Economic Impact of British Rule

Earlier invaders had plundered India, but British rule did something new: it restructured the Indian economy to serve Britain. India was turned into a colonial economy, a supplier of raw materials and a market for British goods. The scale of the change is captured in one figure often quoted: India's share of the world economy fell from around 23% at the start of the 18th century to about 3% by independence. This topic surveys how that happened, to industry, agriculture and the people.

For centuries India led the world in fine textiles. Indian cotton and silk cloth was so famous that it marked the English language itself. Words like calico, chintz, muslin and bandanna all come from Indian cloth and places. Dhaka muslin and other varieties were exported across the globe. Weaving supported millions of families. The cloth was made entirely by hand, by spinners and weavers working in their own homes. In return, India earned a steady inflow of silver and gold.

India's world-famous handicrafts, above all its textiles, were destroyed by deliberate policy.

• One-way free trade. The Charter Act of 1813 opened India to British goods on easy terms. But Indian textiles entering Britain faced tariffs of nearly 80%. After 1820, European markets were virtually closed to Indian cloth. Cheap, machine-made cloth from the mills of Manchester flooded India. The new railways carried it to the remotest corners. India went from a net exporter to a net importer of cloth.
• The gomastha system. The Company used its power to force weavers to sell only to it, at low prices, through paid agents called gomasthas. Squeezed from both ends, weavers lost their livelihood.
• No new industry replaced the old. Unlike Europe, the loss of traditional livelihoods was not matched by modern industrialisation. This is called deindustrialisation. Artisans were already losing the patronage of princes and nobles, who now favoured Western goods.
• Ruralisation. Ruined artisans abandoned their crafts and crowded back onto the land. This swelled an already overburdened agriculture and was a major cause of poverty.
• Iron smelting destroyed. India had a long tradition of smelting high-quality iron and steel. The famous wootz steel was exported for sword-making. Smelters were ruined by two forces: cheap imported British iron made in large furnaces, and new forest laws that barred smelters from the forests where they gathered charcoal and ore. By the late 19th century the craft had nearly died out.
• Other industries crushed. The thriving shipbuilding industry of Surat, Bengal and Masulipatnam was killed by laws (1813, 1814) that shut Indian-built ships out of British trade routes. The British also held back the Indian steel industry. The Tatas, for example, were forced to make higher-grade steel for British use.

While industry was destroyed, agriculture was squeezed.

• The triple burden. The peasant was crushed under three weights: the government's high revenue demand, the zamindar's illegal dues and begar (forced labour), and the moneylender's debt. Insecure tenants lost their traditional rights in the land.
• Absentee landlordism. By 1815, half the land in Bengal had passed to merchants and moneylenders living in towns. They had no interest in improving the land. They only wanted to extract rent.
• Stagnant agriculture. Neither cultivator nor landlord invested in the land. Government spending on improvement was also very little. So productivity stayed low.
• Commercialisation of agriculture. From the late 19th century, peasants were pushed to grow cash crops (cotton, jute, oilseeds, sugarcane, tea) for distant markets rather than food. This tied Indian farming to world price swings. When the cotton boom of the 1860s collapsed in 1866, the cultivator was hit hardest. It brought debt, famine and the Deccan riots of the 1870s. For the peasant, commercialisation was largely a forced process.
• Famine and poverty. Famines became a recurring horror. They were caused not just by crop failure but by the poverty colonialism created. Between 1850 and 1900, about 2.8 crore people died in famines.

Modern machine industry came late, and on Britain's terms.

• It began only in the second half of the 19th century. The first cotton mill opened at Bombay in 1853 (Cowasjee Nanabhoy), and the first jute mill opened at Rishra, Bengal in 1855. Most modern industry was foreign-owned and run by British managing agencies.
• Indian entrepreneurs. The Bombay cotton mills of the 1850s were largely owned by Indian businessmen, many of whom had earned their capital in trade. In 1912, Jamsetji Tata's iron and steel works at Jamshedpur (the Tata Iron and Steel Company, TISCO) began production. It became the backbone of Indian heavy industry.
• Indian-owned industry (cotton, jute, later sugar and cement) faced heavy handicaps: credit problems, no tariff protection, unequal competition, and hostility from British capital. Even so, it laid the foundation of modern Indian industry and became closely linked to the national movement's call for swadeshi (the use of Indian-made goods).
• Lopsided growth. Heavy and capital-goods industries and power were neglected. Some regions were favoured over others, which created regional disparities. There was also little technical education, so industry lacked skilled manpower.
• This phase gave birth to a modern Indian capitalist class (bourgeoisie) and an industrial working class. Both would go on to shape the national movement.

The most powerful weapon the early nationalists turned against British rule was economic. The "economic drain" means the part of India's national wealth that was taken to Britain without any economic or material return for it. The theory was put forward by Dadabhai Naoroji, the "Grand Old Man of India", in his book "Poverty and UnBritish Rule in India".

The main components of the drain were:

• Salaries and pensions of British civil and military officials, spent or remitted to Britain.
• Interest on loans taken by the Indian government abroad.
• Profits on British investments in India.
• Stores purchased in Britain for the civil and military departments.
• Payments for shipping, banking and insurance services, which stunted Indian enterprise.

The effect was severe. The drain checked capital formation in India. The same wealth then re-entered India as finance capital, which deepened British control. Nationalists estimated the drain at more than the total land revenue, or about half of total government revenue (roughly 8% of national product). Naoroji called it "the pitiless eating of India's substance". R.C. Dutt put it this way: the cultivator saw "the moisture raised from the Indian soil descend as rain on other lands".

The drain theory was one part of a wider analysis built by India's first generation of economic thinkers. By showing, with figures, that India was being deliberately drained and made poorer, they shattered the claim that British rule was for India's good. This critique became the intellectual foundation of the freedom struggle during its moderate phase (1875–1905), the "seed-time" of the national movement.

• Who they were. Besides Dadabhai Naoroji, the key figures were Justice M.G. Ranade, R.C. Dutt (author of The Economic History of India), G.K. Gokhale, G. Subramania Iyer and Prithwishchandra Ray.
• Their core argument. India was poor and growing poorer because of British imperialism. Since the causes were man-made, they could be removed. Poverty was a national problem. That framing rallied all sections of society around common economic grievances.
• One-way free trade and tariffs. They attacked free trade for ruining Indian handicrafts. They also attacked tariff and tax policy for sparing British capitalists while overburdening the poor. They demanded a lower land revenue, abolition of the salt tax, and an income tax on the rich.
• Railways and trade for Britain. They exposed the claim that railways meant development. The railways were built for British needs. They helped foreign goods outsell Indian ones. "Expenditure on railways should be seen as an Indian subsidy to British industries," said G.V. Joshi.
• The political payoff. This agitation undermined the moral claim of foreign rule. It showed that India was ruled for British interests, not Indian ones. It was a major stimulant to national consciousness. By the early 20th century these ideas fed the demand for self-rule.

Historians (notably Rajni Palme Dutt) describe British exploitation as passing through three overlapping stages. Old forms never wholly ceased. They merged into new ones.

• First stage: Mercantilism (Monopoly Trade and Plunder), c. 1757–1813. This was the period of the Company's domination. The aim was a monopoly of trade and the direct appropriation of revenues through state power. Little was changed in administration or society. The wealth drained (2–3% of Britain's national income) helped finance Britain's Industrial Revolution. Weavers were ruined by the Company's monopoly.
• Second stage: Free-Trade Colonialism, c. 1813–1860s. With the rise of British industrial capitalists, India was made a market for British manufactures and a source of raw materials. Free trade integrated India with the world capitalist economy. The Permanent and Ryotwari settlements (the new land revenue systems), modern administration, law and modern education all served this exploitation.
• Third stage: Finance Imperialism (Foreign Investment), from the 1860s. As rival powers (the USA, Germany, Japan) challenged Britain, the emphasis shifted to foreign investment: large British capital in railways, loans, plantations and mines. There was also fierce competition for colonies. Policy turned reactionary under viceroys such as Lytton and Curzon. The idea of training Indians for self-government was abandoned in favour of permanent "trusteeship".