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Economic Impact of British Rule

1. Trade Policies of British and its Impact

The two primary developments in 1750s and 1760s were A] Industrial revolution in Europe that triggered search for mass market & B] Increasing political control of British East India Company (BEIC) over Indian states i.e in Hyderabad, Carnatic & Bengal region.  Before 1750, the trade with BEIC was mutually benefitting. India exported spices, cotton & other goods and received Gold from Europe. 

For industrial revolution (IR), the primary requirement was – mass market. Thus British mercantile class started looking at British colonies for the purpose. For example, Lancashire textile producers, after capturing British market through tariff barriers, also looked to India. They captured Indian market by selling their goods to EIC. (It was made mandatory for Company to purchase from Lancashire producers by law – although company had to incur losses in the deal). Thus predatory pricing/dumping was done to capture Indian cloth market.

Thus these measures drove away Indian handloom producers and created mass unemployment. This was a clear example of one sided free trade. The India, which was the sink for world gold hitherto, started losing its gold to British. From exporter of finished goods, it was reduced to importer of industrial products & exporters of raw material. In mere 2-3 decades, the trade between India and British kingdom was completely reversed. In the words of Karl Marx,

“Industrial Revolution had done the unthinkable, that it converted the mother of cotton (India) into a vast market for cotton goods”.

Karl Marx

2. Construction of Railways and its Impact

Lord Dalhousie

The first train in India ran between Bombay & Thane in 1854 (1853 according to some historians). By 1947, approximately 45,000km of railway line was put by British in India. There is a debate if Railways were positive aspect of British legacy or just another instrument of exploitation.

2.1 Purpose of Railways

It was a chief instrument for movement of goods. i.e. Raw materials from interior of country to British ports and English exports to interior of India. It allowed them to capture Indian markets better since it facilitated faster and cheap movement of goods. It also acted for faster movement of troops, which strengthened political control of country.

To discourage transport by Indian traders, ‘inverted tariff structure’ was used i.e. tariffs to move goods from one interior of country to another interior was more costly than that from port to interior or the other way.

British capitalist class gave loan of 350Cr to British Indian govt. for construction of railways. It was given at 5% interest rate, while prevailing market rate was 3%. And the cost was ultimately paid from Indian tax collection. Thus rather than presenting positive legacy of British rule, railways represented how British infrastructure and economic policies primarily benefited their capitalist class while the cost was borne by Indians.

2.2 Land Revenue Policies and its Impact

Before arrival of British, all the land was considered to be owned by King. There was no commodification(treating land as commodity, just like any other good which can thus be sold & purchased) or ownership system.

British introduced ‘right to property’ (ownership) in relation to land, and also provided legal protection to it. Thus land was converted into a commodity (commodification). Consequently, inheritance rights in land were also introduced.

British also tried to introduce stable taxation regime. In Pre British era, tax rates used to vary. King used to take higher taxes when produce used to be more and lower taxes when yield was less.

East India Company, for the purpose of establishing fixed revenue stream, introduced changes into taxation system. The ultimate aim to maximize revenue collection by increasing productivity.

2.3 Types of Land Revenue System

  1. Permanent Settlements System- In Bengal region, introduced by Cornwallis.
  2. Ryotwari System – In South India Region, introduced by Reed & Munroe.
  3. Mahalwari System- In North and North West region.

2.3.1 Permanent Settlement System

This system was introduced in Bengal region by Lord Cornwallis (1786-93). Under the system, land ownership was given to Jagirdars (existing revenue collectors, now to be called Zamindars). Zamindars were supposed to pay tax on land under their ownership and failure to do so would result in auctioning of property (land). ‘Permanent’ means stable tax rate i.e. tax rates would remain stable for ~ 25-40 yrs. Cornwallis expected that long term ownership & fix tax rate would inspire Zamindars to invest in their land and increase productivity.

However, agricultural productivity didn’t increased because of:
1] High tax rate fixed by British 30-40%.
2] Zamindars being traditionally revenue collectors, had no experience of actual cultivation.
3] Intermediate Jagirdars were appointed by Zamindars. They became ‘absentee zamindars’. (This process of adopting intermediate Jagirdar is called sub-infeudation.) Such intermediaries further appointed people below them for the purpose of tax collection. To facilitate entire chain, huge taxes were collected, reaching to 70-80% of produce from actual peasants.

2.3.2 Ryotwari System

Introduced by Munroe and Reed in South India during 1820s when Lord Hastings as Governor General. (Munroe was governor of Madras). Maximum land in India was under this system. Under this system, private ownership of land was granted to peasants (ryot) and company officials directly collect taxes.

However this system also failed to increase productivity because:
1] Peasants lacked surplus capital.
2] Tax rates were high.
3] Tax rates were relatively less stable, fixed only for 10-15 yrs.
4] Non payment of taxes would result in displacement of peasants.

2.3.3 Mahalwari System

This system was Introduced around 1830s in the newly conquered regions of Panjab and Haryana. Introduced under Lord Bentick, revenue settlement was to be done at village level in this system. It took shape largely because the local govt. system was well developed in this region. However, this method also failed to increase revenue of East India Company.

We can attribute the lack of active participation by state as the main reason behind failure of all 3 systems, along with individual situation-specific reasons.

2.3.4 Impact of British Land Revenue System

It increased burden of taxation on peasantry or the Zamindars.
It often resulted in the displacement of peasants or old Zamindars (land alienation).
To increase productivity, there was shift in cropping pattern from food crops to cash crops. Cotton, Jute were produced.
Recurrent peasant revolts were witnessed against the high burden of taxation.

3. Industrialization Pattern under British Rule and its Impact

Pushed by rising labour costs, British industries started looking beyond Britain to set up factories. Thus 1850s saw the advent of British industries in India. India proved to be an attractive investment destination where cheap raw materials, cheap and skilled labour and safe political climate enabled the British to set up their base.

However, the growth of ‘Indian’ industries was utterly neglected. British Indian govt. took no active steps to set up Iron and steel industries which were critical for the growth of Indian industries and the lack of access to capital and technology created further hurdles in the growth of Indian industries.

3.1 Impact of British Industries

British industries and their production base constituted a major route of drain of wealth as the profits made were left largely untaxed.

Dadabhai Nairoji argued that true freedom would arise only with the overthrow of both – British rule and British capitalist class, whose presence would hamper the growth of Indian industries.

3.2 Analysis of British Economic Policies

A large portion of revenue generated by company from various means was spent on salaries and pension of army as well as on administrative officials (around 3.1% of GDP). And it was largely untaxed. There was under-allocation on social sectors like education and health.

Dadabhai Nairoji, in his DRAIN OF WEALTH theory, showed how through various means like railways, trade policies, expenditure pattern, industrialization, land revenue policies etc. actually British East India Company was draining wealth from India. According to him, the chief reason for poverty in India is, British policies themselves are meant to increase poverty. These policies are actually un-British, quite different from what is practiced in Britain.

“Our system acts very much like a sponge, drawing up all the good things from the banks of the Ganges, and squeezing them down on the banks of the Thames”

Johan Sullivan, President of Board of Revenue, Madras

Three Important Economic Historians of India

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