Pre independence History of Indian Economics

  1. The history of India Economics begins with Indus Valley civilization which flourished between 3500 BC to 1800 BC.
    1. The Indus civilization's economy appears to have depended significantly on trade, Transport facilities were good.
    2. Practiced agriculture, Domesticated animals
    3. Made sharp tools and weapons from copper, bronze and tin
    4. Traded in
      1. Terracotta pots, beads, gold and silver,
      2. Coloured gem stones such as turquoise and lapis lazuli, metals, flints, seashells and pearls.
  2. Around 600 BC, the Mahajanapadas were using punch-marked silver coins.
    1. During this period there was intensive trade activity and urban development.
  3. During 300 B.C. most of Indian Subcontinent was under rule of Maurya Empire (B.C 321- 185 BC)
    1. The empire spent considerable resources building roads and maintaining them throughout India.
    2. The political unity and military security allowed for a common economic system and enhanced trade and commerce, with increased agricultural productivity.
    3. The improved infrastructure combined with increased security, greater uniformity in measurements, and increasing usage of coins as currency enhanced trade
  4. Between 1st and 17th centuries AD, India is estimated to have had the largest economy of the ancient and medieval world, controlling between one third and one fourth of the world's wealth.
  5. During the Mughal period (1526–1858 AD) India experienced unprecedented prosperity in history.
    1. The gross domestic product of India in the 16th century was estimated at about 25.1% of the world economy.
    2. An estimate of India's pre-colonial economy puts the annual revenue of Emperor Akbar's treasury in 1600 AD at £17.5 million
    3. The gross domestic product of Mughal India in 1600 AD was estimated at about 24.3% the world economy, the second largest in the world.
    4. Mughal Empire enforced a uniform customs and tax-administration system.
    5. In 1700 AD the exchequer of the Emperor Aurangzeb reported annual revenue of more than £100 million.
  6. The British imperial empire began to grow in India in the middle of 18th Century. The phase of decline of Indian industry set in.
  7. The British East India Company used huge revenue generated by the provinces under its rule for purchasing Indian raw materials, spices and goods.
    1. The continuous inflow of bullion that used to come into India on account of foreign trade stopped altogether.
    2. The Colonial government used land revenue for waging wars in India and Europe leaving little for development of India.
    3. In short span of 80 years (1780-1860 AD) under Colonial rule, India changed from being an exporter of processed goods for which it received payment in bullion, to being an exporter of raw materials and a buyer of manufactured goods.
    4. In the 1750s, mostly fine cotton and silk was exported from India to markets in Europe, Asia, and Africa.
    5. By 1850s raw materials, which chiefly consisted of raw cotton, opium, and indigo, accounted for most of India's exports.
    6. The ruthless exploitation under British colonial rule completely devastated India’s economy.
    7. India’s population was subject to frequent famines, had one of the world's lowest life expectancies, suffered from pervasive malnutrition and was largely illiterate.
    8. As per British economist, Angus Maddison India's share of the world income went from 27% in 1700 AD (compared to Europe's share of 23%) to 3% in 1950.
  8. The first phase (1757-1813) of ‘mercantilism’ was one of direct plunder in which surplus Indian revenues were used to buy Indian finished goods to be exported to England.
    1. This ‘First Phase’ is generally dated from 1757, when the British East India Company acquired the rights to collect revenue from its territories in the eastern and southern parts of the subcontinent.
    2. The East India Company’s monopoly over trade with India came to an end 1813.
    3. The British had come to India purely as a trading company, backed by an exclusive royal charter to trade with India, from their queen, Elizabeth I.
    4. First ‘factory’ was set up on the banks of the Hugali River in Bengal.
    5. The Company had managed to acquire permits or a ‘dastak’ from the Mughal emperor that exempted it from having to pay duties on its trade.
    6. ‘Dastak’ for exempation to pay duties on trade also meant heavy losses in revenue for the Bengal governors (later nawabs) in way of customs duties. This became a contentious issue and one of the chief factors, which led to the Battle of Plassey, fought in 1757.
    7. British East India Company in this period was to buy spices, cotton and silk from India and large quantities of bullion would flow out of Britain into India to pay for these commodities.
    8. After the diwani of Bengal, Bihar and Orissa was granted to the East India Company in 1765, the maximization of revenue from the colony became the primary objective of the British administration.
    9. Agricultural taxation was the main source of income for the company, which had to pay dividends to its investors in Britain.
    10. In 1772, the Governor of Bengal, Warren Hastings, introduced a system of revenue farming in the province of Bengal
      1. In this system European District Collectors would „farm‟ out the right to collect revenue to the highest bidder.
      2. This system was a total failure and ruined the cultivators because of the arbitrarily high revenue demands.
    11. Cornwallis introduced the system of Permanent Settlement in 1793
      1. Under this system, ‘zamindars’, who earlier only had the right to collect revenue, were established as the proprietors or owners of land.
      2. The state’s demand for land revenue was permanently fixed But if the zamindars were unable to pay the full tax on time, their lands would be taken away and auctioned by the state.
      3. But this system led to greater impoverishment of the tenant-cultivator because of the burden of high revenue assessment.
      4. It also caused great difficulty for zamindars, many of whom were unable to pay the revenue on time and lost their lands. A large number of traditional zamindar houses collapsed.
      5. The system also encouraged subinfeudation i.e. many layers of intermediaries between the zamindar and cultivator, adding to the woes of the peasantry.
    12. The Ryotwari System was started by Alexander Read in 1792, for the Madras Presidency, To keep out intermediaries from revenue collection, so that the state could acquire a larger share of the income from land.
      1. Later it was introduced in the Bombay Presidency as well.
      2. Under this system, revenue was initially collected from each village separately, but later each cultivator or ‘ryot’ was assessed individually.
      3. Peasants not zamindars were established as property owners.
      4. RYOT system increased the revenue collected by the state.
    13. In the north and northwest of India the Mahalwari Settlement was followed after 1822.
      1. The state made settlements with either the village community or, in some cases, the traditional ‘taluqdar’
      2. Each such fiscal unit was called a ‘mahal’
      3. Company officials amassed huge fortunes before they returned home, and they were referred to as 'nabobs’ in Britain
  9. In the second phase (1813-1858) of free trade India was converted into a source of raw material and a market for British manufactured goods.
    1. The Company lost its monopoly trading rights in India with the charter Act of 1813.
    2. The British crown took over the direct control and administration of all British territory in India in 1858
    3. Adam Smith’s book, An Inquiry into the Nature and Causes of the Wealth of Nations, heralded a new school of economic thought, which critiqued the idea of companies enjoying exclusive monopolies and lobbied for a government policy of ‘free trade’ or ‘laissez faire’.
    4. Open Indian markets for the entry of cheap, mass produced, machine-made British goods, which enjoyed little or almost no tariff restrictions.
    5. The passage of expensive, hand-crafted Indian textiles to Britain was however obstructed by prohibitive tariff rates.
    6. British-Indian territory was developed as a source of food stuff and raw material for Britain, which fuelled rapid growth in British manufacturing sector, crucial to the emergence of a powerful capitalist economy.
    7. The foundations of a classic colonial economy within India through the complex processes of commercialization of agriculture and deindustrialization.
      1. The 1860s onwards, the nature of agricultural production was determined by the demands of the overseas markets for Indian primary products.
      2. The items exported in the first half of the nineteenth century included cash crops like indigo, opium, cotton and silk.
      3. Gradually raw jute, food grains, oil seeds and tea replaced indigo and opium. Raw cotton remained the most in demand item.
      4. This expansion in cash crop production was accompanied by the building of railways, after 1850, to improve trade networks.
      5. The larger part of the profits generated by the export trade went to British business houses, which controlled shipping and insurance industries, besides commission agents, traders and bankers.
      6. Tea was grown in plantations in Assam, owned by whites, and they used indentured labour, which was almost like slavery
      7. Farmers were forced to grow cash crops also because they had to pay the high revenue, rents and debts in cash. The shift away from food crops like jowar, bajra and pulses to cash crops often created disaster in famine years.
      8. The jute industry collapsed in the 1930s, which was followed by a devastating famine in 1943 in Bengal.
    9. Deindustrialization
      1. In 1853, Lord Dalhousie took the decision to construct railways in India.
      2. The railway network made it easier to penetrate the interior markets and sources of raw material in the colony and linked them to port cities, instead of linking internal markets to each other. The railway network was thus primarily geared to serve the interest of foreign trade.
      3. The whole railway project was built with British capital, and investors in Britain were guaranteed 5% interest, which was paid out of Indian revenue
      4. Most of the high level expertise and railway equipment like machinery, railway lines and even coal to an extent, was imported from Britain.
      5. The British also enforced an unequal tariff system, whereby the entry of Indian commodities in British markets was restricted by high custom duties
      6. The Industrial Revolution in Europe enabled the mass production of cheap machine-made goods, which flooded Indian markets. Unable to compete with this, Indian commodities lost both their overseas and domestic markets. This destructive process led to deindustrialisation that increased pressure on land. Sandesh College Of LAW
  10. The third phase (1858 onwards) was one of finance imperialism in which British capital controlled banks, foreign trading firms and managing agencies in India.
    1. This period was one of ‘finance imperialism’, when some British capital was invested in the colony.
    2. Capital was organized through a closed network of British banks, export-import firms and managing agencies.
    3. Capital was initially invested in railways, jute industry, tea plantations and mining.
    4. The Indian money market was dominated by European banking houses.
    5. British entrepreneurs had easy access to capital made available by this banking network; Indian traders had to depend on family or caste organizations for their capital needs.
    6. British banking houses and British trading interests were well organized through Chambers of Commerce and Managing Agencies and could also influence the colonial state, to carefully deny Indian entrepreneurs access to capital.
    7. British Managing agencies controlled 75% of industrial capital, and most of the profits from this limited industrialization were also sent back to Britain.
    8. During the First World War that some Marwari businessmen from Calcutta, like G.D.Birla and Swarupchand Hukumchand invested in the jute industry.
    9. Gradually Indian businessmen’s control started expanding into other areas like coal mines, sugar mills and paper industry, and they could even buy up some European companies.
    10. The greatest success of Indian capital was seen in the cotton industry in western India, which took advantage of high demands during the war years (1914-18) and was in competition with Lancashire.
    11. Certain traditional trading communities like Gujarati Banias, Parsis, Bohras and Bhatias became important in cotton industry sector.
    12. The Tata Iron and Steel Company under government patronage provided leadership to the fledgling iron and steel company of India.
    13. In the Depression years (1929–1933), the domestic market became relatively free to be exploited by indigenous industry, as foreign trade declined.
    14. The colonial government also provided some protection to the sugar and cotton industries, in the face of falling prices in the agricultural sector. Low prices forced capital from land into the manufacturing sector.
    15. Indians also ventured into the field of insurance and banking.
    16. During the Second World War (1939–45), as foreign economic influence declined, Indian entrepreneurs managed to make huge profits
    17. The Indian capitalist class strengthened their links with the nationalist movement and soon started demanding the establishment of heavy industries under state ownership and started organizing themselves to resist the entry of foreign capital.
    18. Early Indian nationalists like Dadabhai Naoroji, M.G. Ranade and R.C.Dutt had expected Britain to undertake capitalist industrialization in India, but were deeply disillusioned with the results of colonial industrial policies.
    19. Dadabhai Naoroji put forward the drain of wealth theory.
    20. This drain occurred through the interest that India paid for foreign debts of the East India Company, military expenditure, guaranteed returns on foreign investment in railways and other infrastructure, importing all stationery from England, ‘home charges’ paid for the Secretary of State in Britain and salaries, pensions and training costs of military and civilian staff employed by the British state to rule India
    21. Half-hearted attempts by British at ‘modernisation’ were motivated primarily to benefit the ‘mother country’ (Britain)
    22. British economy was linked parasitically to the Indian economy, in an integrated world economic system of ‘free trade’.
    23. India in 1947 was not at a pre-industrial stage, and so her post independence economic growth patterns may not be compared with processes of industrialization in the West.
    24. In 1947, independent India embarked into a process of modernization from a ‘colonial’ mode rather than a ‘traditional’ mode, which was structurally backward and underdeveloped.

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