(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 imperialism

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 means. 

  • 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 treasury. 

  • 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 underdevelopment.

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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