Economic Consequences of British Colonialism in India

Arora IAS Class Notes



  • Shift from Colonial Economy:British rule transformed India into a colony serving British interests.
  • India’s Decline:Share of global economy dropped from 23% (18th century) to 3% (independence).

Destruction of Traditional Industries

  • One-Way Free Trade (Post-1813):
    • British goods flooded Indian markets with low tariffs.
    • High tariffs (80%) on Indian exports (textiles) restricted market access.
  • Cheap British Imports:
    • Machine-made British goods undercut Indian handicrafts.
    • Railways facilitated distribution of British products throughout India.
  • Deindustrialization:
    • Loss of traditional livelihoods for artisans and handicraftsmen.
    • No significant industrialization to replace lost jobs.
    • Decline of patronage from royalty adopting Western tastes.


  • Artisans to Agriculture:Displaced artisans migrated to villages for farming.
  • Increased Pressure on Land:More people relying on agriculture strained resources.
  • Poverty and Upset Village Economy:Overburdened agriculture led to poverty and instability.


Impoverishment of Peasantry

Land Systems and Exploitation

  • Permanent Settlement:
    • Focused on maximizing revenue for the British.
    • Land transferable, insecurity for tenants.
    • Little investment in improving land productivity.
  • Increased Zamindari Power:
    • Summary evictions of tenants.
    • Demanded illegal dues and forced labor.
    • No incentive to invest in agriculture.

Debt and Exploitation by Moneylenders

  • Peasants forced to borrow to pay zamindars.
  • Moneylenders also controlled grain markets.
  • Low prices for crops, high interest on loans.
  • Manipulation of judiciary by moneylenders.

Triple Burden and Impoverishment

  • Peasants burdened by:
    • Government revenue demands.
    • Zamindari exactions.
    • Moneylender debt.
  • Worsened during famines and scarcities.
  • Loss of land and impoverishment. (This happened under all land systems – Zamindari, Ryotwari, Mahalwari)


Emergence of Intermediaries and Ruin of Old Zamindars

  • Land Transfer (by 1815):
    • Half of Bengal’s land in new hands (merchants, moneylenders).
  • New Zamindars:
    • Increased power, limited investment opportunities.
    • Resorted to land grabbing and sub-infeudation.
  • More Intermediaries:
    • Absentee landlordism due to multiple layers of collectors.
    • Increased burden on peasants.
  • Rising Land Prices:
    • High demand for land pushed prices up.
    • Increased peasant liabilities.
  • No Investment in Agriculture:
    • New zamindars lacked traditional ties to the land.
    • Focused on maintaining British rule and opposing Indian nationalism.


Stagnation and Deterioration of Agriculture

  • Low Productivity:
    • Peasants lacked resources and incentive to invest.
    • Zamindars had no interest in improvement.
    • Government spending on agriculture was minimal.
    • Land fragmentation hindered modernization.
  • Famines and Poverty:
    • Frequent famines due to poverty, not just food shortage.
    • Estimated 28 million deaths due to famine (1850-1900).

Commercialization of Indian Agriculture

  • Shift from Subsistence to Market-Oriented:
    • Cultivation of cash crops for national and international markets.
    • Examples: cotton, jute, sugarcane, etc.
  • Factors Enabling Commercialization:
    • Spread of money economy.
    • Growth of national market and internal trade.
    • Improved transportation (railroads, roads).
    • International trade with British investment.
  • Impact on Peasants:
    • Little opportunity for investment due to existing poverty.
    • Vulnerable to price fluctuations in international markets.
    • Example: Cotton boom followed by bust (1860s-1870s) led to debt, famine, and riots.
    • Overall, limited benefits for cultivators.

Destruction of Traditional Indian Industry

  • Textile Industry:
    • British stopped paying fair prices for Indian textiles.
    • Weakened Indian producers and impoverished peasants.
  • Shipbuilding Industry:
    • Thriving industry on both coasts of India.
    • British restricted Indian ships through regulations and duties.
    • Limited Indian participation in trade routes.
  • Steel Industry:
    • British restricted growth of Indian steel production.
    • Limited Indian production to higher quality steel for British use.
    • Stifled production of lower quality steel needed for domestic market.

Late Development of Modern Industry

  • Limited Role for Indian Entrepreneurs:
    • Indian traders and financiers as junior partners to British capital.
    • Facilitated revenue collection and product movement.
    • Hindered development of independent Indian industrial class.
  • Foreign Domination of Modern Industry:
    • Rise of machine-based industries in late 19th century.
    • Mostly foreign-owned and controlled (British managing agencies).
    • Influx of foreign capital due to:
      • High profit potential.
      • Cheap labor and raw materials.
      • Large domestic and regional markets.
      • British government support.
      • Export opportunities for some Indian goods.
    • Challenges for Indian-Owned Industries:
      • Difficulty securing credit.
      • Lack of government tariff protection.
      • Unequal competition from foreign companies.
      • Opposition from British capitalists with stronger infrastructure.
    • Uneven Development:
      • Neglect of core industries and power generation.
      • Focus on certain regions led to regional disparities.
      • Lack of investment in technical education.
    • Social Impact:
      • Emergence of an industrial capitalist class and working class.


Nationalist Critique of Colonial Economy

Shifting Views on British Rule

  • Early 19th century intellectuals: Supported British rule for potential modernization.
  • Post-1860s: Disillusionment with British economic policies.

Key Nationalist Economists

  • Dadabhai Naoroji (“Grand Old Man of India”)
  • Justice Mahadev Govind Ranade
  • Romesh Chandra Dutt
  • Gopal Krishna Gokhale
  • Subramania Iyer
  • Prithwishchandra Ray

India’s Role Under British Rule

  • Supplier of raw materials and food for Britain.
  • Market for British manufactured goods.
  • Destination for British investment.

Theory of Economic Drain (Dadabhai Naoroji)

  • Drain:National product unavailable for Indian consumption, diverted to Britain.
  • Components of Drain:
    • Salaries/pensions of British officials.
    • Interest on loans from Britain.
    • Profits on foreign investments in India.
    • Payments for British goods and services.
  • Impact:
    • Stifled capital formation in India.
    • Accelerated growth of British economy.
    • Limited income and employment opportunities in India.

British Policies Blamed for Poverty

  • Core Argument:British imperialism caused and worsened Indian poverty.
  • Focus on National Development:
    • Poverty seen as a national issue requiring increased productivity.
    • Industrialization as the key to development.
    • Preference for Indian over foreign capital.
  • Critique of British justifications:
    • Trade:Unfavorable for India, promoting raw material exports and finished good imports.
    • Railways:Served British industry by creating markets for steel and machinery, while enabling cheaper import of British goods.

One-Way Free Trade and Tariff Policy

  • Free Trade:Exposed Indian handicrafts to unequal competition from Britain.
  • Tariff Policy:Favored British goods over Indian products.
  • Taxation:Burdened the poor while sparing British interests.
  • Government Spending:Prioritized colonial needs over development and welfare.

Impact of Economic Drain

  • Drain of capital hindered India’s economic growth.
  • Estimated Drain (Nationalist View):
    • More than total land revenue.
    • Half of total government revenue.
    • One-third of total savings (or 8% of national product in modern terms).
  • Concept of drain resonated with Indian peasants accustomed to exploitation.


Economic Critique Fuels Nationalism

  • Challenge to British Legitimacy:
    • Nationalist arguments exposed economic exploitation by British.
    • Undermined British claims of ruling in India’s best interest.
  • Stimulant for National Consciousness:
    • Economic critique spread during the moderate phase (1875-1905).
    • Helped build national identity and demand for self-rule.
    • Figure: Dadabhai Naoroji


Stages of Colonialism in India (Rajni Palme Dutt)

Marxist View: Overlapping Stages of Exploitation

  • Each stage builds on the previous one, with some overlap.
  • Old forms of exploitation persist alongside new ones.


Stage 1: Merchant Capital (1757-1813)

  • Goals:
    • Monopolize trade with India (against other European merchants and Indian traders).
    • Directly control Indian government revenue.
  • Limited Economic Change:
    • No major changes in administration, law, infrastructure, or production methods.
    • Traditional Indian society largely left intact.
  • Military and Revenue Focus:
    • Modernization of military (similar to Indian rulers).
    • Streamlining revenue collection for efficiency.
  • Economic Drain:
    • Large-scale wealth transferred from India to Britain (2-3% of British national income).
    • Funded Britain’s Industrial Revolution.
    • Increased export of Indian textiles (weavers exploited by Company monopoly).


Stage 2: Free Trade Colonialism (1813-1860s)

  • Shifting Priorities:
    • Rise of British industrial capitalists.
    • Demand for India as a market for British goods and source of raw materials.
  • Integration with British Economy:
    • Free trade introduced, reducing or eliminating Indian import duties.
    • British investment in plantations, trade, transport, mining, and industry in India.
  • Transforming Indian Economy:
    • Permanent Settlement and Ryotwari systems aimed to create a capitalist agrarian structure.
    • More comprehensive administration to reach rural areas for trade and resource extraction.
  • Education and Law:
    • Modern education to provide cheap labor for administration.
    • Aim to change Indian society and culture:
      • Promote overall development.
      • Foster loyalty to British rule.
    • Overhaul of criminal law, contract law, and legal procedures to support commerce.
  • Taxation and Burden on Peasants:
    • Increased taxes due to economic changes and expensive administration.
  • Increased British Trade with India:
    • India absorbed 10-12% of British exports, including textiles.
    • Import of British machinery (engines, railways) after 1850.
  • Military and Empire Expansion:
    • Indian soldiers used for British conquest in Asia and Africa.


Stage 3: Foreign Investment and Competition (1860s onwards)

Global Context:

  • Increased competition for colonies from other industrialized nations (US, Japan, Europe).
  • Rapid industrialization due to scientific advancements (e.g., internal combustion engine, electricity).
  • More unified global market due to improved transportation.

British Response:

  • Consolidating Control:
    • Stifling competition through “reactionary imperialist policies” (Lytton, Dufferin, Lansdowne, Curzon).
    • Attracting British capital for investment.
  • Heavy Investment:
    • Railways, loans to Indian government, trade.
    • Some investment in plantations, mining, mills, shipping, banking.
  • “White Man’s Burden”:
    • Self-government for India abandoned.
    • British rule as permanent “trusteeship” over immature Indians.
    • Race, culture, history used to justify continued colonial rule.





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