CHAPTER-1

INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

Great Britain’s relationship with India was primarily exploitative in nature. India was under
British rule which lasted for almost 2 centuries before India finally won its independence on 15th
August 1947.

A)EVIDENCE OF EXPLOITATION
1. Flourishing economy prior to the British rule
● Agriculture was the main source of livelihood for most of the people
● Manufacturing industries which enjoyed a worldwide market were usually handicraft
industries which dealt in cotton & silk textiles, metals and precious stone works etc.
These products enjoyed a worldwide market because of fine quality raw material and
high standards of craftsmanship.

2. Low level of economic development under the British rule

The British changed the structure of the Indian economy by making it a net supplier of
raw materials and a consumer of finished industrial products from Britain. The economic policies
pursued by the colonial government in India were concerned more with the protection and
promotion of the economic interests of their home country than with the development of Indian
economy.

❖ At the end of the 19th century and the beginning of the 20th century, attempts were made
to estimate the per capita income and national income by Dada Bhai Naoroji, V.K.R.V.
Rao (His estimates were very significant), William Digby, Findlay Shirras and R.C. Desai
.These estimates revealed two facts:
a) The country’s growth of aggregate real output during the first half of the 20th century was less
than 2%
b) Growth in per capita output was 0.5% p.a.

B) IMPACT OF BRITISH RULE ON INDIAN AGRICULTURE

85% of India's population lived mostly in villages and derived livelihood directly or indirectly
from agriculture. Despite this, the agricultural sector was stagnant due to the following reasons:

1.Land settlement system : The most important reason for stagnation in the agricultural sector
was the introduction of the ‘Zamindari system’ by the colonial government. It was implemented
in the then Bengal presidency(present day eastern states)
a) Under this system, the profits accruing out of the agricultural sector went to the zamindars
instead of the cultivators. Neither the Zamindars nor the colonial government did anything to
improve the condition of agriculture.
b) The main interest of the zamindars was only to collect rent from the cultivators regardless of
their economic condition. This caused immense misery and social tension among the cultivators.
c) The terms of the revenue settlement forced the zamindars to adopt such an attitude as the
Zamindars were bound to deposit the revenue by a fixed date, otherwise they lost their right over
the land.
2. Low agricultural productivity: Agricultural production became low though, in absolute terms,
the sector experienced some growth due to the expansion of the aggregate area under cultivation.
Agricultural productivity was low due to the following factors:
a)Low level of technology
b)Negligible use of fertilisers
c) Lack of irrigation facilities
d) Lack of investment in terracing, flood control, drainage and desalinisation of soil.
While a small section of farmers changed their cropping pattern from food crops to commercial
crops, a large section of tenants, small farmers and sharecroppers, neither had resources and
technology nor had incentive to invest in agriculture.

3.Commercialisation of Agriculture: It means production of crops for sale in the market

instead of self consumption. The British encouraged the production of cash crops against food
crops. These cash crops were made for British Industries and this led to a further shortage of
food grains in India.

C)IMPACT OF BRITISH RULE ON THE INDUSTRIAL SECTOR

India could not develop a sound industrial base as the British were not interested in
industrializing India. It is evident from the following features:

1) Systematic deindustrialization of India: The country’s world famous handicraft industries

were declined as a result of British Policies, no corresponding modern industries were allowed to
come up in their place. The primary motive behind this was two-fold:
a) To reduce India to an exporter of important raw materials for the upcoming
modern British Industries
b) To turn India into a sprawling market for British manufactured goods so that
British Industries could expand further.
This policy had 2 adverse effects:
a) It created widespread unemployment due to the displacement of labourers from
the local handicrafts industries.
b) It led to introduction of new demand of imported cheap Britain manufactured
goods in the Indian consumer market as they were deprived of the supply of the
locally made goods.

2) Lop-sided industrial development: During the second half of the 19th century, several modern
industries came up but its progress remained very slow.
a) Cotton Textiles Mills, mainly dominated by Indians, came up in Maharashtra and
Gujarat.
b) Jute Mills, dominated by the foreigners, came up in Bengal.
c) The Tata Iron and Steel Company (TISCO) came up in 1907.
d) A few other industries like sugar, cement, paper etc came up after the 2nd world war.

3)Lack of Capital goods industries: Capital Goods Industries are those industries which can
produce machine tools, which are in turn used for producing articles for current consumption.
There were hardly any capital goods industries to help promote further industrialisation in India.
4)Low growth rate of Industrial sector: A few manufacturing industries did come up but they
were not enough to compensate for the wholesale displacement of the country’s traditional
handicraft industry. Hence, the growth rate of the new Industrial sector and its contribution to
GDP remained very small.

5)Limited role of the Public Sector: The area of operation of the public sector was very limited.
It is confined to railways, power generation, ports, communication and some other departmental
undertakings.

D) IMPACT OF BRITISH RULE ON FOREIGN TRADE

India had a flourishing trade with the external world before the advent of
British rule but the restrictive policies of commodity production, trade and tariff by the colonial
government adversely affected the structure, composition and volume of India’s foreign trade.

1) Composition of Foreign Trade: Britain maintained a monopoly control over India’s exports
and imports. It became an exporter of primary products such as cotton, wool, raw silk, indigo,
sugar, jute etc and importer of British manufactured finished consumer goods such as cotton, silk
and woollen clothes, capital goods like light machinery.

2)Direction of Foreign Trade: More than 50% of India’s foreign trade was carried out with
Britain and the rest was allowed with China, Ceylon (Sri Lanka) and Persia (Iran). With the
opening of Suez Canal in 1869, the access to Indian markets became easier as the transportation
cost was reduced. This further intensified Britain’s control over our foreign trade. Suez Canal
provided a direct and shorter trade route for ships operating between Britain and India and
avoided the need to sail through Africa. Strategically and economically, it is one of the most
important waterways in the world.

3) Volume of Foreign Trade: The most important characteristic of India’s foreign trade
throughout the colonial period was the generation of a large export surplus. (Export surplus is
the excess of exports over imports which leads to inflow of foreign exchange). However, the
generation of export surplus did not benefit India because:
a)The scarcity of essential commodities like food, clothes, kerosene etc. were found in the
domestic market.
b) The export surplus did not result in any flow of gold or silver into India. Rather, this was used
to make payments for the expenses incurred by the offices set up by the colonial government in
Britain, expenses on war fought by the British Govt, to pay for imports of invisible items. Thus,
there was a one way transfer of wealth from India to Britain which is called ‘Drain of India’s
wealth’.

E)IMPACT OF BRITISH RULE ON DEMOGRAPHIC CONDITION

(Study of population characteristics like age, sex, income and education level etc by
governments, corporations and non- govt organizations for formulation of policies is known as
demography.)
 1. The first official Census in India was conducted in the year 1881 which showed
unevenness in India’s population growth, thereafter it was conducted every 10 years.
2. Before 1921, India was in the first stage of demographic transition. The second stage of
transition began after 1921. However, neither the total population nor its rate of growth at
that time was very high.
3. The various social development indicators also were not very encouraging as shown by
the following:
● The average literacy rate (ability to read and write for 7 years and above) was less than
16% and female literacy rate was 7%.
● Public facilities were either unavailable or highly inadequate. Consequently, water and air
–borne diseases were rampant and took a huge toll on life.
● The overall mortality rate was very high and particularly, the infant mortality rate was as
high as 218 per thousand in contrast to the present rate of 33 per thousand.
● Life expectancy was as low as 32 years in contrast to the present 69 years.
● Extensive poverty prevailed in India during the colonial period which contributed to the
worsening profile of India’s population.

F) OCCUPATIONAL STRUCTURE
It is the distribution of the working population across different industries
and sectors of the economy. Under British rule occupational structure showed little signs of
change:
1. Predominance of agriculture which accounted for 70-75% of the workforce. This showed
a backward economy. Manufacturing sector accounted for 10% and the service sector
accounted for 15 to 20%.
2. The regional variation was growing rapidly i.e. dependence of workforce on the
agricultural sector declined and increased in the manufacturing and service sectors in the
then Madras Presidency(Tamil Nadu, AP, Kerala, Karnataka), Bombay and Bengal.
However, the share of the workforce in agriculture increased in states like Punjab, Orissa
and Rajasthan.

G) INFRASTRUCTURE
Under British Rule, the state of infrastructure improved. However, their
real motive was not to provide basic amenities to the people but to subserve their own interest.
1. Prior to the advent of British rule, roads were not fit for modern transport. Roads that
were built mobilised the army within India and transported the raw materials from the
countryside to the nearest Railway Station or the port for further being sent to England or
other lucrative foreign destinations. Thus, there always remained an acute shortage of
all-weather roads to reach out to the rural areas during the rainy season and people of
rural areas suffered during natural calamities and famines.
2. The Railways were introduced in 1850 but its social benefits to the Indians were
outweighed by the country’s huge economic loss.
3. The British Government took steps to develop the inland trade and sea lanes but these
measures were far from satisfactory. The Inland waterways proved uneconomical as in
the case of the coast canal on the Orissa Coast. Though the canal was built at a huge cost
yet it had to be ultimately abandoned as it failed to compete with the railways.
 4. The introduction of an expensive system of electric telegraph served the purpose of
maintaining law and order in the country.
5. The postal services remained all through inadequate.

❖ THE MOST IMPORTANT CONTRIBUTION OF BRITISH RULE IN INDIA

INTRODUCTION OF RAILWAYS: It affected the economy in many ways.

1. It enabled people to undertake long distance travel and thereby broke geographical and
cultural barriers.
2. It fostered (encouraged) commercialisation of Indian agriculture though it adversely
affected the self sufficiency of the village economies in India.
3. The volume of India’s exports undoubtedly expanded but its benefits rarely accrued to the
Indian people. The export surplus did not result in any flow of gold or silver into India.
Rather, there was a one way transfer of wealth from India to Britain which is called
‘Drain of India’s wealth’.
4. The social benefits to the Indians were outweighed by the country’s huge economic loss.

CONCLUSION
The agricultural sector was already saddled with surplus labour and extremely low productivity.
The industrial sector was crying for modernisation, diversification, capacity building and
increased public investment. Foreign trade was oriented to feed the Industrial Revolution in
Britain. Infrastructure facilities, including the famed railway network, needed upgradation,
expansion and public orientation. Prevalence of rampant poverty and unemployment required
welfare orientation of public economic policy. In a nutshell, the social and economic challenges
before the country were enormous.

Note:
1.Tata Airlines, a division of Tata and Sons, was established in 1932,inaugurating the aviation
sector in India.
2. First Railway bridge was constructed in 1854 linking Bombay with Thane.