Indian Economy at the eve of Independence
Here are notes on the Indian Economy drawing on the provided sources:
Indian Economy in the Pre-British Period
The Indian economy before the British period was characterized by isolated and self-sustaining villages alongside towns that served as centres for administration, pilgrimage, commerce, and handicrafts.
Means of transport and communication were highly underdeveloped, resulting in very small market sizes.
Understanding pre-British India requires studying the village community structure, the character of towns, and the state of internal and foreign trade, transport, and communications.
Structure and Organisation of Villages
The village community was based on a simple division of labour, with farmers cultivating land and tending cattle, and various hereditary craft occupations like weavers, goldsmiths, carpenters, potters, etc..
These craftsmen were paid a stipend out of the crops at harvest time for their services.
Most food produced in the village was consumed within the village itself.
Handicrafts used raw materials produced from primary industries.
The interdependence of agriculture and hand industry provided the basis for these small village republics to function independently. Sir Charles Metcalfe described them as "little republics having nearly everything they want within themselves; and almost independent of foreign relations".
Villages did acknowledge some outside authority, such as a local princeling, Muslim Nawab, or Hindu king, by paying land revenue (a portion of agricultural produce varying between one-sixth to one-third, or sometimes one-half). This revenue sustained the government.
There were three distinct classes in village India: agriculturists (land-owning and tenants), village artisans and menials (servants of the village), and village officials.
Labour and capital were supplied by producers' savings, the village landlord, or the village moneylender. Moneylenders and landlords were the only sources of credit, charging exorbitant interest rates.
Most villages had panchayats (bodies of village elders) to settle local disputes and serve as courts of justice.
These isolated, self-sufficient units formed an enduring organisation, surviving aggressors and exactions partly due to the absence of widespread transport/communication and centralized government.
Structure and Character of Towns
Towns emerged principally as places of pilgrimage (e.g., Allahabad, Banaras, Puri), seats of courts or capitals (e.g., Delhi, Lahore, Lucknow - these lost importance when courts left), or trading/commercial centres on important routes (e.g., Mirzapur, Bangalore).
Towns had a life different from villages, with a large variety of occupations and trades catering to wider markets.
Industries and Handicrafts in Pre-British India
Contrary to some beliefs, India was an industrial country, although agriculture was dominant.
Products of Indian industries enjoyed a worldwide reputation, including Dacca muslin, Bengal calicos, Banaras sarees, and other cotton fabrics. Indian muslin was used to wrap Egyptian mummies dating back to 2000 B.C.. Dacca muslin was known to Greeks as Gangetika.
Textile handicrafts were the chief industry, spread across the country, known for the high artistic skill of artisans.
India was also well-known for artistic industries like marble-work, stone-carving, jewellery, brass, copper, bell-metal wares, and wood-carving. The cast-iron pillar near Delhi is a testament to high-level metallurgy.
Indian industries not only supplied local needs but also enabled exports of finished products to foreign countries. Exports included cotton/silk fabrics, calicos, artistic wares, silk/woollen cloth, and articles like pepper, cinnamon, opium, and indigo. Europe was a customer of Indian manufactures in the 17th and 18th centuries.
The Industrial Commission (1918) noted India's superior industrial status, stating that even when merchant adventurers arrived from the West, India's industrial development was "at any rate, not inferior to that of the more advanced European nations".
Economic Consequences of British Conquest
Unlike earlier invaders who Indianized, the British maintained distance, creating a distinction between foreign rulers and Indian subjects.
British rule (East India Company 1757-1858, British Government 1858-1947) coincided with England's Industrial Revolution. This helped the British sell machine-made goods in India, competing with handicrafts.
The British conquest led to the disintegration of the village community through new land revenue systems and commercialization of agriculture.
The new land system and commercial agriculture resulted in untold exploitation of the peasantry and frequent famines.
British development initiatives (railways, irrigation, education, revenue settlements) were primarily aimed at accelerating the economic drain from India.
Decline of Indian Handicrafts and Progressive Ruralisation
Before the Industrial Revolution, the East India Company exported Indian manufactures. The Revolution reversed this, creating a demand for raw materials and foreign markets.
Attempts were made to restrict and crush Indian manufactures and commercialize agriculture for raw material export.
Textile handicrafts were the first to decline, starting a chain reaction for other handicrafts. Transport development accelerated this process.
Principal causes for the decay of handicrafts:
Disappearance of Princely Courts: The patronage of rulers who supported industries and towns disappeared under British rule, impacting cotton and silk manufactures and demand for works of art.
Hostile Policy: Policies were guided solely by British interests, disregarding Indian suffering. Tariffs were used to protect British industries, while free trade was later advocated once Britain achieved industrial supremacy, leading to the decline of Indian handicrafts. The British used "the arm of political injustice" to exploit the Indian market and cripple Indian industries.
Competition of Machine-made Goods: Large-scale production in Britain reduced costs. Machine goods from England competed intensely with and led to the decline of Indian handicrafts, especially textiles. While advocating free import of machine goods, the British did not allow the import of machinery into India. This vacuum was filled by British manufactures, making India a classic colonial country exporting raw materials/foodstuffs and importing manufactures. Railways, telegraphs, and the Suez Canal (1869) intensified this competition.
Changing Demand Patterns: The spread of education created a class that imitated Western lifestyles, shifting demand from indigenous goods to European commodities. Loss of demand also resulted from the disappearance of princely courts. This alienated Indians and diverted their demand towards British goods.
Consequences of the destruction of handicrafts included vast unemployment, particularly for weavers. Lord William Bentinck reported in 1834 on the unprecedented misery.
This led to a compulsory back-to-the-land movement as no alternative employment was provided. Unemployed craftsmen increased pressure on agriculture, increasing the population dependent on land (from ~55% in mid-19th century to 72% in 1931).
This trend is called 'progressive ruralization' or 'deindustrialization' of India. Increased pressure led to sub-division/fragmentation of holdings, higher land rents, and more landless labourers. This crisis in handicrafts crippled Indian agriculture.
The Land System During 1793 – 1850
British rule led to the growth of a new land system. The East India Company initially focused on securing the largest possible revenue through excessive exactions. Land revenue was the main source of finance for the Company and its directors.
Permanent Settlement (Zamindari System): Introduced in Bengal and neighbouring areas in 1793 to bring stability. Revenue collectors were made private landlords (Zamindars), responsible for paying a fixed, enhanced land revenue in perpetuity. Extended later with temporary settlements. It created a class loyal to British rule but also absentee landlords who prioritized squeezing rents over agricultural progress.
Ryotwari Settlement: Evolved for large parts of Bombay, Madras, and North-West India. Each peasant holding land was recognised as the landlord and directly responsible to the state for annual land revenue.
In both systems, land rents were excessive and instrumental in destroying the organic village community. The Zamindari system made landlords masters, while the Ryotwari system dealt directly with individual peasants, cutting through the village structure.
Excessive pressure of population and high demand for land allowed Zamindars to charge exorbitant rents and exactions, leading to subsistence agriculture. The rigorous demands of the Ryotwari system forced peasants to sell land to absentee landlords or moneylenders.
The British land system concentrated economic power in the hands of absentee landlords and moneylenders, depressing agriculture and the peasantry. It retarded industrialisation, created "built-in depressors" in agriculture, and contributed to famines.
Famines and Famine Relief
Famines occurred frequently under British rule. Twelve famines and four scarcities occurred during Company rule (1765-1858), and 20 famines between 1860 and 1908. The Bengal famine of 1943 resulted in millions of deaths.
Before modern transport, famines were localized scarcities due to bad rains. After 1860, railways allowed food movement, but famines became 'purchasing power famines'. Food was available, but high prices and agricultural unemployment made it impossible for the poor to buy.
High food prices were caused by hoarding/speculation during impending shortages and the government's policy of not reducing foodgrain exports, even in lean years.
The basic causes of repeated famines (banished from Europe after 1850) were the economic and sociological transformation under British rule:
Destruction of handicrafts increased pressure on land, leading to subdivision, fragmentation, landless labourers, and higher rents. The number of agricultural labourers significantly increased (from insignificant in 1842 to 18% in 1872), exposing a vulnerable population.
The new land system led to exorbitant rents and increased peasant debt to moneylenders, resulting in dispossession and pauperisation. This created disincentives for agricultural development.
The burden of colonialism (costs of administration, wars, Home Charges, taxes, especially land revenue) fell heavily on the peasantry.
India was forced to maintain a favourable trade balance by exporting food and raw materials even during famines, exacerbated by railways facilitating mobilisation.
Depressed agricultural wages combined with rising food prices made labourers hard-hit.
Commercialisation of Agriculture (1850-1947)
Commercialisation implied producing crops for sale rather than consumption.
This was a deliberate policy driven by the demand for raw materials from British industries after the Industrial Revolution.
Peasants were induced to switch from food crops to more profitable commercial crops (cotton, jute, sugarcane, groundnuts) using market price incentives. In some areas, peasants bought their own food.
This shift led to a fall in food production and contributed to terrible famines.
Commercial agriculture was also partly a result of mounting demands for land revenue and landlord rents.
The development of railways after 1850 intensified commercial agriculture, linking interior markets to ports for export and facilitating the distribution of imported manufactures.
Process of Industrial Transition
Industrial growth was mainly driven by the private sector, with slow progress and little protection until after WWI.
19th Century: Saw the decline of indigenous industries and the slow rise of large-scale modern industries. The first cotton mill, jute mill, coal mine, and railway line were established around 1850-55. By the end of the 19th century, there was significant growth in these sectors, but India was simultaneously being converted into an agricultural colony, exporting raw materials and importing British manufactures. India became an appendage of the British colonial system.
British business pioneered industrial enterprise in India, receiving maximum state support and focusing on profit rather than accelerating India's growth.
Indian industrialists (Parsis, Gujaratis, Marwaris, Jains, Chettiars) gradually joined the ranks, adopting the managing agency system. However, many traditional merchants found greater opportunities and security in trade and moneylending. Craftsmen lacked capital and training.
First Half of 20th Century: The Swadeshi movement (1905) stimulated industries. Growth continued, with more mills and railway extension. The foundation of the iron and steel industry was laid. WWI (1914-18) boosted demand for factory goods as imports fell, leading to mills working at full capacity.
Tariff Protection: In 1923, the government granted protection to selected industries (iron/steel, cotton textiles, jute, sugar, etc.) against foreign competition. Indian industrialists used this to develop rapidly and capture the market in these fields. WWII (1939-45) further stimulated industries due to high demand and falling imports.
British control over India's major industries declined over the 20th century.
Causes of Slow Industrial Growth (1850-1947):
Unimaginative Private Enterprise: Inadequate entrepreneurial ability among Indians who preferred safer trade/moneylending. British pioneers were not focused on India's industrialisation. Indian industrialists were sometimes short-sighted, neglecting future needs and prioritizing high prices/profits over sales volume.
Problem of Capital: Indian industrialists lacked adequate capital. A large part of capital for modern enterprises was imported from Britain. Capital was scarce partly due to underdeveloped resources and limited investment avenues like government loans. Wealth was often held in gold/silver. There was an absence of financial institutions to channel savings into industry; indigenous institutions focused on rural lending and internal trade. Banking was underdeveloped and commerce-focused.
Lack of Government Support: The foreign government was unsympathetic to native enterprise. Tariff policy favoured British interests, refusing custom duties on imports until late and using excise duties to neutralise low import duties. Protection was selective and included the Imperial Preference clause, giving British imports/exports favourable treatment, undermining protection for Indian industries and giving Britain control over the market. The government also favoured British industry for its own purchases.
Colonial Exploitation: Forms and Consequences
Exploitation occurred primarily through trade, later through investment income (dividends, profits), and the costs of British administration (Home Charges).
Main forms: trade policies making India an exporter of raw materials/foodstuffs and importer of manufactures, encouraging British capital in consumer goods, finance capital via the managing agency system appropriating profits, and forcing India to pay for administration and wars.
Exploitation through Trade Policies: Used to drain wealth and integrate India into the British colonial system as an appendage.
Forcing cultivation and low prices for crops like indigo.
Using agents (Gomastas) to force artisans to sell cotton/silk fabrics below market prices, leading to pauperisation.
Manipulating import/export duties, banning or heavily taxing Indian goods in Britain while imposing nominal duties on British manufactures in India. This policy destroyed the supremacy of Indian goods and crippled domestic industry.
Implementing discriminatory protection with Imperial Preference, ensuring British dominance in the Indian market. This policy, despite Indian opposition and internal British arguments against it, was imposed to serve British capital interests.
Exploitation through Export of British Capital: Encouraged after 1857 for control and administration. Investments aimed at developing infrastructure (railways, ports, communication, electricity) for efficient resource exploitation and trade promotion. Capital went into mining, commercial agriculture (plantations), consumer goods, banking, and trade. Investments were by British multinationals or sterling loans to the government. British capital grew, with estimates reaching £1,000 million by 1933. This capital was a major source of drain via interest, dividends, and profits. British investment focused on infrastructure, consumer goods, and processing for export, deliberately avoiding heavy/basic industries that would lead to Indian industrial independence. Ownership and management remained British.
Exploitation through Finance Capital via the Managing Agency System: British merchants pioneered modern industry organisation through managing agency firms. These firms provided finance, managed affairs, and acted as agents for purchase/sale. Being financiers ("finance-capitalists"), they gained control. Malpractices developed, focusing on high commissions and profit shares rather than industrial expansion. Managing agents dictated to company boards, appropriating a large portion of profits (~50%).
Exploitation through Payments for Costs of British Administration: India paid for British military and civil administration, including high salaries, allowances, pensions (Home Charges), and interest on sterling debt. India was also forced to pay for British wars and expeditions outside India. During WWII, India's export surplus led to Sterling Balances in London, representing Indian toil, but this policy also exported inflation to India.
Overall Consequences leading up to Independence:
India remained primarily agricultural, with agriculture commercialised to serve British export interests.
Its once advanced industrial structure was not modernised; handicrafts were destroyed, and India became an importer of manufactures.
Trade policies ensured complete British control over the market and secured avenues for British investors.
Infrastructure was developed for British advantage, and investments avoided basic/heavy industries.
The managing agency system became highly exploitative.
The economic drain through Home Charges and war costs indicated the highly exploitative nature of British rule.
The net result of British policies was poverty and stagnation of the Indian economy.
Dadabhai Naoroji highlighted the drain of wealth and capital as responsible for lack of development. Estimates showed a significant portion of national income was drained.
The drain prevented capital creation in India, while British capital (often from the drained wealth) set up industries controlled by them, leading to further profit remittances. The drain acted as a drag on economic development until 1947.
Dr. Bipan Chandra argues India did undergo transformation under British rule, but within the political parameters of a colonial economy. India was integrated into world capitalism but without its benefits, experiencing both modernization and underdevelopment simultaneously.
Industrial progress was often spurred when colonial links were disrupted (like during WWI, the Great Depression, WWII), suggesting free flow of foreign trade/capital meant stagnation for India.
British capital was not inherently more adventurous, being often backed by guarantees and focused on profitable areas.
British rule was a systematic exploitation, with benefits being incidental; the main motive was to serve England's interests.
At independence in 1947, India inherited a crippled economy with stagnant agriculture and a peasantry steeped in poverty. As Jawaharlal Nehru noted, India became a passive agent of modern industrial capitalism, suffering its ills without its advantages.