Economic Policies in India During British Rule | Indian History

The following points highlight the top three British economic policies in India. The policies are: 1. Commercial Policy 2. Land Revenue Policy 3. The Drain of Wealth Policy.

1. Commercial Policy:

From 1600 to 1757 the East India Company’s role in India was that of a trading corporation which brought goods or precious metals into India and exchanged them for Indian goods like textiles and spices, which it sold abroad. Its profits came primarily from the sale of Indian goods abroad.

Naturally, it tried constantly to open new markets for Indian goods in Britain and other countries. Thereby, it increased the export of Indian manufacturers and thus encouraged their production.

This is the reason why Indian rulers tolerated and even encouraged the establishment of the Company’s factories in India. But, from the very beginning, the British manufacturers were jealous of the popularity that Indian textiles enjoyed in Britain.

All of a sudden, dress fashions changed and light cotton textiles began to replace the coarse woolens of the English. Before, the author of the famous novel, Robinson Crusoe, complained that Indian cloth had “crept into our houses, our closets and bed chambers; curtains, cushions, chairs, and at last beds themselves were nothing but calicos or India stuffs”.

The British manufacturers put pressure on their government to restrict and prohibit the sale of Indian goods in England. By 1720, laws had been passed forbidding the wear or use of printed or dyed cotton cloth. In 1760 a lady had to pay a fine of £200 for possessing an imported handkerchief.

Moreover, heavy duties were imposed on the import of plain cloth. Other European countries, except Holland, also either prohibited the import of Indian cloth or imposed heavy import duties.

In spite of these laws, however, Indian silk and cotton textiles still held their own in foreign markets, until the middle of the eighteenth century when the English textile industry began to develop on the basis of new and advanced technology.

After the battle of Plassey in 1757, the pattern of the Company’s commercial relations with India underwent a qualitative change. Now the Company could use its political control over Bengal to acquire monopolistic control over Indian trade and production and push its Indian trade. Moreover, it utilised the revenues of Bengal to finance its export of Indian goods.

The activity of the Company should have encouraged Indian manufacturers, for Indian exports to Britain went up from £1.5 million in 1750-51 to £5.8 million in 1797-98, but this was not so. The Company used its political power to dictate terms to the weavers of Bengal who were forced to sell their products at a cheaper and dictated price, even at a loss.

Moreover, their labour was no longer free. Many of them were compelled to work for the Company for low wages and forbidden to work for Indian merchants. The Company eliminated its rival traders, both Indian and foreign, and prevented them from offering higher wages or prices to the Bengal handicraftsmen.

The servants of the Company monopolized the sale of raw cotton and made the Bengal weaver pay exorbitant prices for it. Thus, the weaver lost both ways, as a buyer as well as a seller. At the same time, Indian textiles had to pay heavy duties on entering England. The British government was determined to protect its rising machine industry whose products could still not compete with the cheaper and better Indian goods.

Even so Indian products held some of their ground. The real blow to Indian handicrafts fell after 1813, when they lost not only their foreign markets but, what was of much greater importance, their market in India itself. The Industrial Revolution in Britain completely transformed Britain’s economy and its economic relations with India.

During the second half of the eighteenth century and the first few decades of the nineteenth century, Britain underwent profound social and economic transformation, and British industry developed and expanded rapidly on the basis of modern machines, the factory system, and capitalism. This development was aided by several factors.

British overseas trade had been expanding rapidly in the previous centuries. Britain had come to capture and monopolise many foreign markets by means of war and colonialism. These export markets enabled its export industries to expand production rapidly, utilizing the latest techniques in production and organisation.

Africa, the West Indies, Latin America, Canada, Australia, China and above all India provided unlimited opportunities for export. This was particularly true of the cotton textile industry which served as the main vehicle of the Industrial Revolution in Britain.

Britain had already evolved the colonial pattern of trade that helped the Industrial Revolution which, in turn, strengthened this pattern: the colonies and underdeveloped countries exported agricultural and mineral raw materials to Britain while the latter sold them its manufactures.

Second, there was sufficient capital accumulated in the country for investment in new machinery and the factory system. Moreover, this capital was concentrated, not in the hands of the feudal class which would waste it in luxurious living, but in the hands of merchants and industrialists who were keen to invest it in trade and industry.

Here again the immense wealth drawn from Africa, Asia, the West Indies, and Latin America, including that drawn from India by the East India Company and its servants after the battle of Plassey, played an important role in financing industrial expansion.

Third, rapid increase in population met the need of the growing industries for more and cheaper labour. The population of Britain increased rapidly after 1740; it doubled in fifty years after 1780.

Fourth, Britain had a government which was under the influence of commercial and manufacturing interests and which, therefore, fought other countries determinedly for markets and colonies.

Fifth, the demands for increased production were met by developments in technology. Britain’s rising industry could base itself on the inventions of Hargreaves, Watt, Crompton, Cartwright, and many others. Many of the inventions now utilised had been available for centuries. In order to take full advantage of these inventions and steam-power, production was now increasingly concentrated in factories.

It should be noted that it was not these inventions which produced the Industrial Revolution. Rather it was the desire of manufacturers to increase production rapidly for the expanding markets and their capacity to invest the needed capital which led them to utilise the existing technology and to call forth new inventions.

In fact, new organisation of industry was to make technical change a permanent feature of human development. The Industrial Revolution has, in this sense, never come to an end, for modern industry and technology have gone on developing from one stage to another ever since the middle of the eighteenth century.

The Industrial Revolution transformed British society in a fundamental manner. It led to rapid economic development which is the foundation of today’s high standard of living in Britain as well as in Europe, the Soviet Union, the U.S.A., Canada, Australia, and Japan.

In fact, until the beginning of the nineteenth century, the difference in the standards of living of what are today economically the advanced and the backward countries was not marked. It was the absence of the Industrial Revolution in the latter group of countries which has led to the immense income gap that we see in the world of today.

Britain became increasingly urbanized as a result of the Industrial Revolution. More and more people began to live in factory towns. In 1750, Britain had only two cities with more than 50,000 inhabitants; in 1851, the number was 29.

Two entirely new classes of society were born, the industrial capitalists, who owned the factories, and workers who hired out their labour on daily wages. While the former class developed rapidly, enjoying unprecedented prosperity, the workers—the labouring poor— in the beginning reaped a harvest of sorrow.

They were uprooted from their rural surroundings, and their traditional way of life was disrupted and destroyed. They now had to live in cities which were full of smoke and filth. Housing was utterly inadequate and insanitary.

Most of them lived in dark, sunless slums which have been described so well in the novels of Charles Dickens. The working hours in the factories and mines were intolerably long—often going up to 14 or 16 hours a day. Wages were very low.

Women and children had to work equally hard. Sometimes 4- or 5-year-old children were employed in factories and mines. In general, a worker’s life was one of poverty, hard work, disease, and malnutrition. It was only after the middle of the nineteenth century that improvement in their incomes began to take place.

The rise of a powerful class of manufacturers had an important impact on Indian administration and its policies. The interest of this class in the Empire was very different from that of the East India Company.

It did not gain from the monopolisation of the export of Indian handicrafts or the direct appropriation of Indian revenues. As this class grew in number and strength and political influence, it began to attack the trade monopoly of the Company.

Since the profits of this class came from manufacturing and not from trading, it wanted to encourage, not imports of manufactures from India, but exports of its own products to India as well as imports of raw materials like raw cotton from India.

In 1769 the British industrialists compelled the Company by law to export every year British manufactures amounting to over £380,000, even though it suffered a loss on the transaction.

In 1793, they forced the Company to grant them the use of 3,000 tons of its shipping every year to carry their goods. Exports of British cotton goods to the East, mostly to India, increased from £156 in 1794 to nearly £110,000 in 1813, that is, by nearly 700 times.

But this increase was not enough to satisfy the wild hopes of the Lancashire manufacturers who began to actively search for ways and means of promoting the export of their products to India.

As R.C. Dutt pointed out later in 1901 in his famous work, The Economic History of India, the effort of the Parliamentary Select Committee of 1812 was “to discover how they (Indian manufacturers) could be replaced by British manufacturers, and how British industries could be promoted at the expense of Indian industries”.

The British manufacturers looked upon the East India Company, its monopoly of eastern trade, and its methods of exploitation of India through control of India’s revenues and export trade, to be the chief obstacles in the fulfillment of their dreams.

Between 1793 and 1813, they launched a powerful campaign against the Company and its commercial privileges and finally succeeded in 1813 in abolishing its monopoly of Indian trade.

With this event, a new phase in Britain’s economic relations with India began. Agricultural India was to be made an economic colony of industrial England. The Government of India now followed a policy of free trade or unrestricted entry of British goods.

Indian handicrafts were exposed to the fierce and unequal competition of the machine-made products of Britain and faced extinction. India had to admit British goods free or at nominal tariff rates. The Government of India also tried to increase the number of purchasers of British goods by following a policy of fresh conquests and direct occupation of protected states like Awadh.

Many British officials, political leaders and businessmen advocated reduction in land revenue so that the Indian peasant might be in a better position to buy foreign manufacturers. They also advocated the westernization of India so that more and more Indians might develop a taste for Western goods.

Indian hand-made goods were unable to compete against the much cheaper products of British mills which had been rapidly improving their productive capacity by using inventions and a wider use of steam power. Any government wedded to Indian interests alone would have protected Indian industry through high tariff walls and used the time thus gained to import the new techniques of the West.

Britain had done this in relation to its own industries in the eighteenth century; France, Germany and the U.S.A. were also doing so at the time; Japan and the Soviet Union were to do it many decades later; and free India is doing it today.

However, not only were Indian industries not protected by the foreign rulers but foreign goods were given free entry. Foreign imports rose rapidly. Imports of British cotton goods alone increased from £1,100,000 in 1813 to £6,300,000 in 1856.

The free trade imposed on India was, however, one-sided. While the doors of India were thus thrown wide open to foreign goods, Indian products which could still compete with British products were subjected to heavy import duties on entry into Britain.

The British would not take in Indian goods on fair and equal terms even at this stage when their industries had achieved technological superiority over Indian handicrafts. Duties in Britain on several categories of Indian goods continued to be high till their export to Britain virtually ceased.

For example, in 1824, a duty of 67 ½ per cent was levied on Indian calicos and a duty of 37½ per cent on Indian muslins. Indian sugar had to pay on entry into Britain a duty that was over three times its cost price. In some cases duties in England went up as high as 400 per cent. As a result of such prohibitive import duties and development of machine industries, Indian exports to foreign countries fell rapidly.

The unfairness of British commercial policy has been summed up by the British historian, H.H. Wilson, in the following words:

It was stated in evidence, that the cotton and silk goods of India up to this period could be sold for a profit in the British market, at a price from 50 to 60 per cent lower than those fabricated in England. It consequently became necessary to protect the latter by duties of 70 to 80 per cent on their value, or by positive prohibition.

Had this not been the case, had not such prohibitory duties and decrees existed, the mills of Paisley and of Manchester would have been stopped in their outset and could scarcely have been again set in motion, even by the power of steam.

They were created by the sacrifice of the Indian manufacture. Had India been indepen­dent, she would have retaliated, would have imposed preventive duties upon British goods, and would thus have preserved her own productive industry from annihilation. This act of self-defence was not permitted her; she was at the mercy of the stranger.

British goods were forced upon her without paying any duty; and the foreign manufacturer employed the arm of political injustice to keep down and ultimately strangle a competitor with whom he could not have contended on equal terms.

Instead of exporting manufactures, India was now forced to export raw materials like raw cotton and raw silk which British industries needed urgently, or plantation products like indigo and tea, of food grains which were in short supply in Britain.

In 1856, India exported £4,300,000 worth of raw cotton, only £810,000 worth of cotton manufactures, £2,900,000 worth of food grains, £1,730,000 worth of indigo, and £770,000 worth of raw silk. 

The British also promoted the sale of Indian opium in China even though the Chinese put a ban on it because of its poisonous and other harmful effects. But the trade yielded large profits to British merchants and fat revenues to the Company-controlled administration of India.

Interestingly enough, the import of opium into Britain was strictly banned. By the end of the nineteenth century, Indian exports consisted primarily of raw cotton, jute and silk, oilseeds, wheat, hides and skins, indigo and tea.

Thus, the commercial policy of the East India Company after 1813 was guided by the needs of British industry. Its main aim was to transform India into a consumer of British manufactures and a supplier of raw materials.

2. Land Revenue Policy:

The Company needed Indian revenues to pay for its purchase of Indian handicrafts and other goods for export, meet the cost of the conquest of the whole of India and the consolidation of British rule, pay for the employment of thousands of Englishmen in superior administrative and military positions at salaries that were fabulous by contemporary standards, and to meet the costs of economic and administrative charges needed to enable colonialism to fully penetrate Indian villages and the far-flung areas.

This meant a steep rise in the burden of taxation on the India peasant. In fact, nearly all the major changes in the administration and judicial system till 1813 were geared to the collection of land revenues. The main burden of providing money for the trade and profits of the Company, the cost of administration, and the wars of British expansion in India had to be borne by the Indian peasant or ryot.

In fact the British could not have conquered such a vast country as India if they had not taxed the peasant heavily. The Indian state had since time immemorial taken a part of the agricultural produce as land revenue.

It had done so either directly through its servants or indirectly through intermediaries, such as zamindars, revenue farmers, etc., who collected the land revenue from the cultivator and kept a part of it as their commission. These intermediaries were primarily collectors of land revenue, although they did sometimes own some land in the area from which they collected revenue.

3. The Drain of Wealth Policy:

The British exported to Britain part of India’s wealth and resources for which India got no adequate economic or material return. This ‘economic drain’ was peculiar to British rule. Even the worst of previous Indian governments had spent the revenue they extracted from the people inside the country.

Whether they spent it on irrigation canals and trunk roads, or on palaces, temples and mosques, or on wars and conquests, or even on personal luxury, it ultimately encouraged Indian trade and industry or gave employment to Indians. This was so because even foreign conquerors, like the Mughals, soon settled in India and made it their home. But the British remained perpetual foreigners.

Englishmen, working and trading in India, nearly always planned to go back to Britain, and the Indian government was controlled by a foreign company of merchants and the government of Britain. The British, consequently, spent a large part of the taxes and income they derived from the Indian people not in India but in Britain, their home country.

The drain of wealth from Bengal began in 1757 when the Company’s servants began to carry home immense fortunes extorted from Indian rulers, zamindars, merchants and the common people. They sent home nearly £6 million between 1758 and 1765. This amount was more than four times the total land revenue collection of the Nawab of Bengal in 1765.

This amount of drain did not include the trading profits of the Company which were often no less illegally derived. In 1765 the Company acquired the Diwani of Bengal and thus gained control over its revenues. The Company, even more than its servants, soon directly organised the drain. It began to purchase Indian goods out of the revenue of Bengal and to export them. These purchases were known as ‘Investments’.

Thus, through ‘Investments’, Bengal’s revenue was sent to England. For example, from 1765 to 1770, the Company sent out nearly £4 million worth of goods or about 33 per cent of the net revenue of Bengal.

By the end of the eighteenth century, the drain constituted nearly 9 per cent of India’s national income. The actual drain was even more, as a large part of the salaries and other incomes of English officials and the trading fortunes of English merchants also found their way into England.

The drain took the form of an excess of India’s exports over its imports, for which India got no return. While the exact amount of the annual drain has not been calculated so far and historians differ on its quantum, the fact of the drain, at least from 1757 to 1857, was widely accepted by British officials.

Thus, for example, Lord Ellen borough, Chairman of the Select Committee of the House of Lords, and later Governor-General of India, admitted in 1840 that India was “required to transmit annually to this country (Britain), without any return except in the small value of military stores, a sum amounting to between two and three million sterling”.

And John Sullivan, President of the Board of Revenue, Madras, remarked:

“Our system acts very much like a sponge, drawing up all the good things from the banks of the Ganges, and squeezing them down on the banks of the Thames.”

The drain went on increasing after 1858, though the British administrators and imperialist writers now began to deny its existence. By the end of the nineteenth century it constituted nearly 6 per cent of India’s national income and one-third of its national savings.

The wealth drained out of India played an important part in financing Britain’s capitalist development, especially during the eighteenth century and the beginning of the nineteenth century, that is, during the period of Britain’s early industrialization.

It has been estimated that it constituted nearly two per cent of Britain’s national income during that period. The figure assumes importance if it is kept in view that Britain was at that time investing in industry and agriculture about 7 per cent of its national income.