Indian Economy Before Independence

Indian economy in pre-independence era:

* Land system and its changes
* Commercialization of agriculture
* Drain Theory
* Laissez Faire theory and critique
* Manufacture and transport: Jute, Cotton, Railways
* Money and Credit
* Changes in Agriculture and Industry (this is not mentionecd in syllabus, but make
short notes anyway)

Chapter 01

1. What was Indias population in 1871? In 1921?

Answer:
1871: 250 million
1921: 305 million

2. What was Indias population growth rate during 1871-1921?

Answer: 0.4% p.a.

3. What was the mean life expectancy at birth in 1871 and 1921?
Answer:
1871: 24 years
1921: 20 years

4. To what extent, as claimed by Lord Dufferin, was overpopulation responsible

for widespread poverty in India?
Answer:
As seen, Indias overall population growth was very low in colonial times.
While the birth rate was certainly high, the death rate gave it close
competition, and beat it in several decennial censuses. Thus, Indias poverty
stemmed from backwardness in production, not from a high rate of
population growth

5. Write a note on de-urbanization during colonial times. State 2 reasons why

this happened.
Answer:
In 1881, Indias urban population was only 9% of the total. In 1921, this was
10%. In fact, during the 19th century, numbers of people living in some
erstwhile major towns (such as Patna, Dhaka, Murshidabad, Lucknow wtc.)
declined considerably. 2 main reasons:
i. Elimination of urban crafts and services that were previously demanded by
pre-British ruling classes
ii. Ruin of urban crafts through imported manufactures
6. What are the estimates of per-capita income in 1875 and 1921 according to
Sivasubramonian?
Answer:
(At 1875 prices)
1875: Rs.30.5
1895: 31.7
1921: 31.4

Thus, per-capita income in 1921 was actually lower than what it was in
1895. Add to this the fact that various colonialists and wealthy landlords
consolidated their wealth, it is likely that the vast masses of the population
got increasingly impoverished

7. What are some of the factors that decided the money supply in colonial
India? Discuss the evolution of the peculiar form of the sterling-rupee
relationship since 1757.

Answer:
During Mughal times, a uniform silver-based currency was introduced pretty
much all across the country. Tradition was of open minting, where anyone
with silver could go to a mint and get it converted into currency. British
maintained this policy; while they also issued some paper currency that was
redeemable in silver, it had very low circulation.

Thus, the quantity ofsilver exercised a major influence on the money supply
of the country. Since India had little silver reserves, the size of silver imports
had a major impact on the money supply. Trends in silver imports:

Pre-1757 (Plassey):Some silver imports to pay for companys expenses,

but impact muted due to low volume
1757-1850:After the victory at Plassey, Brits started paying for their Indian
expenses by Indian revenues. Thus, silver imports were hardly needed,
and a long-term deflationary trend set in in India
1850-1893:Many countries across the world moved to the gold standard,
which led to a spurt in demand for gold, and decline in demand for silver.
Thus, global silver prices fell. Since silver was still the currency-base in
India, this led to huge imports of silver into India => money supply
increased, and so did prices (=> inflation).Thus, during 1873-96, when the
industrial world faced the Great Depression and saw falling prices, India
experienced inflation.

This also led to a fall in the pound-sterling value of rupee (depreciation).

Pound was on the gold standard, and Indias silver currency stock was
increasing even with stagnant production levels. Thus, between 1873 and
1895, the rupee fell by 42% against the pound
The immediate impact of this was that Home Charges (fixed in sterling)
increased for the Government of India, and colonial officers could only
 send a reduced value of remittances back home to England. The
colonialists were obviously worried about this, and also about the impact
of this on trade (good for Indian exporters, bad for British interests
especially so in the cotton industry, where Indian cotton factories were
giving stiff competition to Lancashire in the export market). Thus, in 1893,
the government decided to close all Indian mints to silver coinage, till the
desired rupee-sterling ratio was achieved.
India was now pegged to the sterling at 1s 4d, and through the sterling, to
the gold standard. This peculiar form of gold standard (through a silver
currency) still required that a large amount of Indian revenues be used up
to buy and keep substantial reserves of gold in England. The entire
arrangement was quite profitable for Britain and fairly expensive for India

8. In a society like India, what was the impact of the high level of inflation seen
during 1873-1894?
Answer:
- Prices increased, but money wages for labourers etc. were fixed
- Land rents were fixed
- Thus, redistribution of income from the poor to rich landlords

Chapter 02

9. Write a note on the Drain of Wealth theory.

Answer:

Major components of the drain:

- After the Battle of Plassey in 1757, the English EIC began converting a large
portion of the tax revenue from conquered areas into funds for
investments. These investments were then used to purchase Indian
goods (from Indian money), and these goods were then sold
internationally.This represented a wholesale transfer of Indian revenues to
the Companys coffers in Britain

- This meant that Britain did not need to export anything to India in return
for what it obtained from India as imports. Thus, there arose a large excess
of Indian exports over imports pretty much all the way through before the
WW1. Even in face of ever-increasing British imports (textiles etc.), India
almost consistently maintained an export surplus of over 20% over
imports till 1914; this didnt translate into any benefit for the economy

- The servants of the company, and later officials, themselves strove to

make personal gains through gifts, bribes, and extortions of various kinds,
profits from local trading monopolies, and increasingly high salaries paid
out to them out of Indian revenues (this is the private portion of the
drain)
 - This situation was only worsened after the Charter Act of 1858, which
made the future dividends of the company, as well as all its debts and
liabilities in England, a charge upon Indian revenues

- The 1858 Act also led to the establishment of a large bureaucratic

structure in London geared towards Indian imperial governance. This was
serviced by Indian revenue, via the so called Home Charge (which
comprised civil charges, such as salaries and pensions of British civil
servants, maintenance of India office in London etc., and also military
charges, which also included charges for military affairs waged outside of
India)

- Amount paid out of Indian revenues to railway companies in England in

lieu of their guaranteed profits

- Enormous amount of interest paid on debts: Habibs estimates show that

if one adds up private remittances and home charges, the size of the drain
in 1897 was as large as Rs. 22.5 crore. Indias constant export surpluses
were the only way in which this tribute could be furnished to Britain
(from Indian revenues, buy Indian products, then sell them abroad at huge
margins, and consequently pay the tribute). However, even this was
usually insufficient to service the obligation of the Indian government-
thus, India with a constant export surplus still faced an unfavourable
balance of payments (due to obligations such as the Home Charge, Old
Guarantee payments etc.). Thus, India was constantly forced to increase
the size of the debt in sterling, and then put under reinforced pressure to
increase the size of the unequited exports to service interest obligations

10. What was one of the chief causes of the Opium Wars?
Answer:

India needed to maintain huge export surpluses in order to service its various
obligations in England; however, after 1800, due to Industrial Revolution in
England, Britains own manufacturers drove Indian textile exports out of their
traditional markets (remember, GoI could buy these from Indian
manufacturers at low prices by using the land revenue theyd gathered, and
then sell these off in other countries at higher prices). Attempts were then
made to export raw cotton and indigo from India instead, but this didnt work
due to intense competition from USA and the Caribbean islands. Then, the
British started a triangular trade: China paid Britain in silk and tea for opium
brought from Indian (using Indian revenues), thus helping EIC relaize its
Indian tribute

11. What was the size of the export surplus as % of NI in 1909?

Answer:
2.2%; this was enough to constitute practically half of the savings that a
subsistence economy like India could be expected to generate at the time
12. Write a note on the Laissez-Faire theory and its critique.
Answer:
After the Industrial Revolution, British interest increaingly started moving
away form the prevailing mercantilist ideology, and move towards
propounding free trade values. As noted by some of its most forceful
proponents (Adam Smith/ Ricardo), essentials of the doctrine was that the
state shouldnt interfere in economic affairs, establish monopolies, or hinder
imports by levying high, protective tarrifs.

In theory, this amounted to a rejection of the mercantilist dictat of using

colonies as useful adjuncts, and there would be no need to forcibly alter
economic policies of colonies. In practise, this amounted to Imperialism of
Free Trade, as England was to gain greatly if other countries lifted all their
tarrifs on British imports; force was not ruled out to secure this state of
affairs.

Initially, the EICs self-interest kept the ambitions of British industrialists in

check to some extent. However, after the Charter acts f 1813 and 1833
removed the EICs monopoly, and even moreso after 1858, British Free Trade
interests started dominating policy like never before. Increasingly, the
hypocrisy behind the free trade rant was consistently exposed:

- Free trade policies could be easily dispensed with wherever the interests of
the British manufacturers so directed, for example, the brazen Buy British
policy
- Britain maintained an iron grip on Indias foreign trade, maintaining
consistent export surpluses, which not only helped it realize the tribute, but
also enabled India to pay for imported English manufactures, notably
textiles
- Imposition of countervailing excise in 1894
- Manipulation of the rupee to keep it overvalued
- All the risk of developing the railways via British capital was to be
shouldered by the Indian taxpayer (against free trade principles)

India was, thus, converted into an unprotected market for British consumer
goods, while there was little reason for Britain to transfer capital beyond
what was necessary for creating the necessary infrastructure in India
(railways, more or less).

13. What was the impact of railways on agriculture?

Answer:
- A national market for goods of bulk was being created; initiated the process
of commercialization of agriculture
- Since the railways immensely reduced transportation costs, they leveled off
prices prevailing in different regions
 - Railways created a firm foundation for regional specialization in different
crops. Each region could concentrate on crops grown best and least
expensively within it, and take full advantage of a countrywide market
- Some crops had previously been grown locally at high prices due to
inaccesiblity; this stopped
- Many crops could also now be produced for foreing markets- extent of area
under cotton, rice, wheat, jute, oilseeds etc. expanded in areas where these
were produced best
- Owing to these factors, there came about a shift from food to non-food
crops: between 1891 and 1916, area under foodgrains grew by 0.3%
annually, while area under non-food crops grew at 0.4%
- Reduced the intensity of famines (while enlarging their area at the same
time) (think how?)

14. What was the impact of intrusion of settled cultivation (increase in acreage of
crop sown) on tribals?
Answer: See page 58

15. Write a note on Railways (reasons for development, terms at which they
were developed, positive and negative features).
Answer:

Reasons for developing railways:

- Ambitions of railway-linked industries such as steel locomotives, railway
tracks, signalling equipment etc.- these had growin massively since 1830 in
England, needed more avenues to expand, India was perfect
- Desire of Lancashire manufacturers to achieve access to the inland cottoon
regions, for cheap supply of cotton, and also to expand market
- Make army movements easier
- As an afterthought, Brits also said that railways could supply cheaper grain
in large quantitites to regions affected by famine

Terms at which Railways were developed:

- Developers would get land free from the Government of India
- Old Guarantee system: They would get a return of 5% on their capital, if
they ran at a loss or secured inadequate profit. This eliminated the
incentives to maintain economy, or for employing Indian labour (cheaper),
instead of highly paid Europeans
- Estimates from 1875 show that guaranteed interest payments for railways
amounted to about 1% of the national income
- The railways would be entirely managed with only nominal governmental
supervision
- Government had the option to take over the ownership of the lines,
provided it paid the price to the company not at the valuation of the real
assets, but at the current stock market valuation in London!

Functioning: Key Negative Features

 - Entire railways system was installed in a haphazard manner with no single
plan for railway constuction. Lines were laid down without planning, and
only to meet immediate concerns of lancashire, the army, tea planters etc.
- Everything needed for railways, apart from coal, came from Britain; direct
stimulating effects were felt only in Britain
- Complex multiplicity in forms of organization
- Freight rates for short distances were excessively high
- Indian passengers were overcharged for miserable conditions of travel
- Open racial apartheid, with Europeans travelling in separate, less crowded
carriages
- All the railway administration, supervisory and technical staff (inclduing
ticket checkers, drivers etc.) were Europeans
- Displacement of workers employed in pre-industrial, long-distance
transportation (such as Banjaras)
- Reduced the intensity of famines (while enlarging their area at the same
time) (think how?)
- During famines, by bringing supplies to the core area of distress, the
railways did help to restrict the rise of prices there, but they
correspondingly raised prices in areas they had drawn their supplies from,
and thus the effects of scarcity became more widely felt
- Seriously reduced food supplies available within the country in times of
famine by moving large amounts to ports for exports, and during wars for
armies(even during times of famines, food exports werent curbed,
because of mounting Home Charges justification given was that it wouldnt
be sound economics(free trade))

Functioning: Key Positive Features

- On an average, nearly 1,000 km of railway lines were opened every year
between 1859 and 1909
- Area theoretically served by the railways extended to 75% by 1914
- A national market for goods of bulk was being created; initiated the process
of commercialization of agriculture
- Since the railways immensely reduced transportation costs, they leveled off
prices prevailing in different regions
- Railways created a firm foundation for regional specialization in different
crops. Each region could concentrate on crops grown best and least
expensively within it, and take full advantage of a countrywide market
- Some crops had previously been grown locally at high prices due to
inaccesiblity; this stopped
- Many crops could also now be produced for foreing markets- extent of area
under cotton, rice, wheat, jute, oilseeds etc. expanded in areas where these
were produced best
- Owing to these factors, there came about a shift from food to non-food
crops: between 1891 and 1916, area under foodgrains grew by 0.3%
annually, while area under non-food crops grew at 0.4%

Chapter 03: Agriculture

16. Write a note on canal irrigation during colonial times.
Answer:
After 1858, initially the government tried building canals using a guarantee
system akin to the one in railways, but many private companies soon
pulled out due to mounting losses
Canals then had to be dug entirely at the governments expense, but with
huge Home Charges, money was scarce
Government wasnt keen on providing public goods if they were
economically unprofitable; canal-irrigated area did not exceed 6.5% of the
total cultivated area in the 1890s

17. What is meant by commercialization of agriculture?

Answer:
Extension of trade and money relations in Indias countryside that followed
the construction of railways. While these were no doubt present in the
earlier times as well (Mughals used to take part of the land revenue in cash),
they were greatly extended by the EIC.

Proportion of the land tax that was taken in the form of produce grew
smaller. Also, the direct pull of the large markets that the railways opened up
made cash nexus even stronger.

As a result, many peasants shifted from growing foodgrains to growing crops

like sugarcane and cotton.

18. Describe the impact of commercialization of agriculture on the terms of trade

of agriculture between 1873 and 1914.
Answer:
The process of commercialization was accompanied by a rise in prices
through a continuous fall in the value of the rupee. In general, inflation was
high, and a special feature of this inflation was that agricultural prices rose
much faster than non-agri prices:
Between 1873 and 1914, agri prices rose 48% in relation to the non-
agri prices!
This was a result of the worldwide phenomenon of falling industrial
costs through mechanical developments as well as increasing
competition among industrial countries

In general, there was also advent of Europen-controlled plantatios in crops

such as tea, coffee, and rubber.

19. What was the impact of the above trend in ToT on those dependent on non-
agri trades?
Answer:
Created difficulties for such people, who were already reeling under the
adverse effects of de-industrialization
 20. What was the impact of the above trend in ToT on peasants?
Answer:
Intuitively, it would appear that such favourable movements in ToT would
have worked in the favour of the farmers. However, given that large areas
were under Permanent Settlement, most of the gains due to decline in the
real value of the land tax were cornered by the landlords. For the rural
population, the real fiscal burden did not decline, but increased.

Also, given increasing agri prices, many moneylenders and landlords bought
up ever more pieces of previously peasant-held lands. Evictions on non-
payment of (increasing) rents led to much more evcitions than had previously
been practiced.

21. What was the key feature of the British settlement systems?
Answer: Identification of the revenue-payer as the lands proprietor (use this
carefully)

22. Outline the areas where the 3 settlement systems were imposed.
Answer:
Permanent Settlement: Bengal, Bihar, Orissa, coastal Andhra
Mahalwari: UP, Haryana, parts of MP
Ryotwari: Madras presidency (excluding coastal Andhra), Mysore

23. What was the attitude of the colonial government to the issue of famines?
Answer:
- Famines were considered to be calamities where individual and state
charity might help mitigate the distress somewhat, but no special
obligation lay on the government to save lives
- Seriously reduced food supplies available within the country in times of
famine by moving large amounts to ports for exports, and during wars for
armies
- Even during times of famines, food exports werent curbed, because of
mounting Home Charges justification given was that it wouldnt be sound
economics (free trade)
- Given that railways had been financed by greatly promising that they will
help in times of famines, the government did eventually appoint multiple
Famine Commissions; famine codes were promulgated, but never actually
wholeheartedly implemented (suggestions included granting public works,
but wages were abysmally low; no system of rationing or controlled price
shops was attempted)

Chapter 04: Industry, Trade, and Finance

24. What was Indias share of the world manufacturing output in 1800 and in
1913? Give two reasons that explain this trend.
Answer:
 1800: 19.7%
1913: 1.4%

Part of this was due to the Industrial Revolution in the west, but a substantial
part was also due to an absolute decline in domestic output per capita; a
process usually called de-industrialization

25. Define de-industrialization.

Answer:
Dictionary: Reduction of a nations industrial capacity. In Indias context, the
term has been used to describe the destruction of traditional Indian
handicraft industries due to competition from the products of British
manufacturers during the 19th century

26. Which industry in India suffered the most from de-industrialization? Why?
Answer:
Cotton textiles industry; outside of agriculture, production of cotton textiles
employed the largest number of people in India, in various stages of cotton
processing, viz., seed separation, carding, spinning, weaving, bleaching,
dyeing etc.

British textile industry destroyed the Indian cotton textiles industry in two
ways:
- Demanded increasingly larger quantities of raw cotton from India, not
leaving much behind for domestic weavers
- Rapidly captured the Indian market, because British cloth was cheaper. By
the end of the 19th centure, textile exports to India amounted to a huge
25% of all of Britains textile exports

27. What were some of the major impacts of de-industrialization?

Answer:
- Large-scale unemployment and heavy depression of wages among
spinners, practically all of whom were women (note that we are talking
about hand spinning, not Indian cotton mills etc.)
- In terms of full-time equivalents, the number of textile workers jobs in
India fell from 6 million in 1850 to 2.4 million in 1913
- Increasing pressure on land; further pauperization of the peasantry

28. What were some of the other Indian industries (apart from cotton textiles)
that bore the brunt of British-led de-industrialization?
Answer:
- Jute handloom weaving in Bengal; in 1835, Jute manufacturing started at
Dundee (Scotland). From only 0.5% of value of Indian exports in 1850, jute
exports grew to 7% of the value in 1872, leaving precious little for the
handloom weavers
- Kashmir Woollen manufactures
- Bengal Silk manufactures
 - Pre-colonial Iron and Steel Industry

29. Some British historians claim that the ruin of older hand-industries was a
necessary consequence of the coming of the factory system in all countries.
Does this justification hold for India?
Answer:
No, because in Indias case the factories appeared and multiplied only in the
alien ruling country, so that any gain in employment thorugh modern
industry largely accrued to Britain, while all the ill-effects of de-
industrialization were confined to India.

30. Trace the evolution of the cotton textile industry in India.

Answer:
Initial attempts to establish cotton textile factories in India were made in the
1850s. However, the major spurt came because of the American Civil War. By
1862, there were 4 cotton mills in Bombay.

- From the very beginning, Lancashire interests were up in arms, and

demanded that import duty be cut for British exports to India
- Cotton mills continued expanding, with Ahmendabad being the next big
centre
- From 4 in 1862, the number of cotton mills in Bombay grew to 49 in 1885
(67 in Bombay presidency)!
- Indias success in exports can be gauged from the fact that exports of
Indian cotton yarn to China exceeded those of England in 1878
- At Lancashires continued insistence, by 1882, practically all import duties
were eliminated
- However, the constant devaluation of the rupee due to global conditions
(gold standard v/s India being on silver currency) helped the Indian
manufacturers tide over; Indian exports of yarn to China maintained their
edge over Britain
- In 1893, Britain adopted currency measures partly to shut off benefits that
Indian cotton mills received from the rupees continuous devaluation; the
new policy hurt Indias exports of yarn and cloth to China and other
countries
- However, due to mounting Home Charges, GoI had to re-introduce a 5%
tariff in 1894; under pressure from Lancashire, a 5% countervailing excise
duty was also imposed on Indian exports (against free trade principles)
- However, Indian cotton industry was resilient, and continued growing- by
1914, the number of mills had risen to 271
- Most of this performance was limited to spinning yarn; when it came to
manufactured cloth, Indian mill production of cotton goods was dwarfed
by the size of net imported fabrics
- Thus, Lancashire mills maintained a firm grip on the Indian market; it is
likely that a substantial part of the expansion of Indian cotton mill
production was at the expense of the surviving domestic handloom
industry
 - Throughout, an outstanding feature of the Indian cotton industry was
that in capital as well as management, the industry remained steadfastly
Indian

31. Trace the evolution of the jute industry in India.

Answer:
- Beginning from a factory being established in 1835, Dundee soon
monopolized the world market for jute sacks
- Since jute was mainly growin in Bengal, many Europeans subsequently
established mills in Calcutta and its vicinity
- Unlike the Bombay cotton mills, the Calcutta jute mills had practically no
Indian owners or even managers
- These mills were built from European capital largely generated in India,
mostly out of the jute trade, monopolized by European firms

32. How was the overall performance of Indian industry in the pre-WW1 era?
Answer:
- By 1911, industrial employment was only about a million people, in a
population of abot 300 million (0.3%)
- In terms of both employment and capital investment, modern industry
remained unquestionably slight in size, relative to the whole economy
- While the textile industries (cotton and jute) attained a respectable scale,
accounting for well over half the industrial working class, other key
sectors such as iron and steel, engineering, coal etc. were very weakly
developed
- Thus, capital goods industry hardly existed, while consumer goods
production was heavily distorted in its concentration on textiles alone
- Total share capital in capital of all companies in 1911 was only 5% in coal,
28% in textiles, and 24% in tea plantations

33. Along what broad lines were industrial firms in India organized during
colonial times?
Answer:
Early industrial firms often originated as either individual undertakings or
partnerships, but the amount of capital invested in these remained relatively
small. Joint-Stock companies, later, were able to gather a much larger
amount of capital. This institution grew largely after 1857, when an act
clearly made such companies limited liabilities, unlike before, where all
investors used to be liable for companys debts, which could be recovered by
enroaching on the investors personal property, if needed.

The institution of managing agency was also peculiar to business

organization in India. When joint-stock companies began to be formed in
large numbers, it became usual for their promoters, whether firms or
individuals, to get themselves appointed as the newly formed companys
managin agents, performing the functions of the management, usually
charging high fees and commissions for their service. For large business
 houses, both European and Indian, this was a useful instrument by which
they could control a large amount of capital and obtain a lions share of the
profits of the managed company with only a small investment.

34. What was the structure of banking in colonial India?

Answer:

Indigenous system of banking (based on hundis) was run by local, rural

moneylenders (shroffs). They were said to finance the entire internal trade
of India. However, from the Mughal times when the shroffs used to engage
in deposit-banking, under the colonial rule the government and officials
werent interested in making deposits with them. Thus, they had no means of
recharging their circulating capital, and were in essense reduced to small-
scale lenders.

Banks were of three kinds:

- Presidency banks: biggest of the banks, one in each presidency (Bengal,

Bombay, Madras). Wholy European controlled, so credit was mostly made
to Europeans. Net result was that bank funds, largely gathered from Indian
depositors, added considerably to the working capital of European firms
- Joint-Stock banks: Grew mainly after they were granted limited-liability
status in 1860. Indian entrepreneurs too entered the field; however, these
had a high rate of failure
- Exchange banks: Financing of foreign trade was almost entirely restricted
to European exchange banks. This further consolidated British firms
control over Indias foreign trade

Overall, as late as 1914, the European share in the capital of companies was
about 65% (15% mixed ownership, only 20% Indian). British controlled
investments obviously looked more towards production for export markets
(indigo, tea, jute etc.) and less towards production for the Indian market