Economics - PreIndependence PDF

5/30/2018 OneNote Online
BRITISH - Pre Indpendence

18 October 2016 16:58
Indian economy in pre-independence era:

* Land system and its changes
* Commercialization of agriculture
* Drain Theory
* Laissez Faire theory and critique
* Manufacture and transport: Jute, Cotton, Railways
* Money and Credit
* Changes in Agriculture and Industry (this is not mentionecd in syllabus, but make short notes anyway)
 
OVERALL
 
1. What was India’s population in 1871? In 1921?
Answer:
1871: 250 million
1921: 305 million
 
2. What was India’s population growth rate during 1871-1921?
Answer: 0.4% p.a.
 
3. What was the mean life expectancy at birth in 1871 and 1921?
Answer:
1871: 24 years
1921: 20 years DECREASED
1947 : 32
 
4. To what extent, as claimed by Lord Dufferin, was overpopulation responsible for widespread poverty in
India?
Answer:
As seen, India’s overall population growth was very low in colonial times. While the birth rate was
certainly high, the death rate gave it close competition, and beat it in several decennial censuses.
Thus, India’s poverty stemmed from backwardness in production, not from a high rate of population
growth
 
 
https://onedrive.live.com/view.aspx?resid=5904275E260F976F!199854&app=OneNote&authkey=!AF41zQ8byOrrLPg 1/22
 
• DRAIN OF WEALTH  
• Instrument
1. TRADE
i. TAX - > INVESTMENT - > EXPORTS - Transfer
ii. After the Battle of Plassey in 1757, the English EIC began converting a large portion of the
tax revenue from conquered areas into funds for ‘investments’. These ‘investments’ were
then used to purchase Indian goods (from Indian money), and these goods were then sold
internationally.This represented a wholesale transfer of Indian revenues to the Company’s
coffers in Britain
 
iii. This meant that Britain did not need to export anything to India in return for what it
obtained from India as imports. Thus, there arose a large excess of Indian exports over
imports pretty much all the way through before the WW1. Even in face of ever-increasing
British imports (textiles etc.), India almost consistently maintained an export surplus of
over 20% over imports till 1914; this didn’t translate into any benefit for the economy. Tax
financed export, the benefits of which went to EIC
iv. Was about 2% of Indias NI
 
2. PRIVATE PORTION OF DRAIN
1. The servants of the company, and later officials, themselves strove to make personal gains
through ‘gifts’, bribes, and extortions of various kinds, profits from local trading
monopolies, and increasingly high salaries paid out to them out of Indian revenues  
 
3. HOME CHARGES
i. The 1858 Act also led to the establishment of a large bureaucratic structure in London
geared towards Indian imperial governance. This was serviced by Indian revenue, via the
so called Home Charge (which comprised civil charges, such as salaries and pensions of
British civil servants, maintenance of India office in London etc., and also military charges,
which also included charges for military affairs waged outside of India)
 
4. DEBTS and LIABILITIES
1. This situation was only worsened after the Charter Act of 1858, which made the future
dividends of the company, as well as all its debts and liabilities in England, a charge upon
Indian revenues
5. RAILWAYS
i. Amount paid out of Indian revenues to railway companies in England in lieu of their
guaranteed profitsn - 5% - Old Gurantee System
 
• Estimate
○ Enormous amount of interest paid on debts: Habib’s estimates show that if one adds up
private remittances and home charges, the size of the drain in 1897 was as large as Rs. 22.5
crore. India’s constant export surpluses were the only way in which this tribute could be
furnished to Britain (from Indian revenues, buy Indian products, then sell them abroad at huge
margins, and consequently pay the tribute). However, even this was usually insufficient to
service the obligation of the Indian government- thus, India with a constant export surplus still
faced an unfavourable balance of payments (due to obligations such as the Home Charge, ‘Old
Guarantee’ payments etc.). Thus, India was constantly forced to increase the size of the debt in
sterling, and then put under reinforced pressure to increase the size of the unequited exports to
service interest obligations
○ Dadabhai Naoroji Value estimate

• The drain amounted to half the govt. revenue, more than entire land revenue collection
and over 1/3rd of India’s savings.
• In today’s term it amounted to 8% of India’s national income.
• the loss of revenue to Britain at 200-300 million pounds which was never returned.
• Criticism
a. Political defense : Whatever was sent to England was in return for services rendered in India -
alleged benefits of good government, law and order etc. 
b. Economic defense : Loans raised in London money markets were at a much lower cost than
could be raised in 19th century India. 
c. British capital expended in India was developing or modernizing her
d. Was criticising the basic fundamentals of trade
• INTERNAL Drain Theory ( Also by Naoroji)

○ High land revenue - Drain to Landlords
○ Govt expenditure mostly on millitary and urban areas
○ Exclusion of Indians from High Paying jobs - Psychological Drain theory
 
Land System and its Changes in Pre-Independence India

 
Agriculture
Throughout the colonial period, agriculture was the mainstay of the workforce, employing over 2/3rd of the
entire labour. Yet, growth rates were low-
• Status
○ Growth
• in the 50 years before independence, average agricultural growth was about 0.3% per
annum (Sivasubramonian) (in contrast to 3% now) and during the interwar period,
○ Declining Productivity
• Betwenn 1911- 1941 population growth was higher than agricultural growth, indicating
declining per-capital food availability. (0.72% pa)
○ Below Subistence
• Food Imports dependencey - Made up 50% of all capital expenditures
○ Substitution of crops
• Decline in Foodgrains was higher - 1.14% per capita per annum
• CASH Crops increasesd though @ 0.57% per person per annum
○ Finance
• 93% credit from money lenders - AT eve of Independence
○ Tech
• 97% wooden ploughs
• 10% Improvised Seeds
• Canal - only 6.5%
○ Landlessness
• 45%
 
 
Commercialization of Agriculture
• Definition
○ Commercialization can be defined as the process wherein farmers start producing primarily for
sale in distant markets rather than for localized consumption or for sale in domestic markets
Or when money and trade influence agriculture (distant doesn’t necessarily mean exports;
long-distance in-country trade, made possible by railways, also counts).
• Evolution  
○ prominent around 1860 A.D. The first wave of commercial agriculture was driven largely by
Indigo and Opium.
○ However, after 1860, major wave of commercialization came from cotton, wheat, sugarcane,
tobacco, and oilseeds.
○ Cash transactions become the basis of exchange and largely replaced the barter system, -
thereby disturbing the traditional self-sufficient village economy of India
• Factors that led to the commercialization of agriculture

1. Colonial subjugation:
• British government liberalized the tariff policy, and abolished or reduced export duties on
many commodities
• Cultivation in India of many commercial crops like cotton, jute, tea, tobacco was
introduced/ expanded to meet the demand in Britain
• Introduction of Land system like Tinkathia
2. Role of Land Revenue System
i. Greater rent of land
ii. (higher incentive to grow more monetarily profitable cash crops 
3. The world demand for food and raw materials was immensely stimulated by industrialization
in Europe
• India was reduced to the supplier of raw materials and food grains, and importer of British
manufactured goods
4. Better means of communication (telegraph) and transportation (railways, steam ships, opening
up of the Suez canal in 1869) made long-distance trade in agricultural products feasible
i. Between 1870 (Suez opened in 1869 I like 69 :P) and 1914, exports increased 500% in
value (about 80% of all exports were non-manufactured - ie planation ).
5. The American Civil War caused the British cotton demand to divert to India. This demand was
maintained even after the civil war ceased because of the rise of cotton textile industries in
India
 
Impact of commercialization of agriculture: - YEAR - Remember 1871 and 1921 for all
While the commercialization of agriculture in India assisted industrial revolution in Britain, it broke the
economic self-sufficiency of villages in India: - Includes Positive + Negative
 
1. Increasing Welfare of Landlord and decreasing of Peasants -
1. Economic theory says that agricultural productivity should have increased, but this didn’t
happen because of poor agricultural organization, obsolete technology ( only 10% used
Improvised seeds) , and lack of resources among most peasants. ( 93% moneylender - Usury)
It was only the rich farmers; who benefited and this in turn, accentuated inequalities of income
in the rural society as No Capital Formation
2. creation of a rentier landlord class, who had no interest in channelling productive
investments towards agriculture.- due to Absentee Landlordism Their prime motivation was to
usurp as much land revenue as possible
2. Substitution of commercial non-food grains in place of food grains: Between 1893-94 to 1945-46,
production of commercial crops increased by 85% and that of food crops fell by 7%. This caused
regular famines
1. Per year -1.14%, 0.57%, -0.72%
 
3. Trade
1. Linking of the agricultural sector to the world market: - Suez - 500% between 1869 and 1914
Price movements and business fluctuations in the world markets began to greatly affect the
Indian farmer. Choice of crops was determined more by market demand and price than home
needs. By the 1920s, world agricultural markets had started facing persistent oversupply and
price depression; in India, major cash crops faced stagnant or falling prices
2. Commercialization affected not only the volume, but also the commodity composition of the
trade. It was no longer practically confined to ‘drugs, dyes, luxuries’, and now included in large
quantities foodgrains, fibres, and other great staples of universal consumption
 
4. Gross cropped area increased in most regions between 1870 and 1920, usually led by marketable
crops such as wheat, cotton, oilseeds, sugarcane, and tobacco
1. Canals expansion made wasteland cultivable
5. Regional specialization of crop production based on climatic conditions, soil etc.: Deccan districts of
Bombay presidency grew cotton, Bengal grew jute and Indigo, Bihar grew opium, Assam grew tea,
Punjab grew wheat
6. Improvement in ToT of agriculture - INTERNAL DRAIN THEORY
• Between 1870s and 1914, agri prices rose 50% in relation to the non-agri prices!
• This was a result of the worldwide phenomenon of falling industrial costs through mechanical
developments as well as increasing competition among industrial countries
• However, Impact on farmers were adverse
• Since, in permanent setllement, rents were fixed, thus gains were actually cornered by
Landlords and increased inequality
• They used it to buy more land, causing greater eviction of farmers  
7. Amartya Sen
1. FAMINES - 1943
2. Food Imports - Made up 50% of the capitl expenditures
Overall, agriculture suffered - AS ALREADY NOTED between 1901 and 1941, per capita agricultural output
declined by 14%, and foodgrain output fell by 24%, leading to a situation where during the first FYP of
independent India, the value of food imports was nearly half of the total capital investment!
 
Write a note on canal irrigation during colonial times.
• After 1858, initially the government tried building canals using a guarantee system akin to the one in
railways, but many private companies soon pulled out due to mounting losses
• Canals then had to be dug entirely at the governmen’ts expense, but with huge ‘Home Charges’,
money was scarce
• Government wasn’t keen on providing public goods if they were economically unprofitable; canal-
irrigated area did not exceed 6.5% of the total cultivated area in the 1890s
Foreign Trade
 
Pre and Early Colonial
The Indian continent was a major link in the maritime trade between Asia and Europe. Initially, the British
used Indian cotton to pay for Indonesian spices, which were valued highly back home. However, by the end
of 1600s, Europe became a bigger market for Indian textile than Southeast Asia. Cotton goods were
exported in the form of muslin, calicoes, and silk-cotton mixes. They catered to both mass markets
(calicoes) and also became fashion trendsetters. Other important items were rice, silver, and horses.
 
Major trading regions were Punjab, Gujarat, Coromandel, and Bengal, and the British set up their trading
posts here (they called these ‘factories’). While initially they concentrated on seaborne trade, the
increasing importance of Indian goods in home markets led them to want to control inland trade as well,
and given their might at sea, they began asking for concessions on inland trade from Indian rulers. The
latter had to comply, because the alternative was to face the wrath of the British at sea. The English
gradually coerced their way into getting trade licenses at negligible fee; however, when they saw that the
Indian rulers were unwilling or unable to help them enforce contracts and generally provide security on
inland trade routes, they increasingly began to wrest direct control of administration.
 
Over time, the company became a territorial power living on land revenue, and many of its employees
established partnerships with Indians to carry on export of major goods.
 
Colonial Period
• betwenn 1869 and 1914 trade rose by 500% Before the outbreak of the First World War, the exports
were primarily oriented towards Britain; later, they titled significantly towards East Asia.
• But share in world trade fell from 20% In 1800 to 2% by Independence ( Madison)
• Composition - K N Chaudhary
Time Export Import Direction
18th Textiles Gold Bullions

century
1800 - Indigo, Cotton , Textiles - 60% of China (Opium) and Britain - 80% of
1850 Silk, Tobacco, Imports trade
Opium
• 1850 - Agriculturual Cotton Textiles - 35% B&C Decline to 35%. US and Japan
1914 goods - 55% Rise of import of more
Machineries as
Indianisation of Textiles
rose
1935 ( Industrial goods Manufacturing goods (Imperial Preference Treaty) Britain

Inter rose and made declined from 80% to share in exports rose to 35% (
war) 30% of exports 65% Pneumonic - same)
Laissez Faire - After 1813 and 1833, when trade monoploy was removed
Reasons
• After the Industrial Revolution, British interest increaingly started moving away form the prevailing
mercantilist ideology, and move towards propounding ‘free trade’ values. As noted by some of its
most forceful proponents (Adam Smith/ Ricardo), essentials of the doctrine was that the state
shouldn’t interfere in economic affairs, establish monopolies, or hinder imports by levying high,
protective tarrifs.
• In theory, this amounted to a rejection of the mercantilist dictat of using colonies as useful adjuncts,
and there would be no need to forcibly alter economic policies of colonies. In practise, this amounted
to Imperialism of Free Trade, as England was to gain greatly if other countries lifted all their tarrifs on
British imports; force was not ruled out to secure this state of affairs.
Main Instrument  
Initially, the EIC’s self-interest kept the ambitions of British industrialists in check to some extent. However,
after the Charter acts f 1813 and 1833 removed the EIC’s monopoly, and even moreso after 1858, British
Free Trade interests started dominating policy like never before. Increasingly, the hypocrisy behind the free
trade rant was consistently exposed:
Until World War 1, trade between India and Britain was effectively free of tariffs. This served the exporters
of British manufacturers, such as the Lancashire mill owners. They resisted attempts to impose or increase
any import duties, because India was one of the most important markets for them (India bought 25% of
British textile exports in 1850). The Government of India based in Calcutta was rather poor, and from time
to time advocated an increase in tariffs. However, the India Office in London listened to the British
businesses, and hence till WW1 tariffs remained negligible.
Consequences/ Critique
• The composition of exports changed in favour of peasant exports. Exports not only enabled Inda to
pay ‘tribute’ due to an export surplus. But it also financed the textile imports from Britain. India was,
thus, converted into an unprotected market for British consumer goods,
• Drain of Wealth
○ Both External
○ And Internal
• At the same time, the increment in capital base was very limited
• This led to de- industrialization. As a result pressure on land increased, causing further
pauperization of peasantry.
• In 1910, Britain's share in Indian imports was 70% ( but only 30% in exports ). This means that apart
from serving as a market,
○it also placed export surpluses with other countries at its disposal, thereby enabling Briatin to
source raw materials from other nations. - Indian export surplus with other nation was thus
diverted to Britain which helped it in its trade with these countries
• Hypocrisy of Lassez Faire
1. Free trade policies could be easily dispensed with wherever the interests of the British
manufacturers so directed, for example, the brazen ‘Buy British’ policy
2. Imposition of countervailing excise in 1894
3. Overvalued Currency esp after 1893
4. Trade between unequal
1. Lack of Modern Banking system to finance the Indian exports
2. Skill, Capital deficit
5. Restrictions on Shipping
• Ranade’s views on Lassez faire ( Father of Indian Economics )
○ He saw predominance of agriculture and backwardness of industries as the root cause of

poverty in India.
○ Ranade thought that Laissez faire policy had enchanced India’s mass poverty as it hurted the
industry.
○ o he advocated a policy of protection to the Indian industries.
○ Not only that, he wanted the government to follow a positive policy for promotion of
industrial development of India.
○ Also wanted Capitalisation and not Commercialisation of Agriculture
This resulted in the (‘Policy of Discriminating Protection’) after WW1
• Reasons
○ Provided Tariff to a fiscally starved govt
○ Infant Industry Argument - To protect from Japanese comppetition
○ Too pacify the Indian nationalists like Ranade who hasd bitterly criticised the Lassez Faire Policy
○ Reward to India for her War Efforts
• Features
○ Some Increase in tariff dis take place - Hence, it Protected the Indian industries
○ Howwever, the protection was DISCRIMINATORY in nature

• Protection only ti theindustries which had Natural Advantage
• These were mostly those goods that did not create Competition with Britain . But, their
competition was more with other countries esp Japan ( British adversaries)
•  Hence industries like cement, woollen and heavy chemicals were denied protection.
○ Discriminating Protection was backed with the Imperial Preference Treaty

• It stated that imports from Britain and exports to Britain will enjoy the most favoured
nation treatment.
• Their main aim was to restrict the entry of other nations goods, mainly Japan, in Indian
market to eliminate the competition. 
• Positives
○ This led to diversification of industrial base and new factories came up in sugar, iron and
steel, matches, paper.
○ Manufacturing grew @ 5.6% between 1920 and 1938 ( pneumonic - same as 80s growth rate )
○ Industries like Tatas and Birls expanded ( eg Tatas in Aviation )
• Gain was little because

○ Britain share in exports rose to 35%
○ Limited only to ceertain industries
○ Over valuation of rupee continued
○ Excess capacities in the world, leading to cheaper imports.
○ Lack of technological and management advancement
Also talk about the Devaluation of Indian currncy between 1850s and 1890s due to the Silver based
Money supply and the boost to Indian export (42% devaluation between 1873 and 1895)
And the issues that began in 1880s like CVD on Indian Exports, excise duties on imports from Lancashire
milsl were removed and the adoption of GOLD standard in 1893
Industry
 
Pre WW1
• Industrial employment (0.3%)
• In terms of both employment and capital investment, modern industry remained unquestionably
slight in size, relative to the whole economy
• While the textile industries (cotton and jute) attained a respectable scale, accounting for well over
half the industrial working class, other key sectors such as iron and steel, engineering, coal etc. were
very weakly developed
• Thus, capital goods industry hardly existed, while consumer goods production was heavily distorted
in its concentration on textiles alone
OVERALL PICTURE
• However, the overwhelming majority of India’s manufacturing workers were employed in small-
scale industries (10% industry at independence wherein 8% in small scale and 10% of GDP ) - At
independence
○ even though overall the employment in SSIs showed a declining trend.
• Most of these SSIs were ‘traditional’, such as handloom weaving, leather manufacturing, furniture,
carpets, pottery etc.
• ‘Modern’ SSIs, such as cotton gins, jute presses, rice mills, brick kilns etc. grew to some extent in the
interwar period. By far, the most important SSI was textiles, employing one in every four industrial
worker.
• During the colonial rule, there was some rise in large-scale industry. ,
○ But very limited
○ Only 2% of employmetn
○ 7% of GDP
• Led by Textiles
○ 60% at independence
• Gradual Indianisation of Capital
• Absence of Core Sector
• Concentrated Industries
• Male
• 3 F issues
De- Industrialisation ( of traditional SSI)
• Definition
○ the destruction of traditional Indian handicraft industries due to competition from the
products of British manufacturers during the 19th century
• Impact
○ Employment ( Amiya Bagchi ) - ( remember 1870 and 1920 again - would help to remember)
Time Industry - HALVED Absorbed by Agri
1881 18% 62%
1931 9% 71%
•
Alternatively may use independence figures
• In terms of full-time equivalents, the number of textile workers’ jobs in India fell from 6
million in 1850 to 2.5 million in 1913
• Women more affected
○ Share of World Trade
• 1800: 20 %
1913: 1.5%
• Also composition changed and Direction of Trade changed as seen above
○ Deindustrailsation in 3 broad traditional areas

• Intermediate Goods ( Yarns)
• Textile  - Most Impacted
• Decline of Indian traditional Industry and Indian becoming a Major Importer of
British Textiles
• 90% textile exports decline between 1815 and 1832
• At the same time, Indian imports of textiles increased - 25% of all British
textile exports to India by 1850
• Reasons - Raw Cotton export to England and cheaper Industrial made
cloth import
• Tools - hand implements
• Consumer Goods for Poor
○ But, Commodities for well off and exports like Silk, Carpet, Leather, Increased
○ Concentration of SSI
• better means of transportation, artisans began migrating to big industrial centers, and
SSI development happened in concentrated areas, with more than half of all SSIs being
located in UP, Punjab, and Madras
• This though led to rise in Productivity of SSIs ( Sivasubramanium )
○ Increasing pressure on land; further pauperization of the peasantry
• Reasons
○ Industrial Revolution in England
○ British Trade Policies
○ Structural Factors in India ( Morris D Morris )
i. India didn't have the market for mass goods. Per capital income was low and purchasing
power was in the hands of only a few people.
ii. Indian towns were pilgrimage / administrative centers. Manufacturing was dispersed into
villages.
iii. Indians avoided technology change. Exchange of knowledge was also very little. Indians
didn't adopt iron casting even though it was introduced in € in 14th century.
iv. Human capital was scarce in India along with physical capital. Unskilled labor only was
plenty.
v. They accorded low social status to manufacturers. Manufacturing was strongly family
based.
○ MYRDAL
• Caste
• Counter
• Even Japan also has some form of caste system - But more flexible
• What about other countries like Africa - they don’t have caste , but still poor
• Monsoon failure
• Poor work discipline
• Lack of Punctuality
• Superstition
 
Stages of industrialization:
• Instead Use
○ Pre British
○ Deindustriualisation
○ 1850s - Growth of Cotton and Jute - Role of Suez, Railways, Monetary Policy, American
Revolution - Write about the Changing Trade Pattern
○ Boost due to WWs
○ Policy of Discriminating Trade and surge of Consumer Industries
○ Situation at Independence
 
1. Phase 1 - 1860s Pre-war period:
1. Episodes
i. After the Suez canal opened in 1869,
ii. American civil war (1861-65) which cut-off supplies of American cotton to Britain’s textile
2. Main industries that developed - Cotton and Jute
2. World War 1:
1. Demand for goods made in India (and now in worldwide shortage) increased,
2. but also inputs such as machinery, raw materials, chemicals etc., which were imported by
Indian industry, became scarce.
3. Industries that gained were cotton, jute mills, and steel
3. Interwar period:
1. LINK With Growing Indianisation , Greater Modern Industry and DISCRIMINIATING TRADE
PROTECTION and edit the following points
2. Until the First World War, the government followed a policy of LAISSEZ FAIRE in the promotion
of industry.
3. Thus, purchase of industrial goods for defense, railways etc. was heavily dependent on Britain,
and this created sudden shortages in India during the war.
4. After the war, the government spoke of promoting Indian industry, but worsening finances kept
it from doing much to support Indian industry.
5. Indian industry faced both cheap imports and falling world prices. Within older industries such
as cotton and jute, the situation became worse; greater competition came from other centers
such as Japan. In jute, which was mostly sold abroad Indian capacity grew faster than world
demand, and falling world prices hurt it badly
4. World War II: Similar effects as WW1- excess demand (=> high prices), but supply constraints
Modern Industrial Development

1. Modern industrial development:
1.  From 1850s modern industry began to develop in India but it was confined mainly to textiles
(cotton and jute) and Bombay - Ahemdabad and Hooghly region.
2. Iron and steel began to grow only after 1907 and
3. others in 1930s.
4. Still textiles comprised of 60 % of total manufacturing output in 1951 (next being engineering
@ 8.4% and steel @ 7.6%). ( PNEUMONIC - 60% same as the imports in the 1850- 1914
period)
5. Even though the pace of development was fast by 1951 it accounted only for 7.5% of the GDP
(up from 4% in 1913). They employed only 2% of the labor force ( up from 0.3% in 1913)
2. Employment
1. Between 1860 and 1940, Employment in the modern factories grew @ 4% pa
2. Overall employment growth 0.5% ( Sivasubramanium)
3. Gradual Indianisation of capital: 
1. Happened after WW1 and Indian industries developed mainly in consumer goods sector and
by WW2 India mainly self-sufficient in it
2. intermediate goods industries like cement and iron and steel also
3. By independence, Indian capital controlled ~60% of the large industrial units.
4. In 1913, 60% under British
4. Higher Productvity in SSIs ( Sivasubramanium)
5. Growing linkages: In 1930s, there began a shift of capital from usury, landlordism to industry. Links
between industry and agriculture grew stronger. The new industries were mainly catering to home
market instead of foreign market
6. Public debt: India turned from a debtor nation to a creditor nation (from a debt of Rs. 450 cr to
positive balances of Rs. 1700 cr) by the end of WW2 mainly on the account of forced savings enforced
by £.
Cons about the Modern Industrualisation Process

1. Absence of core sectors:
1. under development of capital goods and modern banking and insurance sectors.
2. India relied on imports to meet ~90% of its machinery needs in 1951.
3. also maintained dependence on foreign technicians
2. Share limited - At independence
1. Employment 2% up from 0.3% in 1913 - pneumonic -3
GDP 7.5% up from 4% though in 1913)
3. Showed high regional concentration, with most of the industries located in Bombay and Calcutta
(transport links, labour markets, and because these cities were located close to sites of cotton and
jute cultivation, respectively)
4. Factory employment was dominated by the textile industry, primarily in cotton and jute spinning and
weaving mills - 60% of total output in 1951
5. Primarily male-dominated
6. Credit, Skill and Technology shortage
 
Major Industries ( Syllabus)

Cotton:
 
 Evolution
• Begin With Deindustrialisation - and this sector worst affected
• Initial attempts to establish cotton textile factories in India were made in the 1850s. However, the
major spurt came because of the American Civil War, Spread of Railways ,development of Suez
Canal and devaluation of Indian rupee
• From 4 in 1862, the number of cotton mills in Bombay grew to 49 in 1885 ( Congress Year)
• China became a major export destinations- India’s success in exports can be gauged from the fact
that exports of Indian cotton yarn to China exceeded those of England in 1878
• Cotton mills continued expanding, with Ahmendabad being the next big centre
• At Lancashire’s continued insistence, by 1882, practically all import duties were eliminated
• However, the constant devaluation of the rupee due to global conditions (gold standard v/s India
being on silver currency) helped the Indian manufacturers tide over; Indian exports of yarn to China
maintained their edge over Britain
• In 1893, Britain adopted currency measures partly to shut off benefits that Indian cotton mills
received from the rupee’s continuous devaluation; the new policy hurt India’s exports of yarn and
cloth to China and other countries
• However, due to mounting Home Charges, GoI had to re-introduce a 5% tariff in 1894; under pressure
from Lancashire, a 5% ‘countervailing excise’ duty was also imposed on Indian exports (against free
trade principles)
• However, Indian cotton industry was resilient, and continued growing- by 1914, the number of mills
had risen to 270
• Most of this performance was limited to spinning yarn; when it came to manufactured cloth, Indian
mill production of cotton goods was dwarfed by the size of net imported fabrics
• Thus, Lancashire mills maintained a firm grip on the Indian market; it is likely that a substantial part of
the expansion of Indian cotton mill production was at the expense of the surviving domestic
handloom industry
• Throughout, an outstanding feature of the Indian cotton industry was that in capital as well as
management, the industry remained steadfastly Indian
○ Counter
• Built of British capital, machinery
• Hence, British problem was not really that of discrimination, but it was more of
indifference to India, as seen by the Lassez Faire Policy and Inadequate investment in
Human Capital ( Education ) and Infrastructure
 
Crisis
• Mini Crisis post WW1Before the First World War, cotton mills were selling primarily to
handloom weavers in India and China. After the war, the Chinese market was taken over by
Japan; the loss of this market, as well as increasing competition at home (more and more
cotton mills), led the cotton mill owners to want to save on labour costs. This intensified
industrial unrest. The process eventually culminated in the bankruptcy of many of Bombay’s
cotton mills.
• Deindustrialisation in traditional handicrafts
 

Jute:
  Evolution
1. It was an export oriented industry. Earlier raw jute  was exported and in 20th century jute products
exported to US and Germany. It was developed to serve foreign interests
• Beginning from a factory being established in 1835, Dundee soon monopolized the world market for
jute sacks
2. India had jute handlooms in Bengal , but due to colonialization of economy, they were killed and
raw jute was exported instead.
3. In 19th late century, mills came up. Due to rising cost of labor, £ lost their comparative advantage
and mills came up in Bengal.
4. fter the 1870s, Indian jute industry held the virtual monopoly in the world.
• European Unlike the Bombay cotton mills, the Calcutta jute mills had practically no Indian owners or
even managers

. During the war and interwar periods, world trade declined, and so did the demand for jute. To
counter this, the Indian industry unsuccessfully tried forming a cartel, but this only promoted entry
of new firms, which were easily willing to undercut the existing firms. The result was excess
production, unstable profits, and increased competition. In any case, a large part of the industry
was doomed already for having delayed technical improvements. - Just as Cotton suffered during
War period - Mini crisis

After Independence Steps

• National Jute Board
• Grant in Aid to Jute producing states for promotion of Jute Industry
○ Devloved by the Finance Commission
• Mandatory Jute Packaging Act , 1987
○ 20% in Sugar
○ Similarly in Food
○ Have Been diluted since 2012
• JUTE - ICARE scheme
○ TO extend extension facilities in jute
• Jute Modernisation Fund Scheme
• National Center for Jute Diversification
• Jute Technology Missions
• Plantation of Jute along the states of WB , Bihar, Orissa, Assam, Tripura
• Normal MSME schemes - KVIC, SIDBI
• Jute Policy 2005
• Jute Design Cells

Major problems faced by the Jute Industry in India
• After independence most of the jute-producing areas went to Bangladesh (erstwhile East Pakistan)
resulting in acute shortage of raw jute (raw material required for Jute production)
• Indian Jute industry is facing very stiff competition from other jute producing countries viz.
Bangladesh, Philippines, Japan and Brazil
• 10% export subsidy in Bangladesh
• As such the market for jute goods has shrunk due to invention of synthetic substitutes as a
replacement of Jute
• Wage rates need to be linked with productivity, new sophisticated machinery needed, but labour
unions is resistant → businessmen not doing new investment.
• Labour unrest and strikes have further added problems for this industry
• The provision of mandatory use of jute bags in Food and Sugar industry have been diluted in
2012

RAILWAYS
Reasons for developing railways:

1. Ambitions of railway-linked industries such as steel locomotives, railway tracks, signalling equipment
etc.- these had growin massively since 1830 in England, needed more avenues to expand, India was
perfect
2. Desire of Lancashire manufacturers to achieve access to the inland cotton regions, for cheap supply
of cotton, and also to expand market
3. Make army movements easier and Political Unity
4. As an afterthought, Brits also said that railways could supply cheaper grain in large quantitites to
regions affected by famine
5. Administrative Unity
Terms at which Railways were developed:

• Developers would get land free from the Government of India
• ‘Old Guarantee’ system: They would get a return of 5% on their capital, if they ran at a loss or
secured inadequate profit. This eliminated the incentives to maintain economy, or for employing
Indian labour (cheaper), instead of highly paid Europeans
• The railways would be entirely managed with only nominal governmental supervision
• Government had the option to take over the ownership of the lines, provided it paid the price to the
company not at the valuation of the real assets, but at the current stock market valuation in London!
○ Lord Mayo helped create State Railways
 
Functioning: Key Negative Features
1. High costs of construction - 5% Old Gurantee system
1. Estimates from 1875 show that guaranteed interest payments for railways amounted to about
1% of the national income
2. Old Gurantee System also minimised the need to reduce Costs
3. Freight rates for short distances were excessively high
2. Britain reaped all Backward Linkage Everything needed for railways, apart from coal, came from
Britain;
1. (even labour - old guarantee system)
2. All the railway administration, supervisory and technical staff (including ticket checkers, drivers
etc.) were Europeans
3. Entire railways system was installed in a haphazard manner with no single plan for railway
construction. Lines were laid down without planning, and only to meet immediate concerns of
Lancashire, the army, tea planters etc.
4. Complex multiplicity in forms of organization
5. Indian passengers were overcharged for miserable conditions of travel
1. Open racial apartheid, with Europeans travelling in separate, less crowded carriages
6. Led to
1. Deindustrialisation - Greater Marketing of Industrial outputs
2. Commercialisation of Agriculture
7. Reduce Displacement d the intensity of famines (while enlarging their area at the same time) (think
how?)
1. During famines, by bringing supplies to the core area of distress, the railways did help to restrict
the rise of prices there, but they correspondingly raised prices in areas they had drawn their
supplies from, and thus the effects of scarcity became more widely felt
8. Seriously reduced food supplies available within the country in times of famine by moving large
amounts to ports for exports, and during wars for armies(even during times of famines, food exports
weren’t curbed, because of mounting Home Charges justification given was that it wouldn’t be ‘sound
economics’(free trade))
1. Reason given by Amartya Sen for the scale of the 1943 famine
Functioning: Key Positive Features

1. Coverge
1. On an average, nearly 1,000 km of railway lines were opened every year between 1859 and
1909
i. 4.5 km per year now
ii. Cobb Douglas, low hanging fruit
2. Area theoretically served by the railways extended to 75% by 1914
2. Agriculture
1. Commercialisation of agriculture - By creating a National market
i. Since the railways immensely reduced transportation costs, they leveled off prices
prevailing in different regions
2. Railways created a firm foundation for regional specialization in different crops.( transportation
cost in HO) Each region could concentrate on crops grown best and least expensively within it,
and take full advantage of a countrywide market
i. Some crops had previously been grown locally at high prices due to inaccesiblity; this
stopped
3. Many crops could also now be produced for markets- extent of area under cotton, rice, wheat,
jute, oilseeds etc. expanded in areas where these were produced best
4. Owing to these factors, there came about a shift from food to non-food crops:
i. Between 1911- 1941
1. Per capital food production decreased @ 1.14% p.a
2. Per capita cash crop rose @ 0.57% p.a
3. Overall per capita decline @ 0.72% p.a
3. Concentration of Industries
1. Increased Productivity - Sivasubramanium
2. Migration
4. Disaster
1. Reduced the intensity of famines
5. Socio Political
1. National Integration
2. Spurred flow of people and Nationalistic ideas
Because of the negatives, railways failed to act as the agent of Take off in India unlike countries like
Germany or USA where it helped to initiate the industrial revolution
Money and Credit

 
Monetary Policy
Primary goal of monetary policy in colonial India was to stabilize economic transactions between Britain
and India by means of a stable exchange rate. An appreciation hurt Indian exporters, while depreciation
hurt Government of India’s chances of paying back its sterling obligations to the India Office in London.
Many scholars argue that rupee was constantly overvalued (esp after 1893 pegging to gold via pound)to
ensure that budgetary payment obligations to Britain were met, and this policy hurt Indian business
interests.
 
Indian exchange rate was initially on the silver standard, wherein there were two ways money could be
transferred between India and the rest of the world: the Council Draft (wherein India Office sold Council
Bills at a fixed exchange rate; these bills were redeemable in India), or by means of silver. In 1898, a ‘Gold
Exchange Standard’ was introduced (not the same as Gold Standard- think how).
 
During Mughal times, a uniform silver-based currency was introduced pretty much all across the
country. Tradition was of ‘open’ minting, where anyone with silver could go to a mint and get it
converted into currency. British maintained this policy; while they also issued some paper currency
that was redeemable in silver, it had very low circulation.
 
Thus, the quantity ofsilver exercised a major influence on the money supply of the country. Since
India had little silver reserves, the size of silver imports had a major impact on the money supply.
Trends in silver imports:
 
• Pre-1757 (Plassey):
○ Some silver imports to pay for company’s expenses,
○ but impact muted due to low volume
• 1757-1850:
○ After the victory at Plassey, Brits started paying for their Indian expenses by Indian revenues.
○ Thus, silver imports declined ,
○ and a long-term deflationary trend set in in India (MV=PY)
• 1850-1893:
○ Many countries across the world moved to the gold standard, which led to a spurt in demand
for gold, and decline in demand for silver. Thus, global silver prices fell.
○ 2 IMPACT
• INFLATION
• Since silver was still the currency-base in India, this led to huge imports of silver into
India => money supply increased, and so did prices (=> inflation).
• Thus, during 1873-96, when the industrial world faced the ‘Great Depression’ and
saw falling prices, India experienced inflation.
• Prices increased, but money wages for labourers etc. were fixed Land rents were
fixed
• Thus, redistribution of income from the poor to rich landlords
• DEPRECIATION
• This also led to a fall in the pound-sterling value of rupee (depreciation). Pound was
on the gold standard, and India’s silver currency stock was increasing even with
stagnant production levels. Thus, between 1873 and 1895, the rupee fell by 42%
against the pound (Mundell Johnson model)
• Depreciation led to boost in Exports
• 1893 Onwards
○ The immediate impact of this was that ‘Home Charges’ (fixed in sterling) increased for the
Government of India, and colonial officers could only send a reduced value of remittances back
home to England. The colonialists were obviously worried about this, and also about the impact
of this on trade (good for Indian exporters, bad for British interests – especially so in the cotton
industry, where Indian cotton factories were giving stiff competition to Lancashire in the export
market). Thus, in 1893, the government decided to close all Indian mints to silver coinage
(decrease supply) , till the desired rupee-sterling ratio was achieved.
○ India was now pegged to the sterling at 1s 4d, and through the sterling, to the gold standard.
This peculiar form of gold standard (through a silver currency) still required that a large amount
of Indian revenues be used up to buy and keep substantial reserves of gold in England. The
entire arrangement was quite profitable for Britain and fairly expensive for India CASE STUDY of
BRITISH influence on INDIAN TRADE & ECONOMY
The Ratio Controversy is the name given to the interwar strengthening of Indian nationalist protests at the
overvaluation of the rupee; the controversy was worsened by the conduct of Indian monetary policy during
the great depression, which seemed to serve British interests at the expense of Indian ones.
Credit
 
After 1870, banking and insurance grew rapidly; however, this growth occurred in a condition of
pervasive capital scarcity, poor regulation, and opaque business communities. Overall, the aggregate rate
of savings and investments remained low, and choice of assets mainly traditional.
• At Independence, Savings rate was 10% of GDP  
The market for money, thus, suffered from a dualistic structure- rich clients, good government securities,
and stable banks formed one segment, whereas poorer clients, risky securities, and unstable (Indian Joint-
Stock) banks formed another. This kept the risks of banking panics persistently high.
 
Informal Sector
Banks rarely, if ever, lent to peasants and artisans. The informal sector stepped in to fulfill the needs of
local small-scale moneylending, and existed to finance agriculture and craft traders (93% dependence on
moneylenders at the time of independence ) Most of the clients of moneylenders were people in need of
quick money, and who couldn’t give any security. The strengths of the moneylenders were their intimate
knowledge of clients, and absence of regulations, meaning low transaction costs for their customers
 
Formal Sector
Exchange banks financed trade to and from India; the Presidency banks mainly served businesses
connected with European enterprise, Exchange banks: Financing of foreign trade was almost entirely
restricted to European exchange banks. This further consolidated British firms’ control over India’s foreign
tradeand Indian Joint-Stock banks fulfilled that need for Indian businesses.
 
The Indian Joint-Stock banks, however, were characterized by a history of booms followed by crashes.
Among these were some stable banks (the big 5- Allahabad bank, Bank of Baroda, Bank of India, Punjab
National Bank, and Central Bank of India). However, many Indian banks were backed by lesser-known
firms, and were less conservative about their clients as compared to the big 5. Given that they didn’t have
big names, they felt like they had to offer high incentives to attract borrowers and depositors; this,
combined with the lack of an explicit regulatory system, led them to take excessive risks.
Indigenous system of banking (based on hundis) was run by local, rural moneylenders (‘shroffs’). They
were said to ‘finance the entire internal trade of India’. However, from the Mughal times when the shroffs
used to engage in deposit-banking, under the colonial rule the government and officials weren’t interested
in making deposits with them. Thus, they had no means of recharging their circulating capital, and were in
essense reduced to small-scale lenders.
 
Agricultural Credit market
Saw a Large growth in rural credit ( Informal).
Reasons
1. Commercialisation of Agriculture
1. Cash crops like cotton required more finances, because of relatively higher input costs and
investments in things such as land preparation, irrigation, fertilizers etc.
2. Cash crops also remained on the field longer than food crops, thus requiring a longer waiting
period between investment and sale of crop
2. Higher production of non-food crops meant peasants had to buy food crops from the market, which
could lead them to borrow
3. Monetization of tax and it’s non-synchronization with harvest cycles required money advances
4. Debt Trap
5. Supply side : The railways, growth of market towns, and new profit opportunities increased the
mobility, migration, settlement, and enterprise of persons of trader-moneylender class
 
Issues
• Usury
○ Bargaining Power of tenants limited due to caste hierarchies
○ Illiteracy - Duped into making Farcical Contracts
• Rigidity
○ Rents had rigidity in their pricing
○ But, The agriculture prices showed large variability due to monsoon and supply inelasticity (
Cobweb Model )
○ Internal Drain
• Thus at Independence, 93% of all rural credit came from moneylenders, and only about 1% from the
government banks (rest from cooperatives and commercial banks)
 
Industrial Credit market
• Issues
○ Savings Rate of only 10% at independence
• Hence, Capital Scarce and High interest Rate
○ Modern Institutions limited

• Modern banking institutions developed very slowly
• Presidency Banks more for European finance and thus out of reach
• Stock market was a rather small and insignificant institution in the 19th century.
○ and the traditional community-based informal financial institutions remained sectarian in
choice of their clientele.
○ Weak surplus generation
• Given that capital was scarce, there was a tendency to overcapitalize during booms
(machines were bought at time of rising prices at the high prices).
• Similarly, to generate investor confidence, most Indian firms used to pay excessive
dividends in times of boom,
• thereby making generation of excess reserves only a secondary priority.
• Also led to GREATER RISKS
 
Given this state, pioneers in large-scale industry came almost entirely from communities that specialized in
trading and banking activities. There was, thus, an almost perfect correlation between hereditary trader-
bankers and large-scale industry
 
Indian Economy @ Independence

Social Indicators
Education:  Literacy 15%
Health:  Mortality rate 2.7%

1.
IMR 180
Life Expactancy 32
Urbanization:  15%
Cons of British Empire economically - Bipan Chandra

• Savings rate
○ Net savings @ 3% of GDP
○ Reasons
• High taxation and then misspent
• Moneylenders
• Financial institutions absent
• Drain of wealth
• Home charges, salary, pension
• Princes- Consumes 20% of the GNP
• Wrong priorities of expenditure
○ Meagre expenditure on development of agriculture or social infrastructure
• Life expectancy at 32 at independence
• Literacy at 16%
• Women at 8%
• IMR at 180
○ Millitary expenditure after 1890 at about 50%
○ A bulk also absorbed in maintaining administration
• Regressive Tax regime
○ Direct taxes very low
○ Farmers exploited
○ Upper middle and upper class paid little
• Distorted Trade regime
○ India - Raw materials on which no equivalent economic return
○ Imported manufactured goods
○ No protection from cheap industrial imports
• Only in 1918 some trade barriers were put
• Agriculture
○ Not enough attention
○ Bengal famine
○ Permanentn settlement
○ Though irrigation was one field where some progress - Irrigation cover at 27% at independence
○ See Above Gaurav notes
• Industry
○ See above
Positives of The British Empire economically

• Infrastructure
○ By independence
• 60k km of railway lines
• 90k km of paved roads
○ Telegraph highly devloped
○ Although
• Railways no backward linkage to India as made from British tech
• Mainly for industries to ports connection and raw materials evacuation
• Not based upon Indian industrial needs
• Telephone not developed
• Indian industrial base developed
○ See above Gaurav's
○ Also, Bipin says it was done independently and not as junior partners of Britain
Non economic Paradoxes

• Unity of India
○ Pro
• Unified Indian territorily and beyond (burma, lanka)
• Common administration, education system everywhere
○ Con
• Divide and Rule
• Justice
○ Pro
• Rule of Law
• Independent judiciary
○ Cons
• Repressive laws
• Indeoendence of judiciary limited
• Collector both District Magistrate as well as the Development in charge
• Ilbert Law failure
• Court procedures costly- Only rich could benefit
• Benevolent despotism
○ Element of democracy
○ But very limited powers and suffrage
○ Even by 1935- limited to only 15% - men with property
• Modern Bureaucracy
○ Pro
• ICS was seen as honest, efficient and full of integrity (Bipan Chandra)
• Steel Frame of India
• Hence, Sardar Patel wanted to continue with the British legacy
○ Con
• Huge corruption in lower rungs
• Economic paradox

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5/30/2018 OneNote Online

BRITISH - Pre Indpendence

Indian economy in pre-independence era:

○ Dadabhai Naoroji Value estimate

• INTERNAL Drain Theory ( Also by Naoroji)

Land System and its Changes in Pre-Independence India

• Factors that led to the commercialization of agriculture

Time Export Import Direction

18th Textiles Gold Bullions

1935 ( Industrial goods Manufacturing goods (Imperial Preference Treaty) Britain

• Ranade’s views on Lassez faire ( Father of Indian Economics )

○ He saw predominance of agriculture and backwardness of industries as the root cause of

This resulted in the (‘Policy of Discriminating Protection’) after WW1

○ Howwever, the protection was DISCRIMINATORY in nature

○ Discriminating Protection was backed with the Imperial Preference Treaty

• Gain was little because

De- Industrialisation ( of traditional SSI)

Time Industry - HALVED Absorbed by Agri

1881 18% 62%

• Also composition changed and Direction of Trade changed as seen above

○ Deindustrailsation in 3 broad traditional areas

○ Increasing pressure on land; further pauperization of the peasantry

Modern Industrial Development

Cons about the Modern Industrualisation Process

1. Employment 2% up from 0.3% in 1913 - pneumonic -3

GDP 7.5% up from 4% though in 1913)

• 10% export subsidy in Bangladesh

Reasons for developing railways:

Terms at which Railways were developed:

Functioning: Key Positive Features

Money and Credit

Saw a Large growth in rural credit ( Informal).

○ Modern Institutions limited

Indian Economy @ Independence

Education: Literacy 15%

Health: Mortality rate 2.7%

Cons of British Empire economically - Bipan Chandra

Positives of The British Empire economically

Non economic Paradoxes

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Education:  Literacy 15%

Health:  Mortality rate 2.7%