Chapter 1 INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

Low Level Of Economic Development Under The Colonial Rule

Before British rule, India had an independent economy. While agriculture was the main livelihood, it also boasted diverse manufacturing activities. Indian handicrafts, particularly textiles made of cotton and silk, metalwork, and precious stone work, were renowned globally for their high quality and craftsmanship.

Colonial Economic Policies

The economic policies implemented by the British colonial government were primarily designed to protect and promote Britain's own economic interests, rather than fostering development in India. These policies drastically altered the structure of the Indian economy, converting it into a mere exporter of raw materials for British industries and a consumer of finished industrial products from Britain.

Estimating National Income

The colonial government made no genuine attempts to calculate India's national and per capita income. Some individual economists like Dadabhai Naoroji, William Digby, Findlay Shirras, V.K.R.V. Rao, and R.C. Desai made estimates, but their results were often conflicting. V.K.R.V. Rao's estimates were considered significant during the colonial period.

Most studies concluded that India's aggregate real output grew very slowly, less than two percent, during the first half of the twentieth century. Per capita output growth was even more dismal, around a meager half percent per year. This indicates a severely underdeveloped and stagnant economy on the eve of independence.

Agricultural Sector

Agriculture remained the dominant sector of the Indian economy under British rule. Approximately 85% of the population lived in villages and depended on agriculture for their livelihood. Despite this, the sector suffered from stagnation and, in some instances, deterioration.

Agricultural Stagnation And Low Productivity

Agricultural productivity was very low. While total output saw some growth, this was mainly due to an increase in the total area under cultivation, not improved efficiency or yield per unit of land.

Causes Of Stagnation

The stagnation was primarily caused by:

1. Land Settlement Systems: The colonial government introduced various land settlement systems. The Zamindari system, prevalent in Bengal Presidency, vested ownership rights in Zamindars (landlords) who were tasked with collecting rent from cultivators and paying a fixed revenue to the British government. The Zamindars often focused solely on maximizing rent collection, showing little interest in improving agricultural conditions. The strict deadlines for revenue payment to the government motivated Zamindars to be ruthless with cultivators.
2. Lack of Investment: Neither the colonial government nor most Zamindars invested in improving agriculture, such as terracing, flood control, drainage, or desalinization. Investment in irrigation was also inadequate.
3. Low Technology and Inputs: Farmers suffered due to primitive technology, lack of irrigation facilities, and minimal use of fertilizers.
4. Commercialisation of Agriculture: While commercialization led to higher yields of cash crops in some areas, it did not benefit the majority of farmers. They were forced to switch from producing food crops for subsistence to cash crops (like indigo, cotton, jute) for export to British industries. This harmed their food security and did little to improve their economic condition.

Small farmers, tenants, and sharecroppers, lacking resources and technology, had little incentive to invest in agriculture, perpetuating the stagnation.

Industrial Sector

Similar to agriculture, India's manufacturing sector did not develop a strong base under colonial rule. The globally renowned Indian handicraft industries suffered a significant decline, and the British did not encourage the growth of a corresponding modern industrial base to replace them.

Deindustrialisation (Motive and Impact)

The systematic deindustrialization of India by the British had a clear two-fold motive:

1. To turn India into a mere exporter of raw materials for Britain's modern industries.
2. To make India a large market for the finished products of British industries, ensuring their continued expansion and profit.

This decline of indigenous handicrafts resulted in massive unemployment in India. It also created a demand vacuum in the Indian consumer market for goods previously supplied by local artisans. This demand was conveniently and profitably met by importing cheap manufactured goods from Britain.

Emergence Of Modern Industry (Cotton, Jute, Iron & Steel)

Modern industry began to emerge in India during the latter half of the nineteenth century, but its progress was very slow. Initial development focused on cotton and jute textile mills. Indian entrepreneurs primarily owned cotton mills, located in western regions (Maharashtra and Gujarat). Foreigners dominated jute mills, mainly concentrated in Bengal. The iron and steel industry started gaining ground in the early twentieth century, with the establishment of the Tata Iron and Steel Company (TISCO) in 1907. Some other industries like sugar, cement, and paper developed after the Second World War.

Lack Of Capital Goods Industry

A significant drawback was the near absence of a capital goods industry, which produces machines and tools needed for further industrialization. This hampered the development of a self-sustaining industrial base.

Limited Public Sector

The new industrial sector's growth rate and contribution to India's GDP were very small. Furthermore, the public sector's operation was extremely limited, confined mostly to railways, power generation, communications, ports, and certain government departmental undertakings.

Foreign Trade

India had been an important trading nation since ancient times. However, the restrictive trade and tariff policies of the colonial government severely impacted the structure, composition, and volume of India's foreign trade.

Structure And Composition

India was transformed into an exporter of **primary products** like raw silk, cotton, wool, sugar, indigo, and jute, and an importer of **finished consumer goods** (textiles) and **capital goods** (machinery) manufactured in Britain. This reversed the traditional pattern where India exported finished goods.

Monopoly Control

Britain maintained a virtual monopoly over India's foreign trade. More than half of India's trade was restricted to Britain, with the remainder limited to a few countries like China, Ceylon (Sri Lanka), and Persia (Iran). The opening of the Suez Canal in 1869 further intensified British control by reducing transportation costs and making access to the Indian market easier for British goods.

Export Surplus And Drain Of Wealth

A defining characteristic of India's foreign trade during the colonial period was the generation of a large **export surplus** (exports exceeding imports). However, this surplus came at a great cost. Essential goods like food grains, clothes, and kerosene were scarce in the domestic market as they were diverted for export. Moreover, this surplus did not lead to an inflow of gold or silver into India. Instead, it was used to finance expenses incurred by the colonial government's office in Britain, war expenses borne by the British, and the import of 'invisible' items. This entire process constituted the **drain of Indian wealth** under colonial rule.

Demographic Condition

Information about India's population under British rule was first systematically collected through a census in 1881. Subsequent censuses were conducted every ten years.

Demographic Transition

Before 1921, India was in the first stage of demographic transition, characterized by high birth rates and high death rates, resulting in slow population growth. The second stage of transition, marked by falling death rates but still high birth rates, began after 1921, but population growth remained relatively low compared to later periods.

Social Indicators

India's social development indicators during this period were discouraging:

• Literacy: Overall literacy was less than 16%, with female literacy being a negligible 7%.
• Health: Public health facilities were scarce and inadequate, leading to widespread water and air-borne diseases.
• Mortality Rates: The overall mortality rate was very high. Infant mortality was particularly alarming, at about 218 per thousand live births (compared to 33 today).
• Life Expectancy: Average life expectancy was very low, just 32 years (compared to 69 today).

Poverty

Although precise data on poverty is limited, it is clear that extensive poverty was rampant during the colonial period, contributing to the poor demographic profile.

Occupational Structure

During the colonial period, the distribution of the working population across different sectors (occupational structure) showed very little change, indicating a stagnant economy.

Distribution Of Workforce

The agricultural sector employed the largest share of the workforce, consistently remaining high at 70-75%. The manufacturing sector accounted for only 10%, and the services sector for 15-20%.

Regional Variations

A notable aspect was the increasing regional disparity. Areas within the Madras Presidency (parts of present-day Tamil Nadu, Andhra Pradesh, Kerala, and Karnataka), Bombay, and Bengal saw a decline in agricultural dependence and a rise in manufacturing and services employment. However, regions like Orissa, Rajasthan, and Punjab witnessed an increase in the share of the agricultural workforce during the same period.

Infrastructure

Under the colonial administration, some basic infrastructure was developed, including railways, ports, water transport, posts, and telegraphs. However, the motivation behind this development was not the welfare of the Indian people but the service of colonial interests.

Motive For Development

Infrastructure development was primarily aimed at facilitating the movement of the British army and extracting raw materials from the interior to ports for export to Britain or other destinations.

Development Of Railways (Impacts)

The introduction of **railways in India in 1850** is considered a significant British contribution. Railways facilitated long-distance travel, breaking geographical barriers. However, their economic impact on India was largely negative: they fostered the commercialization of Indian agriculture, harming village economies' self-sufficiency. While exports increased, the benefits rarely reached the Indian people. The economic loss due to railways, primarily serving British trade interests, often outweighed their social benefits.

Other Infrastructure (Roads, Water Transport, Communication)

Roads built before British rule were unsuitable for modern transport. The roads constructed by the British primarily served military and raw material transport needs. There was a persistent lack of all-weather roads connecting rural areas, causing hardship during the rainy season and natural calamities. Efforts to develop inland trade and sea lanes were inadequate. Inland waterways sometimes proved uneconomical, like the Coast Canal in Orissa. The expensive electric telegraph system mainly served to maintain law and order for the administration. Postal services, while useful, remained insufficient.

Conclusion

By the time India gained independence, two centuries of British colonial rule had left a significant negative impact on all aspects of the Indian economy. The agricultural sector suffered from surplus labor and extremely low productivity. The industrial sector needed modernization, diversification, capacity expansion, and increased public investment. Foreign trade was structured to benefit Britain's industrial revolution. Infrastructure, including the railway network, required substantial upgrades, expansion, and a shift towards public service orientation. Widespread poverty and unemployment necessitated a strong welfare focus in public economic policy. Overall, the social and economic challenges confronting independent India were immense.