The Economy in British India

27.3.5: The Economy in British India

The economy of British India was largely designed to protect and expand interests of the British economy, but the British collaborated closely with the Indian elites who, unlike the masses of ordinary Indians, benefited from the many economic changes.

Learning Objective

Describe the economy of British India and how it fit into Britain’s mercantilism

Key Points

  • Both the direct administration of India by the British Crown and the technological change ushered in by the Industrial Revolution closely intertwined the economies of India and Great Britain. Railways, roads, canals, and bridges were rapidly built in India and telegraph links established so that raw materials, most notably cotton, from India’s hinterland could be transported more efficiently to ports for subsequent export to England. Finished goods from England were transported back just as efficiently for sale in the burgeoning Indian markets.
  • Despite Britain’s position as the global leader of industrial development, India’s industrialization was limited beyond textiles. Historians have pointed to two causes: relatively low labor costs that discouraged investment in new labor-saving technologies and British control of trade and exports of cheap Manchester cotton. Entrepreneur Jamsetji Tata became the symbol of local industrial success, establishing a company that remains an influential global brand today.
  • A plan for a rail system in India was first put forward in 1832. A few short lines were built in the 1830s, but they did not interconnect. In 1844, Governor-General Lord Hardinge allowed private entrepreneurs to set up a rail system in India. The colonial government encouraged new railway companies backed by private investors under a scheme that would provide land and guarantee an annual return of up to five percent during the initial years of operation. Encouraged by the government guarantees, investment flowed in and a series of new rail companies were established, leading to rapid expansion of the rail system in India.
  • The railways were privately owned and operated and run by British administrators, engineers, and skilled craftsmen. At first, only the unskilled workers were Indians. Like hiring practices, building and maintaining the railways were designed to benefit mostly British companies. India thus provides an example of the British Empire pouring its money and expertise into a well-built system designed for military purposes with the hope that it would stimulate industry.
  • The Indian economy grew about 1% per year from 1880 to 1920 and the population also grew at 1%. The result was, on average, no long-term change in income levels. Agriculture was still dominant, with most peasants at the subsistence level. Extensive irrigation systems were built, providing an impetus for growing cash crops for export and for raw materials for Indian industry, especially jute, cotton, sugarcane, coffee, and tea.
  • Historians continue to debate whether the long-term impact of British rule accelerated or hindered the economic development of India. Some argue that the new economy brought by the British in the 18th century was a form of “plunder.” Others note the British takeover did not make any sharp break with the past. Many scholars in India and the West agree today that the British power depended upon excellent cooperation with Indian elites and that the British rule did not change the highly divisive caste-based hierarchy of the Indian society.

Key Terms

East India Company
An English and later British joint-stock company formed to pursue trade with the East Indies but trading mainly with the Indian subcontinent and Qing China. The company rose to account for half of the world’s trade, particularly in basic commodities including cotton, silk, indigo dye, salt, saltpeter, tea, and opium. It also ruled the beginnings of the British Empire in India.
Indian Rebellion of 1857
A rebellion in India against the rule of the British East India Company from May 1857 to July 1859. It began as a mutiny of sepoys of the East India Company’s army in the cantonment of the town of Meerut and soon escalated into other mutinies and civilian rebellions. It led to the dissolution of the East India Company in 1858. India was thereafter directly governed by the Crown as the new British Raj.

 

Limited Industrialization

In the second half of the 19th century, both the direct administration of India by the British Crown and the technological change ushered in by the Industrial Revolution closely intertwined the economies of India and Great Britain. Many of the major changes in transport and communications typically associated with Crown Rule of India began before the Indian Rebellion of 1857. Railways, roads, canals, and bridges were rapidly built in India and telegraph links established so that raw materials, most notably cotton, from India’s hinterland could be transported more efficiently to ports for subsequent export to England. Finished goods from England were transported back just as efficiently for sale in the burgeoning Indian markets. Imports of British cotton covered 55% of the Indian market by 1875.

Despite Britain’s position as the global leader of industrial development, India’s industrialization was limited, prompting historians to examine why. In the 17th century, India was a relatively urbanized and commercialized country with a buoyant export trade, devoted largely to cotton textiles but also including silk, spices, and rice. India was the world’s main producer of cotton textiles and had a substantial export trade to Britain and many other European countries via the East India Company. Yet while the British cotton industry underwent technological revolution in the late 18th century, the Indian industry stagnated and industrialization in India was delayed until the 20th century.

Historians have suggested that occurred because India was still a largely agricultural nation with low wages. In Britain, wages were relatively high, so cotton producers had the incentive to invent and purchase expensive new labor-saving technologies. In India, by contrast, wages were low, so producers preferred to increase output by hiring more workers rather than investing in technology. British control of trade and exports of cheap Manchester cotton are cited as other significant factors.

Despite the unrivaled quality of Indian cotton, universally recognized as late as the end of the 18th century, Indian textile exports declined significantly over the 19th century. High tariffs against Indian textile workshops and British restrictions on Indian cotton imports quickly transformed India from the source of textiles to a source of raw cotton. Industrial production as it developed in European factories was unknown until the 1850s when the first cotton mills opened in Bombay, posing a challenge to the cottage-based home production system based on family labor.

The entrepreneur Jamsetji Tata (1839–1904) began his industrial career in 1877 with the Central India Spinning, Weaving, and Manufacturing Company in Bombay. While other Indian mills produced cheap coarse yarn (and later cloth) using local short-staple cotton and cheap machinery imported from Britain, Tata imported expensive longer-stapled cotton from Egypt and bought more complex ring-spindle machinery from the United States to spin finer yarn that could compete with imports from Britain. In the 1890s, Tata launched plans to expand into heavy industry using Indian funding. The Raj did not provide capital, but aware of Britain’s declining position against the U.S. and Germany in the steel industry, it wanted steel mills in India and promised to purchase any surplus steel Tata could not otherwise sell. The Tata Iron and Steel Company (TISCO), headed by his son Dorabji Tata (1859–1932), opened its plant in 1908. It became the leading iron and steel producer in India, with 120,000 employees in 1945. TISCO became India’s proud symbol of technical skill, managerial competence, entrepreneurial flair, and high pay for industrial workers.

 

Railway Industry

A plan for a rail system in India was first put forward in 1832. A few short lines were built in the 1830s, but they did not interconnect. In 1844, Governor-General Lord Hardinge allowed private entrepreneurs to set up a rail system in India. The colonial government encouraged new railway companies backed by private investors under a scheme that would provide land and guarantee an annual return of up to five percent during the initial years of operation. The companies were to build and operate the lines under a 99-year lease, with the government having the option to buy them earlier.

Encouraged by the government guarantees, investment flowed in and a series of new rail companies were established, leading to rapid expansion of the rail system in India. Soon several large princely states built their own rail systems and the network spread across regions.British investors and engineers built a modern railway system by the late 19th century. It was the fourth largest in the world and was renowned for quality of construction and service. The government was supportive, realizing its value for military use in case of another rebellion as well as its value for economic growth. All the funding and management came from private British companies. The railways at first were privately owned and operated and run by British administrators, engineers, and skilled craftsmen.

At first, only the unskilled workers were Indians. Historians note that until the 1930s, both the Raj lines and the private companies hired only European supervisors, civil engineers, and even operating personnel such as locomotive engineers. Like hiring practices, building and maintaining the railways were designed to benefit mostly British companies. The government required that bids on railway contracts be made to the India Office in London, shutting out most Indian firms. The railway companies purchased most of their hardware and parts in Britain. There were railway maintenance workshops in India, but they were rarely allowed to manufacture or repair locomotives.

“The most magnificent railway station in the world,” Victoria Terminus, Bombay, completed in 1888

By 1875, about £95 million (equal to £117 billion in 2012) was invested by British companies in Indian-guaranteed railways. It later transpired that there was heavy corruption in these investments, on the part of both members of the British Colonial Government in India and companies who supplied machinery and steel in Britain. This resulted in railway lines and equipment costing nearly double what they should have.

India provides an example of the British Empire pouring its money and expertise into a well-built system designed for military purposes after the Rebellion of 1857 with the hope that it would stimulate industry. The system was overbuilt and too expensive for the small amount of freight traffic it carried. However, it did capture the imagination of the Indians, who saw their railways as the symbol of an industrial modernity—but one that was not realized until after Independence.

 

Economic Impact

The Indian economy grew at about 1% per year from 1880 to 1920 and the population also grew at 1%. The result was, on average, no long-term change in income levels. Agriculture was still dominant, with most peasants at the subsistence level. Extensive irrigation systems were built, providing an impetus for growing cash crops for export and for raw materials for Indian industry, especially jute, cotton, sugarcane, coffee, and tea. Agricultural income imparted the strongest effect on GDP.

Historians continue to debate whether the long-term impact of British rule was to accelerate or hinder the economic development of India. In 1780, conservative British politician Edmund Burke raised the issue of India’s position. He vehemently attacked the EIC, claiming that Warren Hastings and other top officials had ruined the Indian economy and society. Indian historian Rajat Kanta Ray (1998) continues this line of attack, arguing that the new economy brought by the British in the 18th century was a form of plunder and a catastrophe for the traditional economy of the Mughal Empire. Ray accuses the British of depleting the food and money stocks and of imposing high taxes that helped cause the terrible Bengal famine of 1770, which killed a third of the city’s people.

P. J. Marshall shows that recent scholarship has reinterpreted the view that the prosperity of the formerly benign Mughal rule gave way to poverty and anarchy. He argues the British takeover did not make any sharp break with the past, which largely delegated control to regional Mughal rulers and sustained a generally prosperous economy for the rest of the 18th century. Marshall notes the British went into partnership with Indian bankers and raised revenue through local tax administrators, keeping  the old Mughal rates of taxation. Many historians agree that the EIC inherited an onerous taxation system that took one-third of the produce of Indian cultivators. Instead of the Indian nationalist account of the British as alien aggressors, seizing power by brute force and impoverishing all of India, Marshall presents the interpretation (supported by many scholars in India and the West) that the British were not in full control but instead were players in what was primarily an Indian play and in which their rise to power depended upon excellent cooperation with Indian elites. Marshall admits that much of his interpretation is still highly controversial among many historians. However, historians agree that the British rule did not change the divisive caste-based hierarchy of the Indian society and thus ordinary Indians remained excluded from the benefits of economic growth.

The railway network in 1909, when it was the fourth largest railway network in the world

In 1907, almost all the rail companies were taken over by the government. The following year, the first electric locomotive made its appearance. With the arrival of World War I, the railways were used to meet the needs of the British outside India. With the end of the war, the railways were in a state of disrepair and collapse.

Attributions