CHAPTER 4

Impact of the British Regime on the Indian Economy

In this chapter an overview of the way in which the British restructured the indigenous economic system of India, a British colony, to suit their objective of maximum exploitation is presented. Colonization is described as “governance of a land and its people, now on behalf of and primarily for the economic benefits of a community of people inhabiting a far-off land” (Mukhia 2004). The 17th century and the first few decades of the 18th century were bright both for Indian trade and traders. But the process of drainage of the Indian economy started with the growing commercial power of the English and with the gradual transformation of the East India Company into a political power in the post-Plassey period. Indian trade and traders began to suffer till the latter were eventually ousted from the field due to unfair competition from the English. The invasion of the English into the private trade of the country, their abuse of dastaks (a trade permit sanctioned to the east India company by the Mughal government), among others, had the effect of eliminating the Indian merchants from the playing field. The scramble for riches and the scandalous misuse of dastaks after the Battle of Plassey unleashed the forces of economic decline and saw the emergence of the commercial and political supremacy of the English.

The objective of the East India Company was to import raw materials from India, process them, and export the products to earn revenue. This resulted in India being an exporter of goods of less value and an importer of manufactured goods of higher value, which made the nation’s economy spiral downwards. One of the principles of the British commercial policy in India was to protect the textile industry of Britain against the competition of the Indian textile manufacturers. An Act was passed in 1700 prohibiting the use of silk goods and calico prints from Bengal, Persia, China, and the East Indies in England. However, raw silk was allowed to be imported into England in 1701.

The development of nationalism and a political consciousness at the turn of the century made Indian scholars keenly aware of the economic exploitation of India by the British, which formed the theme of the writings of Naoroji (1902) and Dutt (1963). The strong nationalist movement that followed the partition of Bengal in 1905 gave a great impetus to the study of the economic conditions of ancient India. The period between 1916 and 1925, coinciding with the postwar nationalist and revolutionary movements sweeping across Europe and Asia, marked the peak of the nationalist movement in India as well.

Indian scholars focused on analyzing the problems of poverty and colonialism prevailing in the country during those days. Dadabhai Naoroji (1825 to 1917), Mahadev Govind Ranade (1866 to 1915), and Romesh Chunder Dutt (1848 to 1919) analyzed the problem of poverty in India from new perspectives. Naoroji, in 1902, wrote a detailed analysis on the exploitation of the Indian economy by the British regime and advocated for popular protectionism. He was also the first person in India who made an estimate of national income in India, personally putting in his effort in doing so.

Ranade (2018) also criticized the free trade policy followed in India and reflected colonial light in the system of international division of labor. He realized the influence of various psychological and institutional factors on the economic development of India. Ranade’s contribution to economic thought was a synthesis of the British policy of free trade and colonialism and some other ideas of the German school of thought. After Ranade, Dutt undertook a detailed analysis of the “drain theory” of Naoroji. These Indian economists of the 19th century had realized that the economic problems of India were undeniably connected with British colonialism.

Prior to British colonial rule, India was well known for its handicraft industries dealing with cotton and silk textiles, metal and precious stone-work, etc. These products manufactured in India had a worldwide market due to the fine quality of the materials used and high standards of craftsmanship employed in the exported products. Gadgil (1938) attributed the decline in handicrafts in India to the following three factors:

1. I.the disappearance of the court culture of late Mughal days and old aristocracy;
2. II.the establishment of an alien rule with the influx of many foreign influences that such a change in the nature of government meant; and
3. III.competition from machine-made goods.

For the purpose of precise presentation, the period has been divided into three broad stages of British colonialism in India. They are as under1:

1. I.Mercantile development (1757 to 1813): “The East India Company began to use its political power to monopolize the trade in India. It dictated the terms of trade in its dealings with the traders and merchants of Bengal. The Company imposed inflated prices of goods leading to adventurous capitalism whereby the wealth was created by the political clout of the British traders. The revenue collected from Bengal was used to finance exports to England”.
2. II.Industrial phase (1813 to 1858): “With the development of British industries, India was exploited by its colonial masters as a market for British goods. With the passing of the Act of 1813, only one-way trade was allowed by the British, as a result of which, the Indian markets were flooded with cheap, machine-made imports from newly industrialized Britain. This led to the loss of both the Indian and foreign markets for traders in the country. Now, Indians were forced to export their raw materials to Britain and import finished goods from there. The British traders imposed heavy import duties on the Indian products exported to England in order to discourage them from being consumed in the British market”.
3. III.Financial phase (1860 onwards): “After the British consolidated their position in India, they converted India into a market for British manufacturers while still being a supplier of foodstuffs and raw materials. In the second half of the 19th century, modern machine-based industries started coming up in India, helped by the introduction of the railways in 1853, and the post and telegraph later in the same year. There was a rush of foreign investment in India, with investors mainly lured by the chances of high profits and the availability of cheap labor and raw materials. The banking system was introduced in the form of the Avadh Commercial Bank in 1881. Homegrown industries also came into existence, such as Tata Iron and Steel in 1907. Socially, this led to the rise of an industrial capitalist class and the working class became a very important feature of this phase” of Indian economic growth.

The colonial era had a tremendous impact on the economy due to the changes in the process of taxation, trade, property taxes, etc., all of which resulted in the breakdown of the economy, and which also caused the composition of agricultural produce to change drastically.

The Changing Narrative of India’s Economic History

Roy (2002) in his study observed that “until quite recently, most economic history research in India was conducted within a paradigm that saw development and underdevelopment, industrialization and deindustrialization, as two sides of the same coin. This formulation pervaded both Indian nationalist thought as well as leftist historiography”. This view was first challenged when Morris (1963) proposed a more positive view of 19th-century Indian development. The main message was that economic growth in 19th-century India was constrained by productive capacity rather than by politics, which played a benign or positive role. Irrespective of the difference in their political status, British and Indian economic fortunes were complementary rather than contradictory. The uses and benefits of public goods, such as the railways or the telegraph, were not restricted to ethnic groups and benefitted all equally.

Regarding the colonial rule, questions have been raised as to how large, of what nature, and how lasting the impact was. These questions have long guided the study of the economic history of India. The imperialist, or “orientalist,” belief was that the empire heralded modernity in India, while 20th-century writers on imperialism and development believed in an enduring link between colonialism and underdevelopment. Scholarship continues along the imperialism–underdevelopment axis, but this stance looks increasingly dated and disoriented, especially at a time when economic liberalization in India is drawing upon the tenets of classical political economy on which British policy in India was founded. Roy (2002) argues that “a different narrative of Indian economic history is needed. An exclusive focus on colonialism as the driver of India’s economic history misses those continuities that arise from economic structures or local conditions. In fact, market-oriented British imperial policies did initiate a process of economic growth based on the production of goods that were intensive in labor and natural resources. However, the productive capacity per worker was constrained by the low rates of private and public investment in infrastructure”. The paragraphs that follow are largely based on the research analysis of Roy (2002). It is useful to focus on three major features during the period of British colonial rule:

1. I.Structural features include the overwhelming importance of natural resources and labor to economic growth, fluctuations, and welfare. Agriculture and labor-intensive industry and services were the main livelihoods throughout this period and beyond.
2. II.Global features focus on the fact that India’s economy was more open during this period compared with periods before and after colonialism. India participated in a global revolution in transport and communication, which include especially the opening of the Suez Canal, and the introduction of the railways, and the telegraph.
3. III.Colonial features indicate India’s status as a colony imposed certain peculiarities on its balance of payments, like large remittances paid by the government to Britain. However, the ratio of investment to government expenditure was apparently much higher in British India than in earlier Mughal India.

The structural features of India’s economy changed slowly. For example, India’s economy was primarily agrarian before, during, and since colonialization. By 1757, the English East India Company commanded political power in Bengal. This transition from trade to direct rule can be explained partly by the needs of the trade itself. British mercantilists criticized Britain’s payment of bullion for Indian textiles, the most important item in this trade. Local political circumstances that enabled the British to command the land revenues of Bengal came as a less controversial means of payment. The local circumstances included the support of the elite disaffected by the local rulers. When the company’s monopoly in trade ended in the early 19th century, it was committed to building an empire. By 1857, the boundaries of colonial India, which were the basis on which two nations were carved out in 1947, had been defined.

A more or less uniform administrative system came into place in this time span. In the economic sphere, there were several major changes. Agrarian “settlements,” which were contracts between the state and the cultivators on property rights and revenue commitments, were drawn. The British wanted to create a class of cultivators with secure property rights who would yield more revenue to them by pursuing profit-oriented cultivation.

Another set of changes had their origin in foreign trade in an increasingly integrated world where trade expanded quickly. Indian exports had been dominated by textile manufacturers in the 18th century. The composition of exports changed to non-manufactured goods and that of imports to manufactured goods, notably British textiles. The early 19th century saw the rise of new commodities in trade, such as indigo, opium, and cotton. The profits of these trades sustained new commercial-cum-port towns, such as Calcutta, Bombay, and Madras. There is a widely shared belief that the consolidation of British power in the economic sphere saw a violent and uncompensated economic disturbance. The fact that there was such a decline, the period in which it happened, the regions affected, and the causes behind it remain imprecise. One thing is clear—India’s traditional cotton textile industry declined between 1820 and 1860. First, an export market for Indian cloth disappeared. Later, handspun cotton yarn and hand-woven cloth suffered due to the import of yarn and cloth from the mills in England. The decline seems dramatic if seen against India’s earlier dominance in the world textile trade. This single example of decay appears to have generated the “deindustrialization” thesis, which at its narrowest holds that early British rule introduced a violent shock to India’s economy, and at its broadest holds that colonialism caused underdevelopment. Roy (2002) has stated that both the narrow and broad inferences, however, are deeply questionable for a number of reasons:

1. I.The industrial decline was apparently restricted to cotton textiles.
2. II.The decline of the textile industry did not continue through the rest of the 19th century and on into the 20th century as British colonial rule strengthened, which calls into question whether the fundamental cause was the rise of colonial rule in the first place.
3. III.A decline in cotton textiles was not capable of causing economy-wide distress. The proportion of textile export in total textile production was very small, at its peak not more than 1 to 2 percent.
4. IV.Losses for the Indian textile producers were largely balanced by gains for the consumer, which were large. By 1850, prices of ordinary cloth were about 20 percent of what they were by 1800.
5. V.Many of the jobs lost due to competition with mechanized textiles consisted of those held by poorly paid domestic workers with low opportunity costs.

Moreover, an alternate plausible source of economic regress in some areas was taxation, mainly because India’s government of the time collected taxes more thoroughly than before in areas where direct contracts with the cultivator were in play.

Employment in agriculture: Agriculture has been the predominant sector for India’s workers for the last two centuries, right up to present times. About 70 percent of India’s employment was in the primary sector in the first few decades of the 20th century. The conditions for agriculture have been a primary determinant of India’s economic progress and the well-being of most of its people.

“Between 1885 and 1938, cultivable area increased by 60 million acres, of which over half was irrigated. The latter half of the 19th century saw agrarian commercialization driven by trans-local markets. Early in the 19th century, India’s product markets were constrained by a multiplicity of weights and measures, backward and risky transportation systems, and the extensive use of barter. But global technological advances and British administration weakened these constraints and enabled closer integration of markets. Agricultural prices consistently rose. Transactions costs fell. Land sales, land prices, and rents increased. Credit transactions expanded. Labor became more mobile and more market-oriented, and millions went overseas. Profit opportunities led to changes in resource use. For example, in what had been the drier millet zones, after irrigation, a basket of “cash crops” became common, like wheat, cotton, oilseeds, sugarcane, and tobacco. The value of India’s exports quintupled between 1870 and 1914. Agricultural goods accounted for 70 to 80 percent of the exports” (Roy 2002).

Colonialism brought changes in the laborer’s social position. In precolonial India, laborers came from castes whose primary duty was to perform labor. Many were akin to serfs, and some were actually salable. In the colonial period, this serfdom or slavery declined. The element of compulsion and force in employment weakened. The possibility of migrating to the cities and to other British colonies made occupational choices more diverse. The decline of attached labor was partly induced by the widespread exit of these castes from agricultural labor and entry into plantations, mines, urban services, public works, and government utilities.

Employment in industry: India’s workforce is not significantly more industrial today than a century ago. In 1901, 13.9 million industrial workers formed 10.5 percent of the workforce. The share of industry in national income grew from 11.1 percent in the period from 1900 to 1910 to 16.4 percent between 1940 and 1946. “Factory employment in the colonial period was overwhelmingly dominated by the textile industry: mills for cotton and jute spinning and weaving; cotton-ginning firms and jute presses; and a few large firms in wool and silk spinning and weaving. The other mechanized industries were paper, sugar, matches, cement, and steel. Technology and capital goods were imported, but even significant Indian mills used a far higher proportion of labor to capital than the comparable factor proportions in the same industries in Britain. These modern factories were concentrated in two provinces, Bombay and Bengal. The attraction of these provinces, especially that of the cities of Bombay and Calcutta, derived from their position as major centers of transportation and large settlements of maritime traders” (Roy 2002).

Advent of modern industry was essentially a product of India’s contact with Britain. In cotton and jute mills, the idea of a mill, the technical knowledge, the equipment and capital intensity, a part of the capital, and a section of the engineers at first came from Britain. This dependence on British precedence led to ways of organizing work that did not exist before. It gave rise to cities such as Calcutta or Bombay; shaped urban labor markets; encouraged the growth of railways, ports, laws, banks, and technical schools; and was a force behind the modernization of services (Roy 2002). Factory labor was a new form of work in India in the middle of the 19th century. Machinery, migration, urbanization, and discipline were new ingredients in the workers’ lives.

Financial market: At the start of colonial rule in the 1850s, India’s capital market institutions were inadequate to channel household savings to industrial investment. The real cost of capital was astronomical. The hunger of Indians for gold and silver took a toll on productive investment. The slow pace of institutional development on the financial side was also a negative factor. The traditional system normally did not deal in deposits and was thus inadequate in channeling household savings into productive uses. Such a development had to await joint stock banks, which expanded only late in the interwar period, that too in a highly unsteady fashion. It is not surprising that the pioneers in modern industry came almost entirely from communities that had specialized in trading and banking activities—that is, those who could raise money more easily. By and large, fixed capital in modern industry came from its own sources of funds or from borrowings from within a small set of people known to each other.

Increase in commercialization: Commercialization involved a number of shifts increasing integration of the market for the products of traditional manufacturing; a shift away from production for own use or use as gifts and tributes to production for the market; and a shift from local to longer distance trade. As markets integrated, competition within the crafts intensified. There was a decline of older institutional forms and the rise of new ones that used labor more efficiently. In particular, there was a decline in two types of non-specialized workers: women working in household industries and a group the early censuses called “general labor,” which performed a variety of laboring tasks in the villages and some manufacturing on the side (Roy 2002). Leather manufacture provides an example of how commercialization affected traditional manufacturing.

Competition between traditional handloom manufacturing and the modern power loom manufacturing was acute, and the share of traditional manufacturing eroded steadily throughout the 19th century. However, hand- and power-weaving also served segmented markets, and those segments of hand-weaving that did not compete with modern textile manufacturing saw a pattern of expansion in demand, commercialization, and urbanization, along with technological and organizational change. A range of traditional manufacturing industries intensive in craftsmanship—carpets, shawls, engraved metals, or silks—were always urban and commercial. But the extent of urban concentration increased, and there was a qualitative change in clientele from powerful local patrons to exports. If Bombay and Calcutta with their large-scale factories represent one face of industrialization in India, numerous medium-sized towns, such as Agra, Benares, Moradabad, Sholapur, Madurai, or Jaipur, illustrate the strength of labor-intensive industry that arose from traditional roots.

Craftsmanship was a resource contributing to industrialization in India. In the largest industry, handlooms, wages did not rise for the ordinary weaver, but returns to capital and craftsmanship increased. This process illustrates industrialization based on utilizing labor more productively, rather than on replacing labor by machinery. Commercialization started the process. There was a persistence, and even strengthening, of traditional organization in the short run. Thus, in India, both modern and traditional industry developed side by side (Roy 2002).

Movement of trade and capital: India was a more open economy in the colonial period. Before the 19th century, foreign trade was a negligible activity for India’s economy as a whole, though it was significant for certain regions. The ratio of trade to domestic production increased from 1 to 2 percent around 1800 to a little less than 10 percent in the 1860s to 20 percent by 1914. India’s government during the colonial period borrowed heavily abroad to finance its investments and other commitments. Repayment of these loans, along with regular remittance on account of charges made by Britain for costs of the administration of India, was a large net payment item in India’s foreign transactions. The money supply in colonial India was mainly influenced by the balance of payments. The primary objective of monetary policy was to stabilize the exchange rate. Stabilization of prices and outputs was meant to happen automatically. However, when Indian interests and Britain’s interests came in conflict, stabilization in Britain’s external account was usually in the minds of those who decided Indian affairs.

Critiques of colonialism emphasized payments on government account, infamous as “drain.” These remittances held an element of transfer, in that some of the services for which payments were due were overpriced. The British administrative elite, for example, was paid as grandly as its counterpart in precolonial Mughal India. However, a great deal of government expenditure was made for services that India needed but could not supply on its own, such as pensions to teachers and engineers or payment of debts raised to finance railways and irrigation. After all, Britain and India were worlds apart in their technical, scientific, and managerial capabilities. “Drain,” therefore, is extremely difficult to separate from legitimate factor payments (Roy 2002).

India’s growth during the colonial period: The first 60 years or so of British colonialism delivered economic growth and a rising standard of living. The early colonial period between 1858 and 1914 saw positive economic growth for India. The rate of growth was small by modern standards, but not trivial by contemporary standards. India’s real national income grew at over 1 percent between 1868 and 1914, and per capita income at a little less than 1 percent. These growth rates appeared to be rising late in the 19th and early 20th centuries. In contrast, the interwar period of the 1920s and 1930s was a difficult time, for the world economy, for India, for Britain, and for India–Britain relations. A combination of much slower growth in output and much more rapid growth in population meant that average the standards of living stopped improving, or even declined, and the poorer sections of the agricultural population in particular faced harder conditions.

In the 19th century, India’s growth was shaped by factors tied to labor-intensive growth. Public investment—in irrigation, railways, and other public works—extended the production frontier by bringing new land under cultivation. The expansion of trade and commercialization, both between regions and internationally, took advantage of the public investments. There was also a great reallocation of labor away from settled agriculture and handicrafts to new lands and new occupations, such as plantations, mines, public works, or migration overseas. The received interpretation of colonialism tends to see this process as one of pure labor displacement. But more realistically, after the reallocations, overall labor demand increased in the 19th century.

Already by 1900, the opportunities for expanding acreage had been largely exhausted, and new land was scarce. Further growth in agriculture was based wholly on labor input. The period between 1858 and 1920 saw only a modest increase in the supply of workers. Thereafter, the growth rate of the population and the supply of labor both accelerated. In modern industry, expansion was based on growth in both capital and labor inputs. In traditional industry, there was very little growth in capital and a fall in labor input. The main source of growth was institutional changes leading to increased total factor productivity. This outcome was a result of markets and organizational change. When the products of traditional industry became more commercialized in the colonial period, two things happened. First, some low-productivity segments in handicraft textiles were destroyed by foreign competition. Secondly, and somewhat later, there was increasing competition within the domestic handicrafts. As a result, the traditional household organization tended to decay, because it was incompatible with elements of commercial production like the division of labor, economies of scale, monitoring costs, and the opportunity costs of family labor.

The mobility of labor increased as well. In India, reallocation of labor has often required more than just a wage incentive. Much of the reallocation of labor into sectors like modern industry, mines, plantations, and, to a small extent, railways, relied on “contractors,” who could communicate with both the workers and the employers and who frequently took advantage of asymmetric information. After about 1900, voluntary internal migration increased, and labor became increasingly commercialized. Access to training became wider compared to that under older institutions, such as families or close-knit apprenticeship systems (Roy 2002).

Contribution of British rule: The British rule in India for about 200 years left behind some permanent imprints in the socioeconomic, political, and cultural life of Indians. India achieved political unification under the British rule. The credit for the origin of administrative machinery also goes to the British rule. The Indian Civil Service, the Indian Police Service, the Indian Audit and Account Service, the Indian Medical Service, the Indian Education Service, and the Revenue and Judicial Service created an administrative machinery that not only shouldered the responsibility of the work of the government on a large scale, but also dealt with issues such as famine and plague, means of transport and communication, agricultural projects, etc. Credit goes to the British Government for the establishment of popular educational institutions. Due to a Western education, an intellectual awakening took place among the middle-classes, who eventually led the national movement and demanded self-rule for India. However, the British government did not build an effective mass education system. Private education funding was slow. Colonial development was based on the classical principle that nations should grow by utilizing their endowments in a free world market (Roy 2002).

The Indian Renaissance and several socio-religious movements of the 19th century were the outcome of reactions against British rule and their atrocities. All these movements paved the way for the modernization of India. Many social evils were eradicated because of these movements. The British also brought in a new dimension by developing a banking system and a system of free trade. People could use now a single currency system along with the exchange rates. Weights and measures were brought into the system and trade was carried on at a large scale with the development of the railways, roads, telegraph lines, etc. However, the people of India suffered a great loss in the economic domain. Thus, the British rule in India proved both beneficial and harmful in different spheres. In fact, whatever harm the British had done to India was only to safeguard their own interests and whatever advantages the Indians received from British rule were the outcome of the efforts made by the leaders of the national movement.2

Endnotes

1. 1.Economic impact of British Rule in India. https://exampariksha.com/economic-impact-of-british-rule-in-india-history-study-material-notes/, (accessed on December 24, 2019).
2. 2.Contribution and Impact of British Rule on India. http://www.historydiscussion.net/british-india/contribution-and-impact-of-british-rule-on-india/2617, (accessed on December 24, 2019).