LONG NOTES

Chapter 1st
Indian Economy on the Eve of Independence

British Rule
The British Rule over India changed the course of history in India. The foundation of British
Empire in India was laid by Battle of Plassey, fought in 1757.

Purpose of British Rule: The main purpose of the British rule in India was to use Indian
economy as feeder economy for the development of British economy. They exploited India’s
natural as well as human resources for the glory of their own country.

LOW LEVEL OF ECONOMIC DEVELOPMENT UNDER COLONIAL RULE

Features of Indian Economy
Before the arrival of British Rule
(i) Prosperous Economy: India was an independent, self-reliant and prosperous economy.
(ii) Agrarian Economy: Agriculture was the main source of livelihood for most people and it
engaged about two-third of the total population.
(iii) Well known handicraft Industries: India was also known for its handicraft industries in
the fields of cotton and silk textiles, metal and precious stone works, etc. handicraft products
enjoyed a worldwide market due to its reputation of fine quality of material used and the high
standards of craftsmanship.

During the British Rule

The economic policies pursued by the Colonial Government (British Government) in India,
were concerned more with the protection and promotion of their own economic interests,
than with the development of the Indian economy. Their policies brought a fundamental
change in the structure of Indian economy. They transferred the country in a supplier of raw
materials and consumer of finished industrial products from Britain.

Meaning of Colonialism
Colonialism refers to a system of political and social relations between two countries, of
which one is the ruler and the other is its colony. The ruling country not only has political
control over the colony, but it also determines the economic policies of the dominated
country.

Low Level of National Income and Per Capita Income

The economic condition of a nation can be judged with the data of national income and per
capita income.
 However, no sincere attempt was made by the British Government to estimate India’s
national and per capita income.
 Attempts were made by experts like Dadabhai Naoroji, William Digby, Findlay Shirras,
V.K.R.V. Rao and R.C. Dessai. But all these estimates produced conflicting and
inconsistent results.
 However, estimates of Dr. Rao on national and per capita incomes were considered very
significant.
 Most of the studies revealed that country’s growth of aggregate real output during the
first half of the twentieth century was less than 2 per cent and only 0.5 per cent growth
in per capita output per year.

AGRICULTURAL SECTOR
During the pre-British period, the condition of Indian agriculture was not at all satisfactory.
 Nearly 85 per cent of the country’s population lived mostly in villages and derived
livelihood, directly or indirectly from agriculture.
 Even with this large proportion of population engaged in agriculture, the country was not
self-sufficient in food and raw materials for industry.

Reasons for Stagnation in Agricultural Sector

1. Land Settlement System: The most important reason for stagnation in agricultural sector
was the introduction of ‘Zamindari System’ by the colonial government.
 Under this system, profits accruing out of agricultural sector went to the zamindars in
the form of ‘lagaan’.
 The main interest of the zamindars was only to collect lagaan regardless of the
economic condition of the cultivator.
 The dates for depositing specified sums of lagaan to British Government were also
fixed, failing which the zamindars were to loss their rights.
 The zamindars and the colonial government did nothing to improve the condition of
agriculture.
2. Commercialization of Agriculture: means production of crops for sale in the market
rather than for self -consumption.
 During the British rule, farmers were given higher price for producing cash crops (like
cotton or jute), so that such crops could be used as raw material for British Industries.
 Thus. British rule promoted shifting of crops from food crops to cash crops.

Commercialization of Agriculture resulted in Famines

 During the British rule, agriculture was commercialized to cater to the needs of the
British industries for necessary raw materials.
 The British industrialists were always in need of raw materials like cotton, jute,
groundnut, sugarcane etc. to keep their factories running.
 By offering high prices, the Indian peasants were attracted to production of
commercial crops instead of food crops.
 The extent of commercial agriculture went so far as to make many peasants purchase
their food requirements from shops in towns.
 This fall in production of food crops was responsible for frequent famines in India
during the British days.

3. Low Level of Productivity: Low levels of technology, lack of irrigation facilities and
negligible use of fertilisers resulted in low level of productivity.
 The cultivator had neither the means nor any incentive to invest in agriculture.
 The zamindar had no roots in the villages, while the British rule spent little on
agricultural, technique or mass education.
 All this made it difficult to introduce modern technology, which caused a perpetually
low level of productively.
4. Adverse- affects of partition: India’s agricultural production received a further set back
due to the country’s partition at the time of independence.
  A sizeable portion of the undivided country’s highly irrigated and fertile land went to
Pakistan.
 Almost, the whole of Jute producing area became part of East Pakistan (now
Bangladesh). India’s Jute goods industry, which had enjoyed a world monopoly so
far, suffered heavily for lack of raw material.
5. Scarcity of Investment: Agriculture was facing scarcity of investment in terracing, flood
control and drainage. Some 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 in agriculture. Sharecropping is a form of
agriculture in which a landowner allow a tenant to use the land in return for a share of
the crops produced on their portion of land.

INDUSTRIAL SECTOR
Like agriculture, India could not develop a sound industrial base under the British rule. The
poor state of Industrial sector during the British rule is illustrated in the following points:
1. De- industrialisation – Decline of handicraft Industry: British Government
systematically destroyed Indian handicraft industries and no modern industrial base was
allowed to come up. The primary motive of British rule behind the de- industrialization was
two-fold:
1. To get raw materials from India at cheap rates to be used by upcoming modern industries
in Britain’
2. To sell finished products of British industries in Indian market at higher prices. The two-
fold policy of British rule was enforced to ensure the maximum advantage of their home
country.

Reason for Decline of handicraft Industry

The main reason was the introduction of ‘Discriminatory Tariff Policy’ by the colonial
government. This policy allowed free export of raw materials from India and free Import of
final goods of British industry to India. But, heavy duty was imposed on the export of Indian
handicrafts.
As a result, Indian markets were full of finished goods from Britain which were low priced. It
led to the decline of Indian handicrafts, both in the domestic market as well as the export
market.

2. Adverse affects of decline of decline of handicraft Industry: Decline of handicraft

industries adversely affected the Indian economy in the following ways:
(i) High Level of Unemployment : The decline of Indian handicrafts resulted in
unemployment on a mass scale. The displaced artisans were forced to take up agriculture for
their livelihood. This increased the burden of population on villages and over-crowding in
agriculture.
(ii) Import of Finished Goods: The Indian made goods could not withstand the foreign
competition of machine made cheap goods. It encouraged the import of manufactured goods
from Britain.
3. Lack of Capital Goods Industries: Capital goods industry refer to those industries which
can produce machine tools, which are, in turn, used for producing articles for current
consumption.
 During the British rule, there was hardly any capital goods industry to promote further
industrialization in India.
 British rulers did not pay any attention for their promotion as they always wanted Indians
to be dependent on Britain, for the supply of capital goods and heavy equipment.
4. Low contribution to Gross Domestic product (GDP): The growth rate of the new
industrial sector and its contribution to the GDP remained very small.
5. Limited role of public Sector: The limited area of operation of the public sector was also
a significant reason for drawback of the industrial sector. The Public sector remained
confined only to the railways, power generation, communications, ports and some
other departmental undertakings.

Modern Industries operating during independence

Due to initiative of the private sector, modern industries started to come up during the second
half of the 19th century.
 The industries established in this period were mainly confined to cotton textile and
jute mills and their progress remained very slow.
 The cotton textile mills were mainly dominated by Indians and were located in the
western parts of the country, namely, Maharashtra and Gujarat.
 The jute mills dominated by the foreigners were mainly concentrated in Bengal.
 The major breakthrough was setting up of Tata iron and Steel Company (TISCO) in
the year 1907 in Jamshedpur (Bihar).
 A few other industries in the fields of sugar, cement, paper, etc. also came up after the
Second World War.

FOREIGN TRADE
India has been an important trading nation since ancient times. However, the restrictive
policies adopted by the colonial government adversely affected the structure, composition
and volume of India’s foreign trade.
1. Exporter of Primary Products and Importer of Finished Goods: India became an
exporter of primary products such as raw silk, cotton, wool, sugar, indigo, jute, etc. and
an importer of finished consumer goods like cotton, silk and woolen clothes and capital
goods like machinery, produced in the British Industries
2. Monopoly Control of British Rule: British Government maintained a monopoly
control over India’s exports and Imports.
 More than ½ India’s foreign trade was restricted to Britain while the rest was allowed
with few other countries like China, Ceylon (Sri Lanka) and Persia (Iran).
 The opening of Suez Canal in 1869 served as a direct route for the ships operating
between India and Britain.
3. Drain of Indian wealth during British rule: Under the British rule, India became an
exporter of primary products (raw materials) and an importer of finished goods. There
was huge export surplus due to excess exports. However, export surplus was used:
(i) To make payments for expenses incurred by an office set up by the colonial
government in Britain.
(ii) To meet expenses on war fought by the British government.
(iii) To import invisible items.

Trade through the Suez Canal

Suez Canal is an artificial waterway running from north to south across the Isthmus of Suez
in north-eastern Egypt.
 The opening of Suez Canal in 1869 reduced the cost of transportation and made
access to the Indian market easier.
 The Canal provided a direct trade route for ships operating between Britain and India
and avoided the need to sail around Africa.
  Strategically and economically, it is one of the most important waterways in the
world.

DEMOGRAPHIC CONDITION
Demographic conditions during the British Rule exhibited all features of a stagnant and
backward Indian economy.
 1st official Census: The first official census was conducted in the year 1881. Though
suffering from certain limitations, the census revealed unevenness in India’s
population growth. From 1881 onwards, census operations were carried out after
every ten years.
 1921: Year of Great Divide: before 1921, India was in the first stage of demographic
transition. The second stage of transition began after 1921. So, the year 1921 is
described as the ‘year of the Great Divide’.
The demographic condition during the Colonial rule is described in the following points:
1. High Birth Rate and Death Rate: Birth rate refers to number of children born per
thousand in a year. Death rate refers to number of people dying per thousand persons
in a year. Both birth rate and death rate were very high at nearly 48 and 40 per
thousand respectively.
2. Extremely Low Literacy rate: The overall literacy level was less than 16 per cent.
Out of this, the female literacy level was at a negligible low of about 7 per cent.
3. Poor health Facilities: Public health facilities were either unavailable to large mass of
population or, when available, were highly inadequate. As a result, water and air-borne
diseases were widespread and took a huge toll on life.
4. High Infant Mortality Rate: Infant mortality rate refers to number of infants dying
before reaching one year of age per 1,000 live births in a year. The infant mortality rate
was quite alarming – about 218 per thousand, in contrast to the infant mortality rate of
44 per thousand in 2011.
5. Low Life Expectancy: Life Expectancy refers to the average number of years for
which people are expected to live. Life expectancy was also very low 44 years, in
contrast to present 68 years.
6. Widespread Poverty: There was no reliable data about the extent of poverty. But,
there is no doubt that extensive poverty prevailed in India during the colonial period.
The overall standard of living of common people in India was very low and there was
widespread poverty in the country.

OCCUPATIONAL STRUCTURE
Occupational structures refers to distribution of working persons across different industries
and sectors. During the colonial period, the occupational structure of India showed little sign
of change. The state of occupational structure during the British rule can be summarized as
under:
1. Predominance of Primary Occupation: The agriculture sector accounted for the
largest share of workforce with approximately 75%. The manufacturing and service
sectors accounted for the remaining 25%.
2. Regional Variation: Another striking aspect was the growing regional variation.
 The states of Tamil Nadu, Andhra Pradesh, Kerala, Karnataka, Maharashtra and
West Bengal witnessed a decline in dependence of workforce on the agricultural
sector with a commensurate increase in the manufacturing and service sector.
 However, during the same time, there had been increase in the share of workforce in
agriculture in states such as Orissa, Rajasthan and Punjab.
INFRASTRUCTURE
The infrastructure facilities during British rule were very poor. Some efforts were made to
develop basic infrastructure like roads, railways, ports, water transports, posts and telegraphs.
But, the main motive behind such infrastructural development was to serve various colonial
interests.
1. Roads: The colonial administration could not accomplish much on construction of roads
due to scarcity of funds.
 The roads that were built, primarily served the interests of mobilising the army and
shifting raw materials.
 There always remained an acute shortage of all weathers roads to reach out to rural areas
during the rainy season. As a result, people living in these areas suffered badly during
natural calamities and famines.
2. Railways: The most important contribution of the British rule was to introduce railways in
India in 1850. The railways affected the structure of the Indian economy in two important
ways.
(i) Railways enabled people to undertake long distance travel. It broke geographical and
cultural barriers and promoted national integration.
(ii) It enhanced commercialization of Indian agriculture, which adversely affected the
comparative self sufficiency of the village economics in India.
3. Air and Water Transport: British Government took measures for developing the water
and air transport. However, their development was far from satisfactory.
Indian waterways proved to be uneconomical, as in the case of the Coast Canal on the
Orissa coast. This canal was built at a huge cost, but it failed to complete with the
railways, and finally, canal had to be abandoned.
4. Communication: Posts and telegraphs were the most popular means of communication.
 The introduction of the expensive system of electric telegraph in India served the
purpose of maintaining law and order.
 The postal services, despite serving a useful public purpose, remained all through
inadequate.

Reason for Infrastructural Development

The basic objective of British Government to develop infrastructure was not to provide basic
amenities to the people, but to serve their own colonial interest.
1. The Roads were built for mobilizing the army within India and for drawing out raw
materials from the countryside to the nearest railway station or port and to send these to
England or other lucrative foreign destinations.
2. Railways were developed by the Britishers mainly for three reasons :
(i) To have effective control and administration over the vast Indian territory;
(ii) To make profits through foreign trade by linking railways with major ports;
(iii) To make profitable investment of British funds in India.
3. The system of Electric Telegraph was introduced at a high cost to serve the purpose of
maintaining law and order.

POSITIVE CONTRIBUTIONS OF BRITISH RULE

British Rule also had some positive effects on the Indian economy. They are discussed as
under:
1. Self-sufficiency in food grain production: Commercialization of agriculture initiated
by British Government resulted in self-sufficiency in food grain production.
2. Better means of transporation: Development of roads and railways provided cheap
and rapid transport system and opened up new opportunities of economic and social
growth.
3. Check on Famines: Roads and railways worked as a great check on the occurrence and
impact of famines as food supplies could be transported to the affected areas in case of
droughts.
4. Shift to Monetary Economy; British rule helped Indian economy to shift from barter
system of exchange (exchange of goods for goods) to monetary system of exchange.
5. Effective administrative setup: The British Government had an efficient administration
system, which served as a ready reckoner- politicians.

STATE OF INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

During the British rule, the Britishers transformed the Indian economy into a colonial,
backward, semi-feudal, stagnant, backward, depleted and amputated economy.
1. Colonial Economy: In India, colonial exploitation is a long history, spread over nearly
200 year.
 British rule resulted in huge drain of wealth from India, in order to facilitate growing
British industry with the supply of raw materials from India.
 They also encouraged commercialization of Indian agriculture to transform Indian
economy into a British colony.
 The impact of the British colonial policy was deep on India, even at the time of
Independence.

2. Semi-feudal Economy: By the close of the British period, there were two aspects of the
Indian economy.
 Introduction of Feudal System: The land settlement system gave birth to feudal
relations (landlord-tenant relations). The landlords used to charge very high rate of
lagan and were very cruel to the cultivators.
 Introduction of Capitalist System: The establishment of modern industries led to
creation of two classes-capitalist and labourers.
So, India inherited the features of both feudal and capitalized system in the Indian
economy.
3. Stagnant Economy: A stagnant economy is one which is growing at a very low rate. On
the eve of independence, Indian economy was a stagnant economy as country’s growth
of aggregate real output during the first half of 20 th century was less than 2 per cent and
growth in per capita output was only 0.5 per cent.
4. Backward Economy: At the end of British rule, Indian economy was backward and
underdeveloped. The main reasons for the backwardness of Indian economy were;
 Low level of productivity;
 Low per capita income;
 Traditional methods of agriculture;
 High birth and death rate;
 Mass illiteracy.
5. Depleted (or Depreciated ) Economy: At the time of independence, Indian economy
was a ‘Depleted Economy’. Depleted Economy refers to an economy, where no
arrangements have been made to replace the physical assets, depreciated due to
excessive use.
 During the 2nd World War, Indian industries had to work beyond their capacities to
meet the increased demand of plant, machinery, equipments, etc. for the war.
  However, British rulers did not make any arrangements to replace the depreciated
physical assets. As a result, British rulers had left a seriously depleted economy.
6. Amputated Economy: The Britishers policy of ‘divide and rule’ always promoted
discrimination between groups on the basis of religion, caste, language and culture.
 As a result, on the eve of Independence, country was geographically divided into two
parts; India and Pakistan.
 Partition of the country virtually disrupted the economy due to: (i) problem of
rehabilitation of large number of refugees from Pakistan ; and (ii) Shortage of raw
materials for jute and cotton mills as most of the cotton and jute growing areas went
to Pakistan.