Economic policies in India during British Raj

The Britishers arrived in India in 1612, but there real interference in the Indian polity and economy started in 1757. The economic policies and its effects on the economy of India during the British Raj can be grouped into three phases.

1. The first phases were characterised by mercantilism which started after the Battle of Plassey in 1757 and continued till 1813. This phase was marked by the drain of wealth from India and direct colonial plunder by the East India Company through monopoly in trade and its other policies. It was the beginning of colonial exploitation of the economy of India.
2. The second phases were characterised by free industrial capitalism which started in 1813 and continued till 1858. The period saw the deindustrialisation and ruralization of India and the commercialisation of Indian agriculture. It converted the economy of India into a market for British goods and a supplier of raw materials.
3. The third phases were the period of financial capitalism. It started from the closing years of 19th century and continued till independence. This face saw finance imperialism through managing agency forms, Export-Import firms, exchange banks etc.

Economic Policies in India During British Raj

The First Phase of Mercantilism and the Economy of India

After the Battle of Plassey 1757, the East India company started establishing political control over India for her interest. The drain of wealth and colonial plunder were the features of this phase of the British policy of mercantilism.

The Drain of Wealth and Colonial Plunder

• The only aim of East India Company was to make a profit by establishing Monopoly in the trade with India and East Indies. Initially, the British had to pay gold and silver bullion and their coins for buying Indian goods. This lead to drain of gold and silver from Britain to India, which was painful for the system of mercantilism.
• However, after the Battle of Plassey in 1757, the situation became favourable for the Britishers, as it changed the balance of power in the Indian polity and economy. In the 1750s and 1760s, the East India Company acquired political power in Bengal and South India and used it to secure maximum goods for minimum payment. It also opened the gate of open plunder of the economy of India by the British.
• Secondly, the British East India company used the land revenue for gaining huge profits. In 1793, the permanent settlement for land revenue was granted, and the land revenue was fixed at 3,400,000. Huge surpluses generated from the land revenue was repatriated to England. The Indian leaders linked this system of land revenue with the theory of drain of wealth.
• Thirdly, the East India Company officials amassed massive amounts of wealth which were extorted from Indian merchants from zamindars etc. and was sent to England. Between 1765 and 1770, East India Company repatriated around 33 percent of its total revenue in the form of goods.
• Fourthly, the Britishers forced the Indian artisans to sell their products at cheap rates which became economically unviable, and they had to adopt agriculture as the primary occupation.

Reasons Responsible for Mercantilism

• The victory of British East India Company in the Battle of Plassey in 1757 and it's later political successes allowed it to use the political power for gaining profits. The Indian rulers were not able to match the British excellence in military and political diplomacy. This negatively affected the Indian polity and economy.
• The permanent settlement act brought by Lord Cornwallis in 1793 was responsible for the drain of land revenue from India to Britain. This caused hardships and exploitation of the rural economy of India.
• The other Indian powers were unable to regulate and control the advancements of East India company in India. This gave the Britishers freehand to plunder in India during this period of mercantilism.

Impact of British Mercantilism Policy on Indian Polity and Economy

• R.P. Dutt and Pandit Nehru were of the opinion that the seeds of capitalist development which had existed in India were destroyed and robbed by the Britishers. During the second half of 18th century British needed huge investment in its industries which was fulfilled by the plunder and drain of wealth from India, leading to extreme exploitation of the economy of India.
• The revenue policies such as permanent settlement etc were very exploitative. It created a long chain of intermediaries which made the land revenue system very exploitative for the peasantry. The resources of peasants helped the process of industrialisation in Britain.
• The British policies of monopoly in trade and price control were responsible for the ruin of artisans.
• The Britishers did not take any major initiative for the development of agricultural, industrial production, transport, and communication, education etc. All these were responsible for the degradation of Indian polity and economy.

The Second Phase of Trade Capitalism

The second phase which was also known as the phase of trade capitalism coincided with the industrial revolution in England (1813 -1858). This was the age of free trade capitalist exploitation of the economy of India. The Charter act of 1813 gave a boost to the British manufacturers and India became a source of raw materials.

Deindustrialisation and Ruralization of the Economy of India

• During this period of industrial revolution in Britain, the British industries were led by the Indian capital which was drained out of India. This new phase of British capitalist exploitation from 1813 became more inhuman after the end of the monopoly of East India Company in the trade with India.
• Before 1813, the Indian traditional handicraft industries were at their height while the British manufactured products were both inferior in quality and costlier than Indian Products. To protect the textile industry of Britain, the British government levied hefty import duties on Indian goods. This drastically reduced Indian exports to Britain.
• However, the Britishers encouraged the export of raw materials from India which was required by the British machine based industries.
• The economic philosophy of free trade championed by Adam Smith centred during this stage. However, this was one-way free trade i. e. free entry of British goods in India but burdensome tariff rates against Indian exports to Britain.
• In 1824, Indian calicos had to pay a duty of 67%, Muslins 37%, Indian sugar had to pay a duty of 3 times of its price and some goods as high as 400% of import duty in Britain.
• The laying of Railways from the 1850s under governor-general Lord Dalhousie opened the interior markets of India for British goods. This led to the deindustrialisation of rural industries and the exploitation of the economy of India.

Reasons for Deindustrialisation and Ruralisation of India in This Phase

• The industrial revolution in Britain created a new capitalist glass who enjoyed tremendous blessings of the colonial administration and their policies. To serve the interest of this new capitalist class the monopoly of East India Company in the trade with India was removed and a new phase of exploitation of India began.
• The British industrialists needed a market for their products, so they converted India into a market for Manchester goods and a supplier of raw materials.
• Very high import duties were levied on Indian exports to Britain, which was necessary to make Britain the workshop of the world .

Impacts of British Policies on Deindustrialisation and Ruralisation of Economy of India

• From being the largest exporter of textile goods, India was converted into a market for Manchester goods and a supplier of raw Materials. This new state of exploitation of India was more systematic, calculated and intense than the first phase of mercantilist plunder of India.
• The one-way free trade not only lead to the destruction of Indian manufacturing industries but also ensured a growing market for British manufactured goods.
• The period affected the artisans and weavers who were ruined and forced to take agriculture. All these led to the deindustrialisation of India and the decline of traditional cities leading to ruralization of India.

Commercialisation of Agriculture

• The Britishers required the supply of raw materials and exports from India like oil, jute, cotton etc. for the British industries. Therefore they allowed the Britishers to acquire land and setup as planters in India.
• The British planters invested in Indigo, rubber, coffee and tea plantation in India. The period saw merciless exploitation of the Indigo workers of Bengal.
• The food crops were replaced by the commercial crops which had more remunerative value.
• This trend was encouraged by the factors such as the emergence of a unified national market, growth, and spread of money economy, improvements in communication systems through railways and roads, growth in the internal trade and increase in international trade due to capital investments by Europeans etc.

Reasons Responsible for Commercialization of Agriculture in India

• The demand for raw materials from the British industries such as Lancashire cotton manufacturers etc. The colonial government supported the commercialization of agriculture in India.
• It was necessary for the profits of British capitalists and the industrial development of Britain.

Impacts of Commercialisation of Agriculture

• The price fluctuations in the international markets badly hit the farmers, while when the prices increased, it was mostly the intermediaries who benefited from it. For example, with the rise in prices of cotton in 1860, the intermediaries benefited from it, while the price slump after 1866 brought heavy indebtedness, famines and agrarian revolts for the farmers.
• The high expenditure on the army, the salary of Britishers were ultimately borne by Indian taxpayers especially peasants.
• The self-sufficiency of village community received a mortal blow during this phase. The union of agriculture and industry got disintegrated, and India was forcibly converted into a typical agricultural colony of British capitalism.
• The purchasing power of Indians had fallen drastically while at the same time the per capita income and Britain grew. The major negative effects of British policies on the economy of India began showing up during this period.

Third Phase of British Economic Policy - Finance Capitalism

• During the second half of 19th century, several European Nations were able to industrialise themselves. Thus to compete with them, Britain decided to make large investments in India in various fields such as rail, road, Postal System, banking system etc.
• The period saw an increased foreign investment in India due to cheap labour, cheap raw materials, and market in India and neighbourhood areas, and good profits in India.
• Further, the British government in India welcomed them to invest and provided them all the help. The capital which was plundered from India was reinvested in the form of debt in various sectors.
• Large investments in railways were made mostly with foreign capitalist Investments. It was ultimately to be paid by Indian taxpayers, while the benefits went to the British.

Impacts of Finance Capitalism on India

• Higher taxation for the Indian taxpayers. The plundered wealth was reinvested which further exploited the Indian economy.
• Around 97% of British capital Investments in India before first world war was in the administration, plantation, transport, and finance. The main motive was commercial penetration of India and its exploitation.
• Finance capitalism and other policies of British did not allow the rise of modern Industries as had happened in other European countries.

Development of Modern Industry in India

• Initially, the British exports to India did not allow the rise of modern machine based industries in India. It was only in the latter half of 19th century they began to start in India.
• The first cotton textile mill began in Bombay in 1853, which was set up by Cowasjee Nanabhoy Daver. The first Jute mill was set up in Rishra (Bengal) in 1855.
• The Indian owned Industries like jute and cotton textiles were established in the second half of 19th century, while the iron and steel, cement, sugar etc. came in the 20th century.
• There was a lack of sufficient technical manpower in India due to the neglect of technical education in India which retarded the healthy growth of Indian Industries.
• The Indian owned Industries had to face unequal competition from the foreign companies and strong opposition from the foreign capitalist interests.
• Further due to colonial factors the core and heavy industries wear neglected. Also, there were regional disparities in the industrial development which hampered the nation-building process.

Economic Impact Of British Policies  

With the rise of British power in India, the socio-economic fabric of the country changed a lot.

The following were the economic impact of the British Raj.

1. Economy of India became a colonial economy
2. Commercialization of Agriculture
3. De-industrialization
4. Drain of Wealth
5. Ruin of artisan & craftsman
6. Deterioration of agriculture
7. Poverty and famine

Economy of India became a colonial economy

• The economy of India became a colonial economy with the advent of British power in the following ways:
  1. The surplus and self sufficient economy received a jolt with the advent of the British power
  2. All the resources of India were made subservient to the interest of the British manufacturing sector
  3. India became an exporter of the raw material and importer of the finished goods.
  4. The value addition from raw material to finished goods was done in Britain and thus the manufacturing sector of Britain earned huge profits
  5. The exorbitant land revenue and decline in manufacturing sector became the hallmark of the colonial economy
  6. The famines which were the result of the economic policy of the British became rampant.

Commercialization of Agriculture

• Commercialization of agriculture refers to the shift in agriculture cropping pattern from the grains, cereals etc to the cash crops like indigo, tea, coffee etc.
• Although commercialization of agriculture is considered as a sign of advancement, the result in India were catastrophic.
• In India under colonial rule it was a forced and artificial process which led to differentiation without actual growth
• The precondition for the actual growth in the commercialization of agriculture is the advance farm inputs and investment in farm sector. The colonial government never paid any attention for the improvement of the farm inputs or for the investment.
• The commercialization of agriculture increased the risk in the agriculture
• Indian peasants became vulnerable to the fluctuation in prices in the international market
• The bulk of profit was accrued by the British traders and the Indian moneylenders and not the peasants

• De-industrialization is the reverse of the term industrialization.
• The term implies the decline in secondary or the manufacturing sector in the economy.
• 18^th century was a time period when industrial revolution took place in Europe. As a result, the age old traditional industries witnessed de-industrialization and in their place the modern industries grew up.

However the trend in India was very different.

• Due to the economic policies of British Raj, the traditional industries declined in India like Europe, but unlike Europe the modern industries didn’t come up in India.
• India which was a manufacturing and export hub of the textiles and cotton products, witnessed a downtrend in these.

Causes of decline

• The major reason for the decline of the traditional manufacturing sector in India was due to the dual standards adopted by British with respect to the manufacturing sector in India.
  • It was a one sided trade.
  • The imported goods were brought in India under the doctrine of “free trade” without import duty.
  • On the other hand, the finished goods exported to Britain were heavily taxed.

The other factors responsible for the decline of traditional industries in India were:

• The forced pauperization of weavers, by forcing them into contracts whereby the finished goods were sold to Europeans at values below the cost of production
• The unequal competition with the modern industries of Britain
• East India Company used political power to remove its rivals in India, and the traditional industries were seen as rival.
• The sale of raw cotton was monopolized by the company’s servants, forcing a rise in price.

Drain of Wealth

• Drain of Wealth theory refers to a portion of national product of India which was not available for consumption to its people.
• According to this concept a portion of national product of India went outside it without any quid-pro-quo.
• The concept of Drain of Wealth was first propounded by Dadabhai Naoroji in his book “Poverty and Un-British Rule in India” (1867).
• R C Dutta in his “Economic History of India” (1901) also blamed British policies for Indian economic ills.
• The British rule in India was justified on the basis of the concept of “white man’s burden” i.e. the Asian civilizations are still premature for self rule and the onus of providing efficient governance rests on the Europeans or white.
• The theory of Drain of Wealth gave a serious jolt to this concept by proving that European rule is actually ruining India instead of giving efficient governance.

Constituents of drain

• Extortion by company servants the fortunes from rulers, zamindars, merchants and common man and sending them home.
• Purchasing goods out of revenues of Bengal and exporting them. This was called investment.
• Duty free trade provided to the British gave them a competitive edge over Indian traders. These subsidies were financed from Indian treasury.
• Remittances or salaries and other incomes by company officials send to England.
• Home charges or cost of pensions of company officials, the costs of secretary of state’s India office etc.
• Hefty interests paid to British investors.