(IGP) GS Paper 1 – History of India & Indian National Movement – “Economic Impact of the British”

Integrated Guidance Programme of General Studies for IAS
(Pre) – 2013

Subject –  History of India &
Indian National Movement

Chapter : Economic Impact of the British

Pre Colonial Economy of India

  • Indian economy from the beginning has been an agrarian
    economy with agriculture as the primary occupation of the people. Industries
    like textiles, jute, sugar, oil were based on it. India played an important
    part in the spice trade.

  • Village economy was the characteristic feature of India.
    India was a self-sufficient agrarian economy. What was not available within
    the village could be easily obtained in a nearby village.

  • Till the first half of the eighteenth century (till
    1750s), in terms of trade, India was superior to any European country. It
    traded in silk, spices, precious stones, sugar, indigo, sugar, cotton,
    handicrafts and other luxury products. India herself imported very little.

  • India also had a thriving internal trade. India had trade
    connection with other non European countries, from Arabia to China and the
    eastern coast of Africa.

Colonial Economy and its Phases

  • The state of Indian economy under the lmperial ru1e has a
    long history. Its discussion can be traced to 1860’s when the moderates or a
    group of intellectual now known as the economic nationalists led by Dadbhai
    Naoroji and R.C. Dutt spoke about the apparent lack of growth and
    development of Indian economy in the colonial period.

  • R.C. Dutt’s (1901, 1903) work The Economic History Of
    India, “Volumes I & II”, remain till date the most influent book on the
    analysis of the Indian colonial economy. He broadly identified three phases
    of British exploitation of India. This periodisation often overlaps and
    should not be treated as rigid blocks.

Mercantile Phase from 1757 up to 1813

This phase was marked by direct plunder. The East India
Company used it monopoly of trade which functioned through ‘investments’ of
Indian revenues to buy Indian products at low rates. These goods were then
exported to Europe and England. So in essence, the East India Company bought
Indian products from the revenues they collected mainly from Bengal and then
exported them. Taking advantage of the political power the British now could
dictate the prices of the goods that they needed to export. The servants of the
Company amassed enormous fortunes by engaging in the illegal trade till the time
this was banned by Lord Cornwallis. The revenues of Bengal were exploited till
the introduction of the Permanent Settlement in 1793.

The 2nd phase

The 2nd phase coincided with the ‘Industrial revolution in
England (1813- 1858) — It was the age of Free Trade capitalist exp1oitation. The
English manufacturers were given, a boost by the Charter of 1813. Indian markets
were opened up for English imports and India became a source of raw materials.
It is popularly said that this was the period when ‘the home-land of cotton was
inundated with cotton (from abroad.)’. The cotton manufacturers of Lancashire
benefitted the most and in the next ‘thirty years’ time Indian cotton industry
was destroyed. The constant drain was affecting the purchasing power of the
Indians and this would have blocked India as the market for English products. To
resolve this, commercialization of agriculture was introduced (though this alone
was not the reason for commercialization of agriculture) Laying of the railways
from 1850s under Lord Dalhousie opened the interior markets of India for English
products and enhanced the capacity of India as a source of raw materials for the
English industries.

The 3rd phase

The 3rd phase- Finance-Imperialism from the latter half of
the nineteenth century onwards- This phase saw export of capital from India and
also chains of British-controlled banks, export-import firms and managing agency
houses. The manner in which Railways were developed is a fine example of finance

Theory of Drain of Wealth

The main gist of the drain of wealth theory was that a large
part of India’s national wealth or total annual product was exported to England
for which the Indians got no adequate economic or material returns. This one way
drain of India’s wealth was the major cause of her poverty. The colonial
government was utilizing Indian resources- revenues, agriculture, and industry
not for developing India but for utilization in Britain. And had these resources
been utilised within India then they could have been invested and the income of
the people would have increased. Ranade opined that one-third of India’s
national income was being drained away-in one form or the other.

How was this drain taking place?

  • The salaries and pensions of British civil and military
    officials working in India, interests on loans taken by the Indian
    Government, profits of British capitalists in India were all being met by
    the revenues collected in India. This was one way money was being drained
    away from India.

  • The drain took the form of an excess of exports over
    imports for which India got no economic or material return. This ‘excess of
    export over imports’ according to A C Banerjee was possible through three

  • East India Company also provided military help to the
    Indian Princes in their fight for power against a rival claimant(s). In this
    manner in the period of 1761-1771 alone, the Company’s Government earned a
    net amount of £1,190,000 from the Indian princes. Large part of this money
    went in to the personal pockets of the British. Some of it was used to buy
    Indian products which were sold across Europe. The profit thus gained went
    into the pockets of the British.

  • The two most important forms of drain were Home Charges
    and Council Bills, also called invisible charges.

  • Home Charges represented the single biggest source of the
    direct drain of wealth, the expenses in Britain borne by the Indian

  • The drain was not limited to just money or goods : but
    had wider ramifications for India. The drain frustrated employment
    opportunities in India and also that of investment.


  • It was argued by the early nationalists that under the
    rule of East India Company and then the British Crown, India underwent a
    process of de-industrialisation and by the time the Birtish left India, they
    left behind a legacy of poverty, devastated agricultural and industrial
    sector with a stunted growth. The three phases of colonial exploitation
    through their operation left Indian economy in a state of chronic

Commercialisation of Agriculture

  • Commercialisation of agriculture was one of the most
    notable features of the colonial economy in late eighteen and the nineteenth
    centuries even though it was not a colonial innovation. Irfan Habib is of
    the opinion that the phenomenon of commercialisation of agriculture was not
    the creation of the British colonialism. It was a continuation from the
    Sultanate and the Mughal periods. He asserts that a large part of
    the-agricultural production in pre-British India was produced for the
    market. However, what changed during the British was the transformation of
    the economy into a new raw material base.

  • Commercialisation of agriculture implies increase in the
    cultivation of cash crops- cotton, indigo, opium, jute, silk, etc for
    sale-in the market or commodity production over and above simple
    self-consumption or local absorption.

British Land Revenue Policy

  • Revenues are an important source of every economy. The
    basic questions that go into collection and implementation of revenues can
    be summarized in terms of – How much to collect? Who will collect? When to
    collect? And how to collect? The land revenue policies followed during
    colonialism did not materialize overnight but were the results of two odd
    decades of debates- philosophical and ideological, and experiments.

  • The land revenue system emerged as a consequence of
    experiments. Three main systems of land revenue emerged in different parts
    of British territory in India – Permanent Settlement (or Zarnindari),
    Ryotwari Settlement and Mahalwari Settlement. But whatever be the
    legitimising credo, the tax on the land saw a continuous increase. The
    revenue was exorbitant and left less than subsistence for the farmers

Impact of British Land Revenue Policies

  • The overall impact of the land revenues policies was
    generally that of disruption of the village economy and relations of
    production. The landlords during colonialism were of a new kind. They were
    created by the British economic policies and most of them had little direct
    contact with agriculture. These landlords’ interest remained at ensuring
    collection of revenue rather than improving conditions of agriculture and
    investing in improvements.

  • The three settlements led to general breakdown of the
    village economy and relations. New classes like those of the traders,
    middlemen, moneylenders, new landlords rose up and each sought to exploit
    the ryots.

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