

(iii) Note issue. The Paper Currency Act 1861 gave the government a monopoly, backed by the Paper Currency Reserve, and the system was inelastic, so credit was tight in the busy season.

(iv) Banking and credit. Presidency Banks (merged into the Imperial Bank, 1921), foreign exchange banks and joint-stock banks served trade and Europeans. Agriculture depended on moneylenders, with cooperative credit only from 1904. The Imperial Bank was not a full central bank.

(v) Central bank. The Reserve Bank of India, set up under the RBI Act 1934 and opened in April 1935, took over note issue, government banking and reserve functions, but the exchange ratio stayed controlled by London.

(b) Factors behind the shift in sectoral composition of GNP before reform

Between 1950-51 and 1990-91 agriculture's share in national product fell from over 50 per cent to about 30 to 35 per cent, industry's rose from roughly 15 to about 25 to 28 per cent, and services rose to about 40 per cent.

(i) Planning strategy. The Mahalanobis model of the Second Plan and the Industrial Policy Resolution 1956 gave priority to heavy industry and the public sector.

(ii) Import substitution and protection raised manufacturing capacity, though licensing and controls kept it inefficient.

(iii) Slower agriculture. Dependence on rain and land-tenure constraints kept growth at about 2.5 to 3 per cent; the Green Revolution from the mid-1960s helped wheat and rice but did not change the picture much.

(iv) Demand shifts. As incomes rose, demand for food fell relative to manufactures and services (Engel's law).

(v) Services grew with banking (nationalisation of 1969 and 1980), government administration, education, transport and communication, especially in the 1980s.

Thus agriculture's share fell because other sectors grew faster, not because it shrank, yet employment stayed in agriculture.

(c) Reasons for deceleration in agricultural growth after reform

Agricultural growth, about 3.5 per cent a year in the 1980s, slowed to about 3 per cent in the 1990s and to about 2 per cent in some later periods, with sharp volatility.

(i) Falling public investment. Public capital formation in agriculture fell as a share of agricultural product in the 1990s as fiscal correction and rising subsidies crowded it out.

(ii) Irrigation and water. Expansion of canal irrigation slowed, tube-well irrigation led to falling water tables, and large areas remained rainfed.

(iii) Technology and yields. Research and extension were neglected, the yield gains of the Green Revolution levelled off, and fertiliser decontrol (1992) skewed nutrient use towards nitrogen.

(iv) Prices and markets. Input costs rose, output prices were volatile with WTO-era exposure, and marketing and credit remained weak.

(v) Structural. Fragmented holdings, climate risk and a shift of resources to non-farm activity.

Growth recovered in some years (2004-05 onwards) but the core problem of investment and productivity remains.