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Evolution of Indian Economy

Study Material > Economics


  • The structure of India’s present-day economy is not just of current making; it has its roots steeped in history, particularly in the period when India was under British rule which lasted for almost two centuries before India finally won its independence on 15 August 1947. The sole purpose of the British colonial rule in India was to reduce the country to being a raw material supplier for Great Britain’s own rapidly expanding modern industrial base. An understanding of the exploitative nature of this relationship is essential for any assessment of the kind and level of development which the Indian economy has been able to attain over the last six and half decades.
  • Both agriculture and industry were having structural distortions while the state was playing not even a marginal role. During the half century before India became independent, the world was having accelerated development and expansion in its agriculture and industry on the shoulders of the active role being played by the states, with the same happening in the UK itself.
  • India had an independent economy before the advent of the British rule. Though agriculture was the main source of livelihood for most people, yet, the country’s economy was characterised by various kinds of manufacturing activities. India was particularly well known for its handicraft industries in the fields of cotton and silk textiles, metal and precious stone works etc. These products enjoyed a worldwide market based on the reputation of the fine quality of material used and the high standards of craftsmanship seen in all imports from India.
  • The economic policies pursued by the colonial government in India were concerned more with the protection and promotion of the economic interests of their home country than with the development of the Indian economy. Such policies brought about a fundamental change in the structure of the Indian economy — transforming the country into supplier of raw materials and consumer of finished industrial products from Britain. Obviously, the colonial government never made any sincere attempt to estimate India’s national and per capita income. Some individual attempts which were made to measure such incomes yielded conflicting and inconsistent results. Among the notable estimators— Dada Bhai Naoroji, William Digby, Findlay Shirras, V.K.R.V. Rao and R.C. Desai — it was Rao, whose estimates during the colonial period was considered very significant. However, most studies did find that the country’s growth of aggregate real output during the first half of the twentieth century was less than two percent coupled with a meager half percent growth in per capita output per year.
  • The social sector was a neglected area for the British rulers which had a negative impact on the production and productivity of the economy. India remained a continent of illiterate peasants under British rule. At the time of independence, it's literacy was only 17% with 32.5 years of life expectancy at birth. Industrialisation of India was also neglected by the colonisers - the infrastructure was not built to industrialize India but to exploit it's raw materials. Indian Capitalists who did emerge were highly dependent on British commercial capital and many sectors of industry were dominated by British firms, e.g. shipping, banking, insurance, coal, plantation crops and jute
  • The repeated famines and disease epidemics during the second half of the nineteenth century and the first half of the 20th century show the greatest socio economic irresponsibility and neglect of the British Government in India at one hand and the wretchedness of the masses at the other.
  • Agriculture has always been accorded an important position in the Indian society. There is endless evidence, including several British and European accounts, to show the flourishing state of our agriculture in the pre-British period. As regards the technical aspects of Indian agriculture, the British or European observers of 17th and 18th centuries were in no position to appreciate or evaluate them. Several of the indigenous practices which were perfected centuries ago, such as the rotation of crops, the practice of drill husbandry etc. were relatively unknown in the 17th century Europe, and are often cited as the major advances achieved during the 18th century ‘agricultural revolution’ in Europe. 
  • Textile Industry in Bengal: Muslin is a type of cotton textile which had its origin in Bengal, particularly, places in and around Dhaka (spelled during the pre-independence period as Dacca), now the capital city of Bangladesh. ‘Daccai Muslin’ had gained worldwide fame as an exquisite type of cotton textile. The finest variety of muslin was called malmal. Sometimes, foreign travellers also used to refer to it as malmal shahi or malmal khas implying that it was worn by, or fit for, the royalty.
  • Agricultural Sector: 
    1. India’s economy under the British colonial rule remained fundamentally agrarian — about 85 percent of the country’s population lived mostly in villages and derived livelihood directly or indirectly from agriculture.
    2. However, despite being the occupation of such a large population, the agricultural sector continued to experience stagnation and, not infrequently, unusual deterioration. Agricultural productivity became incrementally low though, in absolute terms, the sector experienced some growth due to the expansion of the aggregate area under cultivation. This stagnation in the agricultural sector was caused mainly because of:
      1. Various systems of land settlement that were introduced by the colonial government. Particularly, under the zamindari system which was implemented in the then Bengal Presidency comprising parts of India’s present day eastern states, the profit accruing out of the agriculture sector went to the zamindars instead of the cultivators.
      2. Neither zamindars nor the colonial government, did any thing to improve the condition of agriculture.
      3. Low levels of technology, lack of irrigation facilities  and negligible use of fertilisers, all added up to aggravate the plight of the farmers and contributed to the dismal level of agricultural productivity.
      4. India’s agriculture was starved of investment in terracing, flood-control, drainage and desalinisation of soil.
  • Condition of farmers:
    1. The cultivators, the actual tillers of land, were mere tenants with no rights and could be evicted by the land-owners.
    2. The farmers were often heavily indebted in the clutches of the money-lenders, who, eventually, came to-control the land and its produce.
    3. Agriculture production was no longer for use in the village for consumption only and much of it was sent to the market for sale.
    4. Farmers were forced to produce cash crop to feed the industries in England.
    5. It ruined the self-sufficiency of the village.
    6. The new revenue systems led to peas­ant indebtedness and commercialization of agricul­ture.
    7. This ultimately resulted in mass pov­erty and problem of landlessness. 
  • Efforts to ‘improve’ Indian agriculture 
    1. There were also efforts made by the British to ‘improve’ Indian agriculture, during the 18th and 19th centuries. Under this heading come the setting up of the Royal Botanical Gardens and the Botanical Survey of India to acclimatize exotic crops of commercial importance to Indian conditions. 
    2. Cultivation of existing commercial crops and the introduction of new crops such as tea. 
    3. The various abortive efforts to grow the long-stapled American variety of cotton here.
    4. The setting up of various kinds of plantations runs by Europeans.
    5. According to the Census Returns of 1881, 72 % of the whole male population engaged in some specific occupation are directly supported by Agriculture
    6. The estimate of the Famine Commissioners was that 90 percent of the rural population live, more or less, by the tillage of the soil.
    7. In the second half of 19th century, there started the talk of effecting ‘large-scale’ improvements in Indian agriculture. All this talk merely led to the establishment of a few experimental farms and some agricultural schools.
    8. Quite apart from any indirect benefit that might have accrued to agriculture, their [i.e., the Agricultural Departments] establishment has been amply justified and has resulted in the addition of a considerable increase of revenue to the state. 
  • Industrial Sector 
    • Country’s world famous handicraft industries declined. 
    • No corresponding modern industrial base was allowed to come up because of the colonial government policy of systematically deindustrialising India. This policy of de-industrializing India serves following two greedy purpose of Britain: 
      1. To reduce India to the status of a mere exporter of important raw materials for the upcoming modern industries in Britain. 
      2. To turn India into a sprawling market for the finished products of those industries so that their continued expansion could be ensured to the maximum advantage of their home country — Britain.
  • The decline of the indigenous handicraft industries created massive unemployment in India and the demand in the Indian consumer market, which was now deprived of the supply of locally made goods was profitably met by the increasing imports of cheap manufactured goods from Britain.
  • During the second half of the nineteenth century, modern industry began to take root in India but its progress remained very slow. Initially, this development was confined to the setting up of cotton and jute textile mills.
  • Lack of capital goods industry retards further industrialisation in India.
  • The growth rate of the new industrial sector and its contribution to the Gross Domestic Product (GDP) remained very small.
  • Industrial sector operates in very limited area of public sector. This sector remained confined only to the railways, power generation, communications, ports and some other departmental undertakings.
  • Foreign Trade
    1. Since ancient times India has been an important trading nation but the restrictive policies of colonial government adversely affected the structure, composition and volume of India’s foreign trade. For all practical purposes, Britain maintained a monopoly control over India’s exports and imports. Consequently, India became an exporter of primary products such as raw silk, cotton, wool, sugar, indigo, jute etc. and an importer of finished consumer goods like cotton, silk and woollen clothes and capital goods like light machinery produced in the factories of Britain.
    2. More than half of India’s foreign trade was restricted to Britain while the rest was allowed with a few other countries like China, Ceylon (Sri Lanka) and Persia (Iran). The opening of the Suez Canal further intensified British control over India’s foreign trade
    3. The most important characteristic of India’s foreign trade throughout the colonial period was the generation of a large export surplus. But this surplus came at a huge cost to the country’s economy. There were severe scarcity of essential commodities—food grains, clothes, kerosene etc. — in the domestic market and the export surplus did not result in any flow of gold or silver into India.
    4. Rather, this was used to make payments for the expenses incurred by an office set up by the colonial government in Britain, expenses on war, again fought by the British government, and the import of invisible items, all of which led to the drain of Indian wealth.
  • Infrastructure
    1. During colonial period the basic infrastructure such as railways, ports, water transport, posts and telegraphs develop but this development was meant only to fulfill various colonial interests and not to provide basic amenities to the people.
    2. Roads constructed in India prior to the advent of the British rule were not fit for modern transport. The new roads that were built by the Britishers was primarily to serve the purpose of mobilising the army within India and drawing out raw materials from the countryside to the nearest railway station or the port to send these to far away England or other lucrative foreign destinations.
    3. Rural areas are always out of reach during rainy season due to non availability of all weather road. Therefore, people mostly living in these areas suffered grievously during natural calamities and famines.

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