In this article we will discuss about Indian economy during the second world war.

The Second World War was global as well as total in nature. No country escaped from being affected directly or indirectly. India was directly engaged in the war which left a wide ranging impact on different sectors of its economy.


In the first few months, following the outbreak of the war, it appeared that the clouds of depression that had gathered thick on Indian agriculture, world be dispersed at last. Prices of raw-materials and food stuffs rose and a large overseas demand for commodities like raw-jute and oil-seeds appeared. This prosperity was, however, short-lived.


The difficulties of shipping but more than that, the capture of one country after another by Germany in Europe and by Japan in the East, reduced the area to which exports from India were either possible or per­mitted.

The magnitude of the problem can be estimated from the fact that with Europe alone, India’s loss of trade amounted to over Rupees 30 crores or 1/6 her total over-seas trade. The Commodities most affected were groundnuts, raw- jute, and raw-cotton. The first problem in India, arising out of war, was thus of the so called agricultural surpluses.

A problem more serious than the problem of agricultural surpluses was that of the shortage of food grains. While the demand for food had greatly increased on account of war evacuees and prisoners, a large foreign army, and increased consumption within the country, the supply position deteriorated not so much because of a fall in production as due to a reduction in the marketable surplus.

In view of the high prices of agricultural produce, it was now possible for the farmer to pay off his fixed charges by selling a smaller quantity than before. The rest he retained for this self consumption. Just when the marketable surplus at home decreased, imports from abroad also declined from 2.15 million tons in 1939 to 0.5 million tons in 1941.


Besides, fear of currency depreciation and the expectation of a further rise in prices led to stock building by consumers, traders and farmers much beyond their normal requirements. These were the factors which brought about a scarcity of food and raised its prices.

The situation took an ugly turn with the fall of Burma in April, 1942 and the resulting loss of rice supplies from that country. The situation could have been saved had the government taken energetic steps to dehoard the stocks and ensure their equitable distribution. The attitude of the govt. was, however, complacent and her measures half-hearted.

There was lack of co-operation between different administrative units so that speculators exploited the situation to their full ad­vantage. The result was the Bengal Famine in 1943; 15 lakhs human lives were lost before the govt. introduced rationing in selected centres. At the same time, steps were taken to import food grains from abroad while within the country, the ‘Grow-More-Food grains’ scheme was launched.

The rise in the prices of agricultural commodities benefitted only the well-to-do landlords who had large marketable surpluses. It were they who repaid a large part of their debts. But indebtedness among the small farmers did not decline while terms of tenancy grew harsher and the conditions of agricultural labourers grew worse.


Sky-high prices and near famine conditions forced the small farmers to sell their lands. In one year, 1943 April-1944 April, 25% of all peasant families sold or mortgaged their land, about 2/3 of it falling into the hands of local residents, chiefly absentee landlords.


The war provided a major demand stimulus to Indian industry. The Govt. placed, both on its own behalf as well as on behalf of England and her allies, large orders for domestic industrial products. New firms, which had entered industry amidst threats of over-production, now found a ready market for their products. Older firms expanded their sales and almost every industry operated at full capacity.

Among the older industries to expand were cement, cotton textiles, Iron and steel, and sugar. In 1945, production of cement and paper was 96%, of steel 43% and that of textiles 20% higher than that in 1937. At the same time, some new industries started production for the first time during the war. These included, among others, diesel engines, pumps, bicycles, sewing machines, machine tools, caustic soda, chlorine, Sugar, Phosphates, Ferro Silicon and Ferro-Manganese.

In an atmosphere of increasing demand and rising prices, the established industries reaped a rich harvest of profits. The over all index of profits (Base 1928) moved from 72 in 1939 to 163 in 1945. The mill owners of Bombay alone made 92 crores of rupees in profits on an initial capital of rupees 13.5 crores-their average annual profits being 11 times the pre-war average. These were, however, frittered away and not conserved for modernisation and expansion in the post-war years.

Mention may also be made of the impetus received by small-scale industries. Owing to the huge demand for war goods and the comparatively small capacity of large scale industries, increasing reliance was placed on the small scale producer who supplied large and increasing quantities of cotton and woolen goods including blankets, durries, tents, camouflage nets, army boots, glass-ware and other small articles like Pith hats, socks and hoses.

Despite an impressive increase in the output of certain selected industries, the over all expansion in industrial production was an insignificant 20%. This progress pales into insignificance before the industrial advance registered in America where industrial production went up by 116% between .1939-44.

The relatively small increase in industrial output in India was due to the difficulty of importing plant and equipment from abroad. Preoccupation of Allied countries with the war, danger of enemy submarines, and non-availability of shipping precluded this possibility. The main reason, however, lay in India’s lack of control over her own economic destiny.

The Govt. was still not interested in the in­dustrialisation of India as may be seen from the fact that the proposals to manufac­ture automobiles and ships were turned down just at the time when the government was placing huge orders for them in foreign countries.


Therefore, the increase in production was principally obtained through fuller utilisation of idle capacity by working extra-shifts and more efficient utilisation of capacity in other ways. This led to heavy wear and tear of plant and machinery and created difficulties for post war reconstruction and development.

Thus, despite some progress in the pace and range of production, “India came out of the war much poorer than the entered it.”

Foreign Trade:

The extension in the scope and intensity of the war also brought into play a number of factors affecting the volume, value, composition and direction of India’s foreign trade. The first effect was to reduce the volume. The quantum of exports declined due to loss of the continental markets and an acute shortage of shipping which hampered our exports even to the U.K. Later, the loss of Burma and the Far Eastern markets and the imposition of export restrictions further reduced India’s exports.


Imports fell because of the preoccupation of the exporting countries with the war effort, restrictions on shipping space, increasing incidence of freight and war-risk insurance and the cutting off of the Large supplies of imported goods from some of the enemy countries. On the whole, the quantum of exports in I944-45 was 53% and imports only 40% (in 1943-44) of that in 1938-39.

However, the decline in the volume of trade was more than compensated by the rise in its value from Rupees 385 crores to Rs. 459 crores; the value of exports alone in 1944-45 way 35% higher than that in 1938-39. This increase in value was brought about by a steep rise in prices, both of imports as well as exports.

No less significant were the changes involved in the composition of trade. The proportion of manufactured articles in our exports went up from 30% in 1938-39 to 47% in 1945-46 while the share of raw-materials declined from 45% to 28%. The trend was just the reverse in the case of imports where the share of raw-materials increased from 22% to 48% while that of manufactures came down from 61% to 14% during the same period.

These changes, contrary to what many believe, don’t indicate the extent of industrialisation achieved during the war because the increase in the percentage share of raw-materials in our imports was caused by a large increase in the imports of petroleum for war purposes. Similarly, most of the exports of manufactured articles consisted of cotton and jute goods products of old and well established industries.


A more significant change was in the direction of foreign trade. Due to the shortage of shipping, there was a comparative decline in long distance traffic and a corresponding improvement in our trade relations with nearby countries like Egypt, Iran, Saudi, Arabia, Iraq, Kenya, Australia and Ceylon. The share of the U.S.A. also improved while that of England declined.

India’s balance of trade was traditionally favourable. War made it more so. England and her allies, engaged as they were in a desperate struggle for survival, were not in a position to meet India’s needs. Rather, they needed almost everything that India could produce and export to help their war effort.

As a result, trade surpluses went on mounting so that at the end of the war, India had not only liquidated her external debt but also accumulated a large sterling balance.


The railways had not yet fully recovered from the Depression when the storm of the Second World War overtook them in 1939. There was a tremendous increase in both goods as well as passenger traffic. There was extreme over crowding with passengers often travelling on footboards or the roof of the bogies.

The rolling stock could not be expanded for England could hardly spare anything for India. The position was made more difficult by the presence of enemy sub­marines on the high seas. The entry of Japan into the war further worsened the situation because the plying of even coastal vessels became risky.


There developed an acute shortage of road vehicles as well as petrol necessitating diversion of road traffic to the railways. Some of the railway workshops switched over to the production of war material while about 600 miles of railway lines were dismantled and transported along with engines and wagons to the Middle East.

The railway system thus reached the breaking point. The situation was met by discouraging rail travel, by withdrawing various concessions and requesting the public ‘to travel only when you must’. A Central Transport Organisation and Provincial Transport Boards were set up for the purpose of relieving over­crowding on the railways by diverting traffic to other means of transport.

The war was, however, a period of prosperity for the railways. The losses and deficits of the preceding period gave away to abnormal earnings. Gross traffic receipts rose from Rs. 94 crores in 1938-39 to Rs. 226 crores in 1945-46.

Money Market:

The immediate effect of the war was a certain amount of hurried withdrawals from the banks. The situation, however, soon eased and from 1942, joint stock banks began to take rapid strides as judged by the increase in their number, branches, and deposits.

The number of scheduled banks, including the Imperial Bank and the exchange banks, increased from 51 in June 1939 to 93 in June 1946 and the total number of offices rose from 1959 to 5321.


The largest among the new banks established during the war were the United Commercial Bank, Calcutta, and the Bharat Bank, Delhi, sponsored by the Houses of Birla and Dalmia respectively. With increase in the number of banking offices and the volume of money in the hands of the public, bank deposits rose from Rs. 238 crores at the commencement of the war to Rupees 1097 crores at the end of 1946.

There was, however, a significant change in the character of these deposits in so far as the proportion of fixed to total deposits declined from ½ to less than ¼. The reason, apart from the unattractive rate of interest, was the difficulty of obtaining industrial equipment during the war.

Savings, therefore, could not be used for the erection or extension of industrial establishments and had to be used as working capital for obtaining larger output from the existing scale of equipment.

Although, the progress of Indian banking was rapid and substantial, yet it was not free from defects. There were large-scale complaints of interlocking of banks and other concerns, undesirable manipulation of accounts, indiscriminate branch expansion, opening of branches in centres already well-served, leading to unhealthy and wasteful competition.

The inevitable crash came and, between 1939-45, as many as 482 banks failed.

Public Finance:


During the initial stages of the war, the finances of the Central Govt., paradoxi­cally enough, showed small surpluses. Expenditure, of course, increased but the revenues also expanded due to new taxation, up-grading of old tax-rates, borrowing and inflation.

But from 1942-43 onwards, on account of the vastly expanded scale of war-operations and India’s increasing participation in it, the expenditure began to increase rapidly.

Overall expenditure rose by over three times between 1941-42 and 1945-46 while defence expenditure alone recorded a more than nine­-fold increase. Although tax revenue also expanded by more than four times from Rs. 76 crores in 1938-39 to Rs. 311 crores in 1945-46, but lost ground in the race with expenditure.

There followed a series of progressively-increasing budget deficits — Rs. 17 crores in 1941-42, 47 crores in 1942-43,92crores in 1943-44 and Rs. 78 crores in 1944-45.

Taxation, borrowing, and resort to the printing press were the three principal methods adopted by the Govt. to finance the war. As regards taxation, a new tax, called the Excess profits tax, was introduced while the rate of Income Tax, railway fares and freights, as well as postal, telegraph and telephone rates were enhanced. Likewise, among indirect taxes, surcharge on tobacco and spirit and excise duty on Tobacco were increased while betel nuts, coffee and tea were also brought under the Central Excise Tariff.

Taxation alone was not sufficient to meet the enormous expenditure. The government, therefore, undertook a large scale programme of public borrowing. Defence Bonds, Defence Saving Certificates and interest-free bonds of various denominations were issued. Consequently, the public debt of India jumped up from Rs. 1204 crores in 1939-40 to Rs. 2308 crores in 1945-46.


The largest portion of war finance was provided neither by taxation nor by borrowing but by the issue of paper currency. Total note issue increased about seven times —from Rs. 179 crores in August, 1939, to Rs. 1,247 crores on 26 January 1946. It is noteworthy that while inflationary forces were held in severe check in the U.S. and U.K., in India, inflation grew from bad to worse inflicting intense suffering on the people.

The most objectionable aspect of the war finance in India was that the problem was not viewed and tackled as a whole with an eye to post war reconstruction. Mention may also be made of the indiscriminate levying of indirect taxes without the compensating feature of giving subsidies in respect of essential articles as in Britain. This had the effect of further feeding the persistent inflationary pressures.


Among the various war-time developments in the Indian economy, the enor­mous rise in the price level and the cost of living overshadowed all others by its spectacular character, the wide sweep and its direct impact on the daily life of the common man.

Leaving out China and Greece where runaway inflationary conditions prevailed, India was among those countries which experienced the highest rise in the price level. In 1945, the economic advisor’s price index (August 1939 = 100) stood at 244.

This increase in prices was not equally shared by all commodities. Until the middle of 1943, prices of agricultural commodities lagged behind those of manufactured goods, but from July, 1943 under the stress of scarcity and cutting off of rice supplies from Burma, they not only overtook but even stole a march over them.

The basic cause of the rise in prices was the huge defence expenditure amount­ing to Rupees 2500 crores incurred during the course of the war, the annual average representing 3 times India’s annual revenue at that time. This expenditure was met by a peculiar method under which the British and Allied Govts. made payments for the purchases made on their behalf in India in Sterling in London but the Indian Government released the equivalent amount in rupees in India.

Thus, while sterling accumulated in London, notes in circulation in India rose from Rs. 203 crores in September, 1939 to Rs. 1085 crores in March, 1945. In this manner, inflation was kept at bay in England but unleashed in India.

While the burden of the war was borne by the country as a whole, the inflationary method of war finance and the resulting inflation, which vakil characterised as robbery, distributed this burden most inequitably over different sections of the population.

Broadly, the proportion of country’s wealth, which fell to the share of the low-paid manual worker, the fixed income employee and the small producer diminished while the proportion commanded by the big supplier, the middle man, the war profiteer, the speculator, the large investor, and producer increased.

Economic Controls:

The war brought in its train a sudden speculative rise in retail prices. Hoarding became widespread and flourishing in several essential commodities appeared all over the country. In order to deal with this situation as also to mobilise maximum resources for war effort, the government instituted a variety of controls in the country.

The first was in regard to export trade when the flow of all goods to enemy countries was prohibited while that to friendly and neutral countries was restricted in accordance with war needs and shipping scarcity. This was followed by the imposition of the import control and control of foreign exchanges.

These controls succeeded in controlling both foreign trade and balances in foreign countries although, as a consequence, India suffered on account of the scarcity of consumer goods as well as the depletion of her Dollar resources.

More important than trade control were the commodity controls. Among the chief control measures adopted in 1940-41, rationing of petrol and prices control in respect of Iron and steel, matches, medicines, newsprint, Kerosene and non ferrous metals were introduced. By 1943, by a further extension of controls, a number of industries like leather, cement, paper, rubber, tea, and sugar were also brought within their purview.

By another series of orders and notifica­tions, forward trading in grains, oil seeds, sugar, cotton and bullion were prohibited. In October, 1943, an ordinance for the prevention of hoarding and profiteering and notifications for limiting profits, in a large number of commodities, to 20% above the landed cost or cost of production were issued.

But it was only after the Food Grains Policy Committee had reported that effective measures to control supply, fix prices, and to ration necessities were adopted.

These controls were “un-co-ordinated, ill-conceived and irresolute”. They failed to control the flourishing black-markets partly because of lack of popular support but mainly because of the absence of a coherent policy and a complete lack of the necessary personnel to enforce it.

Besides, wage control and limitation of dividends and profits was either not attempted at all or was not strictly enforced. That is why these controls brought no more than a modest alleviation of the situation.

To conclude. The Second World War provided yet one more graphic picture of the ruthless exploitation of the resources and people of India by England on one side and the Indian monopolist on the other. Apart from a large volume of accumulated sterling balances and the small beginnings made in the field of chemical, metallurgical, and engineering industries, it bequeathed to the country an inflated structure of currency and prices, an intensive and complicated system of exchange control, highly depreciated plant and machinery, a famished and dispossessed peasantry, a growing food shortage, and a flourishing black market in essential commodities.