economic legacies of colonial rule in india

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Economic & Political Weekly EPW april 11, 2015 vol l no 15 51

The Economic Legacies of Colonial Rule in India Another Look

Tirthankar Roy

This paper is based on the text of the Tenth Godrej Lecture delivered in Mumbai, 16 December 2014. The author wishes to thank the organisers of the lecture and the audience for a lively conversation. A longer treatment of the subject with fuller citations and more statistical data is expected to appear in the journal Revista de Historia Economica.

Tirthankar Roy ([email protected]) teaches Economic History at the London School of Economics and Political Science, the UK.

The essay reinterprets the British colonial empire in India

(the Raj, for short) as a state. Based on that

reinterpretation it offers fresh assessments on three

issues: how its policies shaped the economy of India,

what lessons the postcolonial state drew from history,

and the gains and costs of the postcolonial

development strategy.

The long-term legacy of the European empires that ruled over large parts of the non-European world is an endur-ing theme in world history. Although “imperial history”

does not mean the same thing in different academic traditions, the economic consequences of the empires form a more or less coherent discourse. Within that discourse, the British Empire occupies a place of special importance, because in some re-gions of the world, British rule started at the same time that Britain started on a course of rapid modernisation leading to unprecedented rise in productivity in agriculture and manu-facturing industry. Some of the ingredients of the modernisa-tion, including new institutions and new technologies, were transferred to the territories ruled by Britain. And yet, the rule expected to serve the interests of the imperialists. Those who take part in the discourse ask, did the Empire, on balance, modernise and develop the regions that it ruled, or left them poorer than before?

The present paper revisits this issue with reference to the history of India. I ask two questions in this essay. What were the most important economic consequences and enduring legacies of European rule in India? And how far did postco-lonial India modify or retain these effects? In order to answer these questions, we need to consider fi rst those traditions of analytical history that draw lessons about the prospect of eco-nomic development from the history of the European empires.

Linking Empire with Development: The Old Theory

The debate around these questions is almost as old as the em-pires themselves. In the last 15 years, however, the debate has taken a new turn. There is an old theory, and a set of new theo-ries about how empires shaped the prospect of economic de-velopment in the regions once ruled by them. In part, the moti-vation to write this paper arises from these intellectual devel-opments and the need to rethink India’s place in them.

The simplest way to describe the difference between the old and the new theories is that, whereas the old theory focused mainly on trade between the colonist and the colonised econo-mies, the new interpretations are centred on people. People, it is recognised with increasing force in all strands of world his-tory, embody ideas, and ideas change the world. Following up that intuition, some writers see European settlement in the non-European regions to represent channels through which institutions and technologies travelled around the world, and others see the growing scale of international migration of capi-tal and labour in the 19th century, which were enabled and

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april 11, 2015 vol l no 15 EPW Economic & Political Weekly52

sponsored by the empires, to have encouraged the transmis-sion of useful skills, ideas about business organisation, and en-trepreneurship across the world. But both the trade-mediated effect of empires and the people-mediated effect of empires varied in their quality and strength. The new theories are about these interregional variations. I will briefl y describe the two perspectives, and then explain how this essay uses some of the new ideas.

One of the antecedents of the old theory emerged in India around 1900 through the writings of the publicists who wanted to see British colonial rule reform itself. Two individu-als, Dadabhai Naoroji (1825–1917) and Romesh Dutt (1848–1909) were particularly important. Neither was a professional scholar; Naoroji was a teacher–merchant–parliamentarian and Dutt a civilian-cum-novelist. But both were well-read and pro-lifi c writers in English. Both of them had witnessed famines that swept through western and southern India between 1876 and 1899 and felt compelled to develop a theoretical under-standing of Indian poverty.

Two ideas emerged with special force from their writings, that the colonial policy of free trade harmed the peasants and the artisans, and that factor income fl ows reduced potential investment. Dutt believed that the famines were a result of taxation in the countryside. In his lifetime, agricultural com-modity exports had grown in volume about three times, and a string of irrigation canals together with the railways had transformed areas like Punjab from grasslands into wheat bas-kets. The imperialists held up Punjab as a showpiece. Dutt spoiled the celebration by saying that by and large Indian peasants had not gained from foreign trade. In fact, by selling too much food abroad they reduced chances of survival during famines. Trade also destroyed the handicrafts, and the unem-ployed artisan crowded agriculture, putting more pressure on land. That idea later became known as “deindustrialisation.”

Naoroji was known for a different contribution. From the time that the East India Company consolidated its rule in India in the last quarter of the 18th century, a balance of payments system had taken shape wherein India imported a large quan-tity of skilled services, and paid for these services by a positive trade balance, that is, by selling commodities. The main thrust of his analysis was that India paid too high a price for the serv-ices it imported from Britain, which became known as “drain;” meaning that the payments transferred Indian savings abroad without a corresponding benefi t. This was an indirect criticism of trade because the services were paid for with trade.

These authors did not advocate an end of British rule. But those who did fi ght for an end of colonialism late in the inter-war period, found their writings useful as weapons. In the process, there emerged a key tenet of Indian nationalism, which is “economic nationalism” or the belief that India needed to be free because foreigners had ruined its economy. Economic nationalism, in this way, joined the study of history with a po-litical battle, an equation that served politics well, but history rather badly, I will argue in the concluding part of the essay.

Because the two things were tied together, when freedom came in 1947, this economic history had run out of time.

However, it received a new lease of life in the 1960s from a ris-ing intellectual movement, global Marxism. Marxists believe that capitalists appropriate surplus value from the workers. Between 1957 and 1975, a group of Marxists who may be loosely called the Monthly Review Press collective and in-cluded, among others, Paul Baran, Samir Amin and André Gunder Frank, generalised this idea of “exploitation” to the whole world. The rich world, which had more capital, grew rich by transferring surplus value from the poorer world where most people worked as labourers and produced raw material.1 There were differences between major contributors to the Marxist scholarship. Some stressed the process of production, others exchange, and yet others the political aspects relatively more. The contemporary movement called the World Systems School initiated by Immanuel Wallerstein, for example, was more interested in the interactions between international trade and regional politics. It was also more historical and more global in scope than some of the Marxist works, but shared with the latter the beliefs that surplus appropriation explained world inequality and that colonial rule used power to help the transfer of surplus value.

Thus, the Marxist offshoots shared a common set of beliefs about economic history, that in the past (and the present) openness of their economies made the Third World poorer, and that colonialism was a political tool to maintain openness. The charge acquired a particular force in the case of the British Empire, which made no secret of its desire to maintain free trade within the parts of the Empire, and in the case of British India, made sure that London had fi rm control over the Indian monetary and currency system in order to achieve that aim. There thus developed a close bond between economic nation-alism and global Marxism—both schools consisted of essen-tially one agenda, an emphatic rejection of the open economy.

Those who espoused the idea that openness caused under-development discovered in drain, deindustrialisation, and peasant distress discussed by the Indian nationalists, exam-ples of how surplus was transferred from India to Britain by the colonial rulers. These phenomena represented a forced opening of Indian markets to British goods, transfer of Indian savings to Britain via drain, they distorted agricultural institu-tions and worsened inequality by making the poor peasants poorer even as traders-moneylenders-landlords engaged in agricultural exports became richer.

By 1990, global Marxism was in retreat. Its basic insight that capitalist prosperity was based on exploitation went out of the toolbox of the historian. No one denies that exploitation is a fact of life. But exploitation cannot be the defi nition of capita-lism. The idea obscures the innovative propensity of capital-ism, and obscures the presence of brutal exploitation in socia-list societies. That colonialism was a political means to sustain openness seemed blunt as a tool for doing comparative history; it fl attened the differences that existed between times, coun-tries, territories, geographical zones, and between Spanish, Dutch, British and French empires in their policies and institutions.

Not surprisingly, few original works were published in the fi eld of empire and development for 20 years after the last

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major works by the Monthly Review Press collective appeared in print. From the early 2000s, the historical scholarship started moving again in at least three new directions.

Linking Empires with Development: The New Trends

One of these applies to comparative economic development the intuition of new institutional economic history or NIE. The intuition is that the origin of international economic inequal-ity in the modern world had owed to the quality of institutions such as security of property right or the law of contract. One set of authors uses this idea to show why “settler economies,” usually colonies in the New World where Europeans settled in large numbers, often had a different experience from colonies such as India where they did not. The economists Daron Ace-moglu, James Robinson, and Simon Johnson suggest that the size of settlements, which in their view, was a geographically infl uenced variable, predicted the quality of institutions like security of property in the colonies. In settler societies, Euro-peans recreated institutions following the European prece-dent. In regions where their number stayed small, they pre-ferred to rule by indirect means, with the help of local agents, and created “extractive” or predatory institutions.

Staying within the paradigm that institutions matter, another set of writings shows that in fact settler economies varied among themselves; in some cases like Latin America or South Africa settlers appropriated property rights and public goods, whereas in others a more democratic outcome fol-lowed. A yet third strand in institutionist history considers the nature of the legal tradition transplanted by Europeans, and the varied effects thereof.2

The second trend is less interested in seeing empires as insti-tution-building governments, and more interested in the link between the British Empire in particular, and what one con-tributor calls the “early modern globalisation.” A series of works in imperial history in recent years has traced the prehis-tory of globalisation to British imperialism and the spread of settler societies.3 These works talk about a “British world” or an “Anglobalisation,” which was distinct from the British Em-pire as a state system, but dependent on it. This world was a combination of accelerated movements of goods, capital and labour, thanks to the Industrial Revolution and new communi-cation technologies, and a political and institutional set-up supplied by the Empire. The Empire fostered a lingua franca of business, uniform laws, and easy exchange of knowledge over a large part of the globe. Together, the two factors, rising trade and a pro-trade state system, spawned a new network of multi-national enterprise. The Empire was neither benign nor just a marketplace. It produced racism, confl ict, nationalist back-lash, warfare, and consolidation of local hierarchies. But its effect on the making of a world economy was also large and a completely modern phenomenon.

A third set of writings, led by Jeffrey Williamson, offers an interpretation of the 19th century economic globalisation, but can be seen to contain lessons for imperial history insofar as some empires did play a large role in maintaining market inte-gration. The theory of trade predicts that the fall in the costs of

doing trade would lead to more trade along with more spe-cialisation. Consistent with that prediction, the 19th century saw the emergence of economies dependent on manufactured goods exports and those dependent on agricultural or mineral exports. India was an example of specialisation in agricultural export and a retreat from industry, though an awkward exam-ple as we shall see. The decline of handicraft production in India, or deindustrialisation, was part of this process of spe-cialisation. The theory does not predict that the world would become more unequal as a result of specialisation; but it can have that outcome if industrialisation entails increasing returns and agriculture diminishing returns to scale.4

There are problems involved with a straightforward applica-tion of any of these ideas. The settler economy literature has faced three types of criticism. First, it rests too much on an almost religious faith in the importance of institutions, and the superiority of European institutions. To conduct narrative history of any one society from that faith would amount to overlooking, at least not knowing how to deal with, a host of indigenous factors, such as the capacity and power of local elite, quality of norms and customary law, entrepreneurship, and artisanal skills. This is an especially vexing issue with In-dian history, since much of the narrative history of colonial India deals more with indigenous agency, and less with Euro-pean agency.5 There is a more fundamental problem at stake here. NIE as an intellectual movement has enthralled the North American economics departments. But outside that small collective, it has had limited infl uence. Narrative histori-ans by and large have not shown much enthusiasm for NIE. In that sense, it has had a rather divisive effect upon economic history. Whether this is a refl ection of incompatible methods or the way American academic departments communicate is an open question. I will have more to say on this issue below.

Second, the economists’ favoured way of showing that insti-tutions matter involves long-range regression analysis where remote causes or instruments thereof are shown to produce modern effects. The statistical tool obscures the process of change, creates the impression that we already know the proc-ess, obscures path dependence, and the mechanism by which supposed causes translated into supposed effects. The method involves the syndrome that an early criticism called “compres-sion of history” into two dates, one representing the cause, and the other the effect, leaving hundreds of years in between un-accounted for.6 The criticism again refl ects how economists and historians often differ in their approaches to historical processes. Economists believe a model will tell them enough about the process, and that a few anecdotes can serve to moti-vate constructing a model. Historians need to be sure of the historical process by reading the testimony of real people. The two methods cannot happily collaborate, though they must do so if economic history is to have a good future.

Third, while there cannot be any question that European settlement mattered to developmental outcomes, narrative re-search has revealed great diversity and unpredictability in the ways it mattered. The scholarship on Africa has shown this especially well. With India, a counterpart problem arises.

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European settlers as a proportion of Indian population, given its immense size, were invisible in a statistical sense. And yet, British foreign, military, trade, and imperial policies were shaped both by the fact of settlement and the settlers them-selves. It would be naïve to characterise British India, which built one of the largest armies in the world, created a bureau-cratic state, collected an immense body of information, and passed numerous laws, as a case of light-touch indirect rule. The size of European settlement tells us nothing useful about the nature of the rule. The skill composition of the settlement might. But that variable cannot be precisely measured.

The second of the three trends—linking empire with glo-balisation—remains in spirit a Britain-centric scholarship, though nearest to the story that I will offer here. The third—globalisation and inequality—fails to explain basic stylised facts about Indian economic history. India had free trade thrust upon it, and yet it specialised in agricultural exports to a more limited extent than most tropical countries. The evi-dence on deindustrialisation is even more debatable. A new scholarship has questioned the signifi cance of deindustrialisa-tion as a concept. Many skilled artisans survived imports from Britain, and the surviving artisans contributed to the growing share of manufacturing in the national income.7 That many artisans survived the Industrial Revolution and Indian mer-chants set up factories on a large-scale poses a problem for trade and specialisation models, though they do not necessar-ily make them invalid. These anomalies suggest that it is nec-essary to factor in the fl ow of skills and knowledge along with the fl ow goods, for trade models to be credible.

The reason why we need to reopen the debate about empire and economic development in India should now be clear. The old theory has failed to supply a persuasive account of the eco-nomic legacies of the empire. And it cannot yet be said that the three recent trends in the reinterpretation of 19th century eco-nomic history, and of imperial agency in turn, necessarily lead us towards a coherent or better understanding of how the British Empire shaped Indian development. The orientation of the new writings lies elsewhere than in specifi c regions. Their main points of interest are settler societies, the British world, or trade theory. But they do offer some lessons useful for a reinterpretation of Indian history.

In this essay I use two lessons. The settler society scholar-ship stresses that people matter as embodiments of ideas, skills, and capacities. European settlers came with a set of ideas about institutions and technologies, their Indian associ-ates and rivals had another set of ideas. History formed of an interaction between the two. Of course, skills and capacities could be deployed for exploitation purposes, but not necessar-ily. The most important thing about the settlers was not that they were exploiters, but that they carried useful knowledge. The second lesson comes from the empire and globalisation scholarship, which stresses the role of the British Empire as a foundation of the 19th century global order, for two reasons. The Empire used its political power to force open and connect markets. And the empire became a vast fi eld for interaction between ideas, skills and capacities.

These notions can inform a new economic history of the Raj, but cannot really be the foundation for one. The task to build a new foundation should begin with a reconsideration of the kind of state that the Raj was, and why such a state evolved from the activities of a trading fi rm, the East India Company.

What Kind of a State Was the Raj?

What did the British think they were doing in India for 200 years? There is no easy way to answer the question. We know that the British were trading in 1750. But why did they create an empire? Why did they hold it for so long? The Empire served political functions, of course. But surely there was an eco-nomic logic as well. It is not easy to pinpoint that logic. There have been a few attempts to measure the gains from having an empire. At least one of these shows that the “costs” incurred to maintain the Empire were quite large and underestimated.8

If we look within India, one clue to an answer is suggested by the fact that it was a small government keen to maintain open markets. Tax revenue formed about 3% of gross domestic product (GDP) and public administration 5% in 1931. This state was one of the smaller governments in the contemporary world, tiny in comparison with not only contemporary Britain or postcolonial India (government expenditure formed 22% of GDP in 1981), but also with other emerging economies of the time such as Imperial Russia and Meiji Japan. The Indian mar-ket was also one of the least regulated. Now, classical liberal-ism makes a case for small governments and free markets. And this message was applied to India by the early 19th century ideologues and rulers. Perhaps the colonial state and its poli-cies can be understood as an experiment in classical political economy?

This is an attractive idea. But historians fi nd it diffi cult to prove a direct link between economic theory, trends in the British economy that infl uenced theoretical thinking, and colonial policy in the early 19th century. Liberalism, with its belief in liberty, came to terms with colonies not without tortu-ous reasoning.9 Scholars who have studied how colonial poli-cies were implemented fi nd that the link between doctrine and practice varied over time and between contexts of practice.10 The force of ideas changed because free trade and small gov-ernment generated backlash. Free trade for the colonies, in a popular view, was not much more than a means to meet Brit-ish balance of payments. Perhaps it was not liberalism, but an-other 19th century intellectual movement, utilitarianism, with a belief in the rule of law that shaped statecraft in India.11 That, at least, explains better the bureaucratisation of the state in India.

There is a further problem. Many pre-British Empires in India also shared these outward features, small government and unregulated markets. According to one interpretation, the Mughal treasury in Delhi or Agra probably did not earn a large share of the tax receipts from land, much of it being retained by magnates like the jagirdars and zamindars. And beyond collecting taxes, the state did not have a policy on regulating markets either. Merely having the outward features of a liberal ideal—small state and free trade—did not make the Raj special.

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What did make it special were two other features. First, it was a military-fi scal state. Unlike any other South Asian state of the past, the Raj centralised the military and fi scal opera-tions, in the process suppressing and demilitarising the armed groups like jagirdars and zamindars who earlier collected taxes and enjoyed local political power. Such people, if they rebelled together, could and did bring an Empire down. In or-der to suppress them and secure its own future, the British raised a huge standing army, combined it with a navy, funded the whole enterprise by a bureaucratic fi scal machine, and through that army, imposed political unity on a region where power had always been fragmented and decentralised.

The origin of such a state in India cannot be fully explained without reference to the confl icts and contests of the 18th cen-tury, through which the East India Company established power in India. The Company’s strategy to concentrate mili-tary and fi scal power at the centre made it different and a dis-tinctive kind of rule, and an essentially European one, in com-parison with most of its Indian contenders. A new scholarship shows why the Company succeeded as a military-fi scal state whereas its Indian rivals often failed, and emphasises the European dimension in the Company’s strategy and statecraft in late 18th century India.12

Second, whereas most empires of the past had limited access to the seaboard, the British controlled the seaboard fi rmly, and used that control to foster maritime trade. The Raj emerged, not from outright conquest, but from the activities of the East India Company between 1765 and 1818. The Company was a merchant fi rm. Although it had left its commercial legacy behind from much before 1858, when it was removed from the formal rule of India, it understood the commercial importance of India, especially its port cities not least because private European traders were often former employees of the fi rm or their friends. The Crown carried on the commitment to protect overseas trade, increasingly driven by a belief that the Indian Ocean region was crucial to securing Britain’s own future.

Many pre-British regimes in India may have entertained ambitions of fostering market integration on a large scale. But they did not have the means to do so. Mughal ports like Surat or Hooghly were almost certainly much smaller in scale than Bombay, Calcutta or Madras in the 19th century, and more loosely tied both to the imperial capital and intercontinental maritime trade than the port cities established by the Com-pany.13 The Raj had the means, and used these means to foster globalisation. It cannot be understood either as limited gov-ernment or as a free trader. It was a government strong enough to sustain and extend market integration on a world scale, with the result that not only commodities but also capital, labour, and knowhow, circulated on a vastly larger scale than before.

In other words, the Raj functioned as if it saw itself as the guardian of a system of interconnected markets. Statecraft in India played a very important role in that project. In order to maintain market integration between Britain, India, and the colonies, the rulers used three principal means, control on the monetary system which was done by the Secretary of State in

London, commercial laws which were overseen by the Vice-roy’s Council in India, and of course, the huge army, which has been discussed already in relation to the military-fi scal aspect of the state.

With these ideas about what the Raj was, it is possible now to offer a coherent set of conclusions on what it did. We have the elements to talk about the major success and the major failure of this state.

Benefits and Costs of Colonialism

Any assessment of economic change under the Raj must pay special attention to one extraordinary fact. Between 1850 and 1940, employment in Indian factories increased from near zero to two million. Real GDP at factor cost originating in fac-tories rose at the rate of 4%–5% per year between 1900 and 1947. These rates were comparable with those of the two other emerging economies of the time, Japan and Russia, and with-out a close parallel in the tropical world of the 19th century. Cotton textiles were the leading industry of the 19th century. Outside Europe and the United States, 30% of the cotton spin-dles in the world were located in India in 1910. Within the trop-ical zone, 55% of the spindles were in India.

What is really offbeat about industrialisation in India is not that it happened, but that it happened in a region where every textbook prerequisite for industrial capitalism to emerge had been missing in 1850. We tell students in a world history class that Britain industrialised under free market conditions thanks to favourable factor prices, that is, relatively low cost of capital and energy but high wages, and to productive and energy- intensive agriculture which generated savings for investment and created path dependence in technological choices.14 We tell them also that virtually every latecomer to industrialisa-tion needed to do something special to compete with Britain. The most popular idea is that of the activist state, which Alex-ander Gerschenkron and his followers treated as an axiom for “late industrialisation” or catching up. In the discourse on inter national development the idea lives on as “big push,” “em-bedded autonomy,” “developmental state,” and “governed mar-ket”—some of these labels were coined to account for the re-cent industrialisation of East Asia. The developmental state manipulates tariffs or regulates banks or manages the import of technology.15

None of these conditions were present in India in 1850. Interest rates were two-to-three times higher than in the fi nancial centres of Europe. The Empire was as far away from Gerschenkron’s activist state as we can imagine. It did not ac-tually obstruct the industrialisation, it did not have the legal or the political means to do so, but nor did it aid the process. The saving rate was around 5% of GDP in 1920. Indian agriculture was characterised by some of the lowest yields even in the tropics. India’s artisans may have been skilled but they had lit-tle access to the expensive capital market to start factories.

Why did industrialisation happen then? The answer is easy access to the world market for fi nance, machinery and skills. Industry emerged in the three port cities, Bombay, Calcutta, and Madras. These cities had seen rapid population expansion

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since the late 18th century when these were still centres of the commercial activity of the Company. The growth continued into the 19th century. The volume of foreign trade to and from India more than doubled in 1865–1914. The volume of trade through the three ports increased from 2 to 9 million tonnes between 1863 and 1913. The estimated ratio of foreign trade in national income increased from 8%–10% to 20% in 1865–1914. People who led commercialisation-led industrialisation.

Further, because exports were dominated by agricultural goods, overseas trade, overland trade, and indigenous bank-ing became ever more interdependent in the 19th century. Land trade and caravan trade in textiles, grain or cotton had been well developed from before British rule, and bankers who fi nanced long-distance trade could be found in the major towns located on rivers and caravan routes. As the Mughal Empire collapsed from the 1720s, a number of these merchants and bankers migrated to the capitals of the rising states such as Hyderabad, Lucknow, and Pune. But these were not the leading commercial hubs in the late 19th century set-up. There-fore, in the 19th century, much more of the migration was di-rected to the British Indian ports.16 Here, a string of British and European trading fi rms purchased agricultural commodities for export from merchants specialised in overland trade. The merchants themselves were fi nanced not by the small number of corporate banks, but by indigenous bankers and money-lenders. By 1920, the biggest market for rediscounting of indig-enous trade bills, the hundi, was located not in the interior, but in Bombay and Calcutta.

Among those Indians who invested money in manufactur-ing industry, one segment had always been based in the coasts, like the Parsis, and the other segment, like the Marwaris, had migrated from northern and western India towards the coast from the late-1700s. They were joined by foreign trading fi rms and foreign investors in the port cities. The fi rst factories were established by these groups making use of their knowledge and control of inland trade, overseas markets, banking and fi nance. As time passed, profi ts accumulated in industry and trade went into public goods. At the time of Indian inde-pendence, the port cities were homes to some of the best schools, colleges, hospitals, universities, banks, insurance com-panies, and lear ned societies available outside the Western world. A big part of that infrastructure had been created by the Indian capitalists.

It was created in collaboration with skilled immigrants from Europe. And here we return to the signifi cance of European settlement discussed earlier. This world of enterprise could not possibly emerge without heavy reliance on the import of serv-ices from Europe. India had goods to sell. It did not have an adequate supply of skills and technology. In order to set up factories, Indian businesses imported not only machines, but also the engineers and the foremen to operate these. Likewise, doctors, scientists, university teachers, lawyers and military personnel came from Europe, often to work under Indian bosses in the private sector. Corporate executives, managers and partners in foreign fi rms were European. Therefore, join-ing the world economy required India to maintain a defi cit on

the services account. The defi cit included private outfl ows, such as repatriated profi ts or remittances by managers and employees, and the so-called Home Charges, a payment made by the government on account of debt service, pensions and railway subsidy.

This was Naoroji’s drain. Like any payment made by govern-ments anywhere in the world, there was a lack of accountabil-ity and an element of waste. But the so-called drain was also a payment for skills, and it is impossible to imagine an economy short of skills dealing with the world without having to buy skills from abroad. The services thus purchased contributed to national income, public goods, and political stability. There has never been a serious discussion on the scale and the nature of the contribution. Economic nationalism took it for granted that factor payments were necessarily forced and “unre-quited,” and thus, purged the issue of its contribution from scholarly research.

The great paradox of the economic record of colonial India was that national income grew at an exceedingly slow pace throughout. Between 1900 and 1947, GDP increased by 60% and per capita income by 10%. Rulers of postcolonial India as-sumed that the problem was lack of industrialisation and that the problem needed to be fi xed by means of a closed economy and state intervention. They drew the wrong lesson from his-tory. National income statistics show that the non-agricultural economy was always a source of dynamism and growth. The size of the non-agricultural economy doubled during 1900–1947. Trade and industry together more than doubled. Open-ness had delivered a modernisation process that had few par-allels in the tropical world. Industry and commerce did not need fi xing by the visible hand of the government. The real problem was agriculture, which grew by about 15% in the same time span, and only slightly faster in the previous dec-ades. Given the size of agricultural production, its stagnation imparted a depressing effect on real wages across the board, and on national income.17

Neither drain nor deindustrialisation can explain what ailed agriculture. Agricultural productivity was notoriously small in the South Asia region. The majority of the population lived in villages and cultivated land. If the village was located in an arid or upland district, the land produced too little even for a comfortable subsistence. Like the states of the past, the Raj de-pended on land taxes, which was a limited resource because land did not produce a lot. In the past, low land yield was not only the root of poverty, stagnation, and small tax receipts, but also of repeated famines.

Why was land yield so small? Was the answer rooted in man-made factors such as institutions or free trade, or in the region’s geography? Marxist scholars writing in the 1970s sug-gested that the agricultural problem was manmade in nature. This would be credible if we can show that yields were once high, but fell during the colonial era. There is no worthwhile data showing this. From all the evidence we can have, Indian dry-lands had poor yield from precolonial times, because of poor soil, and even more, precarious water supply, and whereas land yield in some parts of the fertile deltas did fall in the early

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20th century, the fall was more likely caused by over-exploita-tion of land by a growing population.

Whatever the roots of the agricultural stagnation, the singu-lar failure of the Raj was an inability to make a dent in rural poverty. It created canals, but on much too small a scale. It cre-ated railways, but railways were not much good if there was not enough surplus product to sell. After the military expendi-ture was taken out, there was little left in the budget for spend-ing on public goods. The biggest casualty of the public goods paralysis was agriculture. The Raj never seriously considered a policy to develop rain-fed agriculture. Between 1900 and 1947, agriculture was in a crisis because the open land frontier had disappeared, government investment in canals stopped, and population growth accelerated.

If the Raj did transform the non-agricultural economy, at least in the port cities, why did it become unpopular? We can point out three reasons. First, agriculture became a rallying point in the nationalist movement in the 1930s. Mahatma Gan-dhi turned what had been until his return to India an urban and elitist political movement into a mass protest movement, partly by going to the countryside. The mounting agricultural crisis made this move timely. Second, after the Great Depres-sion of 1929 ended the globalisation process, Indian business lost interest in the world economy and some of them started to fi nance the independence movement. Among those business interests who joined the independence movement, there were several who hoped that their future would be better secured by a protected economy than an open economy.

The third factor was a more long-standing one. The Raj had made monetary policy and military policy more or less com-pletely non-negotiable entitlements of London. By doing so, during much of its career the Raj appeared to the educated Indian as a “military despotism.” In political culture, it fully refl ected that despotism. For several months in a year the gov-ernment sat in Simla insulated from the heat and dust of the plains. Its proceedings were ritualistic. The Viceroy was tech-nically advised by a council. Individually, the members of the council were capable and interesting people. But the delibera-tions within the council did not allow for open discussion. The government left no room for internal debate. There were no Indians in the secretarial staff around the Viceroy. A reform measure in 1909 had introduced a few elected members in the council, but that did nothing to change the ritualistic mode of its functioning. Subsequent reforms came in too little, too late, and with a good deal of resistance from reformers. These reforms laid the foundation of a parliamentary democracy in India. At the same time, the tortuous process removed the legitimacy, if any, that the Empire still had left.

In 1947, the Empire ended. In India, the new state framed a development strategy that almost point by point attacked the features of the imperial economic system. The most conse-quential change was the retreat from openness.

Policy and Ideology after 1947

In India, the new state set out to replace the Raj’s brand of openness and limited government with vengeance. Protection

was raised to very high levels and reinforced with non-tariff barriers. Commodity export was discouraged. There was pub-lic control of markets and assets, and skills and machinery im-port faced stiffer barriers. All this was done with such commit-ment that 30 years after independence, trade and foreign investment had been reduced to insignifi cance, whereas the size of the government relative to GDP grown seven times in 1931–81.

It is not the purpose here to delve into a detailed assessment of postcolonial policy. I do, however, wish to suggest that the post-1947 record can be understood better if we have a sense of history. At the outset it is necessary to say that although the new regime delivered GDP growth at a much higher level than did the colonial one, I do not consider this a measure of suc-cess. The elevated growth was largely fi nanced out of the tax-payer’s money, as opposed to commercial profi ts earlier. It was not a sustainable strategy, and therefore, not a great idea. That it came to an end in the 1990s was not due to the foresight of politicians, but to its inherent contradictions. GDP fi gures also obscure some of the costs that were paid to achieve this pat-tern of growth and some of the gains made that do not show up immediately in national income data. Let me, therefore, leave GDP aside, make a more direct approach to the issue of gains and costs, and illustrate these with three examples: trade, foreign fi rms, and agriculture.

A massive transformation was unleashed in private trade and private fi nance after 1947, especially in the sphere of agri-cultural goods. In the colonial era, an interdependence had developed between foreign trade, domestic trade, and private banking. There is plenty of evidence that this interlinkage had created synergy between these three activities and helped re-duce risks for merchants investing in banks or manufacturing industry. In the interwar period, sources such as the Banking Enquiry Commission (1929–30) revealed dynamism and insti-tution-building in banking, trade, storage, and futures. All of that entrepreneurship and innovation seemed to evaporate in the next 30 years. Step by step, the government erected a regu-latory system that paralysed trade, and drove private capital away from commercial infrastructure and institutions, revers-ing almost a century-long trend to the contrary. Starting with the Essential Commodities Act, 1955, restrictions were added on movement of goods across India, and on private storage. There was a ban on export of agricultural goods, ban on future markets, ban on private trade, and ban in many states on sale of agricultural goods except in approved sites. With the link between foreign trade, domestic trade and private fi nance now snapped, all three dwindled. The devitalisation of private trading and fi nance was done in the name of food security and from the belief that the moneylender was the root of all evil. Whatever the merits of that sentiment, the new order greatly weakened both internal trade and fi nance.

The retreat from an open economy was bad news also for foreign fi rms. Between 1950 and 1970, except a few multina-tionals selling goods to Indians, the British fi rms that were en-gaged in export-oriented trading and manufacturing were squeezed out of India. The fi rms in Calcutta lived on the export

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of jute and tea, procured capital and technology from abroad, and recruited top management internationally. The national-ist state sharply raised tariffs and capital controls, which made taking any of these steps more difficult than before. The investment policy raised investment cost in businesses that had long relied on imported capital, knowhow and expertise. Exports suffered in jute and tea. The global firms operating in India, thus, faced pressure from two ends. They lost their foot-hold in export trade, and although they could in theory diver-sify, this option was not easy since they never had a foothold in inland trade. A series of hostile takeovers by opportunistic Indian families with help from cynical politicians sealed the fate of the global firms. Most of them were then run down by their new Indian owners.

The retreat from international business also sealed the fate of Calcutta. Once a global city, with a larger entrepreneurial base than that of Singapore and Hong Kong, Calcutta reached the 1970s as a provincial backwater. These other port cities did not turn their backs on the trading past, but built on that herit-age, combining it with good governance. Calcutta set out to destroy its global past and hunt down foreign capital. Outside the communist bloc and some dictatorships, there is probably no comparable example of a systematic and managed grinding down of capitalism.

If the destruction of the open economy and the enlargement of the state were damaging, there was one area where the state scored a major success, which was the absorption of new high-yielding agricultural technology in the 1970s. This one step not only raised output and productivity above historical levels, but also gave rural wages a sustained upward push that was without precedent. We now know that this strategy has been a drain on the budget, and led to an expenditure commit-ment that cannot conceivably come down in near future. Still, it is the national state that must be credited with making a real dent into rural poverty. It is not believable that the British rulers of India would have the courage to undertake such an ambitious development plan, or that they even knew what needed to be done.

The economic liberalisation of the 1990s, which returned India to openness, made it possible to sustain this expensive agricultural system without leading the economy to a break-down. It enabled the state to earn more money to afford spend-ing more money on subsidies. And yet, even as the state secured its commitment to agriculture, in many other ways it retreated from the postcolonial policy regime and even returned to the tenets of the colonial economic system, the key point of return being openness.

Conclusions: Economic Legacies of Colonialism

What were the most important and enduring economic lega-cies of the British colonial rule in India? How did independent India change these legacies? I wish to end by restating three points that help answer these questions.

First, the British built and maintained in India a large army. Independent India inherited this army. If it was a weight upon the budget then, as the nationalist critics pointed out, it

probably still is a significant weight. But without that fiscal burden, it is difficult to imagine political unification of a land that had never before been unified to this degree. In turn, the large army was the consequence of the warfare and conflict through which the East India Company established its state in India. It was a result of the military-fiscal strategy the Com-pany successfully deployed to secure power. The price paid by the Indians for political unity secured in this way was large. Given the small size of the state, the military expenditure that it had to undertake crowded out spending on public goods, leading to the greatest failing of the Raj, an inability to address the key challenge of development, transforming rural livelihoods.

Second, the Empire created an open economy, open to trade, capital flows, and settlement. For the imperialists, keeping India open to trade, investment and migration served British economic interest. But that does not amount to saying that openness was damaging to Indian economic interests. The two interests were broadly compatible until the 1920s, and diver-ged around the time of the Great Depression. But when world trade again recovered from World War II, India had left the stage. In the colonial era, openness contributed to the emer-gence of a robust industrial capitalism centred in the port cities. It helped the growth of a sophisticated education sys-tem. The cosmopolitanism was sustained by the free move-ment of people, skills and knowledge. It is certainly possible to criticise individual items of factor payment. But economic nationalists fundamentally misread these flows by calling APPOINTMENTS/PROGRAMMES/ANNOUNCEMENTS

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these drain. They were the price India paid to tap into a mobile market for skills and capital.

In both these respects, independent India changed the rules. It enlarged the state many times, and dismantled the cosmo-politan capitalist order. If these were on balance regressive steps, the most notable achievement of the postcolonial state was agricultural transformation, which would be inconceiva-ble without enlargement of the state and subsidisation of agriculture on an enormous scale.

Could the rulers of postcolonial India have made a better choice? A handy characterisation of the Raj is that it was a strong economic system with a limited government. The post-colonial economy, by contrast, had a large government with a fl awed economic system. A counterfactual scenario would be one in which the best legacy of the past was combined with the best modern idea. That is, the cosmopolitan capitalism was re-tained with the addition of a large state. This option, however, was unthinkable in 1947. Neither the socialists nor the pro-capitalist politicians in the Congress liked foreign capital or wanted a cosmopolitan capitalist order to continue.

This brings us to the third and perhaps the least visible of the legacies, the persistence of economic nationalism. I have defi ned economic nationalism as a belief that India needed to be free of foreign rule because foreign rule had made Indians poorer. In principle, liberty can be fought for without having a historiography to support that fi ght. These two things—desire for political freedom and an economic history suggesting that free enterprise had damaged India—have no theoretical relationship between them. In India, however, the two became interdependent. That equation served the nationalist struggle well. But it made conducting debates on economic history a diffi cult enterprise. The suggestion that the Empire was good for India because it had created an open economy sounds in some ears like a politically incorrect stance. The point of such a statement is not to support the Empire in a dead and irrelevant political debate, but to reiterate the virtues of openness.

By tying politics with history, economic nationalism devital-ises economic history in India. It creates a narrative trap. One either speaks the language of economic nationalism or enter-tains the wrong political leanings. The outcome of the trap is a weaker discipline. How do we know this?

In the western world economic history is experiencing a comeback, among other reasons because the media takes note of what the professors lecture on, and the professors do carry on vigorous and noisy debates. In India the economic history professors do not take part in a lively debate, and therefore, the media ignores them. On 4 December, the Amer-ican journal Chronicle of Higher Education published a story with the title “The Fall and the Rise of Economic History” in the US. In June 2014 a Routledge journal published an article with the title “The Rise and Decline of Indian Economic History.”18 The “rise” and the “fall” in the titles of these arti-cles stand for a measurable increase or decrease in the quantity of original research published in international jour-nals. In terms of top quality publications originating in India, the record is pathetic and worsening. The world over, the in-terest that mass media exhibits for professional scholarship works as motivation for school students to study history, and creates the capacity to reject the outlandish verdicts on the past that nationalistic politicians often pass. In India, the capacity to respond to slogans about history has grown singularly weak.

It is not only the professional historian who is paying the price for economic nationalism and the narrative trap it cre-ated. Economic nationalism is also a weapon in the hands of businesses that fear foreign competition. “Look what the British did to us” is a potential tool in the aid of xenophobic backlash against globalisation. I have suggested in this essay that the message of economic nationalism is not only wrong but also dangerous in a country that is trying to re-embrace openness and cosmopolitanism with a view to building a secure future for itself in the world economy.

Notes

1 Karl Marx himself had a more upbeat view on the spread of capitalism to the non-European lands via the agency of empires, based on assumptions about the economic system pre-vailing in these lands.

2 Other than the three names mentioned in text, contributors to the literature include Stanley Engerman, Kenneth Sokoloff, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer. For a recent survey, see William Easterly and Ross Levine, “The European Origins of Eco-nomic Development,” Cambridge MA: NBER Working Paper 18162, 2012.

3 Works by Chris Bayly, John Darwin, Gary Magee and Andrew Thompson, and Niall Ferguson, are examples. For a review essay, see P J Cain, “The Economics and Ethics of British Imperialism,” The Historical Journal, 55(1), 2012, pp 249–61.

4 J G Williamson, Trade and Poverty: When the Third World Fell Behind, Cambridge Mass: MIT Press, 2011.

5 C A Bayly, “Indigenous and Colonial Origins of Comparative Economic Development: The

Case of Colonial India and Africa”, Policy Re-search Working Paper 4474, World Bank Devel-opment Research Group, Washington D, 2008.

6 Gareth Austin, “The ‘Reversal of Fortune’ The-sis and the Compression of History: Perspec-tives from African and Comparative Economic History,” Journal of International Development, 20(8), 2008, pp 996–1027.

7 Tirthankar Roy, Traditional Industry in the Economy of Colonial India, Cambridge: Cam-bridge University Press, 1999.

8 For example, Patrick O’Brien, “The Costs and Benefi ts of British Imperialism 1846–1914,” Past and Present, 120(1), 1988, pp 163–200.

9 For one example, Donald Winch, Classical Po-litical Economy and Colonies, Cambridge Mass: Harvard University Press, 1965.

10 S Ambirajan, Classical Political Economy and British Policy in India, Cambridge: Cambridge University Press, 1978.

11 Eric Stokes, The English Utilitarians and India, Cambridge: Cambridge University Press, 1959.

12 Two quite different examples are, Tirthankar Roy, “Rethinking the Origins of British India: State Formation and Military-fi scal Undertakings in

an Eighteenth Century World Region,” Modern Asian Studies, 47(4), 2013, pp 1125–56; and Mandar Oak, and Anand V Swamy, “Myopia or Strategic Behavior? Indian Regimes and the East India Company in Late Eighteenth Century India,” Explorations in Economic History, 49(3), 2012, 352–66.

13 Mumbai, Kolkata, and Chennai, respectively. In this essay the original names are retained.

14 Robert Allen, The British Industrial Revolution in Global Perspective, Cambridge: Cambridge University Press, 2009; E A Wrigley, “The Tran-sition to an Advanced Organic Economy,” Eco-nomic History Review, 59(3), 2006, pp 435–80.

15 H-J Chang, “The Economic Theory of the De-velopmental State” in M Woo-Cummings, ed, The Developmental State, Ithaca: Cornell Uni-versity Press, 1999, pp 182-99.

16 I explore the shift in An Economic History of Early Modern India, London: Routledge, 2013.

17 On national income data, see S Sivasubra-monian, National Income of India 1900–1947, New Delhi: Oxford University Press, 2000.

18 T Roy in The Economic History of Developing Regions, 29(1), 2014, pp 15–41.

economic legacies of colonial rule in india

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