Chapter 1

Introduction

The primary objective of this book,Indian Economic Development, is tofamiliarise you with the basic featuresof the Indian economy, and itsdevelopment, as it is today, in theaftermath of Independence. However, itis equally important to know somethingabout the country’s economic past evenas you learn about its present state andfuture prospects. So, let us first look atthe state of India’s economy prior to thecountry’s independence and form anidea of the various considerations thatshaped India’s post-independencedevelopment strategy.The structure of India’s present-day economy is not just of currentmaking; it has its roots steeped inhistory, particularly in the period whenIndia was under British rule whichlasted for almost two centuries beforeIndia finally won its independence on15 August 1947. The sole purpose ofthe British colonial rule in India wasto reduce the country to being a rawmaterial supplier for Great Britain’sown rapidly expanding modernindustrial base. An understanding ofthe exploitative nature of thisrelationship is essential for anyassessment of the kind and level ofdevelopment which the Indianeconomy has been able to attain overthe last six and half decades.

LOW LEVEL OF ECONOMICDEVELOPMENT UNDER THECOLONIAL RULE

India had an independent economybefore the advent of the British rule.Though agriculture was the mainsource of livelihood for most people,yet, the country’s economy wascharacterised by various kinds ofmanufacturing activities. India wasparticularly well known for itshandicraft industries in the fields ofcotton and silk textiles, metal andprecious stone works etc. Theseproducts enjoyed a worldwide marketbased on the reputation of the finequality of material used and the highstandards of craftsmanship seen in allimports from India

The economic policies pursued bythe colonial government in India wereconcerned more with the protectionand promotion of the economicinterests of their home country thanwith the development of the Indianeconomy. Such policies brought abouta fundamental change in the structureof the Indian economy — transformingthe country into supplier of rawmaterials and consumer of finishedindustrial products from Britain.Obviously, the colonial govern-ment never made any sincereattempt to estimate India’s nationaland per capita income. Someindividual attempts which weremade to measure such incomesyielded conflicting and inconsistentresults. Among the notable estimators— Dadabhai Naoroji, William Digby,Findlay Shirras, V.K.R.V. Rao andR.C. Desai — it was Rao, whoseestimates during the colonial periodwas considered very significant.However, most studies did find thatthe country’s growth of aggregate realoutput during the first half of thetwentieth century was less than twoper cent coupled with a meagre halfper cent growth in per capita outputper year.

Textile Industry in Bengal

Muslin is a type of cotton textile which had its origin in Bengal, particularly,places in and around Dhaka (spelled during the pre-independence period asDacca), now the capital city of Bangladesh. ‘Daccai Muslin’ had gained worldwidefame as an exquisite type of cotton textile. The finest variety of muslin wascalled malmal. Sometimes, foreign travellers also used to refer to it as malmalshahi or malmal khas implying that it was worn by, or fit for, the royalty.

AGRICULTURAL SECTOR

India’s economy under the Britishcolonial rule remained fundamentallyagrarian — about 85 per centof the country’s population livedmostly in villages and derivedlivelihood directly or indirectly fromagriculture (See Box 1.2). However,despite being the occupation of sucha large population, the agricultural

sector continued to experiencestagnation and, not infrequently,unusual deterioration. Agriculturalpro-ductivity became low though, inabsolute terms, the sector experiencedsome growth due to the expansion ofthe aggregate area under cultivation.This stagnation in the agriculturalsector was caused mainly because ofthe various systems of landsettlement that were introduced bythe colonial government. Particularly,under the zamindari system whichwas implemented in the then BengalPresidency comprising parts ofIndia’s present-day eastern states,the profit accruing out of theagriculture sector went to thezamindars instead of the cultivators.However, a considerable number ofzamindars, and not just the colonialgovernment, did nothing to improvethe condition of agriculture. The maininterest of the zamindars was only tocollect rent regardless of theeconomic condition of the cultivators;this caused immense misery andsocial tension among the latter. To avery great extent, the terms of therevenue settlement were alsoresponsible for the zamindarsadopting such an attitude; dates fordepositing specified sums of revenuewere fixed, failing which thezamindars were to lose their rights.Besides this, low levels of technology,lack of irrigation facilities andnegligible use of fertilisers, all addedup to aggravate the plight of thefarmers and contributed to thedismal level of agriculturalproductivity. There was, of course,some evidence of a relatively higheryield of cash crops in certainareas of the country due tocommercialisation of agriculture.

But this could hardly help farmers inimproving their economic conditionas, instead of producing food crops,now they were producing cash cropswhich were to be ultimately used byBritish industries back home. Despitesome progress made in irrigation,India’s agriculture was starved ofinvestment in terracing, flood-control,drainage and desalinisation of soil.While a small section of farmerschanged their cropping pattern fromfood crops to commercial crops, a largesection of tenants, small farmers andsharecroppers neither had resourcesand technology nor had incentive toinvest in agriculure.

Agriculture DuringPre-British India

The French traveller, Bernier, describedseventeenth century Bengal in thefollowing way: “The knowledge I haveacquired of Bengal in two visits inclinesme to believe that it is richer than Egypt.It exports, in abundance, cottons andsilks, rice, sugar and butter. It producesamply — for its own consumption —wheat, vegetables, grains, fowls, ducksand geese. It has immense herds of pigsand flocks of sheep and goats. Fish ofevery kind it has in profusion. Fromrajmahal to the sea is an endlessnumber of canals, cut in bygone agesfrom the Ganges by immense labour fornavigation and irrigation.”Take note of the agricultural prosperity in our country in the seventeenth century. Contrast itwith agricultural stagnation around the time when the British left India, around 200 years later.

Work These OutCompare the map of British India with that of independent India and findout the areas that became parts of Pakistan. Why were those parts soimportant to India from the economic point of view? (Refer, to youradvantage, Dr Rajendra Prasad’s book, India Divided).What were the various forms of revenue settlement adopted by the Britishin India? Where did they implement them and to what effect? How far doyou think those settlements have a bearing on the current agriculturalscenario in India? (In your attempt to find answers to these questions, youmay refer to Ramesh Chandra Dutt’s Economic History of India, which comesin three volumes, and B.H. Baden-Powell’s The Land Systems of BritishIndia, also in two volumes. For better comprehension of the subject, youcan also try and develop an illustrated agrarian map of British India eitherby hand or with the help of your school computer. Remember, nothinghelps better than an illustrated map to understand the subject at hand).

INDUSTRIAL SECTOR

As in the case of agriculture, so alsoin manufacturing, India could notdevelop a sound industrial base underthe colonial rule. Even as the country’sworld famous handicraft industriesdeclined, no corresponding modernindustrial base was allowed to comeup to take pride of place so longenjoyed by the former. The primarymotive of the colonial governmentbehind this policy of systematically de-industrialising India was two-fold. Theintention was, first, to reduce India tothe status of a mere exporter ofimportant raw materials for theupcoming modern industries inBritain and, second, to turn India intoa sprawling market for the finishedproducts of those industries so thattheir continued expansion could beensured to the maximum advantage oftheir home country — Britain. In theunfolding economic scenario, thedecline of the indigenous handicraftindustries created not only massiveunemployment in India but also a newdemand in the Indian consumermarket, which was now deprived of thesupply of locally made goods. Thisdemand was profitably met by theincreasing imports of cheapmanufactured goods from Britain.During the second half of thenineteenth century, modern industrybegan to take root in India but itsprogress remained very slow.Initially, this development wasconfined to the setting up of cottonand jute textile mills. The cottontextile mills, mainly dominated byIndians, were located in the westernparts of the country, namely,Maharashtra and Gujarat, whilethe jute mills dominated by theforeigners were mainly concentratedin Bengal. Subsequently, the ironand steel industries began coming upin the beginning of the twentiethcentury. The Tata Iron and SteelCompany (TISCO) was incorporatedin 1907. A few other industries in thefields of sugar, cement, paper etc.came up after the Second World War.However, there was hardly anycapital goods industry to helppromote further industrialisation inIndia. Capital goods industry meansindustries which can produce machinetools which are, in turn, used forproducing articles for currentconsumption. The establishment of afew manufacturing units here and

there was no substitute to the nearwholesale displacement of thecountry’s traditional handicraftindustries. Furthermore, the growthrate of the new industrial sector andits contribution to the Gross DomesticProduct (GDP) or Gross Value Addedremained very small. Anothersignificant drawback of the newindustrial sector was the very limitedarea of operation of the public sector.This sector remained confined only tothe railways, power generation,communications, ports and someother departmental undertakings.

Work These Out

Prepare a list showing where and when other modern industries of Indiawere first set up. Can you also find out what the basic requirements are forsetting up any modern industry? What, for example, might have been thereasons for the setting up of the Tata Iron and Steel Company at Jamshedpur,which is now in the state of Jharkhand?How many iron and steel factories are there in India at present? Are theseiron and steel factories among the best in the world or do you think thatthese factories need restructuring and upgradation? If yes, how can this bedone? There is an argument that industries which are not strategic in natureshould not continue to be in the public sector. What is your view?On a map of India, mark the cotton textiles, jute mills and textile mills thatexisted at the time of independence.

FOREIGN TRADE

India has been an important tradingnation since ancient times. But therestrictive policies of commodityproduction, trade and tariff pursuedby the colonial government adverselyaffected the structure, composition andvolume of India’s foreign trade.Consequently, India became anexporter of primary products such asraw silk, cotton, wool, sugar, indigo,jute etc. and an importer of finishedconsumer goods like cotton, silk andwoollen clothes and capital goods likelight machinery produced in thefactories of Britain. For all practicalpurposes, Britain maintained amonopoly control over India’s exportsand imports. As a result, more thanhalf of India’s foreign trade wasrestricted to Britain while the rest wasallowed with a few other countries likeChina, Ceylon (Sri Lanka) and Persia(Iran). The opening of the Suez Canalfurther intensified British control overIndia’s foreign trade (see Box 1.3).The most important characteristicof India’s foreign trade throughout thecolonial period was the generation ofa large export surplus. But thissurplus came at a huge cost to thecountry’s economy. Several essentialcommodities—food grains, clothes,

kerosene etc. — were scarcely availablein the domestic market. Furthermore,this export surplus did not result inany flow of gold or silver into India.Rather, this was used to makepayments for the expenses incurred byan office set up by the colonialgovernment in Britain, expenses on war,again fought by the Britishgovernment, and the import of invisibleitems, all of which led to the drain ofIndian wealth.

Work These OutPrepare a list of items that were exported from and imported into India duringthe British rule.Collect information from the Economic Survey for various years publishedby the Ministry of Finance, Government of India, on various items of exportfrom India and its imports. Compare these with imports and exports fromthe pre-independence era. Also find out the names of prominent ports whichnow handle the bulk of India’s foreign trade

DEMOGRAPHIC CONDITION

Various details about the populationof British India were first collectedthrough a census in 1881. Thoughsuffering from certain limitations, itrevealed the unevenness in India’spopulation growth. Subsequent

every ten years such census operationswere carried out. Before 1921, Indiawas in the first stage of demographictransition. The second stage oftransition began after 1921. However,neither the total population of India northe rate of population growth at thisstage was very high.The various social developmentindicators were also not quiteencouraging. The overall literacy levelwas less than 16 per cent. Out of this,the female literacy level was at anegligible low of about seven percent. Public health facilities wereeither unavailable to large chunks ofpopulation or, when available, werehighly inadequate. Consequently,water and air-borne diseases wererampant and took a huge toll onlife. No wonder, the overall mortalityrate was very high and in that,particularly, the infant mortalityrate was quite alarming—about 218per thousand in contrast to thepresent infant mortality rate of 33 perthousand. Life expectancy was alsovery low—32 years in contrast to thepresent 69 years. In the absence ofreliable data, it is difficult to specify theextent of poverty at that time but thereis no doubt that extensive povertyprevailed in India during the colonialperiod which contributed to theworsening profile of India’s populationof the time.

Trade Through the SuezCanal

Suez Canal is an artificial waterwayrunning from north to south across theIsthmus of Suez in north-easternEgypt. It connects Port Said on theMediterranean Sea with the Gulf ofSuez, an arm of the Red Sea. The canalprovides a direct trade route for shipsoperating between European orAmerican ports and ports located inSouth Asia, East Africa and Oceania bydoing away with the need to sail aroundAfrica. Strategically and economically,it is one of the most importantwaterways in the world. Its opening in1869 reduced the cost of transportationand made acc

1.7 OCCUPATIONAL STRUCTUREDuring the colonial period, theoccupational structure of India, i.e.,distribution of working personsacross different industries andsectors, showed little sign of change.The agricultural sector accounted for

the largest share of workforce, whichusually remained at a high of 70-75per cent while the manufacturing andthe services sectors accounted for only10 and 15-20 per cent respectively.Another striking aspect was thegrowing regional variation. Partsof the then Madras Presidency(comprising areas of the present-daystates of Tamil Nadu, AndhraPradesh, Kerala and Karnataka),Bombay and Bengal witnessed adecline in the dependence of theworkforce on the agricultural sectorwith a commensurate increase in themanufacturing and the servicessectors. However, there had been anincrease in the share of workforce inagriculture during the same time instates such as Orissa, Rajasthan andPunjab.

INFRASTRUCTURE

Under the colonial regime, basicinfrastructure such as railways,ports, water transport, posts andtelegraphs did develop. However, thereal motive behind this developmentwas not to provide basic amenities tothe people but to subserve variouscolonial interests. Roads constructedin India prior to the advent of theBritish rule were not fit for moderntransport. The roads that were builtprimarily served the purposes ofmobilising the army within India anddrawing out raw materials from thecountryside to the nearest railwaystation or the port to send these tofar away England or other lucrativeforeign destinations. There alwaysremained an acute shortage of all-weather roads to reach out to therural areas during the rainy season.Naturally, therefore, people mostlyliving in these areas sufferedgrievously during natural calamitiesand famines.The British introduced therailways in India in 1850 and it isconsidered as one of their mostimportant contributions. Therailways affected the structure of theIndian economy in two importantways. On the one hand it enabledpeople to undertake long distancetravel and thereby breakgeographical and cultural barrierswhile, on the other hand, it fosteredcommercialisation of Indianagriculture which adversely affectedthe self-sufficiency of the villageeconomies in India. The volume ofIndia’s exports undoubtedlyexpanded but its benefits rarelyaccrued to the Indian people.The social benefits, which the

Indian people gained owing to theintroduction of the railways, werethus outweighed by the country’shuge economic loss.Along with the development ofroads and railways, the colonialdispensation also took measures fordeveloping the inland trade and sealanes. However, these measures werefar from satisfactory. The inlandwaterways, at times, also proveduneconomical as in the case of theCoast Canal on the Orissa coast.Though the canal was built at a huge

cost to the government exchequer, yet,it failed to compete with the railways,which soon traversed the regionrunning parallel to the canal, and hadto be ultimately abandoned. Theintroduction of the expensive systemof electric telegraph in India, similarly,served the purpose of maintaining lawand order. The postal services, on theother hand, despite serving a usefulpublic purpose, remained all through

inadequate. You will learn more aboutthe present status of variousinfrastructure in Chapter 8.

1.9 CONCLUSION

By the time India won its independence,the impact of the two-century longBritish colonial rule was alreadyshowing on all aspects of the Indianeconomy. The agricultural sector wasalready saddled with surplus labourand extremely low productivity. Theindustrial sector was crying formodernisation, diversification, capacitybuilding and increased publicinvestment. Foreign trade was orientedto feed the Industrial Revolution inBritain. Infrastructure facilities,including the famed railway network,needed upgradation, expansion andpublic orientation. Prevalence oframpant poverty and unemploymentrequired welfare orientation of publiceconomic policy. In a nutshell, thesocial and economic challenges beforethe country were enormous.

Recap

An understanding of the economy before independence is necessary toknow and appreciate the level of development achieved during the post-independence period.Under the colonial dispensation, the economic policies of the governmentwere concerned more with the protection and promotion of Britisheconomic interests than with the need to develop the economic conditionof the colonised country and its people.The agricultural sector continued to experience stagnation anddeterioration despite the fact that the largest section of Indian populationdepended on it for sustenance.The rule of the British-India government led to the collapse of India’sworld famous handicraft industries without contributing, in anysignificant manner, to its replacement by a modern industrial base.Lack of adequate public health facilities, occurrence of frequent naturalcalamities and famines pauperised the hapless Indian people andresulted in engendering high mortality rates.Some efforts were made by the colonial regime to improve infrastructurefacilities but these efforts were spiced with selfish motives. However, theindependent Indian government had to built on this base throughplanning.