Economic Impact of British Rule in India: Deindustrialisation, Drain and Famines

Phases of Colonial Economic Change, 1757 to 1947

Sequence of Economic Change Under Company and Crown

The effects of British rule arrived in a sequence, from the conquest of Bengal to independence:

1. After Plassey (1757) the Company turned Bengal's revenue into trading capital and tightened its hold on weavers.
2. From 1793 new land revenue systems (Permanent Settlement, Ryotwari and Mahalwari) reshaped who paid, who owned and who borrowed.
3. After the Charter Act of 1813 cheap machine-made goods entered India, and handicrafts declined.
4. In the second half of the nineteenth century the railways, commercial crops and the first mills appeared, while famines and indebtedness spread.
5. From the 1860s Indian economists traced the poverty to colonial policy and framed the drain of wealth.
6. At independence India inherited a stagnant farm sector, a narrow industrial base and widespread poverty.

The Indian Economy Before British Rule and the Colonial Economy

India's Manufacturing and Trade Before British Rule

India was renowned for its manufacturing before the British came, and above all for textiles of cotton, silk, wool, jute, hemp and coir. Cotton cloth with rich designs, bright colours and textures from ultra-thin muslins to richly embossed fabrics found buyers across the world. Muslin was a cotton textile from Bengal, made in and around Dhaka; its finest variety was called malmal. Besides cloth, India was known for metalwork and for work in precious stones.

Mughal India produced around 25 per cent of the world's industrial output in the early eighteenth century, and Bengal was prominent in textile manufacturing, especially muslin. The major exports to Europe were indigo, cotton textiles, spices, silks and pepper.

The trade was carried by Indian merchants and bankers. Armenian and Persian merchants took fine textiles from Punjab to Afghanistan, eastern Persia and Central Asia, while ports such as Surat, Masulipatam and Hoogly handled the sea trade. Supply merchants gave advances to weavers, collected the woven cloth and carried it to the ports. By the 1750s this network, controlled by Indian merchants, was breaking down as European companies gained concessions and then monopoly rights. The gross value of the trade through Surat fell from 1.6 crore rupees in the last years of the seventeenth century to 30 lakh rupees by the 1740s, while Bombay and Calcutta grew as the ports of the new colonial order.

Agriculture remained the main source of livelihood, and about 85 per cent of the population of colonial India lived in villages and depended on it. The pre-colonial economy was therefore a farm economy with a large manufacturing and trading sector on top of it, and that sector was what colonial policy dismantled.

What a Colonial Economy Means: Raw Materials Out, Manufactures In

The policies of the colonial government were concerned more with promoting the economic interests of Britain than with developing India. They changed the structure of the economy, and early nationalist economists described the change as three roles for India, those of a supplier of foodstuffs and raw materials, a market for British manufactures, and a field for the investment of British capital.

Foreign trade shows the pattern most clearly. India exported primary products such as raw silk, cotton, wool, sugar, indigo and jute, and imported finished consumer goods like cotton, silk and woollen cloth and light machinery from Britain. Britain held a monopoly over India's exports and imports; more than half of India's foreign trade was with Britain, and the rest was allowed with a few countries such as China, Ceylon and Persia. The opening of the Suez Canal in 1869 reduced the cost of transport and tightened British control further.

India ran a large export surplus throughout the colonial period, but the surplus did not bring gold or silver into the country. It paid for the expenses of the India Office in London, for wars fought by the British government and for invisible imports, which is how the drain of wealth shows in the trade accounts.

Economic Impact of Company Rule in India, 1757 to 1858

Revenue, Weavers and Famine: Five Main Effects

Company rule turned Bengal's revenue into the Company's trading capital, squeezed the artisans who supplied its exports and pushed the countryside into crisis. Five effects stand out.

• Revenue in place of bullion: The Company's agents extracted maximum revenue from Bengal, Bihar and Odisha while investing minimally in governance or development.
• Control over weavers: Gomasthas and advances tied weavers to the Company, which paid low prices.
• Famine in 1770: Harsh revenue targets, kept up through a crop failure, contributed to a famine that killed nearly one-third of Bengal's population.
• New land revenue systems: The Permanent Settlement of 1793 was followed by the Ryotwari and Mahalwari systems.
• End of the monopoly: The Charter Act of 1813 opened India to British manufactures.

Plassey, the Diwani and Bengal's Revenue

Robert Clive and the Company defeated Siraj-ud‑daulah, the Nawab of Bengal, at Plassey in 1757, with Mir Jafar's forces standing aside. A few years later, after the victory at Buxar in 1764, the Company held the Diwani, the right to collect revenue, in Bengal, Bihar and Odisha, some of India's richest regions. Clive called Bengal "the paradise of the earth".

The change in the Company's finances was immediate. Before, it had bought Indian goods with gold and silver brought from Britain. Once it controlled both revenue collection and the opium monopoly in Bengal, it temporarily reduced the gold and silver it brought in each year, and Bengali opium partly replaced silver in the China trade. Within a few years of receiving the Diwani the Company had raised land revenue collections in Bengal by about 30 per cent.

Some historians, among them the American Brooks Adams, argued that the Bengal wealth that reached London soon after Plassey helped to finance Britain's Industrial Revolution. The point is contested, but it explains why nationalist writers later saw the Company's rule as the origin of the drain.

Gomasthas, Advances and the Company's Hold on Weavers

After the 1760s the Company wanted more Indian textiles for export, not fewer, because British cotton industries had not yet grown and Indian fine cloth was in great demand in Europe. Once it held political power it used that power to remove competition and to control costs.

The Company appointed a paid servant called the gomastha to supervise weavers, collect supplies and examine the quality of cloth. Weavers who accepted advances had to hand over their cloth to the gomastha and could not sell to any other trader. Many weavers leased out their small plots of land to devote all their time to weaving, so they now depended wholly on the Company's price, which was miserably low. Earlier supply merchants had lived in weaving villages and helped weavers in a crisis, but gomasthas were outsiders who marched into villages with sepoys and peons and punished delay by beating and flogging.

In Bengal, artisans were paid low wages and forced to sell their products at low prices. Weavers deserted villages in Carnatic and Bengal, set up looms elsewhere, revolted or turned to agricultural labour. The monopoly thus prepared the ground for the later decline of handicrafts.

Charter Act of 1813 and One-Way Free Trade

The Charter Act of 1813 renewed the Company's charter but ended its commercial monopoly, except for the tea and opium trade and the trade with China. The pressure came from British traders, who wanted greater access to Asian markets after Napoleon's Continental System barred British goods from Europe. The act made India a source of raw materials and a market for Britain's finished products.

The terms of trade that followed were one-sided. British goods could be sold in India without tariffs or duties, while Indian producers were heavily taxed and Indian textiles faced high tariffs or bans in Britain. Raw cotton moved to British factories without duties, and the cloth made from it came back to be sold in the Indian market. This is what is meant by one-way free trade, and it began the deindustrialisation of India.

Deindustrialisation and the Ruin of Indian Handicrafts

Deindustrialisation in India: Meaning and Causes

Deindustrialisation is the decline of industrial activity in an economy. In India it meant the ruin of artisans and handicraftsmen, and it came from several causes working together rather than from one.

• One-way free trade: After the Charter Act of 1813, cheap machine-made imports entered India with few or no duties.
• Closed markets abroad: After 1820, European markets were virtually closed to Indian exports.
• Control of sea trade and exchange rates: Britain controlled most of the sea trade as well as exchange rates, so Indian traders found it hard to export as before.
• Railways: The new rail network carried European goods to the remotest corners of the country.
• Loss of patrons: Princes and nobles, the traditional buyers of fine goods, lost power and took to western tastes.
• Dearer raw cotton: When the American Civil War cut off American supplies in the 1860s, Britain turned to India, the price of raw cotton shot up, and weavers had to buy at exorbitant prices.
• Machine-made goods from Indian mills: By the end of the nineteenth century Indian factories had begun production, adding to the competition for hand weavers.

The change shows clearly in trade figures. In 1811‑12 piece-goods accounted for 33 per cent of India's exports; by 1850‑51 they were no more than 3 per cent. At the end of the eighteenth century there had been virtually no import of cotton piece-goods into India, but by 1850 they made up over 31 per cent of the value of imports, and by the 1870s over 50 per cent. Cotton weavers thus faced two blows at once: Their export market collapsed and the home market was glutted with Manchester cloth. The yarn output of the handloom industry fell from 419 million lb (about 190 million kg) in 1850 to 240 million lb (about 109 million kg) in 1900.

Officials noticed the human cost. William Bentinck, the Governor-General, observed in 1834 that "the bones of the cotton weavers are bleaching the plains of India". In 1840 the chairman of the East India and China Association told the British Parliament that the Company had succeeded in converting India from a manufacturing country into a country exporting raw produce.

Effects of Deindustrialisation: Ruralisation, Overcrowded Land and a Net Importer

Artisans who lost their trade had very little to turn to except farming. Communities of skilled artisans who had practised a craft for generations were reduced to poverty and forced back to subsistence agriculture on increasingly overtaxed land. The effects spread through the rural economy in a chain.

• Ruralisation: Many old manufacturing cities declined, and India went through a process of ruralisation as artisans moved to villages and took to agriculture.
• Loss of a second income: Spinning and weaving had been subsidiary industries in the village economy; cloth making had given workers a second income when the harvest failed, and that support disappeared.
• Overburdened farming: More people living off the same land became a major cause of poverty under British rule, and the surplus of farm labour pushed rural wages down.
• Debt: The colonial land and tax policies weakened the peasant's hold on land, and peasants borrowed from moneylenders who charged high interest.
• Net importer: From being a net exporter of manufactured goods, India became a net importer of them.

India lost its handicraft industries just as Europe was industrialising, and, unlike the countries industrialising at the time, it was allowed no modern industrial base to take their place. The decline of handicrafts also created massive unemployment and a demand for goods that the local producers could no longer supply, which was met by increasing imports of cheap manufactured goods from Britain. The occupational structure barely changed: Agriculture kept 70 to 75 per cent of the workforce, against 10 per cent in manufacturing and 15 to 20 per cent in services. India's share of world GDP kept declining through colonial rule and was hardly 5 per cent at independence.

How Far the Industrial Revolution Explains the Decline of Handicrafts

The Industrial Revolution in England was a major cause of the decline of Indian handicrafts, but it acted through colonial trade policy and was not the only cause.

Between 1775 and 1800 significant innovations in the English textile industry raised output and cut the cost of production. The cheap machine-made cloth reached Indian villages through the Charter Act of 1813, the low British tariffs and the railways. Raw cotton moved from India to British factories without duties, and the cloth came back to be sold in the Indian market. So the machines supplied the price advantage and colonial policy supplied the market.

Other causes added to the blow. Princes and nobles, the best customers of fine goods, lost their power; European markets closed to Indian cloth after 1820; and the Company's control over weavers had already lowered their earnings. Some economic historians add a further point: After the Mughal Empire fragmented, wars, raiding and tax farming pushed up grain prices and wages, which made Indian cloth dearer even before British machine cloth arrived. Deindustrialisation itself shows in Indian output only after about 1810.

On balance, the Industrial Revolution was the largest cause, since machine-made cloth was cheaper, but it worked through free trade imposed on India, closed foreign markets, lost patronage and the absence of any policy to industrialise India. Later the Indian cotton mills, too, competed with the hand weaver.

Land Revenue Systems and the Impoverishment of the Peasantry

Permanent Settlement of 1793 in Bengal

Land revenue was the government's main source of income, and the British built three systems to collect it. The first, the Permanent Settlement, was introduced in Bengal in 1793 by Lord Cornwallis. It was extended to Bihar and Odisha, and later to Banaras and the northern districts of Madras, and covered about 19 per cent of British India.

By the 1770s the rural economy of Bengal was in crisis, with recurrent famines and falling output. Officials believed that if the revenue demand was fixed for ever, the Company would get a regular flow of revenue, and landholders would invest in their land, certain that the state would not take away the gains by raising its claim. They hoped for a class of rich landowners and yeoman farmers that would improve agriculture and stay loyal to the Company.

The settlement was made with the existing rajas and taluqdars, who were now classified as zamindars. A zamindar was not the owner of the village land but a revenue collector of the state. He collected rent from the villages, paid the fixed revenue to the Company and kept the difference. If he did not pay on time, his estate could be auctioned.

The results ran against the hopes. Over 75 per cent of the zamindaris changed hands after the Permanent Settlement; in 1797 several estates of the Raja of Burdwan were auctioned in a public sale. Zamindars defaulted for four reasons:

• High initial demands: The Company fixed the revenue high because it feared never being able to claim a share of increased income once the demand was permanent.
• Low prices: The demand came in the 1790s, when farm prices were depressed, so ryots found it hard to pay rent to the zamindar.
• Sunset Law: The revenue was invariable regardless of the harvest, and an estate could be auctioned if payment did not arrive by sunset on the due date.
• Limited powers: The zamindar's powers to collect rent and manage the estate were initially limited, his troops were disbanded, and his courts were put under the Collector.

The zamindars were also required to issue pattas, written deeds, to the cultivators, but many did not, and there was no official check on them.

Ryotwari Settlement: Thomas Munro and the Peasant as Taxpayer

The Ryotwari Settlement dealt with the cultivator, the ryot, directly. It was tried on a small scale by Alexander Read in the Baramahal region and was developed by Thomas Munro, who became Governor of Madras in 1820. It was later extended to the Bombay Presidency and was also used in Assam. It covered about 51 per cent of British India, the largest share of the three systems.

Officials of the 1820s had learnt the economic theory of David Ricardo, by which a landowner should have a claim only to the average rent, and the state should tax any surplus above it. They thought that in Bengal the zamindars had turned into rentiers who lived on rent. A different system, in which the state settled the revenue with the ryot, seemed to answer both worries. The average income from different types of soil was estimated, the ryot's revenue-paying capacity was assessed, and a share of it was fixed as the state's demand. The lands were resurveyed every 30 years and the rates were revised, so the demand was not permanent.

Under it, every registered holder of land was recognised as its proprietor and paid revenue directly to the Government. He could sublet, gift, sell or mortgage the land and could not be ejected so long as he paid the assessment. Munro gradually cut the rate of taxation from one half to one third of the gross produce, which was still an excessive tax.

The first Ryotwari settlement in the Bombay Deccan was made in the 1820s. The revenue demanded was so high that in many places peasants deserted villages and migrated. When rains failed, collectors who wished to show their efficiency seized the crops of defaulters and fined the whole village. The system was rigid, and by the 1840s officials were finding alarming levels of peasant indebtedness.

Mahalwari Settlement: The Village as the Unit

The Mahalwari Settlement treated the village, or mahal, as the unit of revenue. Holt Mackenzie introduced it in 1822, and Regulation VII of 1822 gave it legal sanction. It covered the North-Western Provinces, parts of central India and Punjab, and about 30 per cent of British India.

Village headmen, called lambardars, represented villages or groups of villages, and the landlords along with the village community were jointly responsible for payment. The revenue was assessed on the produce of the mahal, and the settlement took in all the land of the village, including pastures and forest.

The first scheme broke down because the state demand was large and rigid. William Bentinck's government replaced it with a regulation in 1833, framed by Robert Merttins Bird, which fixed average rents for different classes of soil. The state demand was set at 66 per cent of the rental value for 30 years. That too proved onerous, and the Saharanpur Rules of 1855 reduced the share to 50 per cent, although officers paid little attention to the rules.

The Triple Burden and the Indebted Peasant

Whatever the system, the government was mainly interested in maximising rent and securing its share of revenue, and spent little on improving the land. Transferability of land, a new feature, made tenants insecure, because they lost their traditional rights. Zamindars with new powers resorted to summary evictions, illegal dues and begar, forced labour.

The peasant ended up bearing three burdens at once, those of the government, the zamindar and the moneylender, and his hardship grew in times of famine and scarcity. This was true of the Permanent Settlement, Ryotwari and Mahalwari areas alike.

Debt followed a clear path. The revenue had to be paid in cash and on time, so the ryot borrowed; revenue could rarely be paid without a loan from a moneylender. The moneylender was often also the village grain merchant and forced the farmer to sell produce at low prices to clear his dues. Once a loan was taken, it was hard to pay back, and the peasant then needed credit even for everyday needs.

The moneylender could also use the law in his favour. A Limitation Law of 1859 made loan bonds between moneylenders and ryots valid for only three years, to stop interest from piling up over time, but moneylenders found ways around it, and the peasant came to see them as deceitful.

New Landlords, Jotedars and Stagnant Agriculture

By 1815, half the land in Bengal had passed into new hands. Many of the buyers were Indian officials of the Company, who knew which lands were under-assessed. Because land could be bought and sold, it turned into a commodity, and the new zamindars were often absentee landlords with little attachment to the land. They multiplied intermediaries by land-grabbing and sub-infeudation, and the extra layers of rent collectors added to the peasant's burden.

In many villages of northern Bengal, rich peasants called jotedars supervised cultivation and shared the revenue; as zamindars faced crisis, the jotedars consolidated their position.

With no means or reason to invest, the cultivator and the landlord left farming stagnant. The zamindar had no roots in the village, the government spent little on agriculture, technology and education, and land was broken up by sub-infeudation, all of which kept productivity low. Under colonial rule agriculture stagnated and not infrequently deteriorated, and the terms of the revenue settlement were largely to blame.

The new landlord class depended on British rule for its position. In 1829 William Bentinck noted that the Permanent Settlement had created a vast body of rich landed proprietors deeply interested in the continuance of British rule, and this class came to oppose the national movement.

Commercialisation of Agriculture and Famines in British India

Commercialisation of Agriculture: Causes and Consequences

In the latter half of the nineteenth century agriculture began to be run on commercial considerations. Commercialisation of agriculture means growing crops for sale in national and international markets rather than for the village's own use. Cotton, jute, groundnut, oilseeds, sugarcane and tobacco were more remunerative than foodgrains, and the trend reached its highest level in plantations of tea, coffee, rubber and indigo, which were mostly owned by Europeans.

Several things drove it: The spread of a money economy, a unified national market, growing internal trade, better communications by rail and road, and the arrival of British finance capital. The railways in particular fostered the commercialisation of Indian agriculture, which weakened the self-sufficiency of village economies.

For the Indian peasant, commercialisation was a forced process. There was hardly any surplus to invest in commercial crops, given the subsistence level at which the peasant lived, and the new crops tied his fortunes to the movements of world prices. In practice, many farmers had to produce cash crops instead of food crops, to meet the revenue demand and repay debts, and these crops were ultimately used by British industries. Some landlords also pressed tenants to grow indigo and cotton rather than rice and wheat, which was a cause of several of the worst famines of the century. Meanwhile, agriculture was starved of investment in terracing, flood control, drainage and the desalinisation of soil.

The consequences ran in one direction: Gains in good years went mostly to intermediaries, while the cultivator was hit hardest when prices fell, and the result was heavy indebtedness.

Indigo, Cotton and the Deccan Riots

Three episodes show how commercialisation worked on the ground, beginning with indigo in Bengal.

Indigo planting in Bengal began in 1777, and by 1830 there were more than a thousand indigo factories in the province. European planters forced peasants in northern Bengal to give up food crops and grow indigo for the dye then in great demand in Europe. They gave loans called dadon at very high interest, and the price paid was meagre, so the farmers could make no profit. Peasants who refused faced imprisonment, torture and destruction of property.

Thousands of ryots refused to grow indigo in 1859, and the Indigo Revolt of 1859 to 1862 was directed mostly at the planters rather than at the colonial state. The Bengali press and educated Bengalis supported the peasants, an Indigo Commission was appointed in 1860, and the authorities were eventually forced to restrict some of the worst abuses.

The revolt halted indigo production in large areas for a time, but the lasting blow came from chemistry: By 1897 the German firm BASF had developed an economically viable process for synthetic indigo that replaced plant production, so Indian indigo cultivation declined by the early twentieth century because it became unprofitable in the world market.

The second episode is the cotton boom in the Deccan. Before the 1860s three-fourths of the raw cotton imported into Britain came from America. When the American Civil War broke out in 1861, those imports fell to less than 3 per cent of normal, from over 20,00,000 bales in 1861 to 55,000 bales in 1862.

Frantic messages went to India, cotton prices soared, and Bombay merchants gave advances to sahukars, who lent to ryots; ryots were given an advance of 100 rupees for every acre planted with cotton. Between 1860 and 1864 cotton acreage in the Bombay Deccan doubled, and by 1862 over 90 per cent of Britain's cotton imports came from India. A few rich peasants gained, but for the large majority cotton expansion meant heavier debt.

The third is the crash that followed and the Deccan Riots. By 1865 the Civil War had ended and American cotton revived, Indian cotton exports fell, and the merchants and sahukars of Maharashtra closed their operations and demanded repayment. At the same time the new revenue settlement raised the demand by 50 to 100 per cent. The ryots turned to moneylenders who would no longer lend. The anger broke out at Supa in Poona district on 12 May 1875, when ryots attacked shopkeepers and moneylenders and burnt their account books and debt bonds. The revolt spread to Ahmednagar and over 6,500 square kilometres, more than 30 villages were affected, and 951 people were arrested before order was restored.

Causes of Recurrent Famine Under Colonial Rule

Famines in India had occurred throughout history, caused by droughts, floods and military campaigns, but never on the scale seen in the colonial period. Rural India sank into deep poverty under colonial rule, and famines were not simply the result of a shortage of foodgrains. Several causes worked together.

• Revenue collected regardless: In the Bengal famine of 1770, harsh revenue targets requiring high cash taxes were imposed regardless of harvest conditions, and the Company even increased the land tax during the famine. Net revenue was kept up only because collection was violently kept to its former standard.
• Land revenue systems: Fixed cash demands, the Sunset Law and rigid assessments left the peasant with no reserve when the rains failed.
• Cash crops in place of food crops: Crops grown for the market, including indigo and cotton, replaced food crops in many areas.
• Ruined artisans: Weavers and other artisans with no food reserves formed a large proportion of the dead in 1770, and agricultural labourers and artisans have been the main victims of Indian famines.
• Grain exports continued: During the Great Famine of 1876 to 1878 the British administration continued to export grain, about one million tonnes of rice alone per year over the three years.
• Free-market policy: The Viceroy, Lord Lytton, ordered that there was to be no interference of any kind by the Government to reduce the price of food. In the same year, 1876, he organised an extravagant durbar in Delhi.
• Inadequate relief: Relief camps were too few and ill supplied, and some officials argued that famine relief should be kept deliberately low.

Estimates of the number of severe famines range from a dozen to over 20. By some estimates the famines killed 50 to 100 million people, close to the death toll of the Second World War.

Famine Commissions, Famine Codes and Relief

The large loss of life in the series of famines between 1860 and 1877 led to political controversy, and the Great Famine of 1876 to 1878 became the direct cause of investigations. Its excess mortality has been estimated at 5.6 million to 9.6 million deaths, and a careful modern estimate puts it at 8.2 million. The relief was meagre. Richard Temple, the Famine Commissioner, cut the wage on relief works to about half a kilogram of grain plus one anna in January 1877, because excess payment was thought to create dependency; Temple's critic William Digby remarked that "a famine can scarcely be said to be adequately controlled which leaves one-fourth of the people dead".

The Famine Commission of 1880 was the response. It observed that every province of British India had a surplus of foodgrains, and it identified the loss of wages from lack of work of agricultural labourers and artisans as the cause of famine. The Famine Code that followed, passed in 1883, laid down government guidelines on how to respond. It named three levels of food insecurity, near-scarcity, scarcity and famine, and relied on open-ended public works to give work to those who had lost their wages. The 1880 Commission also urged the expansion of railways, with lines inside India rather than only those linking the ports, so that food could flow to famine areas.

After the codes the pattern changed: Long periods of calm were broken by a few large famines, in 1896 to 1897 (over 5 million deaths), 1899 to 1900 (more than 1 million) and, in the Second World War, in Bengal in 1943. The Bengal famine of 1943 killed an estimated 0.8 to 3.8 million people through starvation, malaria and other diseases. Its causes included the loss of rice imports after the Japanese occupation of Burma, wartime inflation, which cut real wages, and policies that gave preference to the army, war industries and officials. A Famine Inquiry Commission, chaired by Sir John Woodhead, reported in 1945.

NCERT dates the Bengal famine to 1770 to 1772, while other accounts place it in 1769 to 1770; the table gives the year 1770 that is common to both.

Railways, Modern Industry and Infrastructure Under British Rule

Railways in British India: Purpose, Finance and Economic Effects

The first line in India, between Red Hills and Chintadripet in Madras, was built for ferrying granite and became operational in 1837. Railways proper began with the government's guarantee. In 1849 the Great Indian Peninsula Railway was incorporated with free land and a guaranteed five per cent return for private English companies, and the first passenger train ran between Bombay and Thane, 34 km, in 1853. Lord Dalhousie formulated a plan for trunk lines connecting the main regions of India in 1854, and the route length grew from 1,349 km in 1860 to 25,495 km in 1890, mostly radiating inland from Bombay, Madras and Calcutta.

The railways did bring people closer together and integrated India's internal market, but they were designed primarily to move raw materials from the interior to the ports for export and to distribute British manufactured goods across India. Routes largely ignored existing trade patterns, and another purpose was to move armies quickly to a distant rebellion or war. They were not a gift: Most of the cost was paid from Indian tax revenue, and the same is true of the telegraph network.

The economic effects were mixed.

• Commercialisation: Railways carried cash crops to the ports and fostered the commercialisation of agriculture, with the loss of village self-sufficiency.
• Foreign goods inland: The network helped European goods to outsell indigenous products in villages.
• Benefits that went abroad: The orders for steel, machinery and capital went to Britain. Bids for railway contracts were made to the India Office in London, which shut out most Indian firms, and the companies bought most of their hardware in Britain. G. V. Joshi remarked that expenditure on railways should be seen as an Indian subsidy to British industries.
• A commercial, not an industrial, revolution: Nationalists argued that the railways were not coordinated with India's industrial needs.
• Famine relief: Later the railways did carry grain from surplus regions to famine areas, although at first the larger market they created also encouraged poor peasants to sell their reserve stocks.

Railway stations also became monuments of the colonial economy. Bombay's Victoria Terminus, now Chhatrapati Shivaji Terminus, was built over ten years from 1878 and became the symbol of Bombay as the Gothic City and the major international mercantile port of India. It is a UNESCO World Heritage Site.

Modern Industry: Cotton, Jute, Steel and the Handicaps of Indian Enterprise

Modern machine-based industry came only in the second half of the nineteenth century. The first cotton mill in Bombay came up in 1854 and began production two years later, and by 1862 four mills were at work with 94,000 spindles and 2,150 looms. The first jute mill in Bengal opened in 1855. Later mills followed in Kanpur, Ahmedabad and Madras. NCERT places the first Bombay mill in 1854, while some accounts give 1853.

Who set up industry? Many Indian business groups grew out of the China trade, among them the Parsi families of Bombay such as the Tatas, and in Bengal Dwarkanath Tagore, who set up six joint-stock companies in the 1830s and 1840s. But European managing agencies, among them Bird Heiglers and Co., Andrew Yule and Jardine Skinner and Co., controlled a large sector of Indian industries until the First World War. Most modern industries were foreign-owned. The cotton mills of Maharashtra and Gujarat were mainly Indian-owned, while the jute mills of Bengal were dominated by foreigners. The Tata Iron and Steel Company was incorporated in 1907.

Foreign capital came for high profits, cheap labour, cheap raw material and a ready market, with the administration willing to help. Indian enterprise faced obstacles that foreign firms did not:

• Credit: Indian firms had trouble raising credit.
• No tariff protection: The government gave Indian industry no protection against imports.
• Unequal competition: Foreign companies backed by sound financial and technical infrastructure at home competed with them, and British capitalist interests opposed them.
• Lopsided development: Core and heavy industries and power generation were neglected, and some regions were favoured more than others, causing regional disparities.
• Technical manpower: Technical education was not nurtured, so industry lacked trained people.

There was hardly any capital goods industry, that is, industry that makes machine tools, to promote further industrialisation. The public sector was confined to the railways, power generation, communications, ports and some departmental undertakings.

Modern industry still produced new classes. An industrial capitalist class and a working class emerged. Indian traders, moneylenders and bankers, who had been junior partners of English merchants, formed the base of the Indian business class, but the colonial setting retarded the growth of a healthy and independent industrial bourgeoisie, unlike that of Germany or Japan.

The Drain of Wealth and the Home Charges

Drain of Wealth: Meaning, Origin and Components

The economic drain, or drain of wealth, is the portion of India's national product that was not available for the consumption of its people but was sent to Britain for political reasons, without adequate economic or material returns. Dadabhai Naoroji put forward the theory in his book Poverty and Un-British Rule in India, published in 1901. Naoroji and the Moderate economic nationalists made it the centre of their critique of British rule.

The major components of the drain were:

• Salaries and pensions of civil and military officials.
• Interest on loans taken by the Indian government abroad.
• Profits on foreign investment in India.
• Stores purchased in Britain for civil and military departments.
• Payments for shipping, banking and insurance services, which stunted the growth of Indian enterprise in these services.

Interest weighed heavily because much of India's public debt was owed in Britain. Between 1867 and 1916 public debt was raised largely to finance railways and canals, and when the Reserve Bank took over the management of public debt in 1935, the Central Government's funded debt stood at 950 crore rupees, of which 54 per cent was sterling debt.

The drain was not only collected through taxes. Indians were also charged for the colonial power's expenditure on building the railways, the telegraph network and even wars. The drain checked capital formation in India while the same wealth accelerated the growth of the British economy, and the surplus then returned to India as finance capital, draining it further.

Because the export surplus was spent in Britain, it brought no gold or silver into India. Britain, in turn, used its trade surplus with India to balance its deficits with other countries, so that India played a crucial role in the late nineteenth-century world economy.

Home Charges: What They Were and Why They Mattered

The Home Charges were the payments made in Britain on India's account, met from Indian revenues. They included the expenses of the India Office in London, the salaries and pensions of British officials, private remittances home by British officials and traders, and interest payments on India's external debt. The export surplus of Indian trade helped pay for them.

Their importance lay in their direction: They flowed to Britain without any equivalent flowing back to India, and they were paid out of revenues raised from Indian peasants and traders. Naoroji's calculation of 1867 was built on exactly these accounts.

Naoroji's Calculation and Later Estimates of the Drain

Naoroji built his charge on official figures. In a paper, England's Duties to India, read before the East India Association on 2 May 1867, he calculated that the Home Charges alone had transferred about 100 million pounds sterling from India to England since 1829, and he put total territorial charges in India since 1829 at about 820 million pounds. He drew on the Parliamentary Returns of Indian Accounts and the Second Customs Report of 1858. His paper Poverty of India, read in 1876, went into acreage, crop production, prices, imports and exports. Poverty and Un-British Rule in India estimated a drain of 200 to 300 million pounds that was not recirculated in India.

Later writers produced other numbers. William Digby estimated that 900 million pounds was transferred from India between 1870 and 1900. A recent estimate by Utsa Patnaik puts the total extracted between 1765 and 1938 at 45 trillion US dollars in today's value, about 13 times Britain's GDP in 2023. Nationalist estimates of the time were that the drain was more than the total land revenue, or half the total government revenue, or one-third of total savings, about 8 per cent of national product.

These figures differ in what they count and in the years they cover. Naoroji himself accepted that some payment was due for services such as the railways, but he argued that India was paying for services that brought it no direct profit. The figures agree on one thing, a large and continuing transfer with no matching return, and that is what made the drain theory so effective politically.

Nationalist Critique of the Colonial Economy and the Impoverishment Debate

Economic Nationalists: Naoroji, Dutt, Ranade, Gokhale and Others

The early intellectuals of the first half of the nineteenth century supported British rule, expecting it to modernise India with the latest technology and capitalist organisation. After the 1860s disillusionment set in among the politically conscious, and they began to examine the reality of British rule. The Great Famine of 1876 to 1878 became a cornerstone of the economic critique of the Raj for Dadabhai Naoroji and Romesh Chunder Dutt.

The foremost economic analyst was Dadabhai Naoroji, the Grand Old Man of India, who was elected President of the Indian National Congress in 1886 and in 1892 became the first Indian elected to the British House of Commons. Others included Justice Mahadev Govind Ranade, Romesh Chunder Dutt, author of The Economic History of India, Gopal Krishna Gokhale, G. Subramania Iyer, the founder of The Hindu, and Prithwishchandra Ray.

Their basic assertions were:

• Man-made poverty: India was poor and growing poorer because of British imperialism; since the causes were man-made, they could be explained and removed, and poverty became a national issue that could rally all sections of society.
• Development meant industrialisation: The industrialisation was to be based on Indian, not foreign, capital, since foreign capital replaced and suppressed Indian capital.
• A critique of trade and railways: Foreign trade made India an importer of finished goods and an exporter of raw materials and foodstuffs, and the railways ushered in a commercial rather than an industrial revolution.
• Ruin of handicrafts and unfair taxes: One-way free trade ruined handicrafts, tariff policy followed British capitalist interests, and taxes burdened the poor while sparing British capitalists and officials. They demanded a lower land revenue, abolition of the salt tax, and income tax and excise duties on goods consumed by the rich.
• Colonial spending: Government expenditure, they argued, served only colonial needs while development and welfare were ignored.

The critique mattered politically. It undermined the claim that foreign rule served Indian interests, and the agitation was one of the stimulants of national consciousness in the moderate phase of the freedom struggle (1885 to 1905).

National Income Estimates and the Poverty Debate

The colonial government never made a sincere attempt to estimate India's national and per capita income. Individual attempts by Dadabhai Naoroji, William Digby, Findlay Shirras, V. K. R. V. Rao and R. C. Desai gave conflicting results, and of these Rao's estimates are considered the most significant. Most studies agreed that the growth of aggregate real output in the first half of the twentieth century was below 2 per cent a year, with only half a per cent a year in per capita output.

The population was mostly rural and poor. The census of 1881 and those after it showed uneven growth. On the eve of independence overall literacy was under 16 per cent and female literacy about 7 per cent, the infant mortality rate was about 218 per thousand and life expectancy was 32 years. In the absence of reliable data the extent of poverty cannot be fixed, but extensive poverty prevailed in the colonial period.

Did British Rule Also Bring Gains? The Impoverishment Debate

Whether British rule impoverished India remains debated, and both sides of the argument need to be known.

The historian Niall Ferguson argues that India gained from British investment of 270 million pounds in infrastructure, irrigation and industry by the 1880s, and that the irrigated area grew eightfold, to 25 per cent of all land. The Ganges Canal ran about 560 km from Haridwar to Kanpur, and by 1900 the Raj had the largest irrigation system in the world; peasants in the districts it watered were visibly better fed and housed.

The numbers give both sides something to use. Using Angus Maddison's estimates, India's GDP grew by 70 per cent between 1850 and 1947, or 0.55 per cent a year, faster than in the Mughal era or in the period from 1700 to 1850. But per capita income grew only 16 per cent over those years, from 533 to 618 dollars in 1990 international dollars, and India's share of world GDP fell from 24.4 per cent in 1700 to 4.2 per cent in 1950.

Nationalists replied that the investment served trade and revenue rather than India's needs, that railways and irrigation were paid for from Indian taxes, and that the drain outweighed any gain. The balanced reading is that infrastructure was built, markets were unified and some modern industry began, but the purpose was colonial, much of the cost and benefit went abroad, and the standard of living of the mass of Indians stagnated.

The Economic Legacy of British Rule at Independence

The Colonial Inheritance in 1947: Agriculture, Industry and Poverty

The structure of India's economy in 1947, and the development strategy chosen after independence, had their roots in colonial rule. Colonial policy aimed to reduce India to a supplier of raw materials for Britain's modern industrial base, and the inheritance can be summarised under six heads.

• Agriculture: About 85 per cent of the population lived in villages, productivity was low, and agriculture was stagnant, burdened with surplus labour.
• Modern industry: The country had a small modern sector, no capital goods industry and a handicraft base largely displaced.
• Foreign trade: Trade was oriented to feed the Industrial Revolution in Britain.
• Infrastructure: Railways, ports and telegraphs existed but needed upgrading and a public orientation.
• Social indicators: Literacy, health and life expectancy were very low.
• Share in the world: India's share of world GDP was hardly 5 per cent, though it had once been among the richest lands.

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