Indian Political and Economic History

Stages of British Rule

1. What are the characteristics of the First Stage of colonial rule in India?
2. How did East India gain by capturing political power in India?
3. Describe about early settlement Acts?
4. If one carefully studies the period of Indian history between 1757 and 1940 one finds
clearly identifiable stages of British colonization each with its specific and distinguishable
characteristics. Can you identify the main features of each stage with corresponding
impacts on the Indian economy?
5. The emergence of Industrial Britain resulted in De-industrialization and
commercialization of Indian Agriculture in the early part of Nineteenth century. Do you
agree? Explain your conclusions.
6. Discuss the impact of the military and industrial revolutions upon India up to 1858. Which
of these would you regard as more important?
Industrial Revolution
1. The industrial revolution in the UK changed the nature of British interest in India.
Comment.
2. How was the Indian economy affected by the change?
3. What role did opium play in that regard?
4. Would you attribute the origins of the industrial revolution to the inventive genius of the
English people? Provide reasons for your answer.
5. Analyze the cause and conditions of the emergence of the factory system of production in
Western Europe. What are the chief characteristics?
Indian Business
1. Explain the difference in the process of industrialization of jute and cotton textile industries
in India?
2. How do you explain the Indian Business Communitys increasing interest in the Indian
national movement beginning with the post First World War period?
3. How do you explain the duality in the attitude of the Indian business community towards
Indian nationalism?
4. How did colonial rule affect Indian business? How did businessmen respond to the new
conditions they faced?
Others
1. List the main problems faced by lord Cornwallis when he arrived as Governor General in
1786. How would you have tackled the situation in his place?
I-Stage in British rule:
Colonization of India by Pre-Industrial Britain
1. EIC given monopoly status by queen to trade with India
2. EIC paying in gold and silver for Indian exports.
3. Gaining control over Bengal by defeating Nawab
4. Unilateral flow of goods
5. Destroying old traders (Punjabis, marwaris and Afghanistan)
6. Creation of Bengali Babus
7. Permanent Settlement- Maximization of profit by maximization of revenue

Buying silk, indigo,

spices, muslin calico
from India

Reaching as wealth in
Europe

Exporting
Bullion Gold/Silver

Revenue/Tax

Buying silk, indigo,

spices, muslin calico
from India

Exporting

Reaching as wealth
in Europe

Inception of Permanent Settlement

Company realized that to maximize the profits it must maximize revenue from land.
EIC auctioned Zamindaris to those who would pay them maximum tax.
Zamindars in turn heavily taxed peasants who had no incentive to produce more.
This over-exploitation led to number of famines greatest being 1776 in Bengal. There was overall
decrease in production and efficiency of agriculture.
To boost the production and to generate constant stream of revenue EIC decided to create gentry of
landlords who had a stake in land. According to this system landlords would pay EIC a fixed
amount of money and hence they would have greater incentive to increase production, as additional
money would go to landlords.
Failure of Permanent Settlement
Proxy Zamindari:
Bengali Babus bought Zamindaris for esteem reasons rather than commercial reasons.
This led to creation of proxy Zamindari of Naibs who controlled the activities for Calcutta-based
Bengali babus.
This led to severe corruption and large no of hierarchies between whom profits needed to be shared.
Peasants were taxed as heavily as before and they had no interest in greater production.
Price fall:
There was a steep fall in price in period immediately after permanent settlement in 1795 and prices
remained low.As per brij narain fell by 35%
For next 15 years at this time most of Zamindars could not fulfill their commitment to EIC and sold
their ownership.
II-Stage in
1.
2.
3.
4.
5.
6.

British rule:
Industrial Revolution
Laissez faire replacing EICs monopoly
Lancashire captures Indian markets.
Reemergence of Marwaris traders as agents of Lancashire goods
De-industrialization.
Fundamental Change. India becoming exporter of agricultural raw materials from exporter
of industrial finished goods
7. Problems of Tribute Realization: Opium Trade
Industrial revolution
Took place in 1770 in Britain and changed the way production was done in Britain.
There was great increase in production and productivity.
And it decreased the price of handloom cloth and a great investment took place in this sector.

Use of steam in
cotton industry

Increase in Production & Larger Investments in Greater demand for

productivity
steam engines and
these industries
handlooms

Demand for Iron & Greater demand for

Steel industry
heavy eqpt

Greater demand for coal

and greater production

Laissez Faire:
New class of entrepreneurs (goods-producers) emerged in Britain.
They could enhance profits by expanding markets. They thrived on lower prices.
They were not worried of competition and wanted removal of monopoly to gain access to new
markets. They wanted Laissez Faire to replace mercantile monopoly. UK was a small market and
Lancashire wanted to export its goods to India.
There was conflict of interest with EIC who thrived on handlooms produced in India.
De industrialization:
Lancashire got Monopoly charter removed in 1813 by parliament. EIC monopoly in India ended.
Objective changed from seizing Indian commodities to seizing Indian markets.
Lancashire did not pay any import duty on goods whereas Indian cotton weavers had to pay an
excise duty Thus they had a great price advantage.
Lancashire wiped out exports of Indian cotton goods. They also challenged them in their home
market.
This led to de-industrialization - massive shutdown of Indian industries.
The impact of this de-industrialization was (a) Indian middle class became poorer due to
unemployment (b) decline of other industries like cutlery, guns, machinery, etc.
Problem in Realization of tribute
Indias de-industrialization seriously affected transfer-of-wealth mechanism.
Till now the realization of tribute had taken the form of export from India.
Rationally this could have been compensated by diversion of raw cotton to English factories. But
this was not possible because Indian cotton was too short-stapled for English factories.
Similarly Indian raw silk could not compete with Chinese and Italian silk for English factories. Its
export remained limited.
The problem became very acute by 1830.
The solution was found in opium trade.
Opium trade
British found a major market for opium in China.
Chinese aristocracy consumed opium for centuries.
British slashed opium prices and smuggled it into China through Shanghai and Hong Kong ports.
Chinese king tried to stop this trade and fought two Opium Wars (1840-42 & 1856-58) with
Britain.
After losing the war opium trade was legalized in China.
British sold Indian opium to China and imported Tea and Silk to England. A large amount of
Bombay and Bengal capital can be traced to illegal opium trade.
The following figure showing imports and exports of Britain to Asia shows the gain to Britain by this
triangular relationship.
Year

Imports

Exports

Excess Imports over exports

1854
1855
1856

23
12
11
24.3
13.1
11.2
29.6
15.4
14.4
* All values in millions pounds

UK
Cotton goods
Imports>Exports

Tea/ Silk
Export>Import

India

China
Opium
Only Exports

III-Stage
1.
2.
3.
4.
5.

Flow of capital to Britain.

Development of Railways as an agent of deindustrialization.
Commercialization of Agriculture.
Zamindars to Landlords.
Emergence of Jute and Cotton Industry.

Flow of capital
At about 1850s the capital investment had reached a saturation point with construction of basic networks of
railways, the greatest absorbent of capital. The major characteristic of this stage was export of capital and
intensified race for Indian markets. From 1857 to 1865 saw major movement of British capital to India.
Development of railways
Reason
No body was interested in investing in railways as no one could see economic viability in it. Lord
Dalhousie wanted railways in India because of problem in administering such a large country. Thus
railways were developed more in need for army personnel movement than movement of goods. East India
Co. became the underwriter and assured 5% ROR in railways investment in India. Major investment was
carried out in Calcutta region although first line was introduced in Bombay.
Complete Colonization:
Railways served as a catalyst of complete colonization of India. Railways led to massive increase in imports
by the country.
Imports of cotton doubled between 1859 and 1877.
Imports of silk became 4 times between 1859 and 1877.
The railways also led to increased exports from India. The entire composition changed as bulk no longer
remained a barrier to transport. In 1871 Opium was still principal item but Oilseeds and cotton came close
second. Thus there was a real shift in Indian agriculture to production of raw material for England, a shift
from food grains to non-food crops.
Commercialization of Agriculture
The railways also led to change in composition of Indian exports, as bulk no longer remained a barrier to
transport. In 1871 Opium was still principal item but Oilseeds and cotton came close second. Thus there
was a real shift in Indian agriculture to production of raw material for England, a shift from food grains to

non-food crops. This vast change in Indian agriculture from food grains to non-food crops (jute, indigo) is
sometimes known as commercialization of agriculture.
The commercialization had a major impact as quantity of food available for home market declined
and it led to great famines (famines of 1896-97 & 1899-1900) were millions perished. The
commercialization made condition of poor peasant worse and only few rich landlords were the gainers.
Zamindars to Landlords
At this period due to Sundown Laws lot of absentee landlords lost their Zamindaris to their naf. So there
developed a new class of people who are the owners of land, peasants and who are also the traders.
M +W + L
Money Lender
(Interest)

Hoarder (Traders
profit)

Land Owner (Rent

from peasant)

This system of pay interest and principal later created a debt trap for the farmers. And they gradually lost
their land and became bonded laborers.
Emergence of jute and Cotton industries
Jute Industries
Jute industry was developed in Scotland (around Dundee) but based on RM supplied from Calcutta.
The characteristics of jute industry were:
1. Labor intensive. The jute industry is highly labor intensive and does not require much skilled labor.
2. Dependant demand. The market of jute goods were other industries and hence demand for jute
depended on demand or well being of other industries. Market was not local but world market.
The factors that led to growth of jute industries in Calcutta are:
1. Low wages in Calcutta as compared to Dundee and hence lower cost of production
2. Nature of RM. The volume/value ratio was high and that was not the case with cotton (jute could
not be bent). The marginal cost of transportation was much higher in jute than in cotton.
3. Production process The raw jute had a high wastage in production process, which meant you
would be importing extra jute and hence would be paying extra for that
4. Slave trade. The slave trade was declining and those in slave trade were looking for some other
investment. They found good opportunity in jute mills in India. That is the reason we find all jute
mills in India, were owned by Europeans till 2nd WW.
Impact of jute industry
The jute mills did not employ local laborers, as wage differential was the key to their success. So they
brought people from different places, Sardars were appointed, sent to Bihar, Orrisa etc . These Sardars
would pay advance to villagers and brought people to town, they not knowing where they were heading
(The operation was very similar to slave trade). These people would be settled in compound of the mills and
that is the reason jute mills had huge compounds.
The people in Calcutta saw jute mills as a symbol of foreign oppression. Whereas the people of
Bombay saw cotton mills as symbol of national pride, owned and worked by Indians.
Cotton Industries
Came to India for reasons different than jute.

Bombay came under British 60 years after Calcutta. By then the monopoly of EIC was withdrawn
and mercantile attitude was replaced by Utilitarian capitalistic attitude. There was an attitude
difference in British Bombay and British Calcutta.
For 60 years of difference Bombay merchants enjoyed free trade in local market and they had a lot
of capital accumulation. Deccan handloom had survived and it was a major cotton belt controlled
by Bombay Parsis.
Lancashire and European textile producers had moved from short Indian staple to long American
staple causing obsolescence of previous spinning mills. The capital goods sector in cotton was
looking for external buyer.
The Bombay mills were dealing with short staple and producing coarser variety of cotton cloth.
There was a small market of this cloth in Africa and Indian textile owners were competing with
Chinese and Japanese textile manufacturers. The demand for yarn was increasing and hand
spinning was not sufficient to meet the demand. The Lancashire did not enter into this market, as
profit margins were lower.
The Parsi traders bought the old spinning mills from the textile manufacturers against wishes of
Lancashire and thus cotton-spinning mills came up in 1840-60s.
This is the reason why Bombay textile mills were not integrated whereas Ahmedabad had
integrated spinning mills.

IV-Stage
Rise of Indian nationalism British rule and Laissez faire reason for Indian poverty
Ranade, Telang, Dadabai Naroji branding laissez faire as reason for poverty.
Bengal partition and Boycott movement
Emergence of Gandhi as a National leader.
I WW and its impact on Indian industry
Need for planned economy
1929 depression
FICCI 1934, Birla Speech
1937 Provincial Election
II World War and Post war Reconstruction Committee
Bombay Plan
Indian nationalism developed in two major categories:
Militant groups/ Political extremism:
Emphasized on glorious Hindu past.
Believed in self-reliance and fell back on traditional handicrafts as means of prosperity.
Opposed British rule as it destroyed traditional Indian society with destruction of local
manufacturers.
Boycott of foreign goods, and rejection of western mode of life.
Moderates:
1. Looked forward to industrial developed India
2. Telang, Naoroji, Ranade, Joshi, RC Dutt belong to this school of thought.
3. Protectionism was key for remedy of economic distress of country.
4. For both the reason for poverty was poor policies of British which led to economic ruin of the
country ( Unbritish rule of India)
5. Identified lack of large-scale industrialization was identified as major reason for poverty and
means to eliminate poverty. It was a shift in thinking from past swadeshi movement which
considered development of traditional handicrafts as panacea for economic ills

Prewar

Poverty

Industrialization

Anti LF

Protection

State Initiative

Role of state
Early criticism of British laissez faire developed into an idea of positive state participation in
economic activities.
Role of state was defined as not only protecting nascent Indian industry against foreign competition
but also to carry out social and agricultural reforms.
1st World War
Laissez faire policy broke down and govt of India placing orders with Indian firms.
Positive change in attitude of govt as regard to excise duty on cotton.
Accumulation of large capital but expansion constrained by capital goods
Complete breakdown of trade with Britain, and first experience with protectionism.
POST-1st WAR
Industries again facing foreign competition and demand for protection rising
After 1st WW we see emergence of new generation of economists KT Shah, Sarkar, Gadgil all were
staunch supporter of protection and encouragement to industrialization.
Visvesvaraiya Reconstructing Indian Economy identified following problem of Indian poverty:
Low standard of living of people
Low level of education
Dependence on agriculture
Lack of industrialization and destruction of indigenous industries due to British tariff and
fiscal policies.
Formation of FICCI in 1927 by GD Birla and Purshotamdas Thakurdas
1929 Depression
Deathblow to laissez faire, and planning taking up firm roots in India.
Sir George Schuster (finance minister) tried to setup Economic Advisory council in India.
FICCI in 1934 Birla and Sarkar spoke on necessity of planned economy in India.
1. Capitalization of west was based on exploitation of colonies, this was large capital accumulated that
was looking for investment but in India there is no surplus and hence capitalization can develop
only through protection and expansion of market.
2. Increasing the purchasing power of people is essential for growth of capitalism. Since 70% of
people are in agriculture hence there is need to develop agriculture to raise PPP. This development
requires new investments in power, irrigation. These investments cannot be made by private sector
so state must develop them.
3. Dependence on imports of machine must be stopped. This means development of key industries/
Capital goods industries. These key industries require large investment and has larger gestation
period, slower rate of profitability and hence must be developed by state
Conference of ministers of industries, for various provinces in 1938. Formation of National planning
committee.
Identified 3 types of industries

A
Defense and Public
Utilities. Must be
developed by state

B
Key Industries, there
was difference of
opinion

C
Consumer Industries
must be left for
private sector.

Second World War

Post War Reconstruction committee was setup in 1941 to prepare development plan for India.
Bombay plan released in January 1944
Industrial policy of GOI in 1945.
Both the plans supported license raj to ensure spread of industries in all parts of country to get true
industrialization.