group b8 meap term paper

7/30/2019 Group B8 MEAP Term Paper

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Impact of British

Imperialism on the

Indian Economy: A

Failure of theClassical Theories of

Macroeconomics

MEAP 2011

Group B8

Arijit Bose U111068

Gourab Ghose U111078

Mayank Vishnoi U111088

Sachin Gupta U111098

Shilpi Jain U111108

Vikas Pattnaik U111118

SUBMITTED TO:

DR. LATHA RAVINDRAN

DEPARTMENT OF ECONOMICS

XAVIER INSTITUTE OF MANAGEMENT

FOR THE COURSE MEAP 2011


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Contents

1. Synopsis (As already submitted) Page 22. A Discussion on the Concentration of Land

and Capital in Colonial India Page 4

3. The Nature and the Trends in Bullion Flowbetween India and Britain Page 4

4. Demystifying British Investment in India Page 55. The Result: An Unbalanced Indian Economy Page 66. Case In Point: The incidence of widespread poverty

in the Kingdom of Tanjore under British rule Page 8

7. Conclusion Page 98. Bibliography Page 10


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Synopsis

Taking the standards of advance which are employed to test the progress of Western countries,

there is no country in Europe which has advanced during the same period more rapidly and

farther than British India. [There has occurred] a process of continuous moral and material

improvement which in some particulars has attained a higher point than has yet been reached inEngland - Henry Sumner Maine, 1887

Not all the hardships of past tyranny can compare in intensity with the colossal misery

occasioned by the unequal distribution of the necessaries of life, by the concentration of wealth

and property, the legalised slavery of labor to capital, the squalor and suffering from insufficient

sustenance, the numberless deaths due to starvation, and the unrecorded suicides brought about

by despair and disappointed ambition - Journal of the Poona SarvajanikSabha, 1893

Imperialism has been often discussed in the context of its impact on culture and politics with a

certain degree of consensus among scholars; however the opinion on the economic impacts ofimperialism is strangely divided. Even historians who espouse the Marxist ideology do not agree

as to the overall effect that British Colonialism had on India did it leave our nation poor and

drained (a legacy that we are yet to totally tide over) or did the British shoulder the proverbial

white mans burden, catalyzing a process of rapid economic growth (the frui ts of which we are

reaping today). The claims and counter claims fly thick. History records the points of great and

massive change in politics; chronicles wars and events of great moment and pith, but is strangely

silent on the lives of the common people who are the salt of the earth. It is however Economics

that can give us a measure of what life in Colonial India for you and me would have been like. It

is this subaltern idea of history, rooted in the Principles of Macroeconomics that inspired us to

choose the analysis of British colonialism in India and its impact on the Indian Economy.

We will concentrate the initial study on the four factors of production viz. Land, Capital, Labour

and Entrepreneurship. We will try to understand who the owners of these factors were and hence

the consequent recipients of the concomitant rewards. Our study will look at ownership in two

broad perspectives:

The concentration of the land and capital in certain sections of society, stemming fromthe highly unequal social structures prevalent then and its impact

The change in these ownership patterns post the expansion of the political power of theEast India Company

Next we will compare the measures of economic progress used by the British economists and

the Indian economists in gauging the economic development of India. Here we would like to

discuss the following issues:

The nature and the trends of bullion flow from India to England in the course of theestablishment of British colonial power


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The nature of British investment in India and what it implied. An expose of howBritish investment in India perpetuated economic drain from India

The unbalanced nature of the Indian economy.o The sole dependence on agriculture to the detriment of development of

industries

o The impact of and the nature of British investment in Railways and Roadso The incidence of unemployment and disguised underemployment in India

stemming from the over dependence on agriculture

o The lack of substantial capital to sustain industrial growth and the impact ofinflow of British capital into India

o The growth in foreign trade and its predilections The use of India as aplantation for the sourcing of raw materials and unprocessed resources

o Impact of foreign imports on Indian manufacturing industriesFinally we would like to end by taking a case in point: The incidence of widespread poverty in

the Kingdom of Tanjore under British rule

We would like to, in these cases, to see a practical instance of the analysis of the economic

policies we have carried out beforehand.


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Concentration of Land and Capital in Colonial India

During the two centuries of British Colonization, land and wealth lay in the hands of a few who

hijacked the countrys economic independence and undermined its social processes; the British

saw an opportunity to exploit the lands for mines, plantations and other profitable enterprises.

The landownership patterns and acquisition of the same were eased, so as to facilitate profitmaking enterprises by the British. Community ownership of land by tribal societies was

delegitimized during the period with the introduction of private property ownership and further

throughzamindari system. Zamindari or Permanent Settlement System was introduced in 1793,whereby large sections of land were owned by feudal lords against fixed timely payments to the

British Government.

TheZamindari system was primarily prevalent in northern parts of the country. Peasants, under

this system, became tenant farmers and had to pay rent to the zamindars to cultivate the lands

allotted. Across the Western and Southern parts of India, the Ryotwari system was adopted,whereby individual contractors were the proprietors of the land against the revenue payments to

the Government. The ryots had the right to further sub-let the land, mortgage or transfer land as

per their requirements.These systems resulted in the division and polarization of rural society into landlords and rich

peasants versus tenants and agricultural laborers. The income gap between the rich landlords and

poor tenants & agricultural laborers widened due to high revenue rates. It also led to growingindebtedness, dispossession of land and rising tenancy which further aggravated the situation.

Thezamindars primarily belonged to the upper castes like Brahmins, and cultivators belonged to

the middle castes. The agricultural laborers were largely adivasis and dalits. By the time ofIndependence, nearly 40% of Indias rural population was working as peasants or landlessagricultural labor.

Nature and the Trends in Bullion Flow between India and Britain

Pre 1857: It was in the 17th

century that the East India Company first made trade contacts with

India. The East India Company's commercial policy was based on the principle of purchase ofIndian goods in exchange for bullion as there was little demand for European consumer goods in

India. By selling, on the other hand, Indian silk, drugs, spices, etc., in the European market at a

much higher price, the Company earned a considerable profit. Between 1601 and 1612 cargo

worth 200,540 were carried in 9 East India voyages of which 69% consisted of bullion. Thedanger of a drain of treasure from the west became a nightmare and India became the 'sink of

precious metals'. Lord Clive mentioned in 1772 that "silver of the west and the gold of the east

have for many years been pouring into that country [Bengal] and goods only have been sent out

in return."This predominance of bullion in the export trade of the East India Company with India continued

without any interruption until 1757. The following table shows the percentage share of bullion in

the East India Company's export to India and Bengal from 1711 to 1765.


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Year India Bengal

1711-20 80.00 86.00

1721-30 81.00 83.00

1731-40 73.00 66.00

1741-50 74.00 75.00

1751-56 68.00 66.001757-65 13.00 0.00

Percentage Share of Bullion Flow from 1711-1765

Post 1857 Beginning of Drain and The Battle of Plassey in 1857: A macroeconomicexposition of the drain is found in the celebrated Ninth Report from the Select Committee of theHouse of Commons (1783) authored by Edmund Burke. In Edmund Burkes report thatinvestigated the Company's affairs he states the changed position of affairs. With the territorial

gains of the Company in India and greater political power and influence bullion stopped being

exported to Bengal or any part of India. Rather a new form of trade was devised to supply theEuropean Markets. Here I quote: A certain Portion of the Revenues of Bengal has been for

many Years set apart, to be employed in the Purchase of Good for Exportation to England, andthis is called The Investment, The Greatness of this investment has been the standard by which

the merit of the Companys Principal Servants has been generally estimated; and this main Causeof the Impoverishment of India has generally been taken as a Measure of its Wealth and

Prosperity. Hence, Bengals own revenues were now being used for the purpose of exporting

goods to the West and perversely, this was called an Investment. Burke pointed to the

'investment' of the Company as the main cause of the impoverishment of India, though generally

taken by the British as a measure of its wealth and prosperity. Burke argued, exportation implied

a reciprocal supply. But the whole exported produce of the country was not exchanged in thecourse of barter; actually it was taken away without any return or payment whatsoever. He

concluded "the country has suffered what is tantamount to an annual plunder of its manufactures

and its produce to the value of twelve hundred thousand pounds." From 1846 to 1879 Britainexported textiles and capital goods to India for bullion thereby reversing a centuries-old trade

pattern. The 'ideal' result of this massive interchange would have been to transform India into aneconomy dependent and complementary to the British".

Demystifying British Investment in India

Investment in a country is generally referred to as a positive feature and is considered beneficial

to the economy as it brings with it more employment, increased wages and a substantial

improvement in living conditions but when British east India company used this word it was

anything but what it implied. Once the East India Company ceased to export bullion to Bengal

all purchases in Bengal and other parts of India were made out of the surplus of the territorialrevenue of Bengal. The part of revenue devoted to such purchases was known as Investment.

Philip Francis in 1776 divided the flow of economic drain into four streams: 1. East India

companies Investments, 2. Remittances to other presidencies, 3. The transfer of private income

to England and 4. The transfer of income from private trade.

A macroeconomic exposition of drain is found in the Ninth report from the Select committee of

the House of Commons, 1783 by Edmund Burke as mentioned earlier pegged the plunder at


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twelve hundred thousand pounds and in 1827 another study by Rammohun Roy cited that annual

remittances to London on account of individuals were at 2,000,000 per annum and yet anotherreport estimated that the drain in 55 years from 1765 to 1820 was around 110,000,000. In 1838

R M Martin estimated the figure for 30 years at 724,000,000 and he also stated that this kind of

outflow would have impoverished even England. According to DadabhaiNaorojis Drain theory

which is considered to be one of the most foolproof and used by many socialist leaders statedthat the wealth transferred from 1787-88 to 1828-29 and estimated transfer prior to 1788

aggregated and capitalized at 5 per cent yielded the final figure at a whopping 1500,000,000.

The figures mentioned above give a clear picture of how a land with immense wealth was looted

and plundered. The British are criticized for leaving Indians poorer and more prone to

devastating famines; exhorting high taxation in cash from people; destabilizing cropping patternsby forced commercial cropping; draining Indian revenues to pay for an expensive bureaucracy

(including in London) and an army beyond India's own defense needs; servicing a huge sterling

debt, not ensuring that the returns from capital investment were reinvested to develop the Indian

economy rather than reimbursed to London; and retaining the levers of economic power in

British hands.

The Result: An Unbalanced Indian Economy

In the 1800s, at the commencement of British rule in India, Britain was the most economically

advanced nation of the world and it was no stretch of the imagination to think that contact with

such a nation would propel India to the very forefront of economic prosperity. However, evenafter decades of British rule, the benefits were nowhere to be seen. The desperate poverty of the

people, the incidence of famines and pestilence and as someone said "the wretched, heart-

rending, blood-boiling condition" of the general populace soon tore apart any illusions as to the

fact that India was actually economically regressing as opposed to progressing.

The Indian Nationalists, particularly the economists among them (like Dadabhai Naoroji, M. G.Ranade, G. V. Joshi, G. Subramaniya Iyer & R. C. Dutt), considered this impoverishment to be a

direct consequence of the British Rule in India, particularly of the unbalanced character of the

Indian Economy as a direct consequence of British economic policies. The British economists

(all disciples of John Stuart Mill) contested this opinion.

The British position is encapsulated in the term development of resources which they used tojustify their theory that India was growing economically at a breakneck speed, akin to that of the

United States of America. They particularly looked at the growth in agriculture and foreign trade

as measures of progress, which indeed had grown by leaps and bounds. When confronted withthe question of abysmal poverty and low living standards of the Indian people in spite of this

growth the general thesis advanced was that the benefits were not tangible for the followingreasons: (i) a rapidly increasing population multiplying beyond the number the land could

sustain (ii) the shortage of internal capital and inadequate capital formation (iii) Economicdevelopment began in India from a very low base to begin with (iv) inability to raise enough

funds for its own administration and development. All these factors were such that they could be

cured by the Indians themselves and not a consequence of the British Rule. The British policiesfor the economic growth were based on rather sound economic theories the Classical Model

propounded by John Stuart Mill among others. The policy points were:


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1. The state as a provider of Law and Order- Internal order and protection form externalaggression guaranteed the security of life and property essential for economic activity.

2. The promotion of private property rights in landAs per the Classical Model, whenIndividuals are guaranteed the right to the fruits of their industry competition in the free

market would ensure economic growth. Hence, the British reorganized the agrarian

system in India, through creation of private property in land owned by thezamindars andryots. This was believed would incentivize the land owners to invest capital and labor

into the land they owned and fuel growth, creating capitalists among the farmers.

3. The development of free foreign trade- India was seen to be best suited to theproduction of agricultural goods alone and foreign export of agricultural produce would

create demand for such goods across India, leading to improved production and also

causing benefits to the local handicrafts and so on.4. The promotion of the means of transport with positive impacts on trade and

production.

5. The investment of British capital- India though rich in land and resources, lackedcapital, a deficiency well served by investment of British capital.

The Nationalists challenged these policies on the following grounds:

1. Law and Order - alone do not guarantee growth, but rather what they are used for. WhatDadabhai Naoraji said was, while people "were secure from any violence from each other

or from Native despots, from England's own grasp there is no security of property at all,and, as a consequence, no security for life. In the name of security, the unbalancedexpenditure on Britains colonial wars in other parts of the world and its maintenance of

British officials at huge salaries were investments in no way germane to Indian economicgoals.

2. The Zamindari system - was the precursor to the breakdown of agrarian relations in thecountry. Landowners failed to invest in the land and resorted to rack renting and peasants

fell into the clutches of moneylenders. The free transfer of land ownership, led topeasants losing rights to their lands. The rights of landowners were never restricted for

fear of loss of investment and moneylenders were unchecked for fear of loss of credit and

capital. No change of policy resulted.3. Foreign Trade - surely has its benefits, but if a countrys interests are subordinated to

another then it is no measure of economic growth. Not looking at the volume of the trade

but considering the nature and effect of such trade on the national income we see thatimports did not bring in new technology and aid the growth of industry but imported

goods displaced indigenous manufactures and prevented industrialization. Export of

agricultural goods and raw materials were harmful as well as these were a unilateral

transfer of goods, not as a response to demand. India was forced to maintain a huge

export surplus so that British merchants could make profits and all such profits were sentback to England as well. Overall, the status of India became that of a plantation for the

growth of British industries, a mere appendage to Britain.

4. Railways - had only aided in the penetration of the Indian market by British goods, notaided in the growth of indigenous industries. Freight rates to and from ports being lower

than that for inland transport served this very purpose.

5. Foreign Capital - was detrimental to the growth of India on many counts as it (i)Replaced and suppressed Indian Capital (ii) All profits from such capital was repatriated


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abroad as the British monopolized the high posts and used Indians as coolies and such

(iii) This led to a further drain of wealth from India in the form of profits (iv) Increasedthe political hold of the British on India.

The above becomes a classic case of the failure of the Classical Model of Economics in which

perfectly reasonable economic policies led to the impoverishment of the nation through unabated

market economics without the guiding hand of a benevolent Government. This would only beaddressed post-independence when the likes of Pt. Nehru, P C Mahalanobis, and J R D Tata

realized that there was a close connection between state power and economic policy, and that

economic development required a political system conducive to it leading to our Five-Year

Plans, the cornerstone of Indian Development.

Case in Point: The Widespread Poverty in the Kingdom of Tanjore under British Rule

Thanjavur, or Tanjore had the most productive agricultural system of Tamil Nadu which the

British East India Company captured during 1749. In the past, European companies importedgold, silver, horses, weapons etc., on which the Indian rulers started depending for their survival.

Tanjore declined during 1749-1799 after the British annexation. They made alliances with thenative rulers to squeeze revenue from the villagers at a rate as high as 59% of the gross produce.The last quarter of the eighteenth century saw a sharp decline in Tanjores population, which didnot recover until British rule had ended. The Brahman scholars formed a theocratic ruling class,

directly administering about a third of the villages. There was little or no private property in landand the managerial class supervised all production. The village servants who formed 22% of the

villagers received just 12% of the gross produce. The slaves were kept segregated outside the

village settlement in separate kinship communities. Slaves, about a quarter to a third of the

people, received one-tenth of the gross produce.

The British compelled the weavers to produce textiles for export in return for subsistence

payments. The native traders also became Company agents earning commissions. The cities wereruined, crafts disrupted, treasuries emptied, population decimated and people made destitute, to

pay the price of British conquest. Under the East India Company, Tanjore was converted into a

virtual mono-crop region, exporting rice and labor. After 1812, Tanjores export earnings felldrastically and the district entered a long period of deflation, accompanied by dismantling of

industrial production. The smaller landlords and peasants became irrevocably indebted to the big

owners and prosperous merchants, who themselves received credit from British banks and firms.This chronic indebtedness of people has persisted to contemporary times. The seaborne rice

exports remained high even in years of flood and drought. At least half of Tanjores exportsrepresented surplus value paid gratis to the conquerors. Tanjores imports were meant for the

rich or the government, while exports came from the labor of slaves and peasants.

The British gradually transformed land ownership into private property and conferred

landlordship on a variety of people. The British favoured the landlords at the expense of smallowners. But the small owners too did not oppose it since their positions as employers and village

managers set them in opposition to their tenants and laborers. Ironically, the rice bowl of South-

India did not feed its own people. It exported majority of its produce and imported coarse rice

from Burma. Throughout British rule, Tanjore had a large export surplus. The agriculturalpattern created acute shortages of dairy products, fruits, vegetables, fodder and meat, while the


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depletion of forests contributed to seasonal flooding. Large scale emigration imposed extra

burden on Tanjore as its able-bodied workers spent most of their working lives in foreign landsfor contemptible wages. Apart from railroads and processing plants, the British imperialism

failed to industrialize Tanjore and kept the population in the same conditions and relationships as

in 1800. The most striking sign of deterioration is the fact that despite emigration and major

famines, the ratio of agricultural laborers increased.

Conclusion

The persistent problem of apparent underdevelopment and the symptoms of it in poverty and

famine forced the British government to appoint five major economic commissions between1916 and 1930. However, their purviews were limited to specific economic problems and none

of them took a macro-economic view of the situation. It was in this environment that the

economic crisis of 1930 shook the very foundations of the Classical Theories of Economy and it

was not long before the Keynesian ideas found a voice in India through mainly three sources.

In 1934, M Visvesvaraya, the scientist from Mysore framed a 10 year plan to increase industrialproduction by 600%. The Indian National Congress in 1938 formed the National Planning

Commission under the Chairmanship of Pt. Nehru. In 1944 a Plan of Economic Development ofIndia also called the Bombay Plan was framed by leading industrialists like JRD Tata, G D

Birla and Shri Ram. All these plans converged on two pointsthe need for government plannedexpenditure in economics and the development of the public sector, no doubt inspired by the new

winds blowing in from Keynes and the Soviet Russia. It was clear that planning and the active

role of the state in controlling different aspects of the economy were essential if economicdevelopment was to be initiated.

These plans all agreed on the need for rapid industrialization, particularly in the heavy key

industries like power and machinery in order to increase national income and alleviate poverty.These projects were to be mainly financed through direct taxation and not through foreign

capital. A reordering of the agrarian system was in order to remove the talukdars andzamindars

and a stress on collective and cooperative farming. There was advocacy for large scale deficitfinancing for improving productive capacity. Even if inflation would result it would be

temporary and would eventually result in lower prices. Further measures were suggested for

social welfare and removal of income disparities again mainly financed through taxation. As wecan see, these were the seeds of the first few five year plans which propelled the nation post-

independence to economic self-sufficiency.

To conclude, we would say that the impoverishment of India was a phenomenon stemming from

the failure of the Classical Model of Economics, akin to the depression in the USA, but different

in scale and effects and lasting for over 200 years. The situation of course was compounded bythe unique contingencies of Colonialism. However, as history has proved, the fault lay as much

on the faulty theories of economic development as much as on the intent of the British

administrators.


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Bibliography

1. Some Aspects of the Economic Drain from India during the British RuleAuthor(s): Rama Dev Roy

Source: Social Scientist, Vol. 15, No. 3 (Mar., 1987), pp. 39-47

2.

Colonial Economics in Southeast IndiaAuthor(s): Kathleen Gough

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3. Trade and Empire in Awadh 1765-1804Author(s): Rudrangshu MukherjeeSource: Past & Present, No. 94 (Feb., 1982), pp. 85-102

4. Economic History and Modern India: Redefining the LinkAuthor(s): Tirthankar Roy

Source: The Journal of Economic Perspectives, Vol. 16, No. 3 (Summer, 2002), pp. 109-130

5.

Early British Imperialism in IndiaAuthor(s): P. J. Marshall

Source: Past & Present, No. 106 (Feb., 1985), pp. 164-1696. Imperialism in World-System Perspective: Britain 1870-1914

Author(s): Patrick J. McGowan and BohdanKordan

Source: International Studies Quarterly, Vol. 25, No. 1, World System Debates (Mar.,1981), pp.43-68

7. Capitalism, Imperialism and UnderdevelopmentAuthor(s): Ranjit San

Source: Economic and Political Weekly, Vol. 10, No. 33/358. Explaining Imperialism: The State of the Art as Reflected in Three Theories

Author(s): RajanMenon and John R. Oneal

Source: Polity, Vol. 19, No. 2 (Winter, 1986), pp. 169-1939. The Industrial Revolution and British Imperialism, 1750-1850

Author(s): J. R. Ward

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10.Potential of Industrial Revolution in Pre-British IndiaAuthor(s): Shaibal Gupta

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11.Some Characteristics of Industrial Growth in IndiaAuthor(s): A. K. Bagchi

Source: Economic and Political Weekly, Vol. 10, No. 5/7, Annual Number (Feb., 1975)

12.Colonial India: British versus Indian Views of DevelopmentAuthor(s): Bipan ChandraSource: Review (FernandBraudel Center), Vol. 14, No. 1 (Winter, 1991), pp. 81-167

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