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SPECIAL ARTICLE

The Economic Legacies of Colonial Rule in India
Another Look
Tirthankar Roy

The essay reinterprets the British colonial empire in India
(the Raj, for short) as a state. Based on that
reinterpretation it offers fresh assessments on three
issues: how its policies shaped the economy of India,
what lessons the postcolonial state drew from history,
and the gains and costs of the postcolonial
development strategy.

T

he long-term legacy of the European empires that ruled
over large parts of the non-European world is an enduring theme in world history. Although “imperial history”
does not mean the same thing in different academic traditions,
the economic consequences of the empires form a more or less
coherent discourse. Within that discourse, the British Empire
occupies a place of special importance, because in some regions of the world, British rule started at the same time that
Britain started on a course of rapid modernisation leading to
unprecedented rise in productivity in agriculture and manufacturing industry. Some of the ingredients of the modernisation, including new institutions and new technologies, were
transferred to the territories ruled by Britain. And yet, the rule
expected to serve the interests of the imperialists. Those who
take part in the discourse ask, did the Empire, on balance,
modernise and develop the regions that it ruled, or left them
poorer than before?
The present paper revisits this issue with reference to the
history of India. I ask two questions in this essay. What were
the most important economic consequences and enduring
legacies of European rule in India? And how far did postcolonial India modify or retain these effects? In order to answer
these questions, we need to consider first those traditions of
analytical history that draw lessons about the prospect of economic development from the history of the European empires.

Linking Empire with Development: The Old Theory

This paper is based on the text of the Tenth Godrej Lecture delivered in
Mumbai, 16 December 2014. The author wishes to thank the organisers
of the lecture and the audience for a lively conversation. A longer
treatment of the subject with fuller citations and more statistical data is
expected to appear in the journal Revista de Historia Economica.
Tirthankar Roy (t.roy@lse.ac.uk) teaches Economic History at the
London School of Economics and Political Science, the UK.
Economic & Political Weekly

EPW

april 11, 2015

vol l no 15

The debate around these questions is almost as old as the empires themselves. In the last 15 years, however, the debate has
taken a new turn. There is an old theory, and a set of new theories about how empires shaped the prospect of economic development in the regions once ruled by them. In part, the motivation to write this paper arises from these intellectual developments and the need to rethink India’s place in them.
The simplest way to describe the difference between the old
and the new theories is that, whereas the old theory focused
mainly on trade between the colonist and the colonised economies, the new interpretations are centred on people. People, it
is recognised with increasing force in all strands of world history, embody ideas, and ideas change the world. Following up
that intuition, some writers see European settlement in the
non-European regions to represent channels through which
institutions and technologies travelled around the world, and
others see the growing scale of international migration of capital and labour in the 19th century, which were enabled and
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From the time that the East India Company consolidated its rule in India in the last quarter of the 18th century. But both were well-read and prolific writers in English. among others. Both of them had witnessed famines that swept through western and southern India between 1876 and 1899 and felt compelled to develop a theoretical understanding of Indian poverty. for example. Neither was a professional scholar. and a string of irrigation canals together with the railways had transformed areas like Punjab from grasslands into wheat baskets. Dutch. Naoroji was a teacher–merchant–parliamentarian and Dutt a civilian-cum-novelist. Not surprisingly. examples of how surplus was transferred from India to Britain by the colonial rulers.1 There were differences between major contributors to the Marxist scholarship. The main thrust of his analysis was that India paid too high a price for the services it imported from Britain. was more interested in the interactions between international trade and regional politics. transfer of Indian savings to Britain via drain. Its basic insight that capitalist prosperity was based on exploitation went out of the toolbox of the historian. These authors did not advocate an end of British rule. These phenomena represented a forced opening of Indian markets to British goods. which became known as “drain. There thus developed a close bond between economic nationalism and global Marxism—both schools consisted of essentially one agenda. British and French empires in their policies and institutions. and that factor income flows reduced potential investment. This was an indirect criticism of trade because the services were paid for with trade. It was also more historical and more global in scope than some of the Marxist works. by selling commodities. geographical zones. which had more capital. No one denies that exploitation is a fact of life. this economic history had run out of time. One of the antecedents of the old theory emerged in India around 1900 through the writings of the publicists who wanted to see British colonial rule reform itself. But exploitation cannot be the definition of capitalism. when freedom came in 1947. The idea obscures the innovative propensity of capitalism. Because the two things were tied together. But both the trade-mediated effect of empires and the people-mediated effect of empires varied in their quality and strength. The rich world. to have encouraged the transmission of useful skills. that in the past (and the present) openness of their economies made the Third World poorer. Some stressed the process of production. made sure that London had firm control over the Indian monetary and currency system in order to achieve that aim. Dadabhai Naoroji (1825–1917) and Romesh Dutt (1848– 1909) were particularly important. but shared with the latter the beliefs that surplus appropriation explained world inequality and that colonial rule used power to help the transfer of surplus value. and peasant distress discussed by the Indian nationalists. generalised this idea of “exploitation” to the whole world. That idea later became known as “deindustrialisation. and entrepreneurship across the world. The new theories are about these interregional variations. others exchange. which is “economic nationalism” or the belief that India needed to be free because foreigners had ruined its economy. an equation that served politics well. Economic nationalism. putting more pressure on land. joined the study of history with a political battle. that the colonial policy of free trade harmed the peasants and the artisans. it flattened the differences that existed between times. 52 However. In fact. and obscures the presence of brutal exploitation in socialist societies. ideas about business organisation. Those who espoused the idea that openness caused underdevelopment discovered in drain. Two individuals. Between 1957 and 1975. which made no secret of its desire to maintain free trade within the parts of the Empire. and paid for these services by a positive trade balance. 2015 vol l no 15 EPW Economic & Political Weekly . Marxists believe that capitalists appropriate surplus value from the workers. and yet others the political aspects relatively more. it received a new lease of life in the 1960s from a rising intellectual movement. that is. territories. an emphatic rejection of the open economy. a balance of payments system had taken shape wherein India imported a large quantity of skilled services. That colonialism was a political means to sustain openness seemed blunt as a tool for doing comparative history. Samir Amin and André Gunder Frank. In the process. and the unemployed artisan crowded agriculture. I will argue in the concluding part of the essay. The charge acquired a particular force in the case of the British Empire. and between Spanish. and then explain how this essay uses some of the new ideas. By 1990. the Marxist offshoots shared a common set of beliefs about economic history. I will briefly describe the two perspectives. deindustrialisation. Paul Baran. Dutt spoiled the celebration by saying that by and large Indian peasants had not gained from foreign trade. but history rather badly. and in the case of British India. found their writings useful as weapons. Thus. global Marxism was in retreat. Trade also destroyed the handicrafts. there emerged a key tenet of Indian nationalism.” meaning that the payments transferred Indian savings abroad without a corresponding benefit. countries. In his lifetime. Dutt believed that the famines were a result of taxation in the countryside. few original works were published in the field of empire and development for 20 years after the last april 11. But those who did fight for an end of colonialism late in the interwar period. and that colonialism was a political tool to maintain openness. global Marxism. grew rich by transferring surplus value from the poorer world where most people worked as labourers and produced raw material. The contemporary movement called the World Systems School initiated by Immanuel Wallerstein. The imperialists held up Punjab as a showpiece.” Naoroji was known for a different contribution. they distorted agricultural institutions and worsened inequality by making the poor peasants poorer even as traders-moneylenders-landlords engaged in agricultural exports became richer. Two ideas emerged with special force from their writings. in this way. agricultural commodity exports had grown in volume about three times. by selling too much food abroad they reduced chances of survival during famines. a group of Marxists who may be loosely called the Monthly Review Press collective and included.SPECIAL ARTICLE sponsored by the empires.

which in their view. Staying within the paradigm that institutions matter. they preferred to rule by indirect means. capital and labour. at least not knowing how to deal with. A yet third strand in institutionist history considers the nature of the legal tradition transplanted by Europeans. often had a different experience from colonies such as India where they did not. One set of authors uses this idea to show why “settler economies. a host of indigenous factors. entrepreneurship. it has had a rather divisive effect upon economic history. was a geographically influenced variable.3 These works talk about a “British world” or an “Anglobalisation. The two methods cannot happily collaborate. conflict. in some cases like Latin America or South Africa settlers appropriated property rights and public goods. and artisanal skills. and the varied effects thereof. predicted the quality of institutions like security of property in the colonies. But outside that small collective. but it can have that outcome if industrialisation entails increasing returns and agriculture diminishing returns to scale. First. and Simon Johnson suggest that the size of settlements. India was an example of specialisation in agricultural export and a retreat from industry. one representing the cause. The settler economy literature has faced three types of criticism. NIE as an intellectual movement has enthralled the North American economics departments.6 The criticism again reflects how economists and historians often differ in their approaches to historical processes. it has had limited influence. From the early 2000s. with the help of local agents. the 19th century saw the emergence of economies dependent on manufactured goods exports and those dependent on agricultural or mineral exports. while there cannot be any question that European settlement mattered to developmental outcomes. The scholarship on Africa has shown this especially well. quality of norms and customary law. such as the capacity and power of local elite. In that sense. offers an interpretation of the 19th century economic globalisation. since much of the narrative history of colonial India deals more with indigenous agency. James Robinson. was part of this process of specialisation. and that a few anecdotes can serve to motivate constructing a model. and created “extractive” or predatory institutions. it rests too much on an almost religious faith in the importance of institutions. The theory of trade predicts that the fall in the costs of Economic & Political Weekly EPW april 11. leaving hundreds of years in between unaccounted for. The Empire was neither benign nor just a marketplace. I will have more to say on this issue below. This world was a combination of accelerated movements of goods. though they must do so if economic history is to have a good future. and consolidation of local hierarchies. Whether this is a reflection of incompatible methods or the way American academic departments communicate is an open question. though an awkward example as we shall see. and a political and institutional set-up supplied by the Empire. Second. Historians need to be sure of the historical process by reading the testimony of real people. but dependent on it. and what one contributor calls the “early modern globalisation. but can be seen to contain lessons for imperial history insofar as some empires did play a large role in maintaining market integration. Together.” A series of works in imperial history in recent years has traced the prehistory of globalisation to British imperialism and the spread of settler societies.” which was distinct from the British Empire as a state system. creates the impression that we already know the process. whereas in others a more democratic outcome followed. Europeans recreated institutions following the European precedent. narrative research has revealed great diversity and unpredictability in the ways it mattered. Linking Empires with Development: The New Trends One of these applies to comparative economic development the intuition of new institutional economic history or NIE.SPECIAL ARTICLE major works by the Monthly Review Press collective appeared in print. Economists believe a model will tell them enough about the process.” usually colonies in the New World where Europeans settled in large numbers. In regions where their number stayed small. To conduct narrative history of any one society from that faith would amount to overlooking. But its effect on the making of a world economy was also large and a completely modern phenomenon. The statistical tool obscures the process of change.2 The second trend is less interested in seeing empires as institution-building governments. The theory does not predict that the world would become more unequal as a result of specialisation. The economists Daron Acemoglu. In settler societies. Consistent with that prediction. The decline of handicraft production in India. and easy exchange of knowledge over a large part of the globe. obscures path dependence. uniform laws. and the superiority of European institutions. spawned a new network of multinational enterprise. the economists’ favoured way of showing that institutions matter involves long-range regression analysis where remote causes or instruments thereof are shown to produce modern effects. The Empire fostered a lingua franca of business. rising trade and a pro-trade state system. The intuition is that the origin of international economic inequality in the modern world had owed to the quality of institutions such as security of property right or the law of contract. With India. warfare. and less with European agency. It produced racism. thanks to the Industrial Revolution and new communication technologies. 53 . and the other the effect. and more interested in the link between the British Empire in particular. The method involves the syndrome that an early criticism called “compression of history” into two dates. nationalist backlash. the historical scholarship started moving again in at least three new directions. Narrative historians by and large have not shown much enthusiasm for NIE. This is an especially vexing issue with Indian history. the two factors. Third. and the mechanism by which supposed causes translated into supposed effects. led by Jeffrey Williamson. or deindustrialisation. 2015 vol l no 15 doing trade would lead to more trade along with more specialisation.4 There are problems involved with a straightforward application of any of these ideas. A third set of writings. another set of writings shows that in fact settler economies varied among themselves. a counterpart problem arises.5 There is a more fundamental problem at stake here.

with a belief in the rule of law that shaped statecraft in India. created a bureaucratic state.10 The force of ideas changed because free trade and small government generated backlash. According to one interpretation. 54 These notions can inform a new economic history of the Raj. but that they carried useful knowledge. And yet. for two reasons. came to terms with colonies not without tortuous reasoning. or trade theory. This state was one of the smaller governments in the contemporary world. European settlers came with a set of ideas about institutions and technologies. though they do not necessarily make them invalid. There have been a few attempts to measure the gains from having an empire.11 That. But surely there was an economic logic as well. the East India Company. But historians find it difficult to prove a direct link between economic theory. History formed of an interaction between the two. and colonial policy in the early 19th century. one clue to an answer is suggested by the fact that it was a small government keen to maintain open markets. in a popular view. of course. But that variable cannot be precisely measured. which built one of the largest armies in the world. Merely having the outward features of a liberal ideal—small state and free trade—did not make the Raj special. We know that the British were trading in 1750. but cannot really be the foundation for one.9 Scholars who have studied how colonial policies were implemented find that the link between doctrine and practice varied over time and between contexts of practice. And the empire became a vast field for interaction between ideas. much of it being retained by magnates like the jagirdars and zamindars. and passed numerous laws. given its immense size. Perhaps the colonial state and its policies can be understood as an experiment in classical political economy? This is an attractive idea. The old theory has failed to supply a persuasive account of the economic legacies of the empire. But they do offer some lessons useful for a reinterpretation of Indian history. And it cannot yet be said that the three recent trends in the reinterpretation of 19th century economic history. was not much more than a means to meet British balance of payments. april 11. The settler society scholarship stresses that people matter as embodiments of ideas. The Empire used its political power to force open and connect markets. It is not easy to pinpoint that logic. Of course. explains better the bureaucratisation of the state in India. There is a further problem. British foreign. but not necessarily. In this essay I use two lessons. at least. and why such a state evolved from the activities of a trading firm. At least one of these shows that the “costs” incurred to maintain the Empire were quite large and underestimated. and imperial policies were shaped both by the fact of settlement and the settlers themselves. The size of European settlement tells us nothing useful about the nature of the rule. Tax revenue formed about 3% of gross domestic product (GDP) and public administration 5% in 1931. The task to build a new foundation should begin with a reconsideration of the kind of state that the Raj was.8 If we look within India. Liberalism. utilitarianism. These anomalies suggest that it is necessary to factor in the flow of skills and knowledge along with the flow goods. tiny in comparison with not only contemporary Britain or postcolonial India (government expenditure formed 22% of GDP in 1981). were invisible in a statistical sense. classical liberalism makes a case for small governments and free markets. collected an immense body of information. the state did not have a policy on regulating markets either. trends in the British economy that influenced theoretical thinking. It would be naïve to characterise British India. and of imperial agency in turn. But why did they create an empire? Why did they hold it for so long? The Empire served political functions. 2015 vol l no 15 EPW Economic & Political Weekly . Free trade for the colonies. the Mughal treasury in Delhi or Agra probably did not earn a large share of the tax receipts from land. but also with other emerging economies of the time such as Imperial Russia and Meiji Japan. which stresses the role of the British Empire as a foundation of the 19th century global order. The evidence on deindustrialisation is even more debatable. trade. their Indian associates and rivals had another set of ideas. The reason why we need to reopen the debate about empire and economic development in India should now be clear. and the surviving artisans contributed to the growing share of manufacturing in the national income. And this message was applied to India by the early 19th century ideologues and rulers. and yet it specialised in agricultural exports to a more limited extent than most tropical countries. Many pre-British Empires in India also shared these outward features. skills and capacities. The most important thing about the settlers was not that they were exploiters. skills. Now. The orientation of the new writings lies elsewhere than in specific regions. And beyond collecting taxes. and capacities. the British world. but another 19th century intellectual movement. small government and unregulated markets. Their main points of interest are settler societies. military. What Kind of a State Was the Raj? What did the British think they were doing in India for 200 years? There is no easy way to answer the question. though nearest to the story that I will offer here. The third— globalisation and inequality—fails to explain basic stylised facts about Indian economic history. Many skilled artisans survived imports from Britain.SPECIAL ARTICLE European settlers as a proportion of Indian population. India had free trade thrust upon it.7 That many artisans survived the Industrial Revolution and Indian merchants set up factories on a large-scale poses a problem for trade and specialisation models. Perhaps it was not liberalism. The skill composition of the settlement might. The second lesson comes from the empire and globalisation scholarship. skills and capacities could be deployed for exploitation purposes. A new scholarship has questioned the significance of deindustrialisation as a concept. with its belief in liberty. The Indian market was also one of the least regulated. as a case of light-touch indirect rule. necessarily lead us towards a coherent or better understanding of how the British Empire shaped Indian development. for trade models to be credible. The second of the three trends—linking empire with globalisation—remains in spirit a Britain-centric scholarship.

it was a military-fiscal state. But they did not have the means to do so. Calcutta or Madras in the 19th century. The Company’s strategy to concentrate military and fiscal power at the centre made it different and a distinctive kind of rule. The Raj emerged. and of course. Industry emerged in the three port cities. which Alexander Gerschenkron and his followers treated as an axiom for “late industrialisation” or catching up. it did not have the legal or the political means to do so. and Madras. and used that control to foster maritime trade. that is. The Empire was as far away from Gerschenkron’s activist state as we can imagine. in comparison with most of its Indian contenders. Although it had left its commercial legacy behind from much before 1858. These cities had seen rapid population expansion 55 . India. 30% of the cotton spindles in the world were located in India in 1910. control on the monetary system which was done by the Secretary of State in Economic & Political Weekly EPW april 11. In other words. commercial laws which were overseen by the Viceroy’s Council in India. labour. The origin of such a state in India cannot be fully explained without reference to the conflicts and contests of the 18th century. and knowhow. if they rebelled together. First.” “developmental state. We tell students in a world history class that Britain industrialised under free market conditions thanks to favourable factor prices. in the process suppressing and demilitarising the armed groups like jagirdars and zamindars who earlier collected taxes and enjoyed local political power. especially its port cities not least because private European traders were often former employees of the firm or their friends.SPECIAL ARTICLE What did make it special were two other features. India’s artisans may have been skilled but they had little access to the expensive capital market to start factories. Cotton textiles were the leading industry of the 19th century. Indian agriculture was characterised by some of the lowest yields even in the tropics. Statecraft in India played a very important role in that project. could and did bring an Empire down. We have the elements to talk about the major success and the major failure of this state. the rulers used three principal means. when it was removed from the formal rule of India. and the colonies. In order to suppress them and secure its own future. through which the East India Company established power in India. Unlike any other South Asian state of the past. Interest rates were two-to-three times higher than in the financial centres of Europe. Benefits and Costs of Colonialism Any assessment of economic change under the Raj must pay special attention to one extraordinary fact. and emphasises the European dimension in the Company’s strategy and statecraft in late 18th century India.13 The Raj had the means. and used these means to foster globalisation. Such people. funded the whole enterprise by a bureaucratic fiscal machine. which has been discussed already in relation to the military-fiscal aspect of the state. It did not actually obstruct the industrialisation. It was a government strong enough to sustain and extend market integration on a world scale. These rates were comparable with those of the two other emerging economies of the time. and to productive and energyintensive agriculture which generated savings for investment and created path dependence in technological choices. Japan and Russia. Within the tropical zone. The most popular idea is that of the activist state.” “embedded autonomy. it understood the commercial importance of India. Between 1850 and 1940. and without a close parallel in the tropical world of the 19th century. A new scholarship shows why the Company succeeded as a military-fiscal state whereas its Indian rivals often failed. relatively low cost of capital and energy but high wages. circulated on a vastly larger scale than before. the huge army. imposed political unity on a region where power had always been fragmented and decentralised. Why did industrialisation happen then? The answer is easy access to the world market for finance. employment in Indian factories increased from near zero to two million. Bombay. The Company was a merchant firm. but from the activities of the East India Company between 1765 and 1818. but nor did it aid the process. With these ideas about what the Raj was. In order to maintain market integration between Britain. the Raj centralised the military and fiscal operations. whereas most empires of the past had limited access to the seaboard. it is possible now to offer a coherent set of conclusions on what it did. Mughal ports like Surat or Hooghly were almost certainly much smaller in scale than Bombay. with the result that not only commodities but also capital. the British raised a huge standing army.12 Second. The saving rate was around 5% of GDP in 1920. not from outright conquest.14 We tell them also that virtually every latecomer to industrialisation needed to do something special to compete with Britain. Many pre-British regimes in India may have entertained ambitions of fostering market integration on a large scale. 55% of the spindles were in India.15 None of these conditions were present in India in 1850. The Crown carried on the commitment to protect overseas trade. Outside Europe and the United States. Calcutta. What is really offbeat about industrialisation in India is not that it happened. Real GDP at factor cost originating in factories rose at the rate of 4%–5% per year between 1900 and 1947. It cannot be understood either as limited government or as a free trader. machinery and skills. the Raj functioned as if it saw itself as the guardian of a system of interconnected markets. The developmental state manipulates tariffs or regulates banks or manages the import of technology. and more loosely tied both to the imperial capital and intercontinental maritime trade than the port cities established by the Company. and an essentially European one. the British controlled the seaboard firmly. but that it happened in a region where every textbook prerequisite for industrial capitalism to emerge had been missing in 1850. In the discourse on international development the idea lives on as “big push. 2015 vol l no 15 London. combined it with a navy. and through that army.” and “governed market”—some of these labels were coined to account for the recent industrialisation of East Asia. increasingly driven by a belief that the Indian Ocean region was crucial to securing Britain’s own future.

Trade and industry together more than doubled. but also the engineers and the foremen to operate these. and small tax receipts. Among those Indians who invested money in manufacturing industry. and on national income. Further. 2015 vol l no 15 EPW Economic & Political Weekly . which was a limited resource because land did not produce a lot. This was Naoroji’s drain. The volume of foreign trade to and from India more than doubled in 1865–1914. overland trade. overseas markets. pensions and railway subsidy. doctors. and it is impossible to imagine an economy short of skills dealing with the world without having to buy skills from abroad. The real problem was agriculture. Indian dry-lands had poor yield from precolonial times. Likewise. the hundi. Corporate executives. Therefore. banking and finance. the biggest market for rediscounting of indigenous trade bills. profits accumulated in industry and trade went into public goods. insurance companies. Given the size of agricultural production. The majority of the population lived in villages and cultivated land. and the other segment. Economic nationalism took it for granted that factor payments were necessarily forced and “unrequited. But these were not the leading commercial hubs in the late 19th century set-up. National income statistics show that the non-agricultural economy was always a source of dynamism and growth. This world of enterprise could not possibly emerge without heavy reliance on the import of services from Europe. They drew the wrong lesson from history. Agricultural productivity was notoriously small in the South Asia region. grain or cotton had been well developed from before British rule. purged the issue of its contribution from scholarly research. because exports were dominated by agricultural goods. But the so-called drain was also a payment for skills. because of poor soil. Indian businesses imported not only machines. People who led commercialisation-led industrialisation. lawyers and military personnel came from Europe. was located not in the interior. They were joined by foreign trading firms and foreign investors in the port cities. like the Parsis. university teachers. like the Marwaris. The services thus purchased contributed to national income. there was a lack of accountability and an element of waste. GDP increased by 60% and per capita income by 10%. low land yield was not only the root of poverty. By 1920. a number of these merchants and bankers migrated to the capitals of the rising states such as Hyderabad. often to work under Indian bosses in the private sector. Why was land yield so small? Was the answer rooted in man-made factors such as institutions or free trade. which grew by about 15% in the same time span. or in the region’s geography? Marxist scholars writing in the 1970s suggested that the agricultural problem was manmade in nature. Rulers of postcolonial India assumed that the problem was lack of industrialisation and that the problem needed to be fixed by means of a closed economy and state intervention.” and thus. but also of repeated famines. and political stability. and learned societies available outside the Western world. a payment made by the government on account of debt service. and whereas land yield in some parts of the fertile deltas did fall in the early april 11. precarious water supply.17 Neither drain nor deindustrialisation can explain what ailed agriculture. There has never been a serious discussion on the scale and the nature of the contribution. the land produced too little even for a comfortable subsistence. stagnation. Industry and commerce did not need fixing by the visible hand of the government. much more of the migration was directed to the British Indian ports. in the 19th century. hospitals. but fell during the colonial era. public goods. It did not have an adequate supply of skills and technology. its stagnation imparted a depressing effect on real wages across the board. Lucknow. such as repatriated profits or remittances by managers and employees. If the village was located in an arid or upland district. The size of the non-agricultural economy doubled during 1900– 1947. In the past. The great paradox of the economic record of colonial India was that national income grew at an exceedingly slow pace throughout. scientists. the Raj depended on land taxes. and indigenous banking became ever more interdependent in the 19th century. one segment had always been based in the coasts. but in Bombay and Calcutta.SPECIAL ARTICLE since the late 18th century when these were still centres of the commercial activity of the Company. There is no worthwhile data showing this. Openness had delivered a modernisation process that had few parallels in the tropical world. Between 1900 and 1947. the port cities were homes to some of the best schools. The estimated ratio of foreign trade in national income increased from 8%–10% to 20% in 1865–1914. It was created in collaboration with skilled immigrants from Europe. universities. At the time of Indian independence. India had goods to sell. The growth continued into the 19th century. The first factories were established by these groups making use of their knowledge and control of inland trade. managers and partners in foreign firms were European.16 Here. In order to set up factories. As time passed. banks. and Pune. As the Mughal Empire collapsed from the 1720s. and only slightly faster in the previous decades. Like the states of the past. had migrated from northern and western India towards the coast from the late-1700s. The volume of trade through the three ports increased from 2 to 9 million tonnes between 1863 and 1913. Like any payment made by governments anywhere in the world. The merchants themselves were financed not by the small number of corporate banks. overseas trade. joining the world economy required India to maintain a deficit on 56 the services account. Land trade and caravan trade in textiles. From all the evidence we can have. a string of British and European trading firms purchased agricultural commodities for export from merchants specialised in overland trade. and bankers who financed long-distance trade could be found in the major towns located on rivers and caravan routes. Therefore. but by indigenous bankers and moneylenders. And here we return to the significance of European settlement discussed earlier. The deficit included private outflows. colleges. A big part of that infrastructure had been created by the Indian capitalists. and even more. and the so-called Home Charges. This would be credible if we can show that yields were once high.

I do not consider this a measure of success. all three dwindled. the Empire ended. trade. The firms in Calcutta lived on the export 57 . Second. That it came to an end in the 1990s was not due to the foresight of politicians. and futures. The third factor was a more long-standing one. the new order greatly weakened both internal trade and finance. make a more direct approach to the issue of gains and costs. GDP figures also obscure some of the costs that were paid to achieve this pattern of growth and some of the gains made that do not show up immediately in national income data. By doing so. during much of its career the Raj appeared to the educated Indian as a “military despotism. but that did nothing to change the ritualistic mode of its functioning. It is not the purpose here to delve into a detailed assessment of postcolonial policy. With the link between foreign trade. Policy and Ideology after 1947 In India. there was little left in the budget for spending on public goods. domestic trade. that the Empire still had left. reversing almost a century-long trend to the contrary. sources such as the Banking Enquiry Commission (1929–30) revealed dynamism and institution-building in banking. and skills and machinery import faced stiffer barriers. Subsequent reforms came in too little. and agriculture. The Viceroy was technically advised by a council. Its proceedings were ritualistic.SPECIAL ARTICLE 20th century. First. Mahatma Gandhi turned what had been until his return to India an urban and elitist political movement into a mass protest movement. domestic trade and private finance now snapped. Protection Economic & Political Weekly EPW april 11. and therefore. 1955. too late. The biggest casualty of the public goods paralysis was agriculture. There is plenty of evidence that this interlinkage had created synergy between these three activities and helped reduce risks for merchants investing in banks or manufacturing industry. After the military expenditure was taken out. A massive transformation was unleashed in private trade and private finance after 1947. At the same time. But the deliberations within the council did not allow for open discussion. If the Raj did transform the non-agricultural economy. ban on private trade. Individually. The retreat from an open economy was bad news also for foreign firms. and private banking. Starting with the Essential Commodities Act. Let me. In India. and drove private capital away from commercial infrastructure and institutions. ban on future markets. but to its inherent contradictions. the tortuous process removed the legitimacy. The Raj had made monetary policy and military policy more or less completely non-negotiable entitlements of London. restrictions were added on movement of goods across India. and ban in many states on sale of agricultural goods except in approved sites. at least in the port cities. The most consequential change was the retreat from openness. There were no Indians in the secretarial staff around the Viceroy. agriculture became a rallying point in the nationalist movement in the 1930s. Step by step. and population growth accelerated. Between 1900 and 1947. leave GDP aside. It was not a sustainable strategy. there were several who hoped that their future would be better secured by a protected economy than an open economy. Indian business lost interest in the world economy and some of them started to finance the independence movement. There was public control of markets and assets. In 1947. after the Great Depression of 1929 ended the globalisation process. government investment in canals stopped. the members of the council were capable and interesting people. especially in the sphere of agricultural goods. All of that entrepreneurship and innovation seemed to evaporate in the next 30 years. The mounting agricultural crisis made this move timely. There was a ban on export of agricultural goods. why did it become unpopular? We can point out three reasons. but railways were not much good if there was not enough surplus product to sell. but on much too small a scale. and illustrate these with three examples: trade. the fall was more likely caused by over-exploitation of land by a growing population. Whatever the merits of that sentiment. For several months in a year the government sat in Simla insulated from the heat and dust of the plains. Commodity export was discouraged. the British firms that were engaged in export-oriented trading and manufacturing were squeezed out of India. In the colonial era. and with a good deal of resistance from reformers. It created canals. the government erected a regulatory system that paralysed trade. In the interwar period. the new state set out to replace the Raj’s brand of openness and limited government with vengeance. whereas the size of the government relative to GDP grown seven times in 1931–81. except a few multinationals selling goods to Indians. Among those business interests who joined the independence movement. it fully reflected that despotism. and on private storage. as opposed to commercial profits earlier. Whatever the roots of the agricultural stagnation. the new state framed a development strategy that almost point by point attacked the features of the imperial economic system. however. agriculture was in a crisis because the open land frontier had disappeared. foreign firms. The Raj never seriously considered a policy to develop rain-fed agriculture. Between 1950 and 1970. partly by going to the countryside. trade and foreign investment had been reduced to insignificance. A reform measure in 1909 had introduced a few elected members in the council. The devitalisation of private trading and finance was done in the name of food security and from the belief that the moneylender was the root of all evil. All this was done with such commitment that 30 years after independence. I do. an interdependence had developed between foreign trade.” In political culture. These reforms laid the foundation of a parliamentary democracy in India. wish to suggest that the post-1947 record can be understood better if we have a sense of history. therefore. It created railways. storage. if any. The government left no room for internal debate. At the outset it is necessary to say that although the new regime delivered GDP growth at a much higher level than did the colonial one. not a great idea. The elevated growth was largely financed out of the taxpayer’s money. the singular failure of the Raj was an inability to make a dent in rural poverty. 2015 vol l no 15 was raised to very high levels and reinforced with non-tariff barriers.

They lost their foothold in export trade. It enabled the state to earn more money to afford spending more money on subsidies. it is difficult to imagine political unification of a land that had never before been unified to this degree. Conclusions: Economic Legacies of Colonialism What were the most important and enduring economic legacies of the British colonial rule in India? How did independent India change these legacies? I wish to end by restating three points that help answer these questions. Mumbai 400 013. Independent India inherited this army. For the imperialists. In the colonial era. which returned India to openness. Exports suffered in jute and tea. India. Outside the communist bloc and some dictatorships. even as the state secured its commitment to agriculture. The retreat from international business also sealed the fate of Calcutta. the British built and maintained in India a large army. it 58 ­ robably still is a significant weight. and although they could in theory diversify. The ­investment policy raised investment cost in businesses that had long relied on imported capital.in/subscribe. visit: www. A series of hostile takeovers by opportunistic ­Indian families with help from cynical politicians sealed the fate of the global firms. with a larger entrepreneurial base than that of Singapore and Hong Kong. The nationalist state sharply raised tariffs and capital controls. First.in april 11. transforming rural livelihoods. It helped the growth of a sophisticated education system. If the destruction of the open economy and the enlargement of the state were damaging. Postal address: Economic and Political Weekly. or that they even knew what needed to be done. The cosmopolitanism was sustained by the free movement of people. thus. an inability to address the key challenge of development.html Attractive rates available for students. knowhow and expertise. The price paid by the Indians for political unity secured in this way was large. but built on that heritage. Calcutta reached the 1970s as a provincial backwater. Calcutta set out to destroy its global past and hunt down foreign capital. Given the small size of the state. faced pressure from two ends. which was the absorption of new high-yielding agricultural technology in the 1970s. and settlement. And yet. it is the national state that must be credited with making a real dent into rural poverty. openness contributed to the emergence of a robust industrial capitalism centred in the port ­cities. and recruited top management internationally.SPECIAL ARTICLE of jute and tea. In turn. procured capital and technology from abroad. made it possible to sustain this expensive agricultural system without leading the economy to a breakdown. as the nationalist critics pointed out. India had left the stage. But economic ­nationalists fundamentally misread these flows by calling APPOINTMENTS/PROGRAMMES/ANNOUNCEMENTS Subscribe to the Print edition What do you get with a Print subscription? • 50 issues delivered to your door every year • All special and review issues • Access to Archives of the past two years • Web Exclusives • And a host of other features on www. open to trade. Second. and led to an expenditure commitment that cannot conceivably come down in near future.epw. The economic liberalisation of the 1990s. It is not believable that the British ­rulers of India would have the courage to undertake such an ambitious development plan. These other port cities did not turn their backs on the trading past. Lower Parel.in To subscribe. It is certainly possible to criticise individual items of factor payment. Still. individuals and institutions. 2015  vol l no 15  EPW   Economic & Political Weekly . combining it with good governance. It was a result of the military-fiscal strategy the Company successfully deployed to secure power. The global firms operating in India. which made taking any of these steps more difficult than before.epw. 320-321. but also gave rural wages a sustained upward push that was without precedent. This one step not only raised output and productivity above historical levels. capital flows. We now know that this strategy has been a drain on the budget. and diver­ ged around the time of the Great Depression. there is probably no comparable example of a systematic and managed grinding down of capitalism. keeping ­India open to trade. But when world trade again recovered from World War II. A to Z Industrial Estate. If it was a weight upon the budget then. the large army was the consequence of the warfare and conflict through which the East India Company established its state in India. the Empire created an open economy. the key point of return being openness. Tel: +91-22-40638282 | Email: circulation@epw. GK Marg. the military expenditure that it had to undertake crowded out spending on public goods. Once a global city. skills and knowledge. The two interests were broadly compatible until the 1920s. in many other ways it retreated from the postcolonial policy regime and even returned to the tenets of the colonial economic system. there was one area where the state scored a major success. investment and migration served British economic interest. But that does not amount to saying that openness was damaging to Indian economic interests. this option was not easy since they never had a foothold in inland trade. But without that fiscal p burden. leading to the greatest failing of the Raj. Most of them were then run down by their new Indian owners.

however. I have suggested in this essay that the message of economic nationalism is not only wrong but also dangerous in a country that is trying to re-embrace openness and cosmopolitanism with a view to building a secure future for itself in the world economy. On national income data. E A Wrigley. see P J Cain. and Anand V Swamy. World Bank Development Research Group.”18 The “rise” and the “fall” in the titles of these articles stand for a measurable increase or decrease in the quantity of original research published in international journals. independent India changed the rules. pp 182-99. Economic nationalism is also a weapon in the hands of businesses that fear foreign competition. Ithaca: Cornell University Press. “The ‘Reversal of Fortune’ Thesis and the Compression of History: Perspectives from African and Comparative Economic History. 4 J G Williamson. Robert Allen. by contrast. Florencio Lopez-de-Silanes. 55(1). 2015 6 7 8 9 10 11 12 By tying politics with history. One either speaks the language of economic nationalism or entertains the wrong political leanings. These two things—desire for political freedom and an economic history suggesting that free enterprise had damaged India—have no theoretical relationship between them. 3 Works by Chris Bayly. Classical Political Economy and British Policy in India. A counterfactual scenario would be one in which the best legacy of the past was combined with the best modern idea. This brings us to the third and perhaps the least visible of the legacies. London: Routledge. 2013. and the professors do carry on vigorous and noisy debates. Mumbai. 2000. see William Easterly and Ross Levine. I have defined economic nationalism as a belief that India needed to be free of foreign rule because foreign rule had made Indians poorer. How do we know this? In the western world economic history is experiencing a comeback. The British Industrial Revolution in Global Perspective. “The Costs and Benefits of British Imperialism 1846–1914. 2012. and therefore. and creates the capacity to reject the outlandish verdicts on the past that nationalistic politicians often pass. based on assumptions about the economic system prevailing in these lands. 2011. “The Economic Theory of the Developmental State” in M Woo-Cummings. It is not only the professional historian who is paying the price for economic nationalism and the narrative trap it created. 47(4). pp 163–200. 1999. pp 15–41. Eric Stokes. contributors to the literature include Stanley Engerman. Kenneth Sokoloff.” Past and Present. 1965. Cambridge: Cambridge University Press. 20(8). For a review essay. John Darwin. 1999. S Ambirajan. and Andrei Shleifer. the American journal Chronicle of Higher Education published a story with the title “The Fall and the Rise of Economic History” in the US. For a recent survey. Cambridge: Cambridge University Press. The point of such a statement is not to support the Empire in a dead and irrelevant political debate. For example. 2 Other than the three names mentioned in text. Classical Political Economy and Colonies. Neither the socialists nor the procapitalist politicians in the Congress liked foreign capital or wanted a cosmopolitan capitalist order to continue. but to reiterate the virtues of openness. In June 2014 a Routledge journal published an article with the title “The Rise and Decline of Indian Economic History. 2014. In both these respects. 59(3). Washington D.SPECIAL ARTICLE these drain. which would be inconceivable without enlargement of the state and subsidisation of agriculture on an enormous scale. 2013. National Income of India 1900–1947. Notes 1 Karl Marx himself had a more upbeat view on the spread of capitalism to the non-European lands via the agency of empires. In India. The outcome of the trap is a weaker discipline. and Mandar Oak. The world over. Cambridge Mass: Harvard University Press. The postcolonial economy. Cambridge Mass: MIT Press. Case of Colonial India and Africa”. Donald Winch. But it made conducting debates on economic history a difficult enterprise. 2009.” The Historical Journal. ed. respectively. Tirthankar Roy. If these were on balance regressive steps. 1978. That is. The English Utilitarians and India. pp 996–1027. the two became interdependent. 352–66. Two quite different examples are. the cosmopolitan capitalism was retained with the addition of a large state. In principle. Rafael La Porta. The Developmental State. 2008. and dismantled the cosmopolitan capitalist order. 120(1). Cambridge: Cambridge University Press. “The Transition to an Advanced Organic Economy. the interest that mass media exhibits for professional scholarship works as motivation for school students to study history. 2012. In India. H-J Chang. 2012. They were the price India paid to tap into a mobile market for skills and capital. Tirthankar Roy. the media ignores them. This option. 59 . “Look what the British did to us” is a potential tool in the aid of xenophobic backlash against globalisation. Gary Magee and Andrew Thompson. however. It creates a narrative trap. 49(3). Patrick O’Brien. For one example. It enlarged the state many times. pp 1125–56. pp 249–61.” Economic History Review. among other reasons because the media takes note of what the professors lecture on. Could the rulers of postcolonial India have made a better choice? A handy characterisation of the Raj is that it was a strong economic system with a limited government. I explore the shift in An Economic History of Early Modern India. economic nationalism devitalises economic history in India. 29(1). had a large government with a flawed economic system. That equation served the nationalist struggle well. T Roy in The Economic History of Developing Regions. Policy Research Working Paper 4474. “The Economics and Ethics of British Imperialism. see S Sivasubramonian. the persistence of economic nationalism. the record is pathetic and worsening. In this essay the original names are retained. 2008. 5 C A Bayly. are examples. Cambridge: Cambridge University Press. The suggestion that the Empire was good for India because it had created an open economy sounds in some ears like a politically incorrect stance. “Myopia or Strategic Behavior? Indian Regimes and the East India Company in Late Eighteenth Century India. In India the economic history professors do not take part in a lively debate. and Niall Ferguson. was unthinkable in 1947.” Modern Asian Studies. the most notable achievement of the postcolonial state was agricultural transformation. 2006.” Journal of International Development. 1959. In terms of top quality publications originating in India. and Chennai. “Indigenous and Colonial Origins of Comparative Economic Development: The Economic & Political Weekly EPW april 11.” Cambridge MA: NBER Working Paper 18162. 1988. Trade and Poverty: When the Third World Fell Behind. Kolkata. “Rethinking the Origins of British India: State Formation and Military-fiscal Undertakings in vol l no 15 13 14 15 16 17 18 an Eighteenth Century World Region. liberty can be fought for without having a historiography to support that fight. pp 435–80. Gareth Austin. New Delhi: Oxford University Press. “The European Origins of Economic Development. Traditional Industry in the Economy of Colonial India.” Explorations in Economic History. On 4 December. the capacity to respond to slogans about history has grown singularly weak.