Economy of India under the British Raj
The economy of India under the British Raj describes the economy of India during the years of the British Raj from the 1850s to 1947. During this period, the Indian economy essentially remained stagnant, growing at the same rate (1%) as the population.
The fall of the rupee
- See also: Gold standard
After its victory in the Franco-Prussian War (1870–71), Germany extracted a huge indemnity from France of £200,000,000, and then moved to join Britain on a gold standard for currency. France, the US and other industrialising countries followed Germany in adopting a gold standard throughout the 1870s. At the same time, countries, such as Japan, which did not have the necessary access to gold or those, such as India, which were subject to imperial policies that determined that they did not move to a gold standard, remained mostly on a silver standard. A huge divide between silver-based and gold-based economies resulted. The worst affected were economies with a silver standard that traded mainly with economies with a gold standard. With discovery of more and more silver reserves, those currencies based on gold continued to rise in value and those based on silver were declining due to demonetisation of silver. For India, which carried out most of its trade with gold-based countries, especially Britain, the impact of this shift was profound. As the price of silver continued to fall, so too did the exchange value of the rupee, when measured against sterling.
The absence of industrialisation during the colonial period
Historians have questioned why India did not undergo industrialisation in the nineteenth century in the way that Britain did. In the seventeenth century, India was a relatively urbanised and commercialised nation with a buoyant export trade, devoted largely to cotton textiles, but also including silk, spices, and rice. By the end of the century, India was the world’s main producer of cotton textiles and had a substantial export trade to Britain, as well as many other European countries, via the East India Company. Yet as British cotton industry underwent a technological revolution in the late eighteenth century, the Indian industry stagnated, and industrialisation in India was delayed until the twentieth century.
Historians have suggested that this was because India was still a largely agricultural nation with low wages levels. In Britain, wages were high, so cotton producers had the incentive to invent and purchase expensive new labour-saving technologies. In India, by contrast, wages levels were low, so producers preferred to increase output by hiring more workers rather than investing in technology.
The above explanation contains a serious flaw. The analysis ignores the fact that under British rule, India did not operate in a free and competitive environment. Quite the opposite. Once British rule through the East India Company was consolidated by the late 1700s the British dismantled India's advanced textile industry that was in direct competition to the developing British textile industry.
Since the Middle Ages, Indian textiles such as muslin were revered around the world and were produced at a cost that the British and Europeans could not compete with. So once the British ruled India they did what they couldn't do in a freely competitive environment. They forcefully shut down the competition.
Even as late as 1772, Henry Patullo, in the course of his comments on the economic resources of Bengal, could claim confidently that the demand for Indian textiles could never reduce, since no other nation could equal or rival it in quality. However, by the beginning of the nineteenth century, a beginning of a long history of decline of textile exports is observed.
In the early 19th century, the East India Company (EIC), had cut off the hands of hundreds of weavers in Bengal in order to destroy the indigenous weaving industry in favor of British textile imports (some anecdotal accounts say the thumbs of the weavers of Dacca were removed). Twenty weavers’ families from Murshidabad and Nadia in Bengal had then fled to Awadh (to the British: Oudh; corresponding to modern-day Uttar Pradesh), whose nawab resettled them in the town of Mahua Dabar. The refugees taught weaving to their offspring and Mahua Darbar became a weaving town of 5,000 people. In March–April 1857 when Zaffar Ali, a young man whose grandfather had migrated from Bengal, spotted a British boat coming down the Manorama (a tributary of the Ghagra on which Mahua Darbar was set). Local people intercepted the boat and killed the British soldiers by beheading - Lt T.E. Lindsay, Lt W.H. Thomas, Lt G.L. Caulty, Sgt Edwards and privates A.F. English and T.J. Richie. The British had their revenge – on June 20 that year, the British 12th Irregular Horse Cavalry surrounded the town, slaughtered hundreds and set all the houses on fire. On the colonial revenue records, the area was subsequently marked gair chiragi (non-revenue land) and thus .Mahua Dabar, a town of 5,000 persons, completely disappeared. 
The worldwide Great Depression of 1929 had a small direct impact on traditional India, with relatively little impact on the modern secondary sector. The government did little to alleviate distress, and was focused mostly on shipping gold to Britain. The worst consequences involved deflation, which increased the burden of the debt on villagers while lowering the cost of living. In terms of volume of total economic output, there was no decline between 1929 and 1934. Falling prices for jute (and also wheat) hurt larger growers. The worst hit sector was jute, based in Bengal, which was an important element in overseas trade; it had prospered in the 1920s but was hard hit in the 1930s. In terms of employment, there was some decline, while agriculture and small-scale industry also exhibited gains. The most successful new industry was sugar, which had meteoric growth in the 1930s.
British investors built a modern railway system in the late 19th century—it was the fourth largest in the world and was renowned for quality of construction and service. The government was supportive, realising its value for military use in case of another rebellion, as well as its value for economic growth. All the funding and management came from private British companies. The railways at first were privately owned and operated, and run by British administrators, engineers and skilled craftsmen. At first, only the unskilled workers were Indians.
A plan for a rail system in India was first put forward in 1832. A few short lines were built in the 1830s, but they did not interconnect. 1844, Governor-General Lord Hardinge allowed private entrepreneurs to set up a rail system in India. The John Company (and later the colonial government) encouraged new railway companies backed by private investors under a scheme that would provide land and guarantee an annual return of up to five percent during the initial years of operation. The companies were to build and operate the lines under a 99-year lease, with the government having the option to buy them earlier.
Two new railway companies, Great Indian Peninsular Railway (GIPR) and East Indian Railway (EIR) began in 1853–54 to construct and operate lines near Bombay and Calcutta. In 1853, the first passenger train service was inaugurated between Bori Bunder in Bombay and Thane. Covering a distance of 34 kilometres (21 mi). The first passenger railway line in North India between Allahabad and Kanpur opened in 1859.
In 1854 Governor-General Lord Dalhousie formulated a plan to construct a network of trunk lines connecting the principal regions of India. Encouraged by the government guarantees, investment flowed in and a series of new rail companies were established, leading to rapid expansion of the rail system in India. Soon several large princely states built their own rail systems and the network spread to the regions that became the modern-day states of Assam, Rajasthan and Andhra Pradesh. The route mileage of this network increased from 1,349 kilometres (838 mi) in 1860 to 25,495 kilometres (15,842 mi) in 1880 – mostly radiating inland from the three major port cities of Bombay, Madras, and Calcutta. Most of the railway construction was done by Indian companies supervised by British engineers. The system was heavily built, in terms of sturdy tracks and strong bridges. By 1900 India had a full range of rail services with diverse ownership and management, operating on broad, metre and narrow gauge networks. In 1900 the government took over the GIPR network, while the company continued to manage it.
In the First World War, the railways were used to transport troops and grains to the ports of Bombay and Karachi en route to Britain, Mesopotamia, and East Africa. With shipments of equipment and parts from Britain curtailed, maintenance became much more difficult; critical workers entered the army; workshops were converted to making artillery; some locomotives and cars were shipped to the Middle East. The railways could barely keep up with the increased demand. By the end of the war, the railways had deteriorated badly. In 1923, both GIPR and EIR were nationalised.
Headrick argues that until the 1930s, both the Raj lines and the private companies hired only European supervisors, civil engineers, and even operating personnel, such as locomotive engineers. The government's Stores Policy required that bids on railway contracts be made to the India Office in London, shutting out most Indian firms. The railway companies purchased most of their hardware and parts in Britain. There were railway maintenance workshops in India, but they were rarely allowed to manufacture or repair locomotives. TISCO steel could not obtain orders for rails until the 1920s.
The Second World War severely crippled the railways as rolling stock was diverted to the Middle East, and the railway workshops were converted into munitions workshops.
India provides an example of the British Empire pouring its money and expertise into a very well built system designed for military purposes after the Mutiny of 1857, and with the hope that it would stimulate industry. The system was overbuilt and too expensive for the small amount of freight traffic it carried. However, it did capture the imagination of the Indians, who saw their railways as the symbol of an industrial modernity—but one that was not realised until after Independence. Christensen (1996) looks at of colonial purpose, local needs, capital, service, and private-versus-public interests. He concludes that making the railways a creature of the state hindered success because railway expenses had to go through the same time-consuming and political budgeting process as did all other state expenses. Railway costs could therefore not be tailored to the timely needs of the railways or their passengers.
After independence in 1947, forty-two separate railway systems, including thirty-two lines owned by the former Indian princely states, were amalgamated to form a single unit named the Indian Railways. The existing rail networks were abandoned in favour of zones in 1951 and a total of six zones came into being in 1952.
Agriculture and industry
The Indian economy grew at about 1% per year from 1880 to 1920, and the population also grew at 1%. The result was, on average. no long-term change in income levels. Agriculture was still dominant, with most peasants at the subsistence level. Extensive irrigation systems were built, providing an impetus for growing cash crops for export and for raw materials for Indian industry, especially jute, cotton, sugarcane, coffee and tea.
The entrepreneur Jamsetji Tata (1839–1904) began his industrial career in 1877 with the Central India Spinning, Weaving, and Manufacturing Company in Bombay. While other Indian mills produced cheap coarse yarn (and later cloth) using local short-staple cotton and cheap machinery imported from Britain, Tata did much better by importing expensive longer-stapled cotton from Egypt and buying more complex ring-spindle machinery from the United States to spin finer yarn that could compete with imports from Britain.
In the 1890s, Tata launched plans to expand into heavy industry using Indian funding. The Raj did not provide capital, but aware of Britain's declining position against the U.S. and Germany in the steel industry, it wanted steel mills in India so it is did promise to purchase any surplus steel Tata could not otherwise sell. The Tata Iron and Steel Company (TISCO), now headed by his son Dorabji Tata (1859–1932), opened its plant at Jamshedpur in Bihar in 1908. It became the leading iron and steel producer in India, with 120,000 employees in 1945. TISCO became an India's proud symbol of technical skill, managerial competence, entrepreneurial flair, and high pay for industrial workers.
Economic impact of British imperialism
Debate continues about the economic impact of British imperialism on India. The issue was actually raised by conservative British politician Edmund Burke who in the 1780s vehemently attacked the East India Company, claiming that Warren Hastings and other top officials had ruined the Indian economy and society. Indian historian Rajat Kanta Ray (1998) continues this line of reasoning, saying the new economy brought by the British in the 18th century was a form of plunder and a catastrophe for the traditional economy of Mughal India. (Economic Drain Theory) Ray believes that British depleted the food and money stocks and imposed high taxes that helped cause the terrible famine of 1770, which killed a third of the people of Bengal.
P. J. Marshall, a British historian known for his work on the British empire, has a reinterpretation of the view that the prosperity of the formerly being Mughal rule gave way to poverty and anarchy. Marshall argues the British takeover did not make any sharp break with the past. British control was delegated largely through regional rulers and was sustained by a generally prosperous economy for the rest of the 18th century, except the frequent famines with very high fatality rate(Famine in India). Marshall notes the British raised revenue through local tax administrators and kept the old Mughal rates of taxation. Instead of the Indian nationalist account of the British as alien aggressors, seizing power by brute force and impoverishing all of India, Marshall presents a British nationalist interpretation in which the British were not in full control but instead were controllers in what was primarily an Indian play and in which their ability to keep power depended upon excellent cooperation with Indian elites. Marshall admits that much of his interpretation is still rejected by many historians.
The newly independent but weak Union government's treasury reported annual revenue of £334 million in 1950. In contrast, Nizam Asaf Jah VII of south India was widely reported to have a fortune of almost £668 million then. About one-sixth of the national population were urban by 1950. A US Dollar was exchanged at 4.79 Rupees
- B. R. Tomlinson, The Economy of Modern India, 1860–1970 (1996) p. 5
- Griffin, Emma. "Why was Britain first? The industrial revolution in global context". Retrieved 9 March 2013.
- K. N., Chaudhuri (1978). The Trading World of Asia and the English East India Company: 1660-1760. Cambridge University Press. p. 237. ISBN 9780521031592.
- India and the Contemporary World - II (March 2007 ed.). National Council of Educational Research and Training. p. 116. ISBN 8174507078.
- http://www.telegraphindia.com/1081208/jsp/atleisure/story_10221665.jsp ).
- K. A. Manikumar, A colonial economy in the Great Depression, Madras (1929–1937) (2003) p 138-9
- Dietmar Rothermund, An Economic History of India to 1991 (1993) p 95
- Omkar Goswami, "Agriculture in Slump: The Peasant Economy of East and North Bengal in the 1930s," Indian Economic & Social History Review, July 1984, Vol. 21 Issue 3, p335-364
- Colin Simmons, "The Great Depression and Indian Industry: Changing Interpretations and Changing Perceptions," Modern Asian Studies, May 1987, Vol. 21 Issue 3, pp 585–623
- Dietmar Rothermund, An Economic History of India to 1991 (1993) p 111
- Dietmar Rothermund, India in the Great Depression, 1929–1939 (New Delhi, 1992).
- Ian J. Kerr (2007). Engines of change: the railroads that made India. Greenwood Publishing Group. ISBN 978-0-275-98564-6.
- I. D. Derbyshire, "Economic Change and the Railways in North India, 1860–1914," Modern Asian Studies, (1987), 21#3 pp. 521–545 in JSTOR
- R.R. Bhandari (2005). Indian Railways: Glorious 150 years. Ministry of Information and Broadcasting, Government of India. pp. 1–19. ISBN 81-230-1254-3.
- Babu, T. Stanley (2004). "A shining testimony of progress". Indian Railways (Indian Railway Board). p. 101. Missing or empty
- Thorner, Daniel (2005). "The pattern of railway development in India". In Kerr, Ian J. Railways in Modern India. New Delhi: Oxford University Press. pp. 80–96. ISBN 0-19-567292-5.
- Hurd, John (2005). "Railways". In Kerr, Ian J. Railways in Modern India. New Delhi: Oxford University Press. pp. 147–172–96. ISBN 0-19-567292-5.
- R.R. Bhandari (2005). Indian Railways: Glorious 150 years. Ministry of Information and Broadcasting, Government of India. pp. 44–52. ISBN 81-230-1254-3.
- Daniel R. Headrick, The tentacles of progress: technology transfer in the age of imperialism, 1850–1940, (1988) pp 78–79
- Awasthi, Aruna (1994). History and development of railways in India. New Delhi: Deep & Deep Publications. pp. 181–246.
- Daniel R. Headrick, The tentacles of progress: technology transfer in the age of imperialism, 1850–1940, (1988) pp 8–82
- Wainwright, A. Marin (1994). Inheritance of Empire. Westport, CT: Greenwood Publishing Group. p. 48. ISBN 978-0-275-94733-0.
- R. O. Christensen, "The State and Indian Railway Performance, 1870–1920: Part I, Financial Efficiency and Standards of Service," Journal of Transport History (Sept. 1981) 2#2, pp. 1–15
- B. H. Tomlinson, "India and the British Empire, 1880–1935," Indian Economic and Social History Review, (Oct 1975), 12#4 pp 337–380
- F. H. Brown and B. R. Tomlinson, "Tata, Jamshed Nasarwanji (1839–1904)", in Oxford Dictionary of National Biography (2004) accessed 28 Jan 2012 doi:10.1093/ref:odnb/36421
- Vinay Bahl, "The Emergence of Large-Scale Steel Industry in India Under British Colonial Rule, 1880–1907," Indian Economic and Social History Review, (Oct 1994) 31#4 pp 413–460
- Chikayoshi Nomura, "Selling steel in the 1920s: TISCO in a period of transition," Indian Economic and Social History Review (January/March 2011) 48: pp 83–116, doi:10.1177/001946461004800104
- Vinay Bahl, Making of the Indian Working Class: A Case of the Tata Iron & Steel Company, 1880–1946 (1995)
- Rajat Kanta Ray, "Indian Society and the Establishment of British Supremacy, 1765–1818," in The Oxford History of the British Empire: vol. 2, The Eighteenth Century" ed. by P. J. Marshall, (1998), pp 508–29
- P.J. Marshall, "The British in Asia: Trade to Dominion, 1700–1765," in The Oxford History of the British Empire: vol. 2, The Eighteenth Century" ed. by P. J. Marshall, (1998), pp 487–507
- "His Fortune on TIME". Time.com. 19 January 1959. Retrieved 16 October 2012.
- One-sixth of Indians were urban by 1950
- Bose, Sugata; Jalal, Ayesha (2003), Modern South Asia: History, Culture, Political Economy, London and New York: Routledge, 2nd edition. Pp. xiii, 304, ISBN 0-415-30787-2.
- Oldenburg, Philip (2007), ""India: Movement for Freedom"", Encarta Encyclopedia, archived from the original on 2009-10-31.
- Stein, Burton (2001), A History of India, New Delhi and Oxford: Oxford University Press. Pp. xiv, 432, ISBN 0-19-565446-3
- Adams, John; West, Robert Craig (1979), "Money, Prices, and Economic Development in India, 1861–1895", Journal of Economic History (Cambridge University Press) 39 (1): 55–68, doi:10.1017/S0022050700096297, JSTOR 2118910
- Appleyard, Dennis R. (2006), "The Terms of Trade between the United Kingdom and British India, 1858–1947", Economic Development and Cultural Change 54: 635–654, doi:10.1086/500031
- Bannerjee, Abhijit; Iyer, Lakshmi (2005), "History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India", American Economic Review (American Economic Association) 95 (4): 1190–1213, doi:10.1257/0002828054825574, JSTOR 4132711
- Bayly, C. A. (1985), "State and Economy in India over Seven Hundred Years", The Economic History Review, New Series (Blackwell Publishing) 38 (4): 583–596, doi:10.1111/j.1468-0289.1985.tb00391.x, JSTOR 2597191
- Bayly, C. A. (2008), "Indigenous and Colonial Origins of Comparative Economic Development: The Case of Colonial India and Africa", World Bank Policy Research Working Paper 4474
- Bose, Sumit (1993), Peasant Labour and Colonial Capital: Rural Bengal since 1770 (New Cambridge History of India), Cambridge and London: Cambridge University Press..
- Broadberry, Stephen; Gupta, Bishnupriya (2007), Lancashire, India and shifting competitive advantage in cotton textiles, 1700–1850: the neglected role of factor prices
- Clingingsmith, David; Williamson, Jeffrey G. (2008), "Deindustrialization in 18th and 19th century India: Mughal decline, climate shocks and British industrial ascent", Explorations in Economic History 45 (3): 209–234, doi:10.1016/j.eeh.2007.11.002
- Cuenca-Esteban, Javier (2007), "India's contribution to the British balance of payments, 1757–1812", Explorations in Economic History 44 (1): 154–176, doi:10.1016/j.eeh.2005.10.007
- Collins, William J. (1999), "Labor Mobility, Market Integration, and Wage Convergence in Late 19th Century India", Explorations in Economic History 36: 246–277, doi:10.1006/exeh.1999.0718
- Farnie, DA (1979), The English Cotton Industry and the World Market, 1815–1896, Oxford, UK: Oxford University Press. Pp. 414, ISBN 0-19-822478-8
- Ferguson, Niall; Schularick, Moritz (2006), "The Empire Effect: The Determinants of Country Risk in the First Age of Globalization, 1880–1913", Journal of Economic History 66 (2): 283–312, doi:10.1017/S002205070600012X
- Ghose, Ajit Kumar (1982), "Food Supply and Starvation: A Study of Famines with Reference to the Indian Subcontinent", Oxford Economic Papers, New Series 34 (2): 368–389
- Grada, Oscar O. (1997), "Markets and famines: A simple test with Indian data", Economic Letters 57: 241–244, doi:10.1016/S0165-1765(97)00228-0
- Guha, R. (1995), A Rule of Property for Bengal: An Essay on the Idea of the Permanent Settlement, Durham, NC: Duke University Press, ISBN 0-521-59692-0
- Habib, Irfan (2007), Indian Economy 1858–1914, Aligarh: Aligarh Historians Society and New Delhi: Tulika Books. Pp. xii, 249., ISBN 81-89487-12-4
- Harnetty, Peter (1991), "'Deindustrialization' Revisited: The handloom weavers of the Central Provinces of India, c. 1800–1947", Modern Asian Studies 25 (3): 455–510, doi:10.1017/S0026749X00013901, JSTOR 312614
- Imperial Gazetteer of India vol. III (1907), The Indian Empire, Economic, Published under the authority of His Majesty's Secretary of State for India in Council, Oxford at the Clarendon Press. Pp. xxx, 1 map, 552.
- Kumar, Dharma; Raychaudhuri, Tapan et al., eds. (1983), The Cambridge Economic History of India: c. 1757 – c. 1970, Cambridge and New York: Cambridge University Press. Pp. 1078, ISBN 0-521-22802-6
- McAlpin, Michelle B. (1979), "Dearth, Famine, and Risk: The Changing Impact of Crop Failures in Western India, 1870–1920", The Journal of Economic History 39 (1): 143–157, doi:10.1017/S0022050700096352
- Ray, Rajat Kanta (1995), "Asian Capital in the Age of European Domination: The Rise of the Bazaar, 1800–1914", Modern Asian Studies 29 (3): 449–554, doi:10.1017/S0026749X00013986, JSTOR 312868
- Roy, Tirthankar (2002), "Economic History and Modern India: Redefining the Link", The Journal of Economic Perspectives 16 (3): 109–130, doi:10.1257/089533002760278749, JSTOR 3216953
- Roy, Tirthankar (2006), The Economic History of India 1857–1947, Second Edition, New Delhi: Oxford University Press. Pp. xvi, 385., ISBN 0-19-568430-3
- Roy, Tirthankar (2007), "Globalisation, factor prices, and poverty in colonial India", Australian Economic History Review 47 (1): 73–94, doi:10.1111/j.1467-8446.2006.00197.x
- Roy, Tirthankar (2008), "Sardars, Jobbers, Kanganies: The Labour Contractor and Indian Economic History", Modern Asian Studies 42: 971–998, doi:10.1017/S0026749X07003071
- Sen, A. K. (1982), Poverty and Famines: An Essay on Entitlement and Deprivation, Oxford: Clarendon Press. Pp. ix, 257, ISBN 0-19-828463-2
- Studer, Roman (2008), "India and the Great Divergence: Assessing the Efficiency of Grain Markets in Eighteenth- and Nineteenth-Century India", Journal of Economic History 68: 393–437, doi:10.1017/S0022050708000351
- Tomlinson, B. R. (1993), The Economy of Modern India, 1860–1970 (The New Cambridge History of India, III.3), Cambridge and London: Cambridge University Press., ISBN 0-521-58939-8
- Tomlinson, B. R. (2001), "Economics and Empire: The Periphery and the Imperial Economy", in Porter, Andrew, Oxford History of the British Empire: The Nineteenth Century, Oxford and New York: Oxford University Press, pp. 53–74, ISBN 0-19-924678-5
- Travers, T. R. (2004), "‘The Real Value of the Lands’: The Nawabs, the British and the Land Tax in Eighteenth-Century Bengal", Modern Asian Studies 38 (3): 517–558, doi:10.1017/S0026749X03001148