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Indian Political and Economic History

Stages of
1.
2.
3.
4.

British Rule
What are the characteristics of the First Stage of colonial rule in India?
How did East India gain by capturing political power in India?
Describe about early settlement Acts?
If one carefully studies the period of Indian history between 1757 and 1940 one
finds clearly identifiable stages of British colonization each with its specific and
distinguishable characteristics. Can you identify the main features of each stage with
corresponding impacts on the Indian economy?
5. The emergence of Industrial Britain resulted in De-industrialization and
commercialization of Indian Agriculture in the early part of Nineteenth century. Do
you agree? Explain your conclusions.
6. Discuss the impact of the military and industrial revolutions upon India up to 1858.
Which of these would you regard as more important?

Industrial Revolution
1. The industrial revolution in the UK changed the nature of British interest in India.
Comment.
2. How was the Indian economy affected by the change?
3. What role did opium play in that regard?
4. Would you attribute the origins of the industrial revolution to the inventive genius of
the English people? Provide reasons for your answer.
5. Analyze the cause and conditions of the emergence of the factory system of
production in Western Europe. What are the chief characteristics?
Indian Business
1. Explain the difference in the process of industrialization of jute and cotton textile
industries in India?
2. How do you explain the Indian Business Communitys increasing interest in the
Indian national movement beginning with the post First World War period?
3. How do you explain the duality in the attitude of the Indian business community
towards Indian nationalism?
4. How did colonial rule affect Indian business? How did businessmen respond to the
new conditions they faced?
Others
1. List the main problems faced by lord Cornwallis when he arrived as Governor
General in 1786. How would you have tackled the situation in his place?
I-Stage in British rule:
Colonization of India by Pre-Industrial Britain
1. EIC given monopoly status by queen to trade with India
2. EIC paying in gold and silver for Indian exports.
3. Gaining control over Bengal by defeating Nawab
4. Unilateral flow of goods
5. Destroying old traders (Punjabis, marwaris and Afghanistan)
6. Creation of Bengali Babus
7. Permanent Settlement- Maximization of profit by maximization of revenue

Buying silk, indigo,


spices, muslin calico
from India

Reaching as wealth in
Europe

Exporting
Bullion Gold/Silver

Revenue/T
ax

Buying silk, indigo,


spices, muslin calico
from India

Exporting

Reaching as
wealth in Europe

Inception of Permanent Settlement


Company realized that to maximize the profits it must maximize revenue from land.
EIC auctioned Zamindaris to those who would pay them maximum tax.
Zamindars in turn heavily taxed peasants who had no incentive to produce more.
This over-exploitation led to number of famines greatest being 1776 in Bengal. There was
overall decrease in production and efficiency of agriculture.
To boost the production and to generate constant stream of revenue EIC decided to create
gentry of landlords who had a stake in land. According to this system landlords would pay
EIC a fixed amount of money and hence they would have greater incentive to increase
production, as additional money would go to landlords.
Failure of Permanent Settlement
Proxy Zamindari:

Bengali Babus bought Zamindaris for esteem reasons rather than commercial reasons.
This led to creation of proxy Zamindari of Naibs who controlled the activities for Calcuttabased Bengali babus.
This led to severe corruption and large no of hierarchies between whom profits needed to
be shared.
Peasants were taxed as heavily as before and they had no interest in greater production.
Price fall:

There was a steep fall in price in period immediately after permanent settlement in 1795
and prices remained low. As per Brij Narain fell by 35%
For next 15 years at this time most of Zamindars could not fulfill their commitment to EIC
and sold their ownership.

II-Stage in British rule:


1. Industrial Revolution
2. Laissez faire replacing EICs monopoly
3. Lancashire captures Indian markets.
4. Reemergence of Marwaris traders as agents of Lancashire goods
5. De-industrialization.
6. Fundamental Change. India becoming exporter of agricultural raw materials from
exporter of industrial finished goods
7. Problems of Tribute Realization: Opium Trade
Industrial revolution
Took place in 1770 in Britain and changed the way production was done in Britain.
There was great increase in production and productivity.
And it decreased the price of handloom cloth and a great investment took place in this
sector.

Use of steam in
cotton industry

Increase in Production &


productivity

Demand for Iron &


Steel industry

Larger Investments in
these industries

Greater demand
for heavy eqpt

Greater demand for


steam engines and
handlooms

Greater demand for


coal and greater
production

Laissez Faire:
New class of entrepreneurs (goods-producers) emerged in Britain.
They could enhance profits by expanding markets. They thrived on lower prices.
They were not worried of competition and wanted removal of monopoly to gain access to
new markets. They wanted Laissez Faire to replace mercantile monopoly. UK was a small
market and Lancashire wanted to export its goods to India.
There was conflict of interest with EIC who thrived on handlooms produced in India.
De industrialization:
Lancashire got Monopoly charter removed in 1813 by parliament. EIC monopoly in India
ended.
Objective changed from seizing Indian commodities to seizing Indian markets.
Lancashire did not pay any import duty on goods whereas Indian cotton weavers had to pay
an excise duty Thus they had a great price advantage.
Lancashire wiped out exports of Indian cotton goods. They also challenged them in their
home market.
This led to de-industrialization - massive shutdown of Indian industries.
The impact of this de-industrialization was (a) Indian middle class became poorer due to
unemployment (b) decline of other industries like cutlery, guns, machinery, etc.
Problem in Realization of tribute
Indias de-industrialization seriously affected transfer-of-wealth mechanism.
Till now the realization of tribute had taken the form of export from India.
Rationally this could have been compensated by diversion of raw cotton to English factories.
But this was not possible because Indian cotton was too short-stapled for English factories.
Similarly Indian raw silk could not compete with Chinese and Italian silk for English factories.
Its export remained limited.
The problem became very acute by 1830.
The solution was found in opium trade.

Opium trade
British found a major market for opium in China.
Chinese aristocracy consumed opium for centuries.
British slashed opium prices and smuggled it into China through Shanghai and Hong Kong
ports.
Chinese king tried to stop this trade and fought two Opium Wars (1840-42 & 1856-58)
with Britain.
After losing the war opium trade was legalized in China.
British sold Indian opium to China and imported Tea and Silk to England. A large amount of
Bombay and Bengal capital can be traced to illegal opium trade.

The following figure showing imports and exports of Britain to Asia shows the gain to Britain by this
triangular relationship.

Year

Imports

Exports

Excess Imports over exports

1854

23

12

11

1855

24.3

13.1

11.2

1856

29.6

15.4

14.4

* All values in millions pounds

UK

Cotton goods
Imports>Exports
Tea/ Silk
Export>Import

India

China
Opium
Only Exports

III-Stage

1.
2.
3.
4.
5.

Flow of capital to Britain.


Development of Railways as an agent of deindustrialization.
Commercialization of Agriculture.
Zamindars to Landlords.
Emergence of Jute and Cotton Industry.

Flow of capital
At about 1850s the capital investment had reached a saturation point with construction of basic
networks of railways, the greatest absorbent of capital. The major characteristic of this stage was
export of capital and intensified race for Indian markets. From 1857 to 1865 saw major movement of
British capital to India.

Development of railways

Reason
No body was interested in investing in railways as no one could see economic viability in it. Lord
Dalhousie wanted railways in India because of problem in administering such a large country. Thus
railways were developed more in need for army personnel movement than movement of goods.
East India Co. became the underwriter and assured 5% ROR in railways investment in India. Major
investment was carried out in Calcutta region although first line was introduced in Bombay.

Complete Colonization:
Railways served as a catalyst of complete colonization of India. Railways led to massive increase in
imports by the country.

Imports of cotton doubled between 1859 and 1877.


Imports of silk became 4 times between 1859 and 1877.

Commercialization of Agriculture
The railways also led to change in composition of Indian exports, as bulk no longer remained a
barrier to transport. In 1871 Opium was still principal item but Oilseeds and cotton came close
second. Thus there was a real shift in Indian agriculture to production of raw material for England, a
shift from food grains to non-food crops. This vast change in Indian agriculture from food grains to
non-food crops (jute, indigo) is sometimes known as commercialization of agriculture.
The commercialization had a major impact as quantity of food available for home market
declined and it led to great famines (famines of 1896-97 & 1899-1900) were millions perished. The
commercialization made condition of poor peasant worse and only few rich landlords were the
gainers.

Zamindars to Landlords
At this period due to Sundown Laws lot of absentee landlords lost their Zamindaris to their naf. So
there developed a new class of people who are the owners of land, peasants and also the traders.

M +W + L

Money Lender
(Interest)

Hoarder
(Traders profit)

Land Owner (Rent


from peasant)

This system of pay interest and principal later created a debt trap for the farmers. And they
gradually lost their land and became bonded laborers.

Emergence of jute and Cotton industries


Jute Industries
Jute industry was developed in Scotland (around Dundee) but based on RM supplied from Calcutta.
The characteristics of jute industry were:
1. Labor intensive. The jute industry is highly labor intensive and does not require much skilled
labor.
2. Dependant demand. The market of jute goods were other industries and hence demand for
jute depended on demand or well being of other industries. Market was not local but world
market.

The factors that led to growth of jute industries in Calcutta are:


1. Low wages in Calcutta as compared to Dundee and hence lower cost of production
2. Nature of RM. The volume/value ratio was high and that was not the case with cotton (jute
could not be bent). The marginal cost of transportation was much higher in jute than in
cotton.
3. Production process The raw jute had a high wastage in production process, which meant
you would be importing extra jute and hence would be paying extra for that
4. Slave trade. The slave trade was declining and those in slave trade were looking for some
other investment. They found good opportunity in jute mills in India. That is the reason we
find all jute mills in India, were owned by Europeans till 2nd WW.

Impact of jute industry


The jute mills did not employ local laborers, as wage differential was the key to their success. So they
brought people from different places, Sardars were appointed, sent to Bihar, Orrisa etc . These
Sardars would pay advance to villagers and brought people to town, they not knowing where they
were heading (The operation was very similar to slave trade). These people would be settled in
compound of the mills and that is the reason jute mills had huge compounds.
The people in Calcutta saw jute mills as a symbol of foreign oppression. Whereas the people
of Bombay saw cotton mills as symbol of national pride, owned and worked by Indians.

Cotton Industries
Came to India for reasons different than jute.

Bombay came under British 60 years after Calcutta. By then the monopoly of EIC was
withdrawn and mercantile attitude was replaced by Utilitarian capitalistic attitude. There
was an attitude difference in British Bombay and British Calcutta.
For 60 years of difference Bombay merchants enjoyed free trade in local market and they
had a lot of capital accumulation. Deccan handloom had survived and it was a major cotton
belt controlled by Bombay Parsis.
Lancashire and European textile producers had moved from short Indian staple to long
American staple causing obsolescence of previous spinning mills. The capital goods sector in
cotton was looking for external buyer.
The Bombay mills were dealing with short staple and producing coarser variety of cotton
cloth. There was a small market of this cloth in Africa and Indian textile owners were
competing with Chinese and Japanese textile manufacturers. The demand for yarn was
increasing and hand spinning was not sufficient to meet the demand. The Lancashire did not
enter into this market, as profit margins were lower.
The Parsi traders bought the old spinning mills from the textile manufacturers against wishes
of Lancashire and thus cotton-spinning mills came up in 1840-60s.
This is the reason why Bombay textile mills were not integrated whereas Ahmedabad had
integrated spinning mills.

IV-Stage
Rise of Indian nationalism British rule and Laissez faire reason for Indian poverty
Ranade, Telang, Dadabai Naroji branding laissez faire as reason for poverty.
Bengal partition and Boycott movement
Emergence of Gandhi as a National leader.
I WW and its impact on Indian industry
Need for planned economy
1929 depression
FICCI 1934, Birla Speech
1937 Provincial Election
II World War and Post war Reconstruction Committee
Bombay Plan

Indian nationalism developed in two major categories:


Militant groups/ Political extremism:
Emphasized on glorious Hindu past.
Believed in self-reliance and fell back on traditional handicrafts as means of prosperity.

Opposed British rule as it destroyed traditional Indian society with destruction of local
manufacturers.
Boycott of foreign goods, and rejection of western mode of life.

Moderates:
1. Looked forward to industrial developed India
2. Telang, Naoroji, Ranade, Joshi, RC Dutt belong to this school of thought.
3. Protectionism was key for remedy of economic distress of country.
4. For both the reason for poverty was poor policies of British which led to economic ruin of
the country ( Unbritish rule of India)
5. Lack of large-scale industrialization was identified as major reason for poverty and means
to eliminate poverty. It was a shift in thinking from past swadeshi movement which
considered development of traditional handicrafts as panacea for economic ills

Prewar
Poverty

Industrialization

Anti LF

Protection

State Initiative

Role of state
Early criticism of British laissez faire developed into an idea of positive state participation in
economic activities.
Role of state was defined as not only protecting nascent Indian industry against foreign
competition but also to carry out social and agricultural reforms.

1st World War

Laissez faire policy broke down and govt of India placing orders with Indian firms.
Positive change in attitude of govt as regard to excise duty on cotton.
Accumulation of large capital but expansion constrained by capital goods
Complete breakdown of trade with Britain, and first experience with protectionism.

POST-1st WAR
Industries again facing foreign competition and demand for protection rising

After 1st WW we see emergence of new generation of economists KT Shah, Sarkar, Gadgil all
were staunch supporter of protection and encouragement to industrialization.
Visvesvaraiya Reconstructing Indian Economy identified following problem of Indian
poverty:

Low standard of living of people


Low level of education
Dependence on agriculture
Lack of industrialization and destruction of indigenous industries due to British tariff
and fiscal policies.

Formation of FICCI in 1927 by GD Birla and Purshotamdas Thakurdas


1929 Depression
Death blow to laissez faire, and planning taking up firm roots in India
Sir George Schuster (finance minister) tried to setup Economic Advisory council in
India

FICCI in 1934 Birla and Sarkar spoke on necessity of planned economy in India.
1. Capitalization of west was based on exploitation of colonies, this was large capital
accumulated that was looking for investment but in India there is no surplus and hence
capitalization can develop only through protection and expansion of market.
2. Increasing the purchasing power of people is essential for growth of capitalism. Since 70% of
people are in agriculture hence there is need to develop agriculture to raise PPP. This
development requires new investments in power, irrigation. These investments cannot be
made by private sector so state must develop them.
3. Dependence on imports of machine must be stopped. This means development of key
industries/ Capital goods industries. These key industries require large investment and has
larger gestation period, slower rate of profitability and hence must be developed by state

Conference of ministers of industries, for various provinces in 1938. Formation of National planning
committee.
Identified 3 types of industries

Defense and Public


Utilities. Must be
developed by state

B
Key Industries, there
was difference of
opinion

Consumer Industries
must be left for
private sector.

Second World War


Post War Reconstruction committee was setup in 1941 to prepare development plan for India.
Bombay plan released in January 1944
Industrial policy of GOI in 1945.
Both the plans supported license raj to ensure spread of industries in all parts of country to get true
industrialization.

LAISSEZ FAIRE
The Indian business community played a crucial role in developing the concept of planned economic
growth through state intervention.

British preference: The preferred economic policy in Britain and other western countries was Laissez
faire - free trade between countries.

Problem with LF: The policy seems to be perfect on paper - both the involved countries should
benefit from this. However this policy results in discrimination against the weaker or late-coming
partner and always benefits the more industrialized country.

LF in India:
In the name of laissez faire the Indian indigenous manufacturing was destroyed (particularly the
Indian handloom industry).
In order to promote the British textile industry, India was reduced to only a raw material supplier by
the British government.
It led to the large disproportion between the production of raw agricultural products and the
production / distribution of industrial produce.

Thinking in India:
Moderates and the Swadeshi schools identified British-government policies causing the economic
drain & hence abysmal poverty in India.
Large-scale organization of industry was recognized as being vitally necessary.

This thinking was also different from the other trends of the swadeshi movement that recognized
indigenous traditional handicrafts through individual and community efforts as the panacea of the
economic ills.

Propositions:
Protection: One of the chief proponents of industrialization Ranade also observed that there was a
decided reaction against Laissez Faire in western countries also where State was recognized as the
national organ for taking care of national needs in all matters. Even in England The Factory
Legislation and Irish Land Settlement indicated this change of mind.
Planning: Once industrialization on a large scale was identified as the means to develop Indian
economy, the role of state also became vital in such a program. The country was already bereft of
capital and there was a severe lack of capital formation in the economy. Moreover the private
capitalists also could not afford to set up large industries themselves in the face of stiff competition
from British industries. It became essential for the State to contribute to the growth of large-scale
industries.
The role of the state to these thinkers was also not confined to industrial growth but also included
the responsibility of bringing about the agricultural and social reforms. The early criticism of Laissez
faire policy in India, thus, gradually developed into the idea of positive state participation in the
economic activities of the nation.

Change in thinking on LF: Later on another reason for this demand was the success of the first plan
in Russia in sharp contrast to the prevailing crisis of the Great Depression. This also fueled the
demand in India to involve state participation.
Industrial revolution of Britain
Q how did the emergence of industrial Britain affect Indian eco during early years of 19
century?explain

[Early II STAGE]

the sequence of events that took place was as follows


1.
2.
3.
4.
5.
6.

Industrial Revolution
Laissez faire taking over Monopoly: EIC losing monopoly status in India
Lancashire captures Indian markets.
Reemergence of Marwaris traders
De-industrialization.
Fundamental Change. India becoming exporter of agricultural raw materials from
exporters of industrial finished goods

7. Problems of Tribute Realization :Opium Trade

Initial scenario: before IR there was barter system and nobody was gaining much
The only source of income for British was land revenue. And they had to pay in gold to Indian traders
for barter system.
Here India is net exporter of finished goods.

Industrial revolution
Took place in 1770 in Britain and changed the way production was done in Britain. There was great
increase in production and productivity. And it decreased the price of handloom cloth and a great
investment took place in this sector. It thus shows that industrial revolution led to development of
entire industry in Britain. After IR steam engine came and this led to the development of British
industry. The demand of support industry and raw material increased as the production increased
e.g. to make steam engines iron and steel demand, mining increased for iron and so on

Use of steam in
cotton industry

Increase in Production &


productivity

Demand for Iron &


Steel industry

Larger Investments in
these industries

Greater demand
for heavy eqpt

Greater demand for


steam engines and
handlooms

Greater demand for


coal and greater
production

Laissez Faire:
This period also saw emergence of a new class in Britain of entrepreneurs, this new class not traders
but were producers of goods. They thrived on lower prices and knew that they can enhance their
profits maximum by expanding their markets. They were not worried of competition as they
produced cheap and hence wanted removal of monopoly. They wanted Laissez Faire unlike
mercantile monopoly. Once Britain became a production powerhouse it needed markets and its own
market was limited. This led to exports to India. Cotton mills came up in Lancashire

UK was a small market and Lancashire wanted to export its goods to India but there was conflict of
interest with EIC who thrived on handlooms produced in India.

Once Britain became a production powerhouse it needed markets and its own market was limited.
This led to exports to India.
Cotton mills came up in Lancashire and jute mills in Dundee.
These factories produced goods cheaply. The brits flooded Indian markets with these cheap goods. Thus the demand for goods of Indian
industry decreased. Traditional Indian handicraft also suffered. This was deindustrialization of Indian industry as now there was no
demand of Indian goods in India or abroad.

So now Indians began exporting raw materials for British industries.


India was the only producer of jute and thus demand for Indian jute was there
Indian cotton was short staple. So- when America started supplying long staple cotton then
demand for this also fell with British industries.

Lancashire captures Indian markets.


Reemergence of Marwaris traders
These 2 things happened more or less together. Lancashire was in no way associated with EIC. So
when they came they challenged the monopoly of EIC. During the tenure of EIC the Indian trading
class had suffered badly. They were either wiped out or were forced to become their agents.
But when Lancashire came to India they wanted trading partners who had networks in the country.
So they again had an opportunity to flourish again.

De industrialization:
Lancashire through parliament got Monopoly charter removed in 1813 and thus
monopoly of EIC was broken. There was a change in objective from seizing Indian

commodities to seizing Indian markets. The English exports not only wiped out exports of
Indian cotton goods but also challenged them in their home market. Lancashire did not pay
any import duty on goods whereas Indian cotton weavers had to pay an excise duty, thus their
price became more than imported goods from outside. This led to massive shutdown of
industries in India and is called the de industrialization of Indian industries.
The impact of this de industrialization was that Indian middle class became poorer due to
unemployment and there was decline of other industries like cutlery, guns, machinery etc because
of diversion of surplus from India and decline in income of middle class.

Problem in Realization of tribute


The de industrialization of India seriously affected the entire mechanism of the transfer of wealth
from India to Britain and raised serious obstruction to the realization of tribute. Till now the
realization of tribute had taken in the form of export of Indian manufacturers. Rationally this could
have been compensated by diversion of raw cotton to English factories. But this was not possible
because Indian cotton was too short-stapled for English factories. Similarly raw silk could not
compete with Chinese and Italian silk for English factories and its export remained limited.
New goods like raw jute and indigo were identified for trading purposes by EIC but they were not
preferred coz they were raw and value addition was not very much. So need for new material led to
the identification of opium as a trade good.
The problem became very acute by 1830. The solution was found in opium trade.

NOTE: opium wars etc are towards the middle of 19 cent . our question is abt early 19 cent. So cant say whether we shud write abt opium
or not.

Opium trade
British found a major market for opium in china. Chinese aristocracy consumed opium for centuries.
British slashed opium prices and smuggled it into china through shanghai and Hong Kong ports.
Chinese king tried to stop this trade and fought two wars with Britain Known as Opium Wars
(1840-42 & 1856-58). After the war china lost and opium trade was legalized.
British sold opium produced in India to china and took tea and silk from china to England. A
large amount of Bombay and Bengal capital can be traced to illegal opium trade.

UK

Cotton goods
Imports>Exports
Tea/ Silk
Export>Import

India

China
Opium
Only Exports

The following figure showing imports and exports of Britain to Asia shows the gain to Britain by this
triangular relationship.

Year

Imports

Exports

Excess Imports over exports

1854

23

12

11

1855

24.3

13.1

11.2

1856

29.6

15.4

14.4

* All values in millions pounds

after this will come stage according to ieph notes and according to me too
dont think we need to write anything more

Fundamental Change. India becoming exporter of agricultural raw


materials from exporters of industrial finished goods

Effects of Commercialization of Indian Agriculture


Def: This vast change in Indian agriculture from food grains to non-food crops (jute, indigo).

In 1871 Opium was still principal item but Oilseeds and cotton came close second.
The railways aided change in composition of Indian exports, as bulk no longer remained a barrier to
transport.

Impact of commercialization:
1. The quantity of food available for home market declined and it led to great famines (famines of
1896-97 & 1899-1900) were millions perished.
This also made the condition of poor peasant worse and only few rich landlords were the gainers.

2. Zamindars to Landlords
At this period due to Sundown Laws lot of absentee landlords lost their Zamindaris to their naf. So
there developed a new class of people who are the owners of land, peasants and who are also the
traders.

M +H + L

Money Lender
(Interest)

Hoarder
(Traders profit)

Land Owner (Rent


from peasant)

This system of pay interest and principal later created a debt trap for the farmers who gradually
lost their land and became bonded laborers.

3. Debt Trap
Consider a farmer R who is able to produce just enough for sustenance of his family under normal
circumstances

Yt = Ct + St + Gt
Yield = + Savings +

I t+1 = St
Investment for the next period = savings for this year.

Y t+1 = Yt
Yield constant (no growth)

For a typical mono crop cycle from June Dec the price of the crop is as follows

(Show sine curve with min at Dec and max at June)

Sometimes, due to some unforeseen circumstances, (for eg daughters marriage, death) the
farmer may have to resort to borrowings.
In case of non-monetised economy, borrowing is kind (seeds from the trader) but in
monetised it is the value of seeds.
He borrows when the price of seeds is the highest.
Repayment time is the harvest time when the price is the lowest in Dec.
Moreover with the exorbitant rate of interest charged by these moneylenders, it becomes
virtually impossible for the farmer to erase the debt.
He might be able to pay just the accrued interest and hence this process continues every
year and gets trapped in the debt trap.
Further the inability of the farmer to pay the debt (or the interest accrued on debt) led to
seizure of the land by the moneylender and this also gave birth to a new class of bonded
labor.

o
o
o

Thus top landowners amounting to 10% of the population own 70% of the land. 70%
of the agricultural people own 10% of the land. And remaining 20% of the people
own 20%.
Thus it led to collusive oligopoly. Because the farmers were not in a position to take
shocks, it led them to fall into the debt trap.
The landlords started becoming rich.
As the productivity increased they hoarded the goods at lower price and sold them
when it was dear.

Post 1947
After independence the trap itself perpetuates. It was identified that to solve this problem, three
ways were possible

1. Land reforms
2. Co-operation in terms of marketing to increase productivity to buy inputs: Cooperative
farming failed because big zamindars refused to be part of it.
3. Loanable funds access to bank funds: Nationalisation of banks only helped in strengthening
the moneylender. They are the ones who get the loans based on collaterals.

Also only those who served the British Army were allowed to buy the land or very rich landowners
(eg Punjab). This led to large clusters. Sikhs were the spearheads of the British army.

The productivity just shot up in these regions. Even today in the non-irrigated parts, we have bonded
labour with its socio-political aftermaths.

Also attempts to seize the land of landowners failed as they hid the lands under benaami
transactions.

Industrial development of Bombay and Calcutta


There were distinct differences between the nature of growth of Bombay and Calcutta as centers of
major modern industrial cities in India during nineteenth century.

Timing of arrival of British: British first came to Calcutta so the effect of Imperialism was seen very
early there as compared to Bombay and other places in the country.

Existing local business community: Marwaris were the major business community in Calcutta. EIC
established its monopoly by force so Marwaris were forced to abandon their business or just

become EIC agents. These things were not seen in Bombay where the British reached around 40 yrs
later.

Industrial Products: At this time, Calcutta became the center of tea & jute-production whereas
Bombay became center of cotton-production. Bengal was the only jute-producing area and Cotton
was found in the Bombay region Maharashtra, Nagpur, etc.

Ownership: In Calcutta, British-owned industries came up. Bombay most of the industries were
started and owned by Indians themselves. So due to imperial domination the traders in Calcutta did
not flourish whereas the traders in Bombay flourished since they had their own industries.

Labour demography: In Calcutta region, all bonded-labour was brought from MP, Bihar and Orissa.
In Bombay the labor was from the region itself. They worked during he day and went back to their
homes in the evening.

Special problems for Calcutta: Due to linguistic differences in Calcutta, this labor could not mix and
contribute to society. Effect of this was that the responsibility of labor in Calcutta was that of the
owners. This also proved to an extra expenditure in Calcutta, crucial to the industrys survival later. It
was not so in Bombay.

Exim structure: Being short staple, Bombay cotton generated indigenous demand and supply
whereas as the industry in Calcutta was predominantly meant for export purposes.
IEPH My Notes :

Characteristics of First stage of British rule in India:

The history of East India Company is no doubt an interesting story as it epitomizes the whole
dynamics of British Capitalism, especially the phase of its mercantile capital. Founded in
1599 as a joint stock company it received a charter from Queen Elizabeth granting it the
monopoly of eastern trade for next 15 years with. Since the birth of the company it was
guided by 3 principals: preservation of monopoly in eastern trade; execution of plans to
oust rival merchants from eastern front; securing special privileges from oriental
govts to ensure least cost-price for commodities they bought.

LARGE SCALE INDUSTRY BEYOND 1850 : JUTE, COTTON, IRON & STEEL
JUTE: Demand for hemp, traditionally used for rope and sacking increased greatly due to
international trade. British were concerned to reduce their dependency for hemp on Russia
during this period. By 1820-30 Jute was being used in the Dundee, hemp cloth & sacking
center of British as a substitute, though at very small volume as the technology wasnt suited
for Jute. But due to improvements made in mechanical engineering as a natural
consequence of Industrial Revolution, new technique was developed by 1840s to use Jute
for packaging material. From then till 1870, Dundee had an almost complete monopoly over
Jute cloth trade, based on cheap Indian raw material.

CHARACTERISTIC: industry, till 1st WW was initiated, managed by English ppl. The usual
explanation as to why local capitalists did not venture into Jute industry despite the entry
cost being almost same (sometimes less) than cotton mills is that local capitalists suffered
from lack of access to credit and marketing facilities. But this imperfect commercial
environment did not prevent Bombay entrepreneurs from entering into cotton industry, then
why it wasnt so in Bengal. The suggestion is that the British jute manufacturers worked as a
group to prevent any indigenous venturing into jute industry. This brings us to A
DISTINCTIVE FEATURE of the jute industry compared to rampant cotton industry in
Bombay the high degree of cooperation attempted by the companies. The Indian Jute Mills
Association came up in 1884 to deal with problems of overproduction and excess capacity.
The monopolistic agreements worked out by the British could have been effective owing to
the fact that Jute industry was concentrated in a much less geographical area compared to
the Cotton industry centered in Bombay and so being much more easier to control. But the
problem was these arrangements, because of being incapable of ensuring higher profits by
keeping output under tight control, tried to rig prices with the foreign traders. The net effect
was many new players entered into the industry, leading to overproduction and low
efficiency.
ONE ADDITIONAL CHARAC. Ought to be noted. While the cotton industry quickly
developed an indigenous cadre of managerial and technical workforce, the Jute industry
continued to use British supervisors. The technology was as easy to master in both cases,
than why did the shareholders not press for employing local employees as a way of lowering
cost and thus increase profit. The possible explanation is that dominating British
shareholders and managing agents were ready to take a lower rate of return as they felt
more secured with the European employees employed. This suggests the existence of 2
effective rate of returns given the fact British were concentrating on export-oriented business
while the Indians were concentrating on the domestic market. It seems quite likely that
British were quite satisfied with the ROI which had to be more than what was in Britain and
Indians sought higher rates akin to those available at other parts of India.

COTTON INDUSTRY: Jute and Cotton started almost at same timebut Indian investors
and run by native managers & technicians largely controlled cotton industry. Given the
implacable British hostility to Indian competition & confrontation of the most important and
powerful industry in UK, emergence of Cotton industry holds significance in Indian Economic

history. Unlike the Jute industry, its expansion was largely based on local demands with the
contribution of Foreign trade not being as dominant as in the case of the former.

The commercial environment is Bombay in early parts of nineteenth century was complex.
Though the Europeans dominated European trade, East & West Asia sea-trade had
considerable native participation. A great deal of trade of Cotton & Opium to china and the
re-export trade (mainly British Cotton products) of British to Asia was handled by Indians,
either on their own or in partnership with the British. Soon they recognized the commercial
possibility of local factory production of cotton yarn and cloth. The advantages were obviouseasily available and cheap raw material, cheap unskilled labor, large local market and
obvious reduction of transport cost from Britain. Obstacles were formidable. Cost of capital
was high, equipments had to be exported, labor had to be trained and high cost of fuel. But
in the expansive commercial environment of 1840s some initiatives were taken. By 1865
though there were merely 10 mills working, the collapse in American Economy due to Civil
war triggered the subsequent growth. By 1914 there were 85 mills in Bombay and 49 in
Ahmedabad. British mills tend to specialize either in spinning yarn or in weaving cloth, but
now in both. Indian mills on the other hand generally grew into composite enterprise. Initially
the products were sold in the local market. Gradually foreign trade started with Asian
markets. However by the end of the nineteenth century Indian mills were also producing
mostly cotton yarns and handloom weavers became their main customer.

The rapid expansion had a profound impact on the British trade. The British started loosing
its monopoly on the market and the capturing of the China market boosted the Indian
industry immensely. By 1913 India was the second largest exporter of yarn and Bombay port
became important as an exporter. There was also a shift in the kind of products exported
from UK to India. As the lost market in coarser products, Britain had to concentrate more in
finer-count yarns.

However the initial parts of twentieth century saw Bombay mills producing clothes by using
their own yarn. This was mainly due to the stiff competition the cotton yarn industry was
facing in both domestic and foreign market. By the outbreak of world war the cloth mills were
using almost 35% of the yarn produced by them as compared to 15% during end of the
previous century. The market for clothes, like yarn was entirely domestic. And it thrived more
due to its cost advantage rather its quality.
The expansion of cloth mills had a similar effect on British trade. The Indian manufacturers
captured the market for coarser variety where the British had to shift towards finer bleached
and colored product.
It is difficult to say how much capital was invested and how. A great deal of it is estimated to
have come from loans. Companies also took fixed deposits from public at fixed ROI and this
technique was dominant in Ahmedabad. The Managing Agency system played a major role
in Bombay.

The rather spectacular difference in character of industrial entrepreneurs in Bombay and


Calcutta is intriguing. The vitality of Bombays capitalists is largely attributed to the Parsees.
The emergence of the Parsees is largely due to their engagement in foreign trade during 17th
century that made them the most cash rich native community. Though there was attempts of
rigging the market under the aegis of Bombay Mill Owners Association in the line of Indian
Jute Mills Association, it failed largely due to the domestic pattern of the market and everthreatening foreign competition.

Particularly mentionable trait of Cotton Industry was employment of Indian managers and
technicians. Though at the initial period foreign human resource had to be employed, the
contract of service agreed upon obligated these foreigners to employ and train local people.
Though its not particularly established if this was because of emphasis on INDIANIZATION
or just to ensure lower cost.

OPIUM CULTIVATION IN BENGAL: Before British rule opium cultivation was mostly
confined in Patna and its neighborhood. The growing importance of opium trade was
associated with a particular phase of tri-lateral trade between china, India and Britain. Opium
was the solution to the question of financing 2 of Britains chief import form China- Tea and
Silk. The reduced supply of Bullions from South American colonies of England due to
Spanish competition added to the woes of British. Exports of Indian cotton and opium were a
more viable solution. But the demand for Indian cotton in China was dwindling due to huge
production of cotton in China itself.

A notable feature is that till 1830s Indian government had kept cultivation confined to best
possible lands, taking full advantage of monopoly of Bengal Opium. The restrictive policy of
rigging price by cutting short production became self-destructive as prices became too high
so as to encourage Chinese consumers too look out for alternatives. The emergence of
Malwa Opium as a contender to Bengal Opium made matters more complicated. Initially the
government tried to deal with the situation by trying to suppress cultivation in other states in
collusion with local rulers and acting as chief buyer of Malwa Opium. But the strategy failed
due to the non-cooperation of local rulers who came under pressure from powerful economic
groups in their own state. So the government decided to increase the production of opium to
bring down the prices of Bengal Opium. Thus the productions increased between 1828-9 to
1838-9 by almost 122%.

INDIGO CULTIVATION: The growth of Indigo cultivation was helped by various factors
increasing demand in the international market, sharp decline of supply from its traditional
sources like America and WestIndies. Indigo established itself as the major dying agent by
1740s and its demand was immensely stimulated by growth of textile industry in Britain and
War against revolutionary France. In Britain with the emergence of labor class working in

factories, demand for tougher Jeans clothes increased and Indigo was the only dyeing agent
used for these kinds of clothes. Supplies from America declined after its independence, from
West Indies decreased due to shift in cultivation towards coffee and cotton. The slave revolt
and outbreak of French Revolution completely destroyed the French Indigo industry. Despite
initial competitions and problems the Bengal Opium established itself firmly by 1810s. But
the trade was largely fluctuating obviously due to its dependence on International market.

Sugarcane: The sugarcane trade of Bengal prior to British rule was healthy, but declined
between 1740-70 as it lost its market in Middle East. Increase in sugar trade can be related
to large scale consumption of Tea in Europe. As the consumption of sugar was increasing
fast in England after duty on Tea was greatly reduced in 1784 by Commutation act, supply
reduced from British and French colonies in West Indies due to Negro Slave revolution. This
provided the much needed impetus to revive the industry in Bengal. The growth in Bengal of
cane industry in Bengal was mainly due to indigenous enterprise. But several external and
internal reasons caused a major decline in cane industry in early 19th century. It again
revived after 1813 as a large amount of capital started diverting from investment in Indigo as
cane industry was much more stable compared to the former one. But it did not grow as fast
as Indigo trade largely due to discrimination in favor of West Indian sugar in points of duties
in London market. The industry made rapid progress in 1840s because of equalization of
sugar duties in London.

Effect of commercialization of agriculture on Indian peasants:

The growth of commercial agriculture would normally induce a lot of dynamism in the
peasant economy. But it wasnt the case in Bengal. In case of Tea the commercialized
sector was largely isolated from old peasant agriculture. Another reason was that revenue
from cash crops were largely remitted abroad thus very little coming back into the system to
improve the efficiency of the system. Collateral was rise in number of unpaid bonded
laborers. The Zaminders, acting as Lenders, Leaseholders and Hoarder at the same time
devised a credit system notorious enough to rob off marginal peasants of all their savings
and earnings only to reduce them to bonded laborers.

However it did play some positive role also, in the form of interest-free advances especially
in Opium cultivation. Some peasants even managed to evade the government and sell
opium to the private traders.

Industrial Development in India in the nineteenth century


By the beginning of the nineteenth century England, a major importer turned into a big producer of
finished goods. Therefore it naturally made sense for England to explore more markets.

Lancashire was the hub of industrialization. It had led to the downfall of handloom market in
England, then Europe and now was eyeing India, a colony of East India Company.

But the challenge was EIC, which wanted its monopoly in all trade with India. The crown too tried to
protect these traders because they brought wealth. So Lancashire put pressure on the crown to
withdraw the monopoly recognition. By 1813 monopoly charter was withdrawn.

Lancashire as a producer, wanted agents in India to market and sell their products. Marwaris (who
were the major losers of EIC monopoly) grabbed the opportunity.

Net impact was the destruction of Indian artisan base or de-industrialization. Even Europe had
experienced this, but weavers found alternative livelihood in the factories. But not so in India
because no industries to replace. Handloom weavers who lost their jobs became beggars (sanyasis
and fakirs, depending on religion) moving from place to place.

This led to the non-agricultural workforce reduced to 11%.

Due to the huge imports by the Marwaris, EIC had to find new exports to balance the imports &
exports. Therefore the focus is shifted on agricultural inputs to industrial Britain like cotton (textile),
jute (packaging), etc.

Commercialization of agriculture: Hence Indias agricultural exports were tea, jute, indigo and
opium. Food agriculture went down in favor of these cash crops.

Jute was the only major export to start with.


Indian cotton short staple variety and England needed long staple (Egyptian variety), produced in
North America.
Dyes used for textile mills needed indigo.
The EIC identified that they could export opium to China.

UK

Cotton goods
Imports>Exports
Tea/ Silk
Export>Import

India

China
Opium
Only Exports

A triangular trade with China (opium preferred by the Chinese aristocracy, just like tea by British
aristocracy) could tilt the balance of trade with China in Britains favor.
Assam teak was another export from Assam to Calcutta (timber route through Brahmaputra). This
was used as sleepers of rail tracks.
Wild tea plants noticed in Assam forests. The felling of forests for teakwood gave room for tea
gardens. By mid 19th century, tea along with jute was major export. Later tea plantations extended
to Darjeeling and Nilgiris.

Development in Britain

Capital goods sector in Britain bloomed with Lancashire mills.


As the state of art technology gets saturated in domestic industry, it then moves to other
countries as better technology replaces it.
Around 1830s (after the first 50 years of Industrial revolution.) steam engine was on the rail,
major fillip in the Industrial Revolution.
High expertise developed in the Civil, Hydraulic Mechanical Engineering. The expertise in
Railway technology could be used in other countries.
India and China were the two obvious choices. But because of agrarian economy and also its
getting poorer and poorer coz of siphoning of wealth from the country

Railways in India

Nobody was interested in investing in railways as no one could see economic viability in it.
Lord Dalhousie wanted railways in India because of problem in administering such a large
country.

Thus railways were developed more in need for army personnel movement than movement
of goods.
East India Co. became the underwriter and assured 5% ROR in railways investment in India.
Major investment was carried out in Calcutta region although first line was introduced in
Bombay.
Other Industries in India

Sugar: Railways helped develop other industries like sugar. Previously sugar mills couldnt be set up
coz of transportation delays of sugarcane to the mills location. Now railways came to their rescue.

Leather: Madras was the only port to export leather to Europe till the end of the 19th century.
Emergence of nation states led to building up of armies => more demand for leather (boots belts).
Leather was tanned by vegetable (inefficient). Later, chemical tanned leather (chrome-tanned)
emerged and US took advantage of this. This led to the death of Madras leather tanneries.

Indigo faced a similar fate as leather. Indigo was replaced by synthetic blue invented by a German
scientist.

Spices were exported from Madras, Cochin. This was till the end of 19th century after which
Indonesia took that lead from India.

Except China and US, the whole world was either colonies or colonizers property. Among the
colonies, India was the most industrialized, which had indigenous industrial capitalists.

Jute Industry
Jute industry was developed in Scotland (around Dundee) but based on RM supplied from Calcutta.
The characteristics of jute industry were:
3. Labor intensive. But not high-skill labor.
4. Dependant demand. The market of jute goods were other industries and hence demand for
jute depended on demand or well being of other industries. Market was not local but world
market.

The factors that led to growth of jute industries in Calcutta are:

5. Low wages in Calcutta as compared to Dundee and hence lower cost of production
6. Nature of RM. The volume/value ratio was high and that was not the case with cotton (jute
could not be bent). The marginal cost of transportation was much higher in jute than in
cotton.
7. Production process The raw jute had a high wastage in production process, which meant
you would be importing extra jute and hence would be paying extra for that
8. Slave trade. The slave trade was declining and those in slave trade were looking for some
other investment. They found good opportunity in jute mills in India. That is the reason we
find all jute mills in India, were owned by Europeans till 2nd WW.

Impact of jute industry


The jute mills did not employ local laborers, as wage differential was the key to their success. So they
brought people from different places, Sardars were appointed, sent to Bihar, Orissa, etc. These
Sardars would pay advance to villagers and brought people to town, they not knowing where they
were heading (The operation was very similar to slave trade). These people would be settled in
compound of the mills and that is the reason jute mills had huge compounds.
The people in Calcutta saw jute mills as a symbol of foreign oppression.
Whereas the people of Bombay saw cotton mills as symbol of national pride, owned and worked by
Indians.

Cotton Industries
Came to India for reasons different than jute industry.
British oppressed Bombay 60 years after Calcutta. By then the monopoly of EIC was
withdrawn and mercantile attitude was replaced by Utilitarian capitalistic attitude. There
was an attitude difference in British Bombay and British Calcutta.
For 60 years of difference Bombay merchants enjoyed free trade in local market and they
had a lot of capital accumulation. Deccan handloom had survived and it was a major cotton
belt controlled by Bombay Parsis.
Lancashire and European textile producers had moved from short Indian staple to long
American staple causing obsolescence of previous spinning mills. These obsolete machines
found buyers in Indians.
The Bombay mills were dealing with short staple and producing coarser variety of cotton
cloth. There was a small market of this cloth in Africa and Indian textile owners were
competing with Chinese and Japanese textile manufacturers.
The demand for yarn was increasing and hand spinning was not sufficient to meet the
demand. The Lancashire did not enter into this market, as profit margins were lower.
The Parsi traders bought the old spinning mills from the textile manufacturers against wishes
of Lancashire and thus cotton-spinning mills came up in 1840-60s.

This is the reason why Bombay textile mills were not integrated whereas Ahmedabad had integrated
spinning mills.

While the Indian business leaders and the socialistic elites both wanted a planned economy,
they couldnt agree on a common agenda. Why was so and what were the differences?

At the end of first world war, the demand for the protectionism increased further
championed by V.C.Kale, Venoy sarkar, K.T.Shah etc. By 1930 every country was
concerned with planning. Formation of FICCI presided by G.D.Birla and P.Thakurdas,
gave the planning movement an impetus. Prominence of capitalism.
In India indigenous capitalism had to develop under the aegis of colonialism from
scratch. Industrialization through planning would raise the standard of living and
purchasing power, thus propelling industrialization further. NPC with national congress
and subhash bose in 1938. Till now there was no socialism. Later Nehru started
stressing the fact that planning was in fact a step towards the socialism in India.
NPC consisted of politicians, scientists, economists and leaders of Indian business
organizations. Big Businesses joined coz they felt they would protect their interests
better from inside than outside. On the other hand socialists and Gandhians were
opposed to large-scale industrialization.
Role of state in Big Business. Key industries were debatable. It was decided that future
planning would be towards large scale industrialization, but would leave much space for
the capital to grow. Majority said key industries should be state owned, but the business
group differed.
During Second World War, the economy was boosted providing war-necessities. Indian
Business leaders collaborated with Pos-War Reconstruction Commissioning, coz they
wanted to exert influence from inside. Quit India movement was crushed so socialists
and professional experts did not join in.
British wanted to start the planning commission to have sympathy among the workers
and peasants to wean them away from National movement. This planning commission
was secretly conceived, chalked out and financed by Tata, birla, P.Thakurdas etc.
Bombay Plan was prepared.
Planning commission did not vindicate capitalism, and it was agreed that the state
should lay down a general plan for the development of industries, and its control should
carry with it an obligation to assist industries where such assistance was needed.
In agriculture they suggested cooperative firming but failed to come up with some
concrete measures and planning.
Not only the entire customer goods industry, but also some industries where private
enterprising would be profitable should be kept free from state intervention. Nehru
initially supported this view. Almost entire large scale industries would be brought under
central control.
After independence, Nehru formed planning commission, where no business tycoons
were invited. Their British association had irked many socialists. Congress had mobilized
the popular discontent against Indian capitalism to bolster its election campaigning.

While the leaders of Indian business as a group and other nationalist social elites both
wanted a planned economy, they could not agree on a strategy acceptable to both. What
were the differences? Explain why they took different stands?

Attraction to planning
1. Genesis of the idea: economic nationalism.
2. Impetus to the idea: Success of Soviet Russia during 1928-33.
3. Death-knell to Laissez-faire: depression of 1929 & Roosevelts New Deal
policies.

Economic nationalism
1. Britain practiced laissez-faire.
2. Took over the markets and destroyed Indian industry, esp. handloom.
3. Grave poverty due to above and destruction of agriculture.
4. The only thing that could alleviate Indian poverty was large-scale
industrialization.
5. And Indian Industry needed protection from foreign goods.
6. The criticism of Britains laissez-faire developed into an idea of state participation
in the economic activities.
7. British policy of laissez-faire officially ended with WWI when orders had to be
placed with Indian firms.

Post-WWI mindset
1. More complex visions emerged.
2. Problems of Indian poverty were (a) low standard of living; (b) low education; (c)
dependence on agriculture; (d) lack of industrialization.
3. India had abundant natural resources but inadequate govt. initiative.

Events: Post WWI


1. GD Birla & Purshotamdas Thakurdas formed FICCI (for Indian business
interests) against ASSOCHAM (for European interests in India).
2. 1934 FICCI AGM, Birla outlined a plan for Indias development. Sarkar outlined
the idea of planning.
3. Idea was that economic development required planning in production and
distribution of purchasing power (hence need to uplift agriculture too).
4. Need to upgrade agriculture without endangering socio-economic structure to
prevent communism from taking roots in India.

Events: Congress gained power (1931)


1. SCBose announced the formation of National Planning Commission, headed by
Nehru, to solve the problem of unemployment & poverty through
industrialization. The committee comprised business-leaders, politicians &
professionals.
2. There was ideological division over the formation of the committee: Congress left
(Nehru, Bose) vs. Congress right (Patel, Rajagopalachari). 3. All members agreed that
industrialization could cure poverty but their ways to
approach the problem was different. Socialists wanted a welfare state (right to life
included employment, food, health, etc.)
4. The first difference of opinion rose from Gandhians who questioned the NPCs
right to discuss industrialization. This was defeated.
5. Second difference in opinion arose over the role of the state in the plan. All were
unanimous that critical industries (defense, etc.) be owned by State but
differences over key industries. Business groups could concede state-control
over the key industries but not state-ownership. This kept unresolved when NPC
was dissolved with the onset of WWII.

Post WWII
Reconstruction Committee of *viceroys+ council:
1. The colonial state was faced with a crises generated by WWII. Business houses
joined the committee with enthusiasm to protect their interests feom within.
2. New department exclusively for planning.

Bombay Plan:
1. Birla, Thakurdas and Tatas formulated a plan, called Bombay Plan, for national
development, safeguarding the interests of big businesses & preventing the huge
sterling balance from being misappropriated by British for their own interests.
2. The basic idea was that private ownership was sacrosanct and it needed protection
from external competition and internal nationalization.
3. Plan suggested imposition of licensing to give state the control over industries
and echoed the Congress idea of strong central authority on economic matters.
4. The role of state was 3-fold government control, government ownership and
government management. Private enterprises were to get a free hand to choose its
own fields of operation. Public sector must take up only heavy basic industries
that required heavy investment.
5. For improving agriculture, it was recommended that size of holdings be increased
and cooperatives introduced. No inclination to touch the socio-economic balance.