Economic History of Modern India

School of Distance Education
FOURTH SEMESTER M.A. HISTORY
PAPER- 4.3
STUDY MATERIAL
ECONOMIC HISTORY OF
MODERN INDIA
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
Prepared by :
Dr.N.PADMANABHAN
2008
Associate Professor
P.G.Department of History
C.A.S.College, Madayi
415
Admission P.O.Payangadi-RS-670358
Dt.Kannur-Kerala.
Vol.II
MA HIS Pr.4.3 (E.H.M.I.)

UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
STUDY MATERIAL
FOURTH SEMESTER M.A. HISTORY
PAPER- 4.3
ECONOMIC HISTORY OF MODERN INDIA
(2008 Admission onwards)
Prepared by :
Dr.N.PADMANABHAN
Associate Professor
P.G.Department of History
C.A.S.College, Madayi
P.O.Payangadi-RS-670358
Dt.Kannur-Kerala.
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Computer Section. SDE.
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Economic history of modern india Page 2

CHAPTERS CONTENTS PAGES
INTRODUCTION 04
1 INDIAN TRADE AND EUROPEAN COMPANIES 05-47
11 COLONIAL AGRARIAN SETTLEMENTS 48-62
111 TRANSFORMATION OF INFRA-STRUCTURE 63-76
1V ECONOMIC DEVELOPMENT DURING THE INTER 77-102

WAR PERIOD
V INDEPENDENCE AND YEARS IMMEDIATELY 103-128

FOLLOWING IT

INTRODUCTION
Economic history is distinguished from other histories more by content than
methodology. It does not develop the whole of history. History can be of different types-
Social history, Political history, Cultural history, literary history, Economic history, and
so on. Economic history has assumed such importance as to overshadow all other
branches of man’s activity. It is that part of history which requires knowledge of
economics for its full understanding. Economic history explains about the performance of
economies in the past. Performance may be one of growth, stagnation or decline of
economies. As economic performance changes the living standard of the people also
changes. This leads us to study the relationship between economic organization and
performance.
Every problem in history may have its root in an economic issue. Economic history
enquires into two major issues such as the overall growth of the economy, and the income
distribution in the course of its growth or decline. The institutions of slavery, feudalism,
imperialism, capitalism and socialism have all been explained in terms of economic
motives (economic issues).In the past, the economic aspects of life were less differentiated
from other aspects than they are today. Economic history is often presented as a process
of specialization; but the specialization is not only a specialization among economic
activities, it is also a specialization of economic activities from activities of other sorts.
This is a specialization which is not yet complete and can never be complete; it has gone
far enough for us to imitate it in our studies. We cannot set the boundaries of the
subjects to make them more manageable. It is in this context, J.R. Hicks opines, “A major
function of Economic history is to be a forum where economists and political scientists,
lawyers, sociologists, and historians (historians of events and of ideas and of technologies)
can meet and talk to one another.
New-orientation in economic history:
There has been a new orientation in the historical outlook from the days of Marxian
materialistic interpretation of history. Through materialistic interpretation of history Marx
explains the foundation and the evolutionary causes of all social life. Social life implies
class structure. The class structure implies the conflict between the mode of production
and the relation of production, which causes social evolution. Social structure, mode of
production, means of transport and communication, production, distribution,
consumption, production sectors etc figure prominently in history. Economists are
interested in the study of the problems of developed and under developed countries.
Their studies lead to identifying important elements affecting growth. Economists are
also interested in testing of this hypothesis. There has also been the growing volume of
quantitative information about the past. All these developments are responsible for new
orientation in economic history.
Economic history now becomes quantitative: Economic historians often make use of
mathematical or statistical methods. Today a new branch of economic history has
developed which is called “econometric history”. Econometric history has three parts: The
first part covers statistical methods, precision of definition and categorization. The second
part emphasizes the use of statistical techniques and economic theory to study the past.
Regression analysis, input-output – analysis, Neumann – Morgenstern utility index etc
are some of the tools historians often use. The third part is the counter factual
conditional concept in which the problem is analyzed in different ways. The problem is
analyzed on certain assumptions and on change in social and economic relations by
which economic historians find out the reasons behind a historical event. In the light of
the quantitative evidence we can come to the conclusion that economic history offers a
source of generalization.

CHAPTER-1
INDIAN TRADE AND EUROPEAN COMPANIES
MERCANTILISM.
Mercantilism is a system of commercial capitalism of merchant
capitalism which was introduced in different parts of the world during the
period 1500 – 1750. It continued up to the period, roughly speaking, when
Adam Smith published his Wealth of Nations in 1776.The term
‘Mercantilism’ was coined by Adam Smith to describe the loose system
which dated roughly from the beginning of the 16 th century. Mercantilism
includes a group of widely-dispersed writers on many important issues like
trade and commerce, money, employment and so on. These writers shared
some common interest and concern but they did not have a common tool of
analysis. There appears to have been little cohesion among the mercantilist
writers in the sense that they did not have a commonly-accepted body of
ideas. However, in spire of the differences, they had some broad agreement
over certain basic issues of their times. They showed several unifying ideas.
They had certain ideas having central tendencies. In the discussion of this
paper, we will confine only to the broad generalizations of the mercantilist
writers. We will not take into account the differences of the individual
writers.
Mercantilism had different meanings and connotations in different
countries. In Germany, Mercantilism was called Cameralism; in France, it
was called Colbertism and in England, the system was called Mercantilism.
It is a set of doctrines advocating the accumulation of gold and silver,
favourable foreign trade balance, increase in state power and the prosperity
of the nation. It is also defined as the economic counterpart of political
nationalism. It is a system of restrictive trade practices and is called a
system of protectionism. According to Heimann, mercantilism is the
ideological justification of commercial capitalism. Mercantilism, in fact, is
the start of the political economy of capitalism. It is during this period that
Sir James Stuart brought out his book, Principles of Political Economy; in
1760.This was the first book on political economy. Thus mercantilism can
be regarded as a force which gave birth to the system of political economy.
Mercantilist writers are, mainly, Sir Thomas Maun, J.B. Colbert, A. Serra,
S.J. Child and S.J. Stuart.

FACTORS RESPONSIBLE FOR THE GROWTH

OF MERCANTILISM
Many factors are responsible for the growth of Mercantilism. They can be
discussed below:
1. Economic Factor: Towards the end of the 15th century, economic changes
were taking place in the European countries. The domestic self-sufficiency was
giving way to the development of a system of exchange. The market economy was
developing rapidly. Agriculture was being replaced by trade and commerce. It was
necessary to expand the use of money. In fact, the feudalism was being replaced
by commercial capitalism. The feudal society was rapidly breaking up, and
commercial system was gradually evolving. All these required a commercial
system using money.
2. Political Factor: The political organization which loose in the past, came to be
replaced by a strong nation state. In such a state, law and order situation had to
be very strong, and the protective and regulatory function of the state became very
essential. Feudalism was superseded by the formation of nation states in many
countries. These countries required a strong government. Political philosophers
like Machiavelli and others stressed the importance of a strong national state and
Jean Bodin advocated for a benevolent monarchy. Thus, what was demanded was
a unified national state under a strong king. In many countries, strong kings came
to occupy the thrones. Some of these kings were Tudor King and Louis XIV. The
mercantilists required protection under strong kings.
3. Religious Factor: The religious factor also became important for the growth of
mercantilism. The Reformation movement revolted against the supremacy of the
Roman Catholic Church and the authority of the Pope. A new religion, known as
Protestantism, appeared on the scene. This religion was against the earlier
Catholic religion. The new Protestant religion allowed the acquisition of material
goods and property. Money became important in human life along with the
prospect of thrift and material efforts. The new religion was in favour of complete
liberty and freedom of the individuals. The Protestant religion became very strong
in course of time and it was embraced by the merchants.
4. Cultural Factor: Cultural factor was no less important in the growth of
mercantilism. The cultural change in those days was propagated by the
Renaissance. This movement taught that men are free on this earth and they can
create and enjoy well according to their sweet will. They need not bother about the
so-called heaven. Emphasis was given to the creative human activities, acquisition
of wealth and trade and commerce. The Renaissance movement was against the
dictates of medieval theology. The new movement taught the importance of
materialistic outlook and acquisitive spirit. In fact, mercantilism was a reaction
against the moral and idealistic attitude of the medieval period.

5. Scientific and Technological Factor: Inventions and discoveries

facilitated the rise of mercantilism. Many important explorers invented a
new world like the United States. There were also the discoveries like the
mariner’s compass, printing press, and the like. Columbus discovered
America in 1492. Gold and silver mines were also discovered in the new
world. People became adventurous and were in search of new lands for
trade and commerce. The atmosphere was quite suitable for growth of
mercantilism.
6. Intellectual Factor: In many countries, intellectual development on new
lines became visible. The new philosophers like Erasmus, Bacon and
others, new artists like Leonardo- da- Vinci and Michael Angelo, the new
scientists like Galileo, Kepler and others introduced the new area and
concept of knowledge which was challenging to all the concept and thought.
For example, Sir Thomas More’s Utopia challenged the existing basis of the
state. In fact, European countries during the sixteenth century were a new
brave world which emerged from the dark middle Ages. In all directions,
there were new activities, a new spirit of enterprise and a new subject to
explore. The mercantilist idea was advocated by many of these new
intellectual writers. Thomas Maun openly campaigned for the growth of
mercantilism.
All the above factors combined to help the growth of mercantilism which
was a new adventure in the direction of the commercial/merchant
capitalism in the European countries.
BASIC PRINCIPLES AND POLICIES OF MERCANTILISM

There are many basic principles and policies of Mercantilism. The following
are, however, the broad ones:
1. The desire that the state must be made very strong.
2. Money is wealth and capital. There should be amassing of money in the
form of gold, silver and precious metals, which can determine the strength
of a nation.
3. Foreign trade must be encouraged so that a country can have favourable
balance of trade through the earning of export surplus. Every country
should try to export more and import less. This is a way of getting the inflow
of gold and silver by a nation.
4. All exporting industries are to be encouraged and imports are to be
discouraged.

5. A country should give more importance to the development of

manufacture and trade.
6. There would be a strong government for giving protection to the
merchants and for maintaining law and order situation.
7. Colonies could be useful both as a market for exports and as sources of
supply for raw materials.
8. Colonies could only be feeders to the mother country. All colonial trade
should be a monopoly for the mother country.
9. A country should have its own ships for the purpose of trade.
10. The wages should be low so that the production cost and the prices can
be kept low. These will help the growth of export.
11. Population growth should be encouraged. People are the real wealth of
the country.
12. Mercantilism favoured the increase in state power and wealth.
13. A slowly rising price level is helpful to the producers and also for giving
incentive to production. It can lead to additional revenues.
14. Mercantilists were concerned with increasing the employment potential
of a nation.
15. The mercantilist writers were in favour of a lower rate of interest as it
will give incentive to invest and produce.
16. Mercantilism favoured a multiple tax system.
17. Mercantilist writers were against the medieval just price. They
advocated a system of market value.
(See also Heckscher’s Views on Mercantilism in the next section)
HECKSCHER’S VIEWS ON MERCANTILISM: PLENTY OR POWER?

Heckscher’s has examined the various views on mercantilism by writers
like Adam Smith, Schmoller, and William Cunningham and so on. Adam
Smith has considered mercantilism as a type of commercial policy and as a
system of protection. According to Schmoller, mercantilism was essentially
a policy of economic unity which is to a large extent, independent of
particular economic tenets. William Cunningham considered mercantilism
as a force, striving after economic power for political purposes.Heckscher
found a confusing note in the above views. The confusion arose between the
ends and means of economic policy. Mercantilism is a system of national
economic unity. For avoiding confusion on trade between different
countries, the creation of a national customs system was found to be

necessary by Heckscher. Mercantilist policy involved the substitution of a
scheme which would give the whole territory the benefits that each town
had tried to arrogate to itself. The national policy could create a consistent
national system or regulation of internal trade and industry in town and
country. Thus, mercantilist policy was based on a national policy.
According to mercantilist statement, the subject of state is a means to an
end. The end is the power of the state itself. The mercantilist conception of
what was to a country’s advantage centered on two closely allied aspects of
economic life. These two aspects were the supply of commodities and the
supply of money. Mercantilism gave importance to a money economy. The
mercantilists wanted to get maximum gain for the country. This could be
done by stimulating production and by increasing the competitive power of
the country. The real gist of mercantilist doctrine was: Wealth consists in
money, or in gold and silver. Therefore, mercantilists insisted upon an
excess of exports over imports. The distinction between bullionists and
mercantilists is very clear. The bullionists wanted to prohibit the outflow of
bullion, whereas the mercantilists brought forward a theory of the balance
of trade. Most mercantilists were favouring a sort of inflation in the
economy. Mercantilists believed in protectionism.
According to Heckscher, mercantilism involves a general view of society:
a new order of materialism in place of medieval idealism and morality. If we
analyze the view of Heckscher on mercantilism, we come across the
following thoughts:
1. Mercantilism is a system of power. It is not so much a system of plenty,
as believed by Adam Smith. However, Heckscher did not dispute the point
that was raised by Adam Smith by pointing out that mercantilism is a
system of plenty. Rather, Heckscher seems to have agreed with Smith when
the former has said that it is a system of commodity production.
2. Mercantilism is a system of increasing commodity production. This is
required for reaping greater gain in terms of more favourable balance of
trade. This also gives a country more competitive power in the international
market.
3. Mercantilism is out and out a monetary system. This is especially
necessary when the economy becomes an exchange economy where money
is used not only as a medium of exchange but also as a unit of account.
Mercantilism gave stress on the accumulation of treasure.
4. Mercantilism represents a national system of regulation of trade and
commerce. Such a regulation is both internal as well as international.

5. Mercantilism is a system of national economic unity. National unification

is required for both country and town, and also for the domestic and the
international traders. It organizes the different people and an institution
along a uniform line. Mercantilism aims at the unification of nation states.
6. Mercantilism is a system of defending the country and strengthening the
country both economically and politically.
7. Mercantilism is a system of protection. It supports protection to different
types of industries for their proper growth and expansion, so that these
industries can contribute to the earning of a favourable balance of trade by
exporting more than before.
FOREIGN TRADE AND SPECIE FLOW

The mercantilist writers were in favour of having a favourable balance of
trade which could be earned by exporting more than import. It should be
noted that a balance of payments must always balance over time, because it
is only a book-keeping identity of debit and credit. But a balance of trade
need not be in balance. The surplus in the balance of payments which was
emphasized by the mercantilist writers was the excess of exports, both
visible and invisible, over imports. This surplus will come to the domestic
country in the form of gold inflow. In fact, the mercantilists were thinking
of the current account in the balance of payments.Foreign trade was
regarded as very important in the mercantilist system. It is evident from the
title of Thomas Mun’s book: England’s Treasure by Foreign Trade.Viner
observed that there was nothing wrong in emphasizing a favourable balance
of trade.
Why Foreign Trade?

The mercantilist writers have emphasized favourable trade balance (export
over import) for the following main reasons:
1. To make the country economically stronger through the excess of
treasure and wealth than can be earned through foreign trade.
2. Foreign trade is the means to purchase cheaper raw materials from the
international market.
3. Foreign trade is also a means for selling out the domestic output in the
form of export. It is an outlet for the finished goods of the domestic
economy.
4. The mercantilists were eager to earn money and wealth through foreign trade.
Money in the form of gold and silver and other precious metals was very valuable
to the mercantilists. Money was equated to capital or wealth. Foreign trade was a
means to acquire more and more money from the foreign countries.
5. Foreign trade surplus was regarded as an index of economic welfare.
6. The mercantilists wanted to acquire bullion through foreign trade. They knew
very well that bullion will have a favourable effect on the price level of the
commodities. They pointed out that a gently rising price level was very favourable
for the growth of industries, trade and commerce.
7. The inflow of bullion may also reduce the rate of interest. This is very essential
for increasing investment, output and employment.
8. One of the main objectives of mercantilism was to create more and more
employment opportunities for the people of the country. This could be made
possible by a favourable balance of trade which will have several employment-
creating effects.
9. The mercantilists believed that a country can be great only at the cost of others.
They were interested in making their own country relatively stronger than the
neighbouring countries.
How to Attain a Favourable Balance of Trade?
The mercantilists followed a number of policies in order to maximize the net
gain from foreign trade. The main strategy is to increase the production of
exportable commodities in the domestic economy, and reduce the import of
articles from foreign countries. Output in the domestic economy can be maximized
by the following methods:
1. Land resources may be more fully utilized and fallow lands may be brought
under cultivation.
2. More and more employment opportunities should be created in the country so
that the unemployed human resources are utilized for the purpose of increasing
production which can be exported.
3. Better methods and techniques of production should be introduced in the
production process.
4. For the purpose of increasing production and employment, the mercantilists
advocated a system of a low wage level.
5. The colonies can be used for supplying raw materials to the mother country.
The colonies can also be used as a market for finished products.
6. There may be an occupational shift of population from low productivity jobs to
high productivity occupations.

Trade Regulations and Policies: Export-Import Policy

1. The mercantilists were in favour of exporting goods and services, particularly,
they were interested in the export of finished products. Export of raw materials
was not favoured.
2. Raw materials are to be imported from foreign countries.
3. Certain types of imports such as imports of luxuries are to be totally banned.
4. The mercantilists did not favour the export of bullion.
5. They had a fear of foreign goods, and they were not allowed to import foreign
finished products.
6. A country was allowed to import semi-finished goods and then to process them
for the purpose of export.
7. It was advisable to carry on foreign trade with the country’s own ships.
8. Banks are to be established and the use of credit instruments is to be
facilitated.
9. Food import is to be restricted, and food should be grown in the domestic
country by improving the agricultural sector.
10. The government should register mortgages, sales and other commercial
transactions.
11. A colony should not be allowed to enter into foreign trade directly with another
country. All commodities should come to the parent country wherefrom they are to
be exported again.
12. Some industries should be given subsidy. These industries are shipping,
fishing and so on which are taking part in the export trade.
13. Imports from other countries are to be reduced to the minimum.
14. Primary importance must be given to the development of export industries and
then the emphasis should be given to the development of agriculture and other
allied industries.
Great importance is attached to the state as the centre of all economic
activities. The control and regulation of the government are essential for the
attainment of the most favourable balance of trade. In this connection, the
protectionist policy of the mercantilist system may be discussed. The mercantilist
system was, as discussed earlier, a system of protection. It recommended
protection for a few different reasons: (i) Protection may be granted to the strategic
industries. These important industries which are strategic for the nation both in
terms of their export contribution and also in terms of their contribution to
development can be earmarked by the government of the country. (ii) Protection
may also be granted to the weak but promising industries which are at the infant
stage of growth. (iii) Protection may also be granted to the defense industries
which are considered to be so essential for the country. (iv) The policy of
protection should be guided by the consideration of self-sufficiency. Those

industries should be given protections which are helpful for generating self-
sufficiency and self-reliance for the country. (v) Protection may also be given to
the industries which are engaged in producing import substitutable and export-
promoting goods, and at the same time, are absorbing the unemployed and the
underemployed labour resources of the economy.
From all this, it appears that the mercantilist writers were well-informed and
well-balanced in their ideas on the different aspects of foreign trade economics,
including the principles of protection. However, there appears to have been no
clear explication of the theory of balance of payment, as it is used in modern
times. The single most important concern of the mercantilist writers was that the
nation’s resources be used in such a manner as to make the state as powerful as
possible, both economically and politically. In their scheme of thing, money was
very important for foreign trade. This was perhaps the reason why mercantilist
writers gave vent to the desire of hunger for money. However, the lofty ideal of the
achievement of a favourable balance of trade is bound to be only temporary.
Thomas Mun clearly pointed out that the inflow of bullion is sure to lead to a rise
in the price level of domestic articles In that case, the possibilities of export
promotion appears to be bleak and self-defeating. Another reason for which the
mercantilist writers are blamed for their self-centeredness is the fact that their
foreign trade policy directly impinges on the growth of other countries. The
mercantilist writers wanted to sell in the dearest market and purchase from the
cheapest market. This can easily lead to the beggar-theory-neighbour policy which
is again self-defeating. One country cannot be continuously the gainer in the
international market at the cost of others. This was not perfectly realized by the
mercantilist writers.
However, there were writers who could very well understand the price-specie
flow mechanism and full implications of the effects of increased bullion on the
domestic price level. One such writer was John Locke. William Petty was against
an indefinite accumulation of bullion. Thomas Mun also understood the effect of
bullion on the domestic price level. However, the mercantilist writers were very
pragmatic. They were not building up any analytical engine, but suggested some
practical measures so that the country may be made strong through foreign trade.
MONEY, PRICE LEVEL AND INTEREST RATE

The mercantilist writers were in favour of accumulation of more and more
treasure for the country. Money in fact was equated with wealth and capital. They
advocated the amassing of gold, silver and other precious metals from foreign
countries. A country which does not have gold mines must amass gold through
foreign trade. The slogan of the day was; gold, more gold, more wealth and more
power. It must not be forgotten that the mercantilist system was essentially a

system of commercial/merchant capitalism which was primarily based on the

materialistic motion. Thus, money came to the forefront of all actions. Money was
regarded not merely as a medium of exchange but also as a store of value. The
following are the reasons for attaching so much importance to money in the days
of mercantilism.
1. Money is a form of working capital and wealth.

2. Money is a medium of exchange.
3. Money is a store of value,
4. Money was a unit of account.
5. Money could facilitate trade and commerce.
6. Money was the life-blood of the exchange economy which developed during the
period of mercantilism. The importance of money in a market economy which was
developing at that time can hardly be exaggerated.
7. A system of taxation was developing during the period of mercantilism, where
money was very essential for the payment of taxes. Needless to say. Taxation in
barter system is obviously difficult.
8. Money was essential for making payment to the standing national armies and
also for purchasing the war materials. Thus, the slogan of the sixteenth century
statecraft was: Money, more money and still more money.
9. Money was a convenient form of holding wealth in lieu of holding it in the form
of commodities.
10. Money was demanded per sexuality, as an alternative form of holding wealth,
as there were no immediate and sufficient investment opportunities for all people.
It was held against the rainy days.
11. The mercantilists felt the scarcity of money in the economy which was
standing in the way of development of trade and commerce. Therefore, money was
demanded for the expansion of trade and commerce.
12. Money could provide the sinews of war.
13. According to some mercantilists, increased money supply can lead to a
lowering of the rate of interest which would be very helpful for the expansion of
investment, output and employment. The thinking was akin to that of Keynes. In
this connection, Sir Josiah Child observed that the low rate of interest is the
natural mother of industry, frugality and arts.
14. More money supply, as can be made possible by the inflow of bullion through
foreign trade, can be expected to lead to a further development in the realm of
trade. Misselden observed that money is the vital element of trade. The fact that

increased money supply leads to lower interest rate was recognized by Locke,
Petty and Law, among others. The lowering rate of the interest can lead to the
expansion of investment for trade and commerce.
The mercantilist writers knew very well that an increased money supply made
possible by a favourable balance of trade may lead to creeping inflation. According
to them, a falling price level is unfavourable to economic development and
expansion. They were rather in favour of a gently rising price level (mild inflation).
In this respect, they were more Keynesian and less Marshallian.They advocated
mild inflation for a number of reasons. It should be noted that the relation
between money supply and price level was known to many of the mercantilist
writers. The money supply made possible through a favourable balance of trade
can lead to a number of favourable effects on the economy; it can increase income
which can increase the level of effective demand in the domestic economy. The
fact that a mild inflation can stimulate economic development and prosperity will
be evident from the following points which perhaps were considered by the
mercantilists’ writers while advocating the inflow of more and more bullion or
money supply.
1. Mild inflation leads to more and more profit which can lead to more and more
incentive for production and investment.
2. When the profit rate goes up, the rate of capital formation also increases.
3. It is possible to have technical improvement during a period when the profit
rate is higher.
4. Mild inflation creates a condition of buoyancy and boom in the economy.
5. Mild inflation may lead to a reduction in the rate of interest which is helpful for
the expansion of investment and employment.
For all the above reasons, the mercantilist writers might have advocated a
desire for an increase in the price level. However, they could not understand that
increased money supply may lead to an unfavourable effect on the prices of
exportable commodities. They wanted to make good the scarcity of money which
was felt in many countries, including England and Holland. The mercantilist
writers were aware of the rudimentary working of the quantity theory of money as
proposed by David Hume. As pointed out earlier, John Locke was well aware of the
relationship between money and price level. However, instead of relating the price
level with the quantity of money, they related the favourable effect of money
supply (M) on the trade of the country. Thus, it was not the quantity theory of
money what the mercantilists were emphasizing, but instead, they were
emphasizing the monetary theory of the volume of trade. The quantity theory
during the seventeenth and eighteenth centuries had the central proposition that
money stimulates trade. While developing the view that an increased supply of
money leads to a reduction in the rate of interest, the mercantilists upheld the
view that there is a monetary theory of rate of interest. The mercantilists,
however, were not in favour of keeping the money as idle treasure, rather they
thought of money as an important part of active balance for the purpose of
circulation and use. However, needless to say, most mercantilist writers failed to
appreciate the hidden implications of Hume’s quantity theory of money.
WAGES AND EMPLOYMENT

In the middle Ages, unemployment was a problem. The main measure of
stimulating employment was the development of manufacturing industry. The
concern about employment was the main motive of the mercantilists. In
Germany, under cameralism, the government accepted the responsibility of the
state to create employment opportunities and maintaining them. This was also the
principle adopted in England in 1795.A number of factors such as dear money
policy, foreign competition, taxes and regulations were considered to be mainly
responsible for unemployment in those days. It was pointed out that a high rate
of interest lowers investment, output and income. Malabar. Child explained,
however, that a high rate of interest will facilitate premature retirement from
business. Be that as it may, the mercantilist writers suggested a number of steps
for maximizing the employment of labour in a country. Some of these steps are
discussed below:
1. Cheap Money Policy: Under this policy, the rate of interest will be lowered so
that investment will expand and more and more employment can be created by
stimulating production.
2. Increasing the Favourable Balance of Trade: A favourable balance of trade
will have a positive multiplier effect on income, output and employment. William
Petty says that it is better to produce useless things than not to produce at all.
The inflow of money will create many opportunities for expansion. It will raise the
price level, which will have a number of goods effects on the economy. In fact mild
inflation to be created by the export surplus will have a number of employment-
creative effects (see, the earlier section). However, Malynes and Misselden did not
accept this view. They pointed out that bullion import will increase trade without
rising prices and this may increase employment. Export surplus by itself may
expand investment which would be helpful for creating more employment, income
and output.
3. Agricultural Development: Mercantilist writes advised that cultivation should
be extended to the unused lands and certain types of import-substituting crops
may be grown.
4. Expansion of Industries: The mercantilist writers advocated for the expansion
of industries, including trade and commerce. Thomas Mun observed that poor
people should be given employment first. For this purpose, he suggested the
development of agriculture and industry (fishing and shipping).
5. Wage and Labour Policy: The mercantile writers were in favour of maintaining
a low wage policy. The low wage, however, should be sufficient for subsistence.
According to them, the poor people should be given low wages. If they are given
higher wages, they will be idle, inefficient, and the labour supply in the economy
will fall.
There is the existence of the backward-sloping supply curve of labour. The

mercantilists believed in the utility of poverty and in the low moral condition of
labourers.All this compelled the mercantilist writers to advocate for a minimum
subsistence wage level. They opined that if the wage level is increased, output will
decline, and the ability to accumulate specie via trade would be similarly reduced.
The mercantilist writers wanted to have maximum amount of labour supply in the
economy, and at the same time, a low wage level. For this, they advocated a high
rate of growth of population which would be able to reduce the wage level through
competition and at the same time will provide a maximum amount of labour for
the expansion of output for the export sector. They advocated reduction in
mortality, reduction in the age of marriage and prevention of emigration and
encouragement of immigration. The mercantilist writers could not understand the
economy of high wages. They wanted hard work and efficiency from the labourers
but did not want to give them the incentive of higher wages. The theory of
subsistence wage level which was the basis of exploitation of the labourers to be
found in the classical political economy had its genesis in mercantilism.
Critical Appraisal
1. The balance of trade theory was self-defeating in nature. The mercantilists did
not consider the deeper implications of the effect of increased bullion on the price
level of the exportable commodities.
2. They wrongly thought that wealth consists in gold and silver and other precious
metals. They thought that wealth was the same thing as money or bullion.
3. The mercantilists regarded wealth as an end in itself.
4. The mercantilists advocated the attainment of favourable balance of trade at the
cost of other countries. Their policy was self-centered. It also led to beggar-theory-
neighbour policy. In the international market, this type of zero-sum game cannot-
continue for a long time without retaliation.
5. The mercantilists were narrow nationalists. Their policy was against
cosmopolitan internationalism.
6. They wrongly considered that foreign trade is the most desirable occupation.
Adam Smith showed that all occupations are equally desirable and important.
7. Mercantilism was based on the policy of exploitation of colonies. It was the
beginning of colonialism and imperialism. The merchant capitalism under
mercantilism was transformed into industrial capitalism in later years, which was
responsible for international inequality.
8. They lacked broad-mindedness and advocated certain narrow policy measures
for their temporary gain.
9. The mercantilist writers were not in favour of the labouring class. They did not
recommend higher wages nor did they understand the implications of the
economy of high wages.
10. “The most misleading doctrine of the mercantilists was the oft-repeated
proposition that a country can get rich only at the expense of other countries.
DOWNFALL OF MERCANTILISM
Because if the above criticism, mercantilism could not continue for a long time.
The intellectual reaction started against mercantilism since the 16th century. The
reactions became very prominent during the later years of the 18th century. In the
17th century, it was found that the European countries wanted state regulation no
longer on economic life. The spirit of monopoly and regulation was gradually
dying out and in its place was introduced competition in all walks of life. The
growth of industries and the onset of industrial revolution changed the character
of ownership and control. Commercial capitalism of the mercantilist period was
transformed into industrial capitalism and many technological changes were
introduced in the process of production. Many changes were also brought into the
field of wage legislation. Trade unionism came into existence and the workers
became more organized. The Industrial Revolution produced a new philosophy of
laissez faire and liberalism. In course of time, this replaced the restrictionist
philosophy of mercantilism. There was also the growth of economic individualism
in many countries of the world. In this atmosphere of change, the wave of
mercantilism was gradually swept away. Mercantilism faced its downfall for
another reason. It was a narrow and partial way of analyzing economic problems.
It favoured industry, trade and commerce, and considered agriculture to be almost
a non-important occupation. Mercantilism stayed away from the natural laws and
rules. This provoked a group of French philosophers to launch another school
known and Physiocracy in place of mercantilism. However, the mercantilist
system was partially revived by the introduction of Keynesian economics in the
thirties of this century.
Merits: When all is said and done, it must be appreciated that mercantilism was
not supposed to be a scientific analytic system. Its protagonists did not want to
build up a theoretical engine of analysis. During the period when the
mercantilism grew up, economics did not have the status of a science. Still they
understood the basic needs of the country during that period. Mercantilism has to
be appreciated with reference to the Relativist approach to the history of economic
thought. Most of the confusions are caused when we take into account the
general view of the mercantilist school. Some of the mercantilist writers well
appreciated the implications of their practical policies. For instance, John Locke
and Thomas Mun observed that wealth consists not in silver and gold but in land,
houses and consumptions goods. Similarly, William Petty was against indefinite
accumulation of bullion. Mun knew the effect of bullion on the price level and its
negative repercussions on exports. They had also an idea of the quantity theory,
particularly the effect of money supply on the price level.
Many economists and politicians appreciated mercantilism as an appropriate
policy to achieve national self-sufficiency and expansion of state power. Adam
Smith indirectly supported mercantilism when he said that “defense is more
important than opulence”. This was exactly what mercantilism wanted. The
mercantilists aimed at building up a strong state; hence, they wanted to achieve

the goal even by weakening the economic powers of the neighbouring states. The
mercantilist writers were interested in optimum employment in the economy and,
for this, they suggested a number of useful steps. The preoccupation of the
mercantilists with gold inflows was no childish obsession, but an intuitive
recognition of the connection between increased money supply and lower rate of
interest. Keynes paid a tribute to the mercantilists for recognizing the fact that it
is very difficult to give an inducement to investment which is so crucial in
economic development.The mercantilists also recognized the favourable impact of
mild inflation on employment, income and output.
Since the scarcity of money was a frequent complaint during the period of
mercantilism, it was but natural for them to arrange for more money for the
expansion of trade and commerce. This is perhaps the reason why they were in
favour of more and more money. The economic setting of the mercantilist world
made free multilateral trade unworkable and it required a system of bilateral
control. Money was also necessary as sinews of war which was apparent in the
days of Henry VIII. The mercantilists brought economic questions to prominence,
and in doing so, they helped the development of Physiocracy. In the Relativist
sense, mercantilist policies were appropriate for that time which wanted to
promote a strong nation state in the midst of chaos and disorder of the feudal
system. Needless to say, many writers of the mercantilist period adhered to the
liberal principles. Keynes indeed found some scientific truth in the philosophy of
mercantilism.
BRITISH ECONOMIC POLICIES AND THEIR IMPACT

The British pursued different policies in the economic field. Their sole motive,
however, was to serve their own economic interests.Allpolicies were pursued by
them with this object and, therefore, none of them proved beneficial to the Indian
people. Some of them were as follows:
1. Commercialization of Agriculture.
Commercialization of agriculture began during the British rule. It is necessity
for an industrially developing country. If the industries are to be fed up,
agricultural production on commercial basis has to be raised up. But, in India,
commercialization of agriculture took place not to feed the Industries of India
because India was far behind in industrial development as compared to Britain
and other European countries. It was primarily to feed the British industries that
it was taken up and achieved only in case of those agricultural products which
were either needed by the British industries or could fetch cash commercial gain
to Britain in the European or American market.
Therefore, interestingly enough, the demand for the creation of a department of
agriculture under the Government of India to look after the development of
agriculture in India came from the Manchester Cotton Supply Association. The
Royal Commission pointed out that in 1869 this Association urged that “measures
should be undertaken for the improvement of cotton, the crop in which it was
primarily interested, and that a separate department of agriculture should be

established in each province”. The Commission further stated: “Cotton, as the
most important crop of special interest to the East India Company, first attracted
attention, and, as early as 1788, the directors of the Company urged that
encouragement should be given to its production and improvement….In 1839, the
Court of Directors sent out twelve American planters to teach the local cultivators
how to grow and clean cotton”.
The primary purpose of all these efforts was to provide raw and good quality
cotton to the cotton textiles industries of Britain which were growing fast after the
industrial revolution in Britain. Therefore, cotton-growing area increased in India
and its production increased manifold with gradual lapse of time. Indigo and more
than that tea and coffee plantations were encouraged in India because these could
get commercial market abroad. Mostly their plantations were controlled by the
British. Jute was another product which received attention of the British because
the jute-made products got a ready market in America and Europe. Thus, the
British encouraged the production of those agricultural goods which were needed
either for feeding their industries or could get them good commercial dividends
otherwise.
The commercialization of agriculture in India was beneficial only to British
planters, traders and manufacturers and partly to Indian traders and money-
lenders who worked as middlemen for them. Of course it led to the establishment
of a few industries in India as well which helped in its industrial growth. But it
was a very poor consolation because most of the industries established in India, in
the beginning, were managed by British capitalists. On the other hand, the Indian
people suffered miserably from this policy of the British. It resulted in reduced
area under cultivation of food crops. The departments of agriculture established
by the government mostly attended to the needs and development of commercial
crops. In other items of agriculture, their contribution remained negligible.
The result was that while the area under food crops increased between 1892-93
and 1919-20 by 7%, that under non-food crops increased by 43%.The commercial
interests pushed themselves so aggressively that during 1934-35 to 1939-40, the
area under non-food crops increased by 1.6 million acres, and that under food
crops fell by 1.5 million acres. It also meant massive export of raw goods and
commercial agricultural goods. The export of raw cotton increased from 1, 78,000
tons in 1900-1901 to 7,62,133 tons in 1936-37, that is, by 328%; in 1939-40 the
figure was 5,26, 411 tons. The exports of tea increased from 190 million pounds
weight in 1900-1901 to 359 million pounds in 1939-40; of oil-seeds from 549,000
tons in 1900-1901 to 1,172,802 tons in 1938-39. The same was the case with
other commercial agricultural goods.
The net result of this process was that India failed to produce even that much
food crops which could provide even two square meals a day to its population. The
misery was further enhanced because the population of India was increasing every
year. Fragmentation of land was taking place because of the pressure on land and
modern means of agriculture production were not introduced in India. The report
of the Prices Enquiry Committee of 1914 stated: “Population has increased by a
larger percentage in the period under inquiry (1890-1912) that either the total
area under cultivation or the area under food grains, or in other words, the
requirements of food grains for internal consumption have increased in a larger
proportion that the total production of food grains”. It seriously affected adversely
the poor people of India. It became difficult for them to get even sufficient food.
In 1945, Sir Manilal B. Nanavati, formerly deputy-Governor of Reserve Bank of
India observed in his presidential address to the sixth conference of the Indian
Society of Agricultural Economics at Banaras: “During the last 75 years
continuous deterioration in the condition of the masses is taking place. In 1880
India had a surplus foreign foodstuff to the extent of 5 million tons and today we
have a deficit of 10 million tons. The consumption of food was then estimated at
1½lb. per individual and now it is 1 lb. nearly 30% of the population of India is
estimated to be suffering from chronic malnutrition and under-nutrition”. Thus,
we find that the commercialization of agriculture in India by the British was also
one of the important causes of the impoverishment of the Indian people.
2. Rural Indebtedness
The revenue policy of the British, increased pressure of population on
agriculture, existence of several intermediaries between the peasants and the
government, sub-division and fragmentation of land-holdings etc. resulted in the
impoverishment of the Indian peasantry and another grave problem of Indian
agriculture that is, rural indebtedness. It has been sometimes asserted that the
one cause of all these typical problems of Indian agriculture was the growth of
population. It should, however, be not forgotten that nearly all these problems
were fully articulated by the 70s of the 19th century, several decades before India
experienced sustained population growth of any mentionable magnitude. There is
no doubt that the population increase after 1921 aggravated the problems which
were already there but the origin of these problems is to be found somewhere else.
Mostly, these were because of the faulty policies of the British government or its
neglectful attitude towards the welfare of the rural population. The same was the
case with rural indebtedness.
Various factors were responsible for rural indebtedness. Increased pressure of
population on land, uneconomic land-holdings, poor means of irrigation, lack of
modernization of agriculture etc. were factors which resulted in low production
while the social and religious customs of the Indians involved extra expenditure
besides that which was necessary for daily needs. Therefore, these were also the
causes of rural indebtedness. But more than these, the policy of the government
was directly responsible for it. The demand of the revenue was high; the
government did nothing to remove the intermediaries who came into existence
even where Ryotwari and Mahalwari systems existed; by the first half of the 19th
century, the government started collecting revenue in cash except in such outlying
areas as Assam; and, collected revenue by a fixed date. All these measures, in one
way of the other, forced the peasants to borrow money from the local money-
lenders who charged not only heavy interest but also took advantage of the
ignorance and illiteracy of the peasants and resorted to deceitful measures, such
as false accounting, forged signatures, making the debtor sign for larger amounts
than he had actually borrowed etc.
In the Zamindari system, the peasants were left to the mercy of zamindars who
raised rents to unbearable limits and compelled them to pay illegal dues also. In
the Ryotwari and the Mahalwari areas, the government took the place of the
zamindars and levied excessive land revenue which, in the beginning was fixed as
high as one-third or one-half of the produce. The presence of intermediaries,
whose number had gone on multiplying, enhanced further the actual demand of
the revenue manifold. What, in fact, happened was that the zamindars and, in
case of Mahalwari and Ryotwari systems, the government gave the right of
collecting revenue to certain other individuals who became intermediaries between
them and the peasants. These intermediaries, in turn, gave this right to
somebody else on profitable terms. Thus, by a chain-process, a large number of
rent-receiving intermediaries between the peasants and the government sprang
up. In some cases, in Bengal their number went as high as 50. As all these
intermediaries drew profit for themselves, their presence burdened the peasants
heavily as the actual revenue collected from them grew enormously.
Besides, the government collected the revenue by a fixed date and by the middle
of the 19th century started collecting it in cash. The peasants, therefore, many
times were forced to sell a part of their land or sell their produce at cheaper prices
to the local Bania who was also his money-lender in most of the cases or to
undergo debt. The absence of a just marketing system for the peasants and the
growing commercialization of agriculture also helped the money-lender-cum-
merchant class to exploit the peasants. The poor peasants had to sell their
produce just after the harvest and at whatever price they could get as they had to
meet the demand of the government, the landlord and the money-lender. All these
factors reduced the peasants to poverty and forced them to beg for loan in absence
of any substitute, mostly from the local money-lender.
Therefore, the village money-lender occupied an important place in the village

economy. The government provided no just substitute for him. The limited
attempts of the government to redress the sufferings of the peasants proved futile.
The Usurious Loans Act, as amended in 1819 and again in 1926, seeking to set a
maximum limit to the rate and amount of interest recoverable was found to be
inoperative in practice by the Royal Commission on Agriculture. The Cooperative
Societies Act, 1904 was certainly a step in the right direction and, by 1939-40, the
total number of cooperative societies in India rose to 1, 37,000 with a total
membership of over six million people. Yet, it failed to solve the problem of rural
indebtedness. The movement was unevenly distributed over the different parts of
the country. Therefore, the advantage remained restricted only to limited areas. In
Punjab, only10.2% families in rural areas drew advantage from the cooperative
societies while in other provinces this figure was below 4%. The same way, other
legislations, passed mostly by the elected provincial governments after 1937, also
failed to find out any solution of this problem.
3. Growth of Agricultural Labour

Social but more than that economic factors particularly arising out of British
policies, resulted in the growth of agricultural labour which has been regarded as
a typical feature of the economic history of India during the 19th and 20th
centuries. There were certain castes in India, both in the North and the South,
constituting a fairly large proportion of working force in agriculture which was
excluded from occupancy rights in land on social grounds. They enjoyed security
of livelihood on the margin of subsistence by customs prevalent and accepted as
norms of the society. Their number increased by natural growth. The government,
under new laws and regulations, did not provide them proprietary or tenancy
rights. Therefore, their increased number contributed a fair proportion of the
increase in the number of agricultural labourers.The general rise of Indian
population which could not be absorbed into non-agricultural sectors was another
cause of the rise in landless agricultural labourers. The reduction in the size of
land-holdings because of the law of inheritance which provided all male members
equal share in the property of their father, the reduction of agriculturist’s income
to an uneconomic level, alienation of land through indebtness and loss of tenancy
rights through eviction also contributed to a large extent to the growth of
agricultural labourers.
Thus, we find that some social factors certainly contributed to the growth of
landless labourers, yet, there is no doubt that economic factors were also involved
with them. Of course, rise in population and law of inheritance, resulting in
fragmentation and thereby uneconomic holdings, were responsible for the growth
of agricultural labourers but lack of industrial growth which if properly attended
could absorb a large portion of the population, absence of laws safe-guarding the
tenants and agriculturists from the clutches of local Banias and landlords and
destruction of village handicrafts which if safeguarded could subsidize the income
of agriculturists, were equally responsible for it.
Economic factors which led to the growth of agricultural labour were largely the
creation of the policies of the British-pursued in different fields for safeguarding
and enhancing their and their country’s economic interests. The 50 years of
British rule in India witnessed the ruin of her trade and industry, driving and
increasingly large proportion of her people to the lands and, next 50 years of their
rule brought temple cultivators as a class, forming nearly four-fifths of the Indian
population, to the brink of ruin and destruction. Its final result was tremendous
rise in the growth of agricultural labourers.The British, during their earliest period
of rule in Bengal, Bihar and Orissa, destroyed the trade and industries
particularly that of cotton cloth of these provinces. The process continued till the
end of their rule. The industrial Revolution in Britain, the abolition of the
monopoly of trade with India of the East India Company in 1813, the revenue
policy of the British which aimed to extort maximum income for themselves
whether it be zamindari or, Mahalwari or Ryotwari, system, their Tariff policy of
free trade from 1833 onwards, commercialization of agriculture in India,
destruction of village handicrafts, the apathy of the British towards
industrialization of India, the Tariff policy of Britain which aimed at discouraging
import of manufactured goods of India, etc. resulted in gross impoverishment of
the Indian people and, having no other means of livelihood, a large number of
them were reduced to the position of landless agricultural labour.
The disproportionate rise in the growth of agricultural labour brought about

pitiable results. From the point of view of economy, it really meant an increase in
disguised unemployment or under-employment in agriculture because the labour
force in agriculture came to exceed the number actually required for maintaining
production at the level attained during this period. Commenting on the condition
of the agricultural labourers, R.C. Dutt writes: “It is literally a fact and not a figure
of speech that agricultural labourers and their families in India generally suffer
from insufficient food from year’s end to year’s end. They are brought up from
childhood on less nourishment than is required even in the tropics, and grow up
to a nation weak in physique, stunted in growth, easy victims to disease, plague or
famine”.
4. Destruction of Handicraft Industries
India lives in her villages and agriculture was the very backbone of her
economic life. Village handicrafts subsidized the economy of the villages and, thus,
villages existed mostly as self-sufficient economic units. But, at the same time,
there was very little left as surplus which could be utilized for the purpose of
trade. Yet, it would be wrong to assume that India’s prosperity was only due to
flourishing agricultural economy. India enjoyed brisk trade with foreign countries
from times immemorial which was the primary reason of its fabulous wealth. India
exported a large quantity of goods to foreign countries; and among them
manufactures of Indian handicraft industries occupied an important place. Cotton
and silk cloth, indigo, salt petre, ivory-goods, sea-pearls etc. were some important
items of export from India and, among them cotton and silk cloth were the
primary ones. Therefore, manufacturing of cloth was the most prominent
handicraft industry of India. British policies were instrumental in destroying most
of the handicraft industries in India but the worst affected were the cotton and
silk cloth handicraft industries which, prior to their destruction, brought immense
wealth to India from foreign countries.
There were at least 200 distinct trade names of Indian cloth which were derived
both from their centers of production in India and from the foreign consuming
markets. Several places in Avadh, Bihar, Calicut, Gujarat, Punjab, North-West
Province and Bengal were the centers of production of cotton cloth while several
places in Bengal, Bihar and Orissa were famous for silk production in the 17th and
the 18th centuries. Gradually, both of these handicraft industries were destroyed
because of the policies of the British. The process started from the provinces of
Bengal, Bihar and Orissa as soon as the East India Company assumed the Diwani
of these provinces. The Company and its servants engaged in private trade desired
to earn maximum profits for themselves. After getting political control over these
provinces, they forced the weavers to work and produce cloth according to their
own requirement and on conditions of their own. The Company contacted the
weavers through their Indian agents called the gumastas.The weavers were
supplied either with advance or raw-material, asked to manufacture specific
quality and quantity of cloth within a specified time and sell it to the Company or
its servants at the price 15% to 40% less than the market price. The Gumastas
also kept monopoly over the weavers and did not permit them to work for any
other trader or trading company. The defaulters among the weavers were severely
punished and, in some cases, even their thumbs were cut off so that they could
not continue with their profession.

The practice, however, could not continue for long because that killed the goose
that laid the golden eggs. A large number of weavers left their profession. It ruined
the cotton and silk cloth handicraft industries of the provinces of Bengal, Bihar
and Orissa within some years. It ruined the economy of these provinces and, in
turn, put the British Company also to loss which was forced to ask for loan from
the British government.
The Industrial revolution in England and particularly manufacturing of
cloth by machines also participated to a large extent in destroying the cloth
handicraft industry of India. The mechanization of textile industry in British
began nearly by the time when the Company assumed the right of Diwani in the
provinces of Bengal, Bihar and Orissa. Hargreaves invented the Spinning Jenny
in 1767 and, two years later, Arkwright the water-frame. Britain no more required
finished cloth from India. Therefore, as early as 1769, the Directors of the
company ordered that “manufacture of raw silk should be encouraged in Bengal
and that of manufactured silk fabrics should be encouraged in Bengal and that of
manufactured silk fabrics should be discouraged”. Gradually, with the help of
machines, Britain started producing large quantity of cloth and at a cheaper rate
than produced by the Indian weavers manually. Britain then required raw cotton
and silk for its manufactures and made India the primary source of their supply.
That resulted in commercialization of agriculture in certain products particularly
silk and cotton. India was, gradually converted into a vast agricultural land
meant to produce raw products which were required by British industries. India
also served as a big market for the finished goods of Britain. Roads, Canals and,
particularly, Railways were constructed in India for extending the market of
British goods to remote places. Besides, it became difficult for the hand-made
Indian cloth to compete with the machine-made cloth of Britain in the market.
The abolition of the monopoly of trade of the Company with India in 1813
flooded India with British traders and their manufactured goods. That also helped
in the destruction of Indian handicraft industries. The Tariff policy of the
government of Britain and that of India played an important role in the
destruction of Indian handicraft industries. As far back as 1720, the British
government totally prohibited the import of Indian silk and calicoes in Britain and,
therefore, the East India Company was forced to find market for them in other
European countries. Even afterwards, when imports were permitted, the British
government charged heavy protective custom-duty on articles imported from
India. In the 19th century, Britain prohibited the wear of printed calico and,
gradually, increased the duties on imported Indian cloth goods rising up to 80%
ad valorem. Besides, it forbade the export of tools and machinery so that no other
country, including India, should get the advantage of them. On the contrary, the
Indian government gave all facilities to British imports. From 1833 onwards, it
supported the policy of free trade and, gradually, decreased the export and import
duties. It provided Britain the facility of getting cheap raw-materials from India
and supplying their finished goods at a cheaper rate in India.

Another cause of the destruction of Indian handicraft industries was that there
remained a wide gulf between temple intellectual and working class in India. It not
only prevented mechanical improvement in the handicrafts of the country but also
kept the workers and artisans in social neglect and low status. Therefore, the
Indian handicraft industries showed no improvement and failed to stand against
the British mechanized industries. Many British officials and scholars described
the destruction of Indian handicraft industries as a sad but inevitable fact as part
of the price of modernization. But it is not correct because Indian handicrafts
suffered not because of industrialization and modernization of India but that of
Britain. Thus, the price which the Indian workers and the artisans, engaged in
these handicrafts, paid was not the price in return of modernization of India but
being slaves of British colonial rule. The argument of U.S. scholar, Morris D.
Morris, that deindustrialization of India was a myth, is also not accepted by Indian
scholars. Different Census and Famine Reports, the acceptance of the Swadeshi
Movement by the masses and their participation in several movements justify the
view that destruction of Indian handicraft industries had taken place on a large
scale during the 18th and 19th centuries and a large number of labourers and
artisans, engaged in these industries particularly in cloth industry, had suffered
miserably. The destruction of Indian handicrafts contributed in the growth of
mass-poverty in India.
5. Drain of Wealth
The economic exploitation of India was the worst feature of the British rule in
India. The British drained off the economic resources of India continuously in a
systematic way during their rule in India and poured the wealth of India in
Britain. Even the loot and plunder of India by Mahmud of Ghazni and Nadir Shah
are reduced to in- significance when compared with that of the British. The British
trade and commerce was only one source of the drain of wealth from India to
Britain. There were several other means by which India was deprived of its wealth
and economic resources. Home charges which included military and other stores
purchased in England, cost of army training, transport and campaigns outside
but charged on Indian finances, guaranteed interest on Railways and pensions of
the retired British personnel, part of the salaries and allowances of those still in
service, the earnings from private trade till it was finally stopped by Cornwallis,
presents and gifts from Indian rulers, other gains made by them profits earned by
British investors, traders and planters and several other kinds of income were
several other means by which India was deprived of its wealth by the British. The
records of the East India Company are replete with references to the export of
diamonds, pearls and other precious stones by various ships leaving the port of
Calcutta which was one of the means adopted to remit their gains by the servants
of the Company. All Englishmen working or trading in India, with bare exception
transferred all their assets to Britain. It constituted a big monetary drain from
India. Only between the periods 1758 to 1765, the Englishmen transferred nearly
six million pounds to Britain. And, this amount did not include the profits of the
Company which definitely must have amounted manifold.

Another means of the drain of wealth from India has been called the transfer of
‘Investments’. The Company financed its purchases from India by the income
derived from military and political services rendered to the Indian rulers. Large
sums were acquired from the Nawabs of Bengal when the Company became the de
facto ruler there. Afterwards, the story was repeated in case of every dependent or
allied ruler of the Company. The money so acquired was invested in purchase of
goods for export. These purchases were known as ‘Investments’. These purchases
brought no bullion in return from Britain. Therefore, it meant the transfer of the
wealth of India to Britain in form of goods which could yield further trade profits.
Based on the reports of the Committee of Secrecy, J.C. Sinha has calculated that,
by this very means, the drain of wealth from India in the first nine years after
Plassey was to the extent of two million pounds.
To this may be added the funds, mainly in the form of silver, which were sent to
China for purchases of tea and silk on Company’s account there. This amount
was also between £1, 00,000 to £3, and 00,000 a year. No return came to India
from this source as well. In 1765, the Company got the right of Diwani in the
provinces of Bengal, Bihar and Orissa. It started to use the surplus revenue of
Bengal for the purpose of ‘Investments’. It has been roughly calculated that a sum
of about ten million pounds, in the form of goods, was sent to England between
the periods 1766 to 1780 alone. These ‘Investments’ also brought no return to
India. Thus, while the Company brought neither goods nor money to India, it
exported Indian goods which were purchased by Indian money and earned profits
which again were transferred to Britain. Thus, through this process this was
called ‘Investments’, the wealth of India was transferred to Britain.
It adversely affected the fortunes of the Indians in another way also. With the
revenues becoming a vital part of British trade, the eyes of the British rulers were
always searching for devices by which it might be increased. The British gradually
increased their demand of land revenue. In 1767, in Bengal it was 60 lakhs of
rupees. In 1793, it totalled Rs. 1, 09, 59,130, the average being 90 lakhs of
rupees. The policy was pursued in other parts of India as well. Further, the British
found other means to increase their economic resources in India. One of its
examples is the salt-tax. The system of monopoly of sat was revised several times
since the Diwani, each resulting in larger collections. By gradual increase, the
salt-revenue had raised to rupees 45 lakhs per annum during the three years
preceding the arrival of Cornwallis. In the third year (1789) of his governor-
generalship it rose to seventy lakhs. It went on increasing. By 1883, according to
Blunt, the salt-revenue had risen to 6 million Sterling. The price of the salt sold to
the people by the government was reckoned at 1,200 to 2,000 per cent on its cost
value at that time. The salt monopoly remained as an oppressive monopoly
throughout the British rule. The same was the case concerning all measures of
economic resources. All this resulted in enormous drain of wealth from India
to Britain. Even the British accepted it. John Sullivan, President of the Board of
Revenue, Madras, remarked: “Our system acts very much like a sponge, drawing
up all the good things from the banks of the Ganges, and squeezing them down on
the banks of the Thames”. According to Dadabhai Naoroji, during the period
1849-50 to 1894-95, India sent goods worth Rs. 40 crores every year to Britain, in
return for which, it got nothing at all.

Thus, economically, India suffered miserably during the Company’s rule in

India. The misfortune of the Indians was not only because of the fact that they
had surrendered themselves to political subjugation of the foreigners but also
because of the lack of scientific acumen and spirit of technological innovation and
also that of economic enterprise among them. The Indians failed to reorganize
their industries with modern techniques. All of them remained at the stage of
cottage industries. The failure was, no doubt, because of the lack of scientific
education and development. But at the same time, the Indians did not even try to
learn the means and methods of the foreigners. They failed to organize modern
means of banking and they also remained behind in commercial enterprise. There
were many who were rich among them but they, instead of creating capital and
utilizing it for commercial purposes, invested their money on land and preferred to
remain as landlords. Thus, the elite of India failed to serve any useful purpose in
the economic field as it had failed to serve its people in the political field.
Therefore, India’s wealth and economic resources were drained off. Indian
cottage industries were completely destroyed, its trade suffered seriously and
heavy pressure was put on agriculture. Its net result was complete
impoverishment of people. On the contrary, Britain grew into the foremost
industrial nation. Commenting on the results of economic exploitation of India by
the British even prior to the revolt, Dr. Bisheshwar Prasad writes: “Prosperity of
England betokened poverty of India, for imperialism, based on a system of colonial
economy, thrives on the exploitation of its dependent subjects. India had become
the victim of colonialism and all the evils of imperialism had become evident
before the East India Company had been extinguished after the revolt of 1857”.On
the contrary, the legal system of the British greatly helped the money-lender. In
pre-British times, the money-lender was subordinated to the village community
which safeguarded the interest of the peasants. But the British made the money-
lender free from this bondage and also gave him the right to capture the land of
the debtor-peasant in case he failed to pay his debt. The cost of litigation, the
complicated process of law and justice and even the police system went in favour
of money-lender than the peasants.
Thus, various factors forced the peasants to undergo debts. And, once a
cultivator was in debt, it was very much difficult for him to get out of it. Mostly, it
resulted in the sale of his land. Thus, rural indebtedness remained a serious
problem for the Indian peasants. It was largely the creation of the British policies
and it grew to large proportions with increasing years of their rule. In 1911, the
total rural debt was estimated at Rs. 300 crores and by 1937 it amounted to Rs.
1,800 crores. The problem, thus, remained unsolved and was one of the major
causes of the hard suffering of the Indian peasantry.
6. Growth of Modern Industry and the Rise of a Capitalist Class
The development of modern industry in India began in the second half of the
19th century and was confined mainly to the plantations and a few consumers’
goods industries like textiles. There was limited development of mining like coal
and iron. The ownership of these industries except the textiles was predominantly

European and mostly British. In fact, the industrial development of India began
only when Britain had sufficient surplus capital at home which needed investment
abroad. India provided a good place for investment to the British capitalists and
financiers as labour was available cheap here. The First World War provided a
good opportunity for Industrial development in India because foreign competition
was eliminated during those years and necessity was felt of producing many
articles at home. But it was only a temporary gain. After the War, India also
shared economic depression with other countries of the World. But the Second
World War opened a new phase in the industrial development of India. The
imports were restricted; there was the demand for war materials and the
government assured protection to many industries even after the expiry of War. All
this helped in the expansion of Indian industries during the course of the Second
World War. The modern industries which developed during the British rule were
primarily as follows:
(i) Textiles: The first cotton mill in India was started in Calcutta in 1818 but later
on, the textile industry was established in the Bombay region under Indian
entrepreneurship and was well settled by the nineties of the 19th century. By
1880, the number of textile mills rose to 56 in India. It had so alarmed the British
manufacturers that the Manchester Chamber of Commerce sought abolition of
import duties on yarn and cotton cloth from the Government of India. It was done
so in 1879. A serious shock was given to Indian industries when the Government
of India abolished all import duties excepting those on salt and liquors in 1882. In
1896, the import duties were revived but, much against the interest of Indian
textiles, and excise duty of 3½% was imposed on cloth manufactured in Indian
Mills. Thus, the British handicapped the growth of Indian textiles from the very
beginning.
The movement of the nationalists to use hand-woven cloth and more than that
the entry of Japan in competition with India in textiles in the 20th century created
critical position for the Indian textiles. The government, under considerable
pressure from the different groups, came to the help of the Indian textiles and in
1917, raised the import duty on foreign cloth to 7½%.First World War helped
further in the revival of this industry. The import duties on foreign but non-British
goods were gradually increased further in the coming years and additional
protection was given to this industry by the Cotton Textile Act of 1934.The Second
World War gave further impetus to the growth of Indian textiles and it gradually
flourished. The result was that while in 1914, the Indian cotton mills produced
only one-fourth of the mill made cloth consumed in India, by 1935, their
contribution rose to three-fourths and in the course of the Second World War,
they not only met the Indian need in full, but became exporters of large quantities.
When the British left India, it had 421 textile mills with 202.814 looms and
between 1941-1946 it exported cloth even to Britain in a sizable quantity.
(ii) Jute: The first jute mill was started by an Englishman, George A eland, in
1855, on the banks of Hooghly. The industry developed almost exclusively in and
around Calcutta even afterwards. The industry remained the exclusive concern of
Scotsmen from Dundee. Jute has been the foremost packing fabric. It never faced
competition and seldom depression. It remained a growing and profitable concern.

First World War and Second World War gave it desired impetus to grow. By 1947,
the number of jute mills in India had risen to 113.
(iii) Plantation Industries: Among plantation industries indigo was pushed out of
the market by the competition of German synthetic products, Coffee by Brazilian
Coffee and rubber, after a favourable period up to 1920-21, by the slump in
rubber prices all over the world. It was tea alone which progressed among
plantation industries in India. The industry remained virtually a British monopoly.
The tea-plant was discovered in India in 1820 and an experimental garden was
started in 1835 by the East India Company. The industry received protection from
the government and tea-plantation emerged on a large scale. It became one of the
important items of export and even before First World War it emerged as “by far
the most important factor” in the world tea-market. Efforts were also made for
home-consumption and wide publicity was given to tea-consumption after 1930. It
bore fruits and in 1946, the home consumption amounted to 175 million lbs.
Thus tea industry flourished well in India and captured both foreign and
indigenous market.
(iv) Mineral Industry: Coal – The earliest of the mineral industries in India was
coal. It developed under the auspices of several European owned joint-stock
companies. The construction of Indian Railways made it a necessary item of
production. The other developing industries of India also needed coal. Therefore
the production of coal went on unhampered. The two World Wars gave further
impetus to its production. A part of its production was exported also but most of it
was consumed by indigenous industries. Therefore, the industry never faced crisis
and flourished uninterruptedly.
(v) Iron and Steel: The production of iron and steel began in the 19th century and
its average annual production was only about 35,000 tons in the early years of the
20th century. In 1911, the Tata Iron and Steel Company were established. It
developed to its full capacity due to the increased demand of iron and steel during
the course of the First World War. A few other companies were also established in
West Bengal and Mysore. But, then, it had to face competition from imported steel
and iron. Therefore the government imposed protective import duties on foreign
steel and iron and the industry survived the slump of post First World War period.
The Second World War again gave impetus to the development of this industry
and, by the time the British left India, it had a freedom foundation in India.
(vi) Other Industries: Among other industries, sugar, oil-seeds, leather,
manganese, petroleum and mica also grew in India and a few of them got foreign
market as well. But the process of their development was slow and difficult. Yet,
each of them succeeded in establishing itself prior to the departure of the British
from India.
Rise of a Capitalist Class: The establishment of modern industries resulted in
the formation of a new class in India, viz., the capitalist class. However, the
process was very slow and meagre. India lacked capital and it had no resources
for its accumulation. The British policies had destroyed its agriculture and
commerce while the landed aristocracy had neither the incentive nor the required
talent to invest their money in industries. The joint-stock-companies and the
banks were mostly British. The Indians, therefore, always lacked behind in
organizational skill concerning modern industries and were devoid of the credit
facilities. Besides, the main impediment in the way of Indians putting up
industries in their own country was the privilege which the British enterprise
enjoyed in India. The government gave all facilities to the British capitalists and
manufacturers to establish themselves in India or invest their capital while the
Indians were mostly forbidden from every like facility. Thus, lack of Indian capital,
enterprise and government support, resulted in meagre growth of modern
industries in India. Therefore, the formation of a capitalist class in India was also
slow and meagre.We find only a few capitalist houses in India before
Independence. Yet, the class came into existence. It even supported the national
movement financially because it expected better treatment and facilities from a
nationalist government than a foreign one. It has succeeded in its efforts and aims
after Independence.
7. Foreign Capital
Foreign capital predominated in Indian industries during the rule of the British.
Industrially advanced Britain accumulated sufficient capital to invest it abroad.
India provided every facility for that. Therefore, we find that most of the Indian
industries like railways, tea, jute, etc. were monopolized by the British and many
others were financed by the British capital. It is difficult to estimate the amount of
British capital in India. Sir George Paish puts it (Ceylon included) at £365,399,000
in 1909-10, while H.F. Howard puts India’s share at 450,000,000. By the time
India gained independence, it must have multiplied manifold. All its profits went
to Britain which meant further impoverishment of the Indian people.
8. Foreign Trade and Tariff Policy
The Company’s primary motive in India was trade. In the beginning, the trading
interests of Company were not against the interest of the Indians. On the
contrary, its trade benefited India. The Company mostly purchased cotton textiles
and spices in India to export them to Britain and other European countries. It,
therefore, brought precious metals and other valuable goods in India which added
to the wealth of India. Besides, it increased the market for Indian goods abroad
and thus, it encouraged the production of Indian goods. Thus, initially the trade of
the Company benefited not only the Company but also the Indians as well. But,
this trade affected adversely the interest of Britain. Indian cotton textiles became
so popular in Britain and were in so large demand that the British government felt
it necessary to limit the import of Indian textiles by protective duties. A law was
also passed in 1720 prohibiting the use of printed cotton cloth in Britain. Many
other European countries were also forced to adopt alike preventive measures
against the import of cotton textiles and Indian silk. Yet, the Indian textiles kept
their hold on foreign market till the middle of the 18th century. But gradually the
situation underwent a change and India became the victim of economic
exploitation by Britain. Primarily, two factors were responsible for it. One was the
political control of India by the British and, the other, was the Industrial
Revolution in Britain. As much as the Company extended its political power in

India and as much as the Industrial revolution gained momentum, the
exploitation of India went on increasing till the Indian sub-continent was reduced
to a field for the production of raw material to be exported to Britain and a vast
market for the finished goods of British manufacturers.
In 1757, the Company won the battle of Plassey which gave them political
influence over the affairs of the provinces of Bengal, Bihar and Orissa. It marked
the beginning of economic exploitation of India. It went on increasing with the
extension of the British Empire in India. The Company in the beginning traded
without payment of any tax, kept the monopoly of trade in certain essential
articles like salt, betel nuts and tobacco, extended its monopoly gradually to most
articles of trade and eliminated its trade rivals, both Indian and foreign. It
monopolized the sale of raw cotton and silk, forced the weavers and
handicraftsmen to manufacture goods of its choice and quality while paying them
low wages or low price of their goods and, thus, drew maximum profit to itself. The
servants of the Company in their individual capacity also drew rich dividends by
engaging themselves in private trade. It reduced Indian handicraftsmen to extreme
poverty, eliminated Indian traders and destroyed the economic prosperity of the
provinces over which it ruled. In 1858, Sir George Cornwall spoke before the
Parliament: “I do most confidently maintain that no civilized government ever
existed on the face of this earth which was more corrupt, more perfidious and
more rapacious than the Government of the East India Company from 1765 to
1784”.
The Industrial revolution in Britain in the second half of the eighteenth century
completely transformed not only its economy but also its economic relations with
India. Coincidentally the “victory” at Plassey and the beginning in mechanization
was made almost simultaneously. Britain was the greatest colonial power in
Europe. Its colonies provided large markets for its goods and mutual trade
facilities which resulted in accumulation of capital in Britain. It was fruitfully
utilized by the Britishers for the development of scientific and technological
knowledge resulting in Industrial Revolution. It led to the production of machine-
made goods and cotton-cloth became one of the most important items of
production in Britain. The industrial development also created a class of
capitalists and financiers which influenced the politics of Britain and the politics
of its government. All this seriously affected the fortunes of India. On the one
hand, it became difficult for the Indian hand-made goods to compete with the
machine-made goods of Britain both in the native and foreign market. On the
other hand, the British government as well as the Company’s government in India
took all possible measures to feed the British industries with Indian raw materials
and encourage the sale of British manufactured goods in India.
The British manufacturers pressurized its government for their advantage and
the policies of the East India Company were framed accordingly. The British
industrialists succeeded in increasing their exports to India manifold by forcing
the Company to liberalize its import policy in India. The British government gave
all possible help to them in their efforts. R.C.Dutt in his famous work, The
Economic History of India, wrote: “The effort of the Parliamentary Select

Committee of 1812 was to discover how they (Indian manufactures) could be
replaced by British manufactures and how British industries could be promoted
at the expense of Indian industries”. In 1813, the Company monopoly of trade
with India was abolished with the view to open the Indian market to all British
manufactures. It resulted in an unfavourable balance of trade to India. Between
1814 and 1835, Britain increased the export of its cotton manufactures from less
than one million yards to more than 61 million yards, while India was obliged to
cut the export of its piece goods to Britain from 12,50,000 pieces to 3,06,000
pieces; by 1844, the Indian export was further reduced to 63,000 pieces.
The next step to support the British industries was taken in 1833 when the
Government of India declared its adherence to the policy of free trade and either
completely abolished or else reduced the import and export duties on many
articles. Thus, the British traders and manufacturers who were already
strengthened by their machine-made production against the Indian handmade
handicrafts got a free access to the Indian market. On the contrary, the British
government continued to restrain the entry of Indian goods in Britain by
prohibitive import duties. For example, in 1824, duty of 67½% was levied on
Indian calicos and duty of 37½% on Indian muslins. Therefore, it would not be
wrong to say that it was not so much by machine as by political power that India
was not only ousted from the British market but was made to buy British
manufactures and bury its own textile industry.
This resulted in an unfavourable balance of trade to India. While the export of
Indian manufactured goods to Britain practically stopped, India started importing
large quantities of British manufactured goods. It practically destroyed the cottage
industries of India and put pressure on land because a large number of
handicraftsmen were left with no alternative employment but agriculture. Besides,
the Indians were forced to feed the British industries with their raw materials.
India, instead of exporting cotton and silk textiles, henceforth, exported raw cotton
and silk to Britain. It became necessary also because in return of British imports,
India had to pay back something and, therefore, raw material, which could feed
the British industries, became the important items of export to Britain. In 1813,
raw cotton exports from India to Britain amounted in weight to 9 million pounds;
by 1833, they rose to 32 million; by 1844 to 88 million; and three quarters of a
century later, to 963 million. The same thing happened with other raw materials,
e.g., the export of jute from India was of the value of £68,000 in 1849 and by
1914, the amount rose to £8.6 million. The Government of India helped in the
production of cotton, silk, indigo, tea etc. for the same purpose. Even the cultural
policy of the Indian government was pursued with a view to develop taste for
British goods among Indians so that these could get wide market in India. It
meant economic exploitation of India which brought prosperity to Britain and
sufficient revenues to the Company but it hurled back poverty on the Indian
people. Ram Gopal writes: “The old pattern of rural economy was destroyed by
British and European manufacturers, rendering the multitude of temple rural
urban population idle and compelling the idle to crowd into agriculture, a factor,
which resulted in fragmentation of holdings and unemployment at a scale
unknown before British rule”.

DRAIN OF BENGAL
Political Background
In 1613, when a British company by the name of the East India Company was granted permission
by the Mughal emperor Jehangir to start their trading activities, nobody imagined that the British
would one day rule India. Starting from the West coast they gradually established their centre on the
East coast and in Bengal. Bengal was then under Mughal rule. In 1717, Murshid Kuli Khan was
appointed as the Subadar (administrator) of Bengal. At this time, Bengal was for all intents and
purposes independent, though nominally it was under Mughal rule. In 1756, after the death of
Nawab Alivardy, Sirajuddaula, who succeeded him, was the last independent ruler of Bengal. Lord
Clive was then the governor of the East India Company in Bengal. Lord Clive hatched a conspiracy
with the commander in Chief of Nawab's army, Mirjafar, and defeated Sirajuddaula in the battle of
Palashii in 1757. After this victory, the British aggressively expanded their domination of India.In
1764, the Nawab of Oudh, Sujauddaula and Mughal Emperor Shah Alam II was defeated in the war
of Buxar. On August 12, 1765, Clive signed a treaty with Emperor Shah Alam II. The East India
Company was granted the Dewani (administrative power to collect taxes) over Bengal, Bihar, and
Orissa by the Mughal emperor. It can be mentioned here that Muslim rule virtually ended at this
time. The British continued to consolidate their power in the Indian sub-continent through
conspiracy, betrayal and ruthless oppression. They did not gain the domination of India easily;
however, they faced continuous revolts and uprising in Bengal and in other parts of India. After the
Sepoy Mutiny in 1857, the company's rule was terminated and the British government directly
assumed the administrative responsibility of India. Political dissent continued to grow in India in the
latter half of the 19th century.
Concerned by the growing political unrest, the British government planned to split Bengal in order
to weaken it. The British thus implemented their traditional policy of "divide and rule”. Assam
province was formed in the year 1874 and included the Bengali-speaking districts of Goalpara,
Kachar, and Shrihatta. At that time the province of Bengal included Bihar and Orissa. When Lord
Curzon came as Viceroy of Bengal, he planned to dismember Bengal further. In 1903, he proposed
that Cittagong division and Dhaka, Maimansing districts should be included in Assam in order to
make Bengalis minorities in both provinces. Tremendous agitation against the proposal immediately
erupted all over Bengal. Lord Curzon became concerned with this unified movement and its impact
on national integration. In order to nip the movement in the bud he made a more sinister design. He
decided to create two provinces-Assam, North Bengal and East Bengal as one province, and Bihar,
Orissa and West Bengal as the other. As a result of this Bengali Hindus would be converted into
minorities in both the provinces. In this way he planted the seed of conflict between Hindus and
Muslims in Bengal. In 1905, this proposal was approved by England. On July 7, 1905, the
government of India implemented the plan of division.
Waves of protest erupted throughout Bengal against such an injustice. This was the starting point
of major political movement in Bengal and in India as a whole against the British rule. Lord Curzon
pretended that the partition was made in order to facilitate administrative efficiency. It was a false
pretence. On January 17, 1904, Lord Curzon wrote a letter to the secretary of State, Brodrick, which
stated in part: "Bengalies think themselves as a separate race and dream that one day they will chase
the British out and govern the Viceroy's mansion. With the division of Bengal their political
importance will be diminished and their dream will be shattered. For this reason they are agitating so
much. If we nullify this division of Bengal to pacify them then the power of Bengal can never be
reduced."Later, when Lord Minto became the Viceroy of Bengal, in a secret dispatch he informed
London: “The political influence of Bengalis in India is becoming very unsafe for the British. The
Bengalis are spreading discontent against the foreign domination in other states. Due to this reason,
the partition of Bengal initiated by Lord Carzon cannot be nullified altogether."
In November 1910, Lord Harding replaced Lord Minto as the governor of Bengal. Lord Crue
replaced Lord Montague as Secretary of State for India. Lord Harding realized that the main reason
for discontent and agitation in Bengal was its partition. He also realized that Calcutta, being the
capital of India, the political impact of Bengalese on the rest of India was quite strong. Ultimately it
was proposed to withdraw the bill to partition Bengal. On December 12, 1911, the King of England,
George V, announced the decision during the Delhi conference. Soon thereafter, Lord Harding sent
the following proposal to England
• To shift the capital of India from Calcutta to Delhi.

• To reorganize Bengal and declare it as a new province under a governor.
• To declare Bihar and Orissa as separate provinces under a lieutenant governor.
• To bring Assam under a chief commissioner.
On June 25, 1912, this proposal was approved by the British Parliament. Lord Curzon angrily
commented that to take such an important decision without the knowledge of the Parliament was
illegal and defective. Lord Crue simply replied that Lord Curzon had also partitioned Bengal without
the knowledge of the Parliament. But this decision was not so noble as it appeared to be. Four new
states were created Bengal, Assam, Bihar, and Orissa. On the surface there could not be any
grievance against it. But in reality the idea was to cripple Bengal's economy. Bengali speaking
provinces like Singhbhum, Dhanbad, Santhal Pargana, etc. were separated from Bengal and were
included in Bihar, because these areas were rich in minerals and had high industrial potential. The
original decision to partition Bengal was withdrawn and the new proposal of Lord Harding was
implemented. The British government continued to pursue its policy of "divide and rule". Ultimately
when they had to leave India in 1947, India was partitioned into two nations, India and Pakistan.
Since then the conflict between the Hindus and the Muslims has left deep scars in the social life of
Indian sub-continent many times.
Devastation of the Bengal Economy by the British
In the year 1947, India gained political independence from British domination. Punjab and Bengal
had to pay the price. These two provinces were partitioned in order to create Pakistan, a new nation.
Millions of people became homeless; thousands were butchered, raped and tortured. The Indian
government extended all-out help to settle the refugees from West Punjab but the Bengali refugees
are almost 40 years later yet to be resettled completely in a dignified way. Assam is demanding their
expulsion. Tripura is showing irritation and in other provinces they are persona-non-grata. History
shows though, that the present plight of Bengal started much earlier than 1947.Ranjit Roy explains
in his book ‘The Agony of West Bengal’:"Salisbury was the British government Secretary of State
for India in the 1870's. The noble Lord made himself famous in England by proclaiming in 1875 that
`India must be bled'. This had indeed been the policy of the British since the battle of the Palashii.
By 1875, the British had been in control of Bengal for 118 years and had emaciated the province

beyond recognition through a merciless and ceaseless `bleeding' operation. Other parts of India had
also experienced a great deal of it and were to suffer more but nothing compared to what had been
done and was still to be done to Bengal, which in those days included Bihar. Bengal was the first
victim of the British predators who came in the guise of supplicating traders. Many empires have
risen and fallen in the world; many nations have been oppressed and exploited by foreigners. No
other people have suffered spoliation as thoroughly as the Bengalis have under the British. There had
been ups and downs in the fortunes of Bengal in ages gone by. Political power had passed from one
hand to another from time to time. The province had been subjected to tyranny and exploitation by
local rulers as well as by those who came from outside and, having subjugated her, stayed on and
made the land their home. Foreign trade, on which Bengal's prosperity depended to a considerable
extent, did not have a smooth and increasing flow all the time. With the rise of the Arabs as a world
power centuries ago, Bengali and foreign traders found it hazardous to negotiate the high seas and,
for a time, trade declined. It revived later. Portuguese and Arakanese pirates came on the scene for
some decades. For a decade Maratha incursions harmed trade with the rest 'of India. But at no time
in Bengal's history before the arrival of the British was the province's economy as a whole ruined.
Wars between contenders for power did not dislocate the normal agricultural and industrial activities
of the people except during the Maratha depredation. These were, on the contrary, encouraged and
promoted. The province's peace was never disturbed for long period. The technical level of her
industries was at every stage of history, high by world standards. The Indian industrial Commission,
appointed by the British government, reported in 1918 after a detailed survey of India's industries:
“At a time when the west of Europe, the birthplace of the modern industrial system was inhabited by
uncivilized tribes, India was famous for the wealth of her rulers and for the high artistic skill of her
craftsmen. And even at a much later period, when merchant adventurers from the West made their
first appearance in India, the industrial development of the country was at any rate not inferior to that
of the more advanced European nations. What was said about India as a whole applied with great
validity to Bengal?" The British after consolidating their power after the battle of Palashii, planned
to destroy first the industrial balance of Bengal and then to extend its sinister design to other parts of
India. In the middle of the 19th century Karl Marx wrote "England has broken down the whole
framework of Indian society, without any symptoms of reconstitution yet appearing." In a few years,
the ruthless exploitation of the British carved its mark on the society. Just five years after acquiring
the Dewanii of Bengal, and thirteen years after the Palashii, the famine of 1770 occurred, which
killed one-third of the population, according to Warren Hastings, the then governor of Bengal.
Britain squeezed Bengal to implement her own industrial revolution in the later half of the 18th
century. Jawaharlal Nehru quoted a foreign author Brooks Adams in his book "The Discovery of
India": "Very soon after the Palashii, the Bengal plunder began to arrive in London, and in the effect
appears to, have been instantaneous, for all authorities agree that the industrial revolution began with
the year 1770." Between 1760 and 1785 varieties of machines such as the flying shuttle, the spinning
jenny, the mule, and the steam engine were invented in quick succession. British industrialists found
the necessary capital by draining Bengal. And as a result, the bones of the Bengali weavers were to
lie bleached on the plains of the province. Commenting on the British plunder in Bengal (and India),
Nehru wrote in 1944, "A significant fact which stands out is that those parts of India which have
been longest under the British rule are the poorest today.... Bengal certainly was a very rich and
prosperous province before the British came.... It is difficult to get over the fact that Bengal, once so
rich and flourishing, after 187 years of British rule, accompanied as we are told, by strenuous
attempts on the parts of the British to improve its condition and to teach its people the art of self
government, is today a miserable mass of poverty stricken, starving, dying people."In 1757, after the
defeat of Nawab Sirajuddaula in the battle of Palashii, Bengal experienced the ruthlessness of British
rule. Open plunder began. The officers of East India Company received enormous wealth from
Mirjafar.Clive himself took Rs. 2.3 million and also a landed property yielding Rs. 0.3 million a
year.Altogether the company and its henchmen netted 3 million sterling (Rs.30 million). (For that
period this amount of wealth must be considered as enormous).
Ramesh Dutta wrote in his famous book Indian Economy under the British: "The people of
Bengal had been used to tyranny, but had never lived under an oppression so far reaching and its
effects, extending to every village market and every manufacturer's loom. They had been used to
arbitrary acts from men in power, but had never suffered from a system which touches their trades,
their occupations, their lives so closely. The springs of their industry were stopped, the source of
their wealth dried up.” The ruthless exploitation that was started by the company was continued by
the Queen's administration a century later.. Every trader, every farmer felt it to the marrow of his
bones. The legacy of the exploitation, however, continued in independent India, with a deliberate
attempt to exploit Bengal. Overseas exploiters were merely been replaced by the exploiters from the
other Indian states. Delhi had taken up the role vacated by London.Immediately after the battle of
Paiashii, the East India Company embarked on a Policy to monopolize the manufacture of silk and
cotton fabrics. Craftsmen were forced to work in the factories, which sprouted like mushrooms all
over the province, or to work at home committing themselves to buy raw materials from the
company and to sell the finished materials back to it. As in typical capitalist strategy, the British
were searching for a bigger market in which to dump the wide range of products produced by
industrial revolution. Americans were at war and soon gained their independence in 1775.
Bengal was chosen as a lucrative alternative market. Goods manufactured in Britain were brought into the
market of Bengal duty free.Whereas a heavy duty was imposed on the export finished products from Bengal.
Within a century from Palashii, all the industries of Bengal declined. This included cotton and silk
Bengal was chosen as a lucrative alternative market. Goods manufactured in Britain were brought
into the market of Bengal duty free. Whereas a heavy duty was imposed on the export finished
products from Bengal.Within, spinning and weaving, dyes, sugar, salt, iron smelting, tool making
and ship building. For example during the last two decades of the 18th century, 56 ships and 93
scows with a total tonnage of 39,080 were built in Bengal. This industry completely collapsed under
the British governance."Weavers thumbs were not literally cut, but worse than that happened to them
and to Bengal.” Countless weavers were forced to abandon their traditional trade to make room for
Manchester clothes and were over-crowded into agriculture, often as labourers. The economic
balance between economy and agriculture, industry and commerce were destroyed. The British
policy laid down by the company in 1769 in London to destroy the economy of Bengal fully
succeeded. In 1783, the house, of select committee in London shamelessly declared that the
company had laid down."a perfect plan of policy, both of compulsion and encouragement, which
must in a very considerable degree operate destructively to the manufacturers of Bengal. Its effects
must be (so far as it could operate without being eluded) to change the face of the industrial country,
in order to render it a field of the producer of crude materials subservient to the manufacturers of
Great Britain."
Bengal was ruralised to the advantage of Britain. As a result of this, even today, 80% of the
population of Bengal depends on agriculture for their existence. This is clearly a devastating state of
economy. Dacca was famous for its textile industry. Soon it was devastated. By 1820 the population
of Dacca dwindled from 200,000 to 40,000. This process continued to the last years of British rule in
India. Bengal was converted into a producer of raw material for British industries and market for

their finished products. In 1779, the British systematically began to destroy Bengal's agriculture. The
farmers of Bengal were forced to cultivate indigo instead of rice. Indigo was of no advantage to the
farmers. It was beneficial only to the British traders, because of the demand of dyes in Britain and in
Europe. As indigo plantation makes the land unsuitable for the growth of rice, for a few seasons,
naturally the farmers resisted it. But they were forced with the help of whip and gun to abide by the
instructions of their white masters. For a full eighty years, these barbarians terrorized, maimed,
killed, cheated and robbed the farmers. It was stopped only when chemical dye was invented. In the
19th century, the British encroached upon two other lucrative fields-jute and tea. Jute was one of the
principal re-sources of Bengal. But both the farmer and the province were exploited mercilessly. By
manipulating the market and direct cheating, the farmers were deprived of the legitimate price to
meet their costs of cultivation. The British traders were the sole beneficiaries. On the tea plantations
the British assured a role paralleling that of the American slave owners. The profits were all sent to
Britain. And what is the happening today, 90% of the jute industries and 99% of the tea gardens are
owned by the non- Bengali capitalists. The Bengal State thus has no share in the foreign exchange
earned through these products. In this way within a hundred years after the Palashii, the pattern of
cultivation of Bengal was changed to suit British interest. Indigo plantation, jute and tea were
introduced successively at the cost of traditional cultivation of cotton and rice. In this plan, the
British found ready collaboration from a section of landlords to accelerate the process of
impoverishment of the Bengali peasantry.
In 1785, the British introduced a budgetary method which even today has no parallel in history.
Consistent with their policy of introducing tax systems to squeeze capital from Bengal, such as the
heavy tax imposed on imports of finished products from Bengal, the British introduced a heavy and
unjust land revenue tax. This revenue tax was considered as profit by the company. Henceforth all
the consumer goods that were imported from Bengal, were purchased with this additional revenue.
Britain ceased to pay anything for its imports. This capital which they forcibly collected from the
farmers was considered simply as a return on their investment. The money they earned from selling
these goods in Britain was credited to company's account in London. Bengal ceased to earn
anything. According to Ramesh Dutta, "Taxation raised by a king, says Indian poet, is like moisture
on the earth sucked by the sun to be returned to earth as fertilizing rain; but the moisture raised from
the Indian soil now descends as the fertilizing rain on other lands, not in India."9 This is a glaring
example of the worst form of an economy. The same policy is continued to this day, in new forms,
for the benefit of some other states. Bengal has continued to remain one of the world's worst victims
of economic exploitation. The following letter from the governor of Bengal, Warren Hastings, to its
director in London in 1772 bears testimony of how mercilessly they carried out their collection of
land revenue. It was written: "Notwithstanding the loss of at least one third of the population of the
province (in the 1770 famine in Bengal and. Bihar), and the consequent decrease of cultivation, the
net collections of the year 1771 exceeded even those of 1768.... It was naturally to be expected that
the diminution of the revenue should have kept an equal pace with the other consequences of so
great calamity. That it did not was owing to its being violently kept up to its former standard." Yes,
"violently" was the word for it. All the revenue company collected through coercion was utilized
only for policing to facilitate unhindered exploitation.
During the first six years of the Dewanii (1765 to 1771) the company earned Rs. 130 million
through taxation and revenue and sent Rs. 90 million. This included the tribute of Rs. 6.8 million
they had to pay the Mughal emperor and as allowance to the Nawab of Bengal. An Englishman
Montgomery Martin who made a detailed survey in 1807-14, recorded: "The annual drain of Rs. 30
m. British India has amounted in thirty years, at 12% (the usual Indian rate) compound interest to the
enormous sum of 723,900,000 sterling pound." The amount was equivalent to Rs. 7,240 million at
the then rate of exchange of two shillings to a rupee) a rupee. In terms of today's value of rupee it is
equal to Rs. 145, 000 million (about $ 10 billion). Before the Company's domination, Bengal always
had a surplus on her exports. In return she used to import bullion, spices and jewels. With the
appearance of the Company, import of these stopped. Britain started to buy Bengal's goods with the
collected surplus revenue by the Company.Whereas Bengal was compelled to buy British goods at a
price dictated by London. This is not the end. The salt industry was systematically ruined for the
interest of the British traders and Madras province. In course of years, Bengal completely forgot that
she ever made salt. Similarly, the sugar industry was destroyed, because the British ship owners
preferred Java sugar. The plight of Bengal has been described lucidly by Ranjit Roy: "Britain's first
achievement in Bengal was the great famine of 1770.... Britain's parting gift to the province was the
great famine of 1943. In this famine 15 lakhs (1 lakh = 100,000) of people perished, according to the
official Woodhead Commission, and 34 lakhs (3.4 million) according to Calcutta University's
Anthropological Department. The Second World War was on, and along with it, profiteering which
put to shame the "gold-lust" of the East India Company's servants after Palashii. For every death in
the famine, an estimate made for the Famine Commission said, the profiteers made an illegal profit
of Rs. 1,000. That gave them a neat illegal profit of Rs. 150 crores (1 crore = 10 million), assuming
that the death toll was 15 lakhs. (At today's value of the rupee, the amount was equal to Rs. 1,500
crores about $ 1 billion). The legal profit made by traders and industrialists during the war was also
fantastic.The jute mills earned nine times in 1943 than in 1939 and the tea planters nearly four times
more. The others did not lag far behind. Commodities were taken out of the Province and other parts
of the country without giving anything in return. Sterling balances accumulated in London to be
repatriated to India when Britain would- be in a position to pay after the war. Bengal suffered most
for this. Speaking in London in May, 1945, J.R.D. Tata said: “As a result of the war and India's
contribution towards it, we have millions dead in Bengal owing to famine.”
Bengal's economy was shattered and her social and cultural fabric shaken to its foundation.
Although some engineering industries were working overtime to fulfill war orders and had plenty of
raw materials, hundreds of thousands of village artisans, making myriad articles for daily use by the
people, were rendered idle. They had no raw materials for their work. K.C. Ghosh, in his Famine in
Bengal writes: “Small enterprises scattered among villages and partly dependent on large factories
from which they received their raw materials were forced to close down, as they could not be sure of
a steady supply of these materials.” Those who perished in the famine mostly belonged to the
landless labour class. The poor peasantry sold its petty holdings to become landless. The lower,
middle class used up its reserves in the form of gold ornaments and savings bank deposits. The upper
middle class was brought one or two steps down the social ladder. And then came the partition, a gift
of our Muslim League and Congress leaders as much as the British. Throughout the British period
many man-made calamities struck Bengal's economic and social order. Every time she showed
resilience and - recovered thanks to the bounties of nature and the abilities of her people. But every
time she was reduced to a lower standard of living. She rallied soon from the aftermath of war and
famine. But once again, partition violently disrupted the economy of the province and the unending
flow of refugees from East Bengal began."The National leaders of India expressed sympathy and
gratitude for the sacrifice Bengal had made for the country's freedom and assured all-out help to heal
its wounds. With a fresh hope and a faith in her future in independent India, West Bengal embarked
on a new journey on the fateful day of August 15, 1947.

DE-INDUSTRIALISATION OR DEVELOPMENT-DEBATES
On June 25, 1853, Karl Marx’s letter, The British Rule in India, appeared in the New-York Daily
Tribune, condemning British colonial policy in India. He wrote, “There cannot … remain any doubt
but that the misery inflicted by the British on Hindustan is of an essentially different and infinitely
more intensive kind than all Hindustan had to suffer before.” However, Marx saw an upside to the
misery Britain had inflicted on the sub-continent. Prior to British colonialism, India had been
comprised of “little communities [which] were contaminated by distinctions of caste and by slavery
that…transformed a self-developing social state into a never changing natural destiny.” It was “these
idyllic village-communities, inoffensive though they may appear [that] had always been the solid
foundation of Oriental despotism.” British colonial rule, though it was “actuated only by the vilest
interests,” had become “the unconscious tool of history.” According to Marx, the introduction of
British capitalism was bringing India out of a feudal state and into a capitalist one. It was this
“fundamental revolution in the social state of Asia” that partially legitimated colonial rule for Marx
and that hastened the arrival of Marx’s teleological destiny of mankind: the overthrow of capitalism,
and the enthronement of communism. While Marx’s teleological view of history has fallen out of
favor, the importance that he assigned to Indian economic history for universal theories of economic
development has remained. Additionally, his assumptions and conclusions regarding Indian
economic history have become the fundamental issues in the debate over de-industrialization among
historians in the twentieth and twenty-first centuries. Marx’s letter addressed four fundamental
questions, which have become the basis for any historical inquiry into de-industrialization in 19th
century India: What was the state of Indian society and economy prior to British colonization? What
was the direct impact of British policy on Indian society and economy? How did British colonialism
affect the trajectories of Indian economic and social organization? What do answers to the previous
three questions tell us about theories of economic development of societies in general?
The de-industrialization thesis attempts to answer these questions. It contends that Indian industry,
especially manufacturing industry, either stagnated or declined throughout the era of colonialism due
to deleterious British policies designed to favor the British economy over the Indian economy. When
deconstructed, this seemingly simple assertion becomes an extraordinarily intricate examination of
both the contentious historical processes that took place within colonial India and the methodologies
and assumptions of the discipline of economic history itself. In order to fully grapple with the de-
industrialization debate, a long list of questions, dealing both with historical methodology and the
possible implications of conclusions regarding de-industrialization, must be considered: Can India be
analyzed as one economic unit? What is the available historical evidence, and how can this evidence
be analyzed? What factors must be accounted for in analysis? Can conclusions of case studies of
specific industries in specific localities during specific time periods be extrapolated to India as a
whole? Once economic growth, decline, or stagnation has been ascertained, what are plausible
causal mechanisms that one might look to as possible explanations? Are there contemporary political
implications of either a conclusion in favor of the de-industrialization thesis or against it? Is a
conclusion in favor of the de-industrialization thesis an indictment of colonial rule? Is a conclusion
suggesting that the British presence in India resulted in significant economic development and
growth a legitimating of colonial rule? Do such conclusions have implications for normative theories
of economic growth and development?

Having now enumerated a series of questions, each of which warrants a much more extensive
discussion than they can be given here, it is important to delimit the scope of this essay. David Frisof
examines how an argument addressing the question of de-industrialization is constructed and
considers its possible conclusions and its possible implications. This essay will attempt to situate the
more recent works of two historians, Peter Harnetty and Indrajit Ray, between the theses and within
the frameworks of two essential texts on de-industrialization: R.C. Dutt’s two-volume exposition
The Economic History of India, and M. D. Morris’s article from 1963, Towards a Reinterpretation of
Nineteenth-Century Indian Economic History. Dutt’s History, volumes one and two published
respectively in 1902 and 1904, is considered highly influential for two reasons. First, the strong
condemnation of British rule over India gave much fuel to the fire of the early 20 th century Indian
nationalists. Second, as one of the first major scholastic works to postulate the idea of de-
industrialization caused by British rule, it is in response to or in support of Dutt that many scholarly
works have been written. As its title suggests, Morris’s article, Towards a Reinterpretation, asserts a
narrative of Indian economic history that is in conflict with Dutt’s almost throughout. Morris writes
that the 19th century was a century of rather substantial economic growth and development for India,
an argument that clashes with the de-industrialization thesis. Morris is likewise an important figure
within the scholarly literature, contributing many influential articles that seem to be cited nearly as
often as Dutt. These two works both provide all-encompassing narratives that attempt the difficult
task of explaining the direction of the Indian economy in the 19 th century.
There are several factors that complicate any attempt to produce an all-Indian economic history.
The first is the sheer complexity of Indian society. Colonial India was composed of several British-
administrated provinces and hundreds of princely states, varying greatly in geographic size,
demography, primary industries, and government policy. As Colin Simmons writes, the population
“was not only differentiated along class lines, but also with respect to religion, race, caste and
language.” Additionally, the economy of India was ‘peculiarly heterogeneous.’ “A confusing
amalgam of capitalism, custom and state involvement produced a hybrid economic structure—one in
which entirely different methods of production, distribution and exchange co-existed side-by-side.”
As British policy in India also varied dramatically in different times and places, making any accurate
assumptions about a consistent British policy is also challenging. Finally, there is a lack of complete
and accurate statistics that are necessary for a precise macro analysis. Simmons summarizes the data
available to historians: There is a fine run of international and inter-regional trade returns, a vast
body of material on railways, and a detailed series of decennial censuses of population. But many of
the most basic quantitative sources are riddled with incalculable margins of error…As a result, we
cannot work out, with any pretensions to accuracy, the long run trend of real per capita output, the
relation between farm output, and population growth, the fate of ‘native arts and crafts’, the savings-
investment and capital-output ratios, or aggregate series of employment, money and real
wages….Thus one of the most important issues of modern India’s economic history—the charge of
de-industrialization and the fate of the ‘handicraft’ workers—can only be discussed in rather vague
or regionally specific terms.
With these restrictions to analysis in mind, one must take with a grain of salt any purported all-
encompassing narrative of Indian economic history.
R. C. Dutt’s tomes were published in 1902 and 1904, providing copious evidence of Indian
poverty and the drain of Indian wealth at the hands of British rulers. As one author puts it, Dutt
supplied the Indian National Congress with “the biggest stick” with which they “beat the British.”
One of the first works in the field of nineteenth-century Indian economic history, Dutt’s work must
be accorded a special place within related scholarship. Writing at the turn of the century, Dutt did
not have access to either modern statistical techniques or the influential macroeconomic theory
developed during the twentieth century. As one of the first works in the field, he also did not have
the benefit of a large body of scholarly research upon which he could draw. However, because
Dutt’s work was so influential in providing the nationalist movement with ammunition and because
it was the first comprehensive work on the subject, Dutt largely set the parameters of the debate for
the next hundred years; it is with his de-industrialization thesis in mind that scholars since have
contemplated and studied 19th century Indian economic history. Collectively, the two-volume work
is over one thousand pages and concerns itself with every aspect of the Indian economy. It includes
numerous chapters on various episodes in the British conquest of India, an impressive collection on
land settlements and reforms throughout the colonial era, and several chapters on raw goods and
manufacturing industries. It is to the chapters on raw goods and manufacturing industries that David
Frisof turns, as the question of de-industrialization is best examined through the growth, stagnation,
or decline of these industries.Dutt centers his argument on three core bodies of evidence. First, he
uses basic import and export data regarding specific industries to show trends within the Indian
economy. Second, he attempts to show causation between British colonial policies and trends within
the Indian economy. Third – and this evidence perhaps takes up the textual bulk of these chapters –
Dutt relies heavily on quotes from British colonial officials and actors in the British economy, taken
from testimony given to various House of Commons committees over the nineteenth century.
In 1840, seven years after the renewal of the East India Company’s Charter in which their interest
in trade was abolished and the Company was instead reinstituted as solely administrators of India,
the Company, in Dutt’s words, “felt a greater interest in the trades and manufacturers of India when
they were no longer rival traders… [The Company] presented a petition to Parliament for the
removal of invidious duties which discouraged and repressed Indian industries”. The Parliament
appointed a Select Committee to investigate and report on the petition: it was composed of Lord
Seymour as chair, a young Mr. Gladstone, and Mr. Brocklehurst, Member for Macclesfield, among
others. Chapter VII in Volume II of Dutt’s work is devoted entirely to presenting the testimony of
the various witnesses called by this committee in conjunction with statistics about the changing
nature and volume of trade between India and Britain. The first witness whose testimony Dutt
invokes as evidence of British intent to impede the profitability and growth of Indian industries is J.
C. Melvill. Prior to examining Melvill’s testimony, Dutt first presents the relevant British policies
and the statistics necessary to corroborate Melvill’s statements: British cotton and silk goods,
exported to India paid a duty of 3%, and British woolen goods exported to India, only a duty of 2%.
In contrast, Indian cotton, silk and woolen goods exported to England paid duties of 10 percent,
20%, and 30%, respectively. “As the import of cotton goods from India into England had died out,
the import of raw cotton had increased. In the five years ending in 1813, the cotton-wool annually
imported from India had been 9,368,000 lbs. on average. The annual average of the five years ending
in 1838 was 48,329,660 lbs.”9 Here, Dutt is attempting to provide evidence for one of the most
important arguments of de-industrialization: that British policy actively sought to reduce India to a
producer of raw goods by prohibitive tariffs and duties placed upon the exportation of India’s
finished goods.
Having now set the scene, Dutt presents Melvill’s testimony word for word, in the question and
answer manner in which the testimony occurred. There are two key points to be gleaned from the
exchange between Melvill and his examiner. First, Melvill answers the question: “The displacement
of Indian manufactures by British is such that India is now dependent mainly for its supply of those
articles on British manufacturers?” with a simple, “I think so.” This quotation establishes that the
British policy had successfully achieved its objective of promoting British manufacturing interests
over Indian manufacturing interests. Second, Melvill states, “Particular trades are, I believe, mixed
up with the peculiarities of caste. I have no doubt that great distress was the consequence in the first
instance, of the interference of British manufactures with those of India.” This establishes that the
destruction of Indian manufacturing interests had negatively affected Indian society and thrown
many tradesmen out of work.Melvill’s statements are perhaps the most neutral of the witnesses who
Dutt chooses to include in this chapter. Others more quickly condemned the British policy as both
unjust and tyrannical. G. G. de H. Larpent, Chairman of the East India and China Association was
particularly vehement: “This supersession of the native for the British manufactures is often quoted
as a splendid instance of the triumph of British skill. It is as much a stronger instance of English
tyranny, and how India has been impoverished by the most vexatious system of customs and duties
imposed for the avowed object favouring the mother country.” Larpent, as well as several others the
Committee examined, was in favor of reducing the unequal duties in the name of justice and
equality. By including their testimony, Dutt shows that it was not the British people who were
oppressing and impoverishing India, but rather it was British policy that was oppressing and
impoverishing India.
Dutt also includes testimony from several British manufacturers desirous of keeping the
unbalanced tariffs. None of these witnesses gave the justification for the discriminatory duties better
than Thomas Cope, a silk-weaver of Macclesfield: “My opinion is that in justice to the English
operative there should be a duty imposed upon the importation of [silk goods] which would put
[Indians] on a level with ourselves. Now if the Hindustanee can live at 1½ d. or 2 d. a day, and if an
Englishman cannot live at less than 2 s. a day, we think it very hard that the weaver in India should
send his goods here and compete with us upon such very unfair terms…I think it is wrong to
sacrifice the comforts of my family for the sake of the East Indian labourer because his condition
happens to be worse than mine; and I think it is not good legislation to take away our labour and to
give it to the East Indian because his condition is worse than ours”. Dutt has established a chain of
historical causation with this presentation of evidence. First, he establishes British intent—to
promote their own industry and economy at the expense of others; second, that this intent manifested
itself in discriminatory tariffs and duties; third, that these policies were a direct cause of the
statistically demonstrated decrease in Indian manufacturing; and fourth, that the decline of Indian
industries had tremendously harmful effects upon the economy and society of India. Ultimately, a
de-industrialization thesis (or counter thesis) is not complete without counter-factual analysis. In
order to complete the de-industrialization thesis as an indictment of British colonial rule, there must
be a counter-factual scenario in which de-industrialization did not occur. This enables Dutt to place
the blame for India’s current15 economic woes and lack of development squarely at the feet of
British policy. If British administration had been different, and then India would have had a different
economic path. Dutt’s counter-factual analysis is as follows: “It is possible to conceive that a
Government, working with an eye to the advancement of the national industries, might have
introduced these superior methods [in manufacturing] among the industrious and skilful people of
India, as they have been introduced among the people of Japan within our generation.”
Writing sixty years later, M. D. Morris presents a narrative of 19 th century Indian economic
history that is at odds with Dutt’s interpretation at almost every level. In contrast to Dutt’s thousand-
page work, Morris’s seminal article, Towards a Reinterpretation of Nineteenth-Century Indian
Economic History, is a scant thirteen pages. Morris acknowledges the limits of his paper, but
anticipates that it will catalyze a new wave of research that will result in a reinterpretation of 19th
century Indian economic history. Despite the fact that there is a substantial difference in the degree
of detail between Morris and Dutt; there are still three more fundamental differences between the
two works. First, Morris strongly advocates for the application of modern economic analysis rather
than the typical descriptive historical interpretation used by Dutt and others. Second, Morris
concludes that the Indian economy actually grew greatly during the nineteenth century, even if there
was a lack of significant industrialization. Third, Morris disagrees with the degree of importance that
Dutt assigns to specific British policies in the shaping of the economy; Morris instead argues that the
dominant factors in shaping the Indian economy during the nineteenth century were the mere
presence of the British and the invisible hand of the market.
Morris never explicitly states his desire for the application of modern economic theory to Indian
economic history, but the idea is implicit in the article. He writes, “Moreover, [the body of work
already published on nineteenth-century Indian economic history] has tended to be purely
descriptive, to be uncritical of its sources, and it has avoided even the simplest tools of economic
analysis.” Later, when speaking about the dominant interpretations which attribute economic
stagnation and decline to either British policy or the peculiarities of Indian society, Morris again
insinuates how helpful economic theory would be. “Both interpretations suffer from internal
contradictions which become quickly apparent when exposed to the touchstone of the simplest
economic tools.” Finally, Morris repeatedly uses terms associated with economic analysis, the
phrases “per capita income”, “declining marginal product”, and “multiplier effects” to name a few.
The thesis that Morris puts forth regarding the direction of the Indian economy in the nineteenth
century relies on an understanding of the state and nature of the Indian economy prior to the colonial
period – an understanding that is very different from the traditional one. He explains: The British did
not take over a society that was ‘ripe’ for an industrial revolution and then frustrate that
development. They imposed themselves on a society for which every index of performance suggests
the level of technical, economic, and administrative performance of Europe five hundred years
earlier. What happened to the Indian economy in the nineteenth century? Although the evidence is
largely unstudied and much of it is ambiguous, my tentative conclusion is that during this period per
capita output grew, and the growth may have been rather substantial.
The second part of Morris’s thesis regards the causes of the economic growth. Unlike Dutt, who
attributed the decline of the economy to specific British tariffs and policies, Morris attributes
economic growth to the presence of the British in India and to the market. He writes, “The mere
introduction of a stable, modern political environment made possible a large rise in the level and
scope of economic activity.” Further, “government policy during the nineteenth century, despite its
authoritarian characteristics, was in its economic aspects essentially laissez faire. The British Raj
saw itself in the passive role of night watchman, providing security, rational administration, and a
modicum of social overhead on the basis of which economic progress was expected to occur.”
Morris claims “taxation and commercial regulations were rationalized, and the arbitrary features of
traditional government were largely eliminated.” Additionally, Morris speculates that agricultural
production per acre and per man rose during colonialism. He attributes this to political stability,
which allowed for more land to be cultivated on a consistent basis; regional specialization of
agriculture, which led to higher crop yields; and the application of newer agricultural technologies.
Morris argues that economic growth and development did occur, and did so substantially. However,
it did not occur at the stupendous rate that would have been required to achieve all the “fundamental
underpinnings of an industrial revolution” that would have been necessary for true industrial
development to take place in India.
The final aspect of Morris’s argument to be examined is his brief discussion of the Indian cotton-
textile industry. Although the paper is only thirteen pages, Morris attempts to dispel what he sees as
one of the most egregious errors of the de-industrialization hypothesis; in short, “that Manchester’s
machine-made textiles wiped out the Indian handicraft industry by the mid-nineteenth century.”
Although the numbers may indicate a massive influx of British cotton goods during the 19 th century,
it is instead representative of both a movement down the demand curve due to a fall in price, and a
shift to the right of the demand curve for cotton goods. There was an increase in cotton consumption
per capita, and “the vast expansion of British cloth exports to India skimmed off the expanding
demand.” He continues, “The handloom weavers were at least no fewer in number and no worse off
economically at the end of the period than at the beginning. The net effect for the economy was a
positive one in terms of per of the world’s total output: a century later this had dwindled to under
10% and by 1880 had further diminished to less than 3%.” Colin Simmons, “‘De-Industrialization’,
Industrialization and the Indian Economy, c. 1850-1947,” in Modern Asian Studies 19, 3 (1985):
599.percapita real income.”On display here is the influence of the market contributing to the growth
of the Indian economy. What, then, does Morris do with Dutt’s central thesis, that specific British
policies had negative impacts on Indian industries throughout the 19 th century? Morris explains,
“While British policy did not actively encourage new industrial expansion, the career of the cotton
textile industry suggests that other factors were probably much more important in explaining the
limited industrialization in nineteenth-century India.”
As has been illustrated above, Morris, in comparison with Dutt, entertains a different methodology
in approaching Indian economic history, and reaches opposite conclusions. With Dutt and Morris
creating vastly different frameworks for the study of Indian economic history, what room does this
leave for more recent scholarship, and can there be a successful reconciling of viewpoints? The
remainder of this essay will focus on two authors’ case studies in nineteenth-century Indian
economic history and the ways in which their works can fit into the frameworks established by Dutt
and Morris. Peter Harnetty, in his extensive study of the handloom weavers of the Central Provinces
of India, is unable to make a definitive conclusion regarding whether de-industrialization actually
occurred. At the beginning of his work, Harnetty informs us that handloom weavers are not a
homogenous group. They are differentiated by religion, caste, and product, and thus changes in
policy or the market can very well affect different sections of the handloom industry differently.
Harnetty is able to conclude that there was decline in the industry. He writes:
From supplying the entire domestic market in 1801 the handloom industry was reduced to a
quarter of market share a hundred years later…From this it is reasonable to conclude that over a
period of one hundred years, the handloom industry had survived only at the cost of rising
unemployment and falling wages. In other words, deindustrialization did occur during the nineteenth
century but it was only partial. Among the many causes to which Harnetty attributes this decline, one
of the most important is the proliferation of railroads within India in the second half of the
nineteenth century. Upon reaching the Central Provinces, railways brought with them a “flood of
imports, manufactured in close imitation of local products, which had a direct and adverse effect on
handloom production and on the income of weavers.” The expansion of the railways and the
consequent depression in the handloom industry is without doubt indicative of the power of the
marketplace, and seems to affirm Morris’s contention that the market played a much larger role in
the economy than Dutt gave it credit for. However, at the same time, the expansion of the railways
represents a specific policy of the British to expand the market for their manufactures. So, while it
was not a duty on a good which caused de-industrialization in the Central Provinces, it was still a
purposeful British policy designed to favor British industries over Indian industries. In his
conclusion, Harnetty twice reminds his readers of the complexity of the handloom weavers industry.
While de-industrialization may have occurred in the industry, it did not affect all weavers. Generally
speaking, urban weavers of a higher caste who produced high-end products were able to survive,
while rural artisans engaged in coarse weaving were not. This case study reveals that even at the
most detailed level, a definitive verdict on de-industrialization is hard to obtain.
The final historian to be discussed presents a peculiar pair of essays. Like Harnetty, Indrajit Ray
focuses on the effects of British policies and the effects of markets. In the first paper, on the Bengal
silk industry, Ray posits that it was not discriminatory British policies that spelled the decline of the
industry, but rather adverse effects of the market. In the second paper, on the Bengal salt industry,
Ray posits that it was indeed discriminatory British policies that destroyed the industry, and that it
was not the effects of the market. In the essay on the silk industry, Ray carefully explains why it is
the market that caused the industry to decline and not British policy. Ray acknowledges that in the
early 19th century, there was a discriminatory tariff system that greatly favored British silk products
over Bengal silk products. Indeed, in proving British support, intent, and justification for the
discriminatory tariff system, Ray quotes the same Thomas Cope of the British silk industry that Dutt
does. However, according to the statistics, the Bengal wrought silk industry did not decline
precipitously during this period, as the typical de-industrialization thesis would predict. Instead, Ray
argues that the silk industry did not decline until the late 19th century, and the cause of the decline is
clear: adverse market forces. He writes in his conclusion: The industry collapsed under the adverse
impact of the market. In the global raw silk market, the re-emergence of China, Japan, Italy and
France in the late 1860s with advanced technology reduced the demand for Bengal silks. The
resultant fall in prices led to a chain of effects that caused its decay. The fall of the raw silk branch
adversely affected the economic viability of silk weaving in Bengal, and the latter was further
constrained by the deficient demand in the wake of changes in preference patterns, both in Europe
and in India, during the last quarter of the 19th century.
In investigating the salt industry, Ray reaches the opposite conclusion. He cites numerous policies
that brought about the decline of the Bengal salt industry. According to Ray’s statistics, the cost of
producing and then shipping British salt to India was almost twice the cost of locally produced salt.
Therefore, if the market had been free and open, Bengal would have never lost its own domestic salt
market to British imports. However, British policy manipulated the market throughout the 19 th
century, resulting in the decline of the local salt industry and the supremacy of British salt in Bengal.
He explains: Salt policy in Bengal was thus changed drastically twice during the first half of the 19 th
century: once in 1835 when the auction system was replaced by the system of administered pricing;
and then in 1845 when a pricing policy was instituted which discriminated against domestic salt in
favour of British salt. In 1829-30, there was not one grain of British salt in Bengal, but due to the
discriminatory policy, by 1851, the British were exporting 2.7 million maunds of salt per year to
Bengal. This accounted for almost half of the Bengal salt market. As has by now become a familiar
tale, the British encouraged the growth of their industry while discouraging Indian industry and
causing de-industrialization.
Harnetty and Ray present us with three unique case studies of Indian industries affected (or not
affected) by British rule. Due to the complex nature of the industry, and the manner in which market
forces affected different parts of the industry differently, Harnetty is unable to render a definitive
verdict in his article on handloom weavers on whether de-industrialization occurred. In Ray’s article
on the silk industry, it is not discriminatory pricing that brings about its decline, but rather adverse
market conditions in the latter half of the century. Here, Ray is able to conclude that de-
industrialization did not take place, despite policy attempts by the British to discourage industry in
the earlier part of the nineteenth century. Finally, Ray’s case study of the Bengal salt industry,

presents an Indian industry that in normal market conditions would face no serious competition from
British interests, but, due to extreme British policies, a banner case of de-industrialization occurs. So
what do these case studies mean? Where do these three and the dozens of others within the scholarly
literature fit between the frameworks and conclusions of Dutt and Morris? What is at stake in the
interpretation of nineteenth-century Indian economic history? It is clear from R. C. Dutt’s rhetoric
and from the historical context in which he was writing that there are serious political implications
for interpretations of nineteenth-century Indian economic history. Nationalists of the early twentieth
century were able to parlay Dutt’s de-industrialization thesis into a condemnation of British rule in
India specifically, and Western colonialism generally. With the advent of the end of colonialism, this
political implication of economic history has ceased to be as manifestly relevant. However, the de-
industrialization debate will undoubtedly play a large role in shaping the legacy of the Raj and thus
of colonialism in general.
In the beginning of his essay, M. D. Morris discusses the rationales behind the importance of
understanding nineteenth-century Indian economic history. Practically, successfully organized
economies depend greatly on an accurate interpretation of economic history. Academically,
understanding how the Indian economy performed and developed in the 19 th century has enormous
possible rewards. Morris writes: So far, most of our generalizations about the character of capital
accumulation, the role of international trade, the significance of entrepreneurship, the role of the
state, and the problems of shifting labor and other factors from one activity to another have been
derived from the experience of Western economies. For significant generalizations we will have to
go beyond the Western cases…Examination of the Indian case is important to the elaboration of a
general theory of economic growth and stagnation... India, illustrating limited growth, can throw
considerable light on the entire process of economic development. However, the difficulties in
achieving a non-Western theory of economic growth and stagnation with which to interpret non-
Western cases are evident by the end of Morris’s essay. In discussing the impossibility of India
achieving industrialization during the nineteenth century, Morris makes reference to the
“preconditions for growth,” and the “structural changes” that must be attained before
industrialization can take place. These preconditions and structural changes that are assumed to be
necessary for industrialization are examples of the very kind of Western economic theory that Morris
claims are irrelevant to non-Western economic experiences. Inadvertently, Morris has highlighted
the central issue at stake in interpretations of 19th century Indian economic history. Are Western
normative economic theories useful in analyzing non-Western economic experiences? Is it even
possible to break away from a Western interpretation of economic history? Is there a non-Western
model for growth and development to be discovered that will more accurately explain non-Western
economic histories? Or do all economies grow or stagnate in the same fundamental manner? What
does this mean for different methodological approaches to economic history?
The case studies enumerated within this essay straddle a very fine line. On the one hand, authors
cannot ignore the advances in economic theory and statistical methods of the past one hundred years,
nor can they ignore Morris’s call for a more scientific approach to Indian economic history.
Frequently, scholars employ modern economic theory to the rough data that is available. On the
other hand, the authors are forced to grapple with Dutt and the legacy of evidence, methodology and
conclusions that he left behind. Frequently, scholars also site the same evidence of British intent and
desire to limit India’s manufacturing industries that Dutt used. The scholars also use similar
methodology, attempting to show causal links between British intent, British policy and effect upon
the Indian economy. Finally, scholars are still working within the de-industrialization paradigm set
forth by Dutt. Each scholar works in support of or in opposition to the concept of de-
industrialization.

CHAPTER-11
COLONIAL AGRARIAN SETTLEMENTS

Land and State.
Until recent years, agriculture in India has seldom been regarded as a business
enterprise. It has been looked upon as a source of meagre livelihood for the mass
of petty peasants, who carry on production chiefly for subsistence and largely with
family labour.They are of course known to be working under severe handicaps.
But they are generally regarded as insulted against the operation of the laws of the
free market, and beyond the orbit of economic professes of commercialization and
monetization, since they are believe to have little to sell in the market for money or
invest in agriculture except on the fringes. This view of Indian agriculture has
conjured up a rather simplified image of Indian agrarian society.
In the traditional land system of India before British rule, the land belonged to
the peasantry, and the government received a proportion of the produce. In the
Hindu period, the land belonged to the village community, and was never regarded
as the property of the king. The state had merely a right to a share always paid in
kind. Under the Muslims, the existing tenures and tax system were adopted with
some modifications. Therefore neither the king, nor the intermediaries
(Zamindars) were owners of land, all conflicts which took place between the rulers
and the village community, were only over the magnitude of the share of the
village produce. The soil in India belonged to the tribe or its sub-division – the
village community, the clan or the brotherhood settled in the village, and never
was considered as the property of the king. Thus, the structure of agricultural
production in the Indian village remained uninterferred with for centuries. No
emperor or his viceroy ever challenged the ultimate customary right over the
village land by the village community. Either in a feudal or an imperial scheme
there was never any notion of the ownership of the soil vesting in anybody except
the peasantry. The Western village communities gave way to feudalism of the
manorial type which in its turn was destroyed by the commercial and industrial
revolution in Europe, the village communities in India remained unaffected by the
political changes at the centre and it was not till new interests in land were
created by the state and urban elements were allowed to infiltrate into rural
economy that these centuries-old institutions of India began to fall into decay. The
king in India, from the dawn of history claimed a share in the produce of land and
not its ownership. Thus, when a new conqueror came, he laid his claim to land
revenue and this was accepted without demur by the village community. Land
was never redistributed on the change of rulers of the country. The king’s share
was traditionally fixed under the kings at one-sixth to one-twelfth of the produce.
In India the feudal nobility which existed throughout the British period was given
by the monarch only the right to collect the appropriate land revenue over a
specific number of villages. The nobility was not the owner of these villages but
only the revenue collector keeping the whole or portion of the land revenue. Thus,
the village community was the de facto owner of the village land. And the state
had a claim only over a share of the realized annual produce from it.

The fundamental principle of the Mughal land revenue system was that the
sovereign or the state was entitled to a certain proportion of the annual produce of
the land. However, the precise share of the produce to be taken was not laid down
by Islamic law. The actual claim was decided by the ruler in accordance with local
conditions. While Akbar had laid down one-third of the average produce as the
standard assessment, Aurangzeb raised it to one-half. In the reign of Akbar, the
permanent schedules or revenue rates had been successfully applied over a large
part of territory and this system seems to have continued unaltered in the 17th
century. The machinery of the revenue collection under the Mughals consisted of
several layers of intermediaries. As long as the Mughal administration retained its
vigour, the intermediaries were allowed to collect only as much revenue as was
authorized by the state. In the period of the breakup of the Mughal empire, the
collectors, to whom the raising of the revenue was farmed out, and who were
already elevating themselves to the level of semi feudal chiefs. When the British
established their dominion on the ruins of the Mughal Empire, they took over the
traditional land as the basis of revenue, but they transformed its character and
they thereby transferred the land system of India. Besides, the ancient village
communities lost its importance, due to the change of property relations wrought
by the introduction of new forms of land tenures and the development of an active
export trade in agricultural produce of India. The land revenue system introduced
by the British caused a revolution in the property relations in land in India and
culminated in the destruction of village communities. The English when they came
to Bengal see little difference, between Indian and English landlord system. They
assumed that the state was supreme landlord and that for every parcel of ground
there must be someone vested with a proprietary interest in the land with whom
the government could settle. Land revenue was considered as a rent rather than a
tax, and the 18th century Englishman was obsessed with the idea that no harm
could follow from taking the highest rent obtainable.
In a country where the vast majority of the inhabitants are engaged in
agriculture, laws relating to land-holding and tenancy rights are of paramount
importance, not only to the people involved but to the government which depends
on the land for its primary source of revenue. During their period of empire
building in India, the British improvised regulation as they went along to satisfy
the needs of everyday administration. One important measure of the period,
however, proved to be of lasting character, which was commonly known as the
permanent settlement. According to Thomson and Garratt “The history of the pre-
mutiny assessments is a series of unsuccessful efforts to extract an economic rent
which was frequently identified with the net produce. The original auctioning of
the Bengal revenue farms was an attempt to get as large a share as possible of the
net produce. In Madras and Bombay the originally assessments were usually
based on four-fifth of the estimated net produce. This proved far too high….There
is no doubt that much suffering was caused both in Madras and Bombay, by the
heavy assessments imposed during the first quarter of the 19th century. Even in
the Punjab, where the British assessments reduced the former Sikh demands, it
would seem that cash payment and rigidity of collection largely setoff the
advantage to the cultivator”.
When the British assumed direct rule in Bengal, the tax had been collected for
over 50 years by men known as Zamindars who were responsible for remitting to
the government the taxes rose on fixed areas, which varied in size. This system
continued by the British until 1772. Under Hastings administration, the right to
collect revenue on behalf of the government was then auctioned to the highest
bidder. As a result, revenue collection fell in to the hands of a large number of
speculators intent on squeezing a profit from the tax payer. This led to a decline in
the revenue. The British next attempted to collect directly through their own
agents. This, too proved unsatisfactory, as the company’s agents knew nothing
about the land, the system of tenure etc. The real problem facing the British was
to decide who actually exercised proprietarily rights. They could not tolerate the
existence of a society based on tradition and custom, both of which lacked
precision. Besides, the previous traditional king’s share was a preparation of the
year’s produce fluctuating with the year’s production, and surrendered as tax by
the village community to the rulers. This was now replaced by the system of fixed
money payments, assessed on land, irrespective of the year’s production. This
payment was commonly known as Rent, thus revealing that the peasantry had
become in fact tenant, whether directly of the state or of the state appointed land-
lords, even though the same time possessing certain proprietary and traditional
rights. The introduction of the English landlord’s system, of individual
landholding, of a whole apparatus of England bourgeois legal conceptions alien to
Indian economy and administered by an alien bureaucracy which combined in
itself legislative, judicial functions, completed the process. The property rights in
land were vested in the cultivator subject to his paying land revenue to the
government. So long as he paid the land revenue, he held the land for cultivation.
It was transferred to the descendant after his death. But he could not sell;
transfer his piece of land to any one for monetary consideration. Since there was
little trade in agricultural produce, land could not be an object of profitable
investment by the businessman. The land laws introduced by the British
Administrators had the effect of undermining the influence of village communities
and converting cultivated lands into a form of business investment. The self-
governing village community was robbed of its economic functions. To secure a
regular payment of land revenue, the new rulers decided to settle the payment of
the revenues. In Bengal there were Zamindars even before the British took over
the administration of that province, but they had been merely revenue farmers.
Their ownership of land was limited to their claim to a share in the produce of
land. The property right in land remained vested in the cultivator who subject to
the payment of land revenue was independent to use his land in any manner he
liked and could not be ousted by the Zamindars. The title of landholders had
finally been conferred on the Zamindars, the men who had collected the land
revenues before the days of British rule. In this way the characteristic process of
the colonial system was in fact carried out with ruthless completeness in India.
The Whig philosophy, which believed that ultimately no harm would arise from
demanding a natural rent, could foresee no hardship in applying the idea of free
trade in land and commodities to India, complete free trade in land was to last for
much longer, justified by the theory that the replacement of an owner who has
shown himself to be incompetent by one with superior intelligence and greater

command of capital cannot be otherwise than beneficial, a theory which
dominated English policy through the 19th century. No doubt, several acts were
passed to safeguard the interest of the peasants, but the inevitable result of the
free disposal of land in a primitive agricultural community illustrates the
persistence of a theory which made the rule of law a very doubtful blessing to the
cultivator. From being owners of the soil, the peasants have become tenants.
While enjoying the woes foreign ownership in respect of mortgages and debts,
which have now descended on the majority of their holdings and with the further
development of the process, an increasing proportion have in the past century,
……became landless labourer, now constituting from one-third to one-half of
agricultural population.
The practice of the new land and revenue system logically brought in its wake
the phenomena of mortgage, the sale and purchase of land. When a land holder
could not pay the land revenue due to poor harvest, he was constrained to
mortgage or sell his land. Thus, insecurity of possession and ownership of land, a
phenomenon unknown to the pre-British agrarian society came into existence.
Agriculture was called upon in the 19th century to meet much bigger demand for
its products caused by the increase in the population of the country and
development of export trade in agricultural produce but the land area under
cultivation did not show any great increase while agricultural technique remained
static. Thus, private property in land came into being in India. Land became
private property and a commodity in the market. The British conquest created the
prerequisite for the capitalist development of agriculture by introducing individual
ownership of land. This transformation of the land relations was the most vital
link in the chain of causes which transformed the pre-capitalist feudal economy in
to the existing capitalist economy.
Land Revenue and Tenurial System
Land tenure refers to the system according to which land is held by an
individual or the actual tiller of the land, it determines his rights and
responsibilities in connection with his holding, and obviously land tenure system
refers to laws, rules and regulations which confer ownership rights upon an
individual. It determines the status of the actual tiller of the land and his relations
with the state. It specifies the conditions under which the actual tiller can sell or
transfer his holding, and whether a cultivator can mortgage his land or not and so
on and so forth. According to Raleigh Barlowe “land tenure concerns all the land
in which people, corporate bodies and government share in the bundle of property
rights and it concerns also the time period during which these rights are held.
Land tenurial system in India has a significant history right from the days of
Vedas. During the Vedic period land was considered to be the common property of
village communities. In course of time the land system underwent many changes.
According to Arthashastra, lands in those days could be confiscated and given to
others if the owner did not make use of the land for cultivation. During the
Muslim period land tenure system transformed into a feudalistic structure. Land
revenues were collected by local chiefs with whom settlement were made by the
Emperor at the centre. Lands given by the emperor to his Administrators in

recognition of their outstanding services to the empire were called Jagirdaris.The
Jagirdars used to collect land revenue on the basis of their own system. So it is
evident that there was no uniformity in the land revenue system during the
Mughal period. In due course these different classes of intermediaries were
grouped into one class designated by a common name of Zamindars.In the 18 th
century the East India Company considered land as a commodity belonging to the
state. Utilizing the institution of the state as super land lord, the British
administration adopted, modified or transformed the prevailing land tenure in a
manner as to secure the maximum revenue for government from land tax. They
made various experiments in the field of tenurial systems keeping in view their
fundamental objective of revenue maximization. The company’s financial
requirements for meeting the cost of its expanding territorial administration began
to increase rapidly and the entire land revenue system was tuned up to meet
those costs. So the Zamindari rights were sold out in public auction in Bengal
with the object of collecting the largest amount of money in the quickest possible
time. The bidders had to deposit the amount in a lump sum and could retain for
themselves any surplus over it by extorting high rents from the peasants. Thus, a
new intermediary class emerged between the government and the tiller by
replacing old Zamindars.On the other hand; the actual cultivators were deprived
of all their traditional rights of security of tenure. The mass of the peasantry were
reduced to the status of rack rented semi serfs, or bonded labour. It was Lord
Cornwallis in 1793, who perfected the genuine Zamindari system through his
scheme of permanent Revenue settlement.
Zamindari System.
The permanent Zamindari settlement of land revenue in Bengal according of
James Mill, was a measure adopted on the basis of abstracts theories, drawn from
other countries, and applicable to a different state of things. Its main principles
were derived from the context of English political economy. Its main architects
were English aristocrats and their aristocratic prejudices determined its basic
features. When Cornwallis came to India he found agriculture and trade decaying,
Zamindars and ryots sinking into poverty, and the money-lenders the only
flourishing community in the country. The directors of the company were also
alarmed at the steady deterioration of the revenue collection. They recommended
a moderate permanent assessment as more beneficial both for the government
and the people. They condemned the employment of temporary renters and who
had no interest either in the state or in the ryots. In 1789 a decennial settlement
was made. It was found that there were two schools of thought with regard to the
revenue settlement. James Grant emphasized the fact that the Zamindars had no
permanent rights whether as proprietors of the soil or as officials who collected
and paid the rent. But Sir John Shore view was that the proprietor rights in the
land belonged to the Zamindars and that the state was entitled only to customary
revenues from them. In accordance with the orders of the court of directors, the
settlement of Bengal, Bihar and Orissa was made permanent in 1793.This was the
first breach affected by the British conquest of India in her old land system based

on village rights over land. The East India Company in India adopted British Judi
co economic conception for land settlement. From the stand point of
administration, in earlier stages of British rule, it was found easier and
economical to gather land revenue from a few thousand landlords than from a
legion of small peasant proprietors. Besides the young British raj needed a social
support in the country to maintain itself. Lord Bentinck, Governor General of
India remarked thus: “If security was wanting against extensive popular tumult or
evolution, I should say that the permanent settlement, though a failure in many
other respects and in its most important essentials, has this great advantage at
least, of having created a vast body of rich landed proprietors deeply interested in
the continuous of the British dominion and having complete command over the
mass of the people”. The British rule in India always found in landlord classes its
staunch supporters. The settlement with the old landed aristocracy of Bengal was
interpreted as a shrewd device on the part of the company for creating for a social
buttress for its rule in the context of an alleged spread of political discontent and
recurrent mass uprising.
The permanent settlement recognized that the East India Company, in its
capacity of the sovereign authority, and the Zamindars or farmers through whom
the state’s share had been collected, had joint interest in the Share of the produce
of the soil which was the traditional property of the state. It fixed the revenue at
ten-eleventh of the assets, which left to the Zamindars one-eleventh of the revenue
which was fixed. Besides, the Zamindars were to be given the benefit of any
future increase in the value of the state’s share, which might result from the
extension of cultivation or other causes. In addition the Zamindars were declared
to be the proprietors of the soil and deliberately given all property rights which
could not be proved to be an encroachment on the customary rights of the
tenants. At the same time the Zamindars were made liable to have their estate
sold for arrears or revenue, if the revenue was not paid by Sun-set of the latest
day fixed for each instalment. Advocates of the permanent settlement claimed that
financially it ensures fixed revenue to the state which was a great necessity in the
early days of the Company’s rule, when financial instability was a recurring evil of
the administration. Politically it has secured the allegiance of the Zamindars to
the company rule. Economically it has secured agricultural prosperity. The
Zamindars no longer harassed by repeated change of assessment, have been able
to devote their attention to the problem of permanent agricultural improvement.
Further, permanent settlement avoided the evils of periodical settlements which in
spite of long intervals produced economic dislocation, evasion and the deliberate
throwing of land out of cultivation. But it must be mentioned that the decision to
confer a right of private property in the soil on the Zamindars was an act of
deliberate policy and not a confirmation of the status quo. This decision was
taken in spite of a clear recognition by some officials that to admit either in theory
or in practice, the doctrine of private individual landed property… would be a
more dangerous innovation, diametrically opposite to the letter and spirit of all
oriental legislation, ancient and modern devised by conqueror. In fact, Lord
Cornwallis gave little attention to the question whether the Zamindars were the
rightful owner of the soil or not. A new type of shark and rapacious businessmen
came forward to take over the estate, who was ready to stick at nothing to extract
the last Ana from the peasantry in order to pay their quota and fill their own
pockets. The government settled the land revenue demanded with them and in
exchange for their undertaking the responsibility, to pay the state demand, the
government conferred on them the rights of land ownership. Both parties stood to
gain from this arrangement but the advantage was secured by sacrificing the
cultivator’s interest. From proprietor of land, he was reduced to the status of a
mere tenant. He could be removed from the land by the landlord any time at the
latter’s will. Contrary to expectations, the system proved positively harmful to the
cultivator and to the agricultural progress of the country. The Zamindari system
placed the farmers completely at the mercy of the gentlemen farmer who did not
hesitate to extort the last ounce of blood. The new proprietary class consisted
mostly of Calcutta businessmen who looked upon Zamindaries as income yielding
assets. They had neither the knowledge of agriculture nor they were interested in
effecting permanent improvement in land. They were absentee landlords whose
sole interest lay in maximizing the rent of land. As many of them happened to be
absentee Zamindars, sub-in feudation came into existence.
It is easy to trace the sources of these basic principles of the Bengal permanent
settlement in the English institution of property, English classical political
economy and the contemporary philosophy of laissez-faire, advocated by the
French as well as English philosophers and economists. But the social, economic
and political consequences of the imposition of an alien and artificial system were
bound to be unfortunate in many ways. The promulgating of the permanent
settlement in Bengal resulted in a large scale transfer of property from the ancient
Zamindars, to the mercantile classes of Calcutta. According to Baden-Powell,
“The permanent settlement disappointed many expectations and produced several
results that were not anticipated. A very great blunder as well as gross injustice
was committed when a settlement was made with the Zamindars alone…..
Cornwallis committed him-self-to a policy which in regard to the three interested
parties – the Zamindars, the ryot and the ruling power ……assured the welfare of
the first, somewhat postponed the claim of the second and sacrificed the interest
of the third. If permanent settlement is desirable, government must sacrifice
something but it should go to the ryots and not be absorbed by the Zamindars.
By creating landlord, governments instead of encouraging industry and thrift,
simply leaves the ryots in the hands of Zamindars”……. S.N. Banerjee not only
favoured permanent settlement with the cultivator but even went to the extent of
condemning the settlement of 1793.The Bengalee in its issue dated 29 June 1890
pointed out that: “We fully approve of the principles of permanent settlement, but
what we maintained is that it would have been a great thing for the country, if it
could be concluded with the ryots, and that it was grievous mistake on the part of
lord Cornwallis to have concluded it with Zamindars…….. But we must protest
against any proposal to extend the settlement of 1793 to any other part of the
empire that do not have it at present……

The system, unjust and oppressive as it was, deprived the government of

intimate knowledge of rural conditions – the plight of the cultivator or the state of
agriculture. The tenant was left to the tender mercies of a heartless landlord who
ignoring the customary rights, evicted him at the slightest provocation. Even
then, the poverty of the people, their passive character, and the extreme difficulty
of proving, by legal evidence before a distant court, what was customary, rendered
this protection illusory in practice. While the ryot lost his security of tenure, the
share of the government remained fixed and the income of the Zamindars by way
of higher rents, multiplied several times. R.C. Dutt, made a vigorous attack on the
permanent settlement of Bengal and described it as Cornwallis “prodigious
blunder”. The permanent settlement deprived the state of a share in the increase
of rent which resulted from the general improvement of the economic condition
and handed over the entire unearned increment to the Zamindars. “Excepting an
extremely selfish class of people known as the Zamindars, this system has
benefited neither the state nor the ryots”.Land revenue, the chief source of income
to the state in an agricultural country, has remained almost inelastic. The
benefits of more valuable crops and higher prices have gone mostly to landlords.
According to S. Gopal “By vesting the Zamindars with all residuary rights of
property, the government exalted their status. Whereas, the rights of the ryots
were exposed to damage……. The permanent settlement altered the balance of
rural society in Bengal”. From the administrative point of view, the permanent
settlement became synonymous with a policy of non-interference in the Zamindari
estate, and in consequence government officers were much less in touch with the
tenants. It has been one of the greatest handicaps that, throughout 19th century,
the administration has had to carry on land settlement without any village maps
and record of rights. According to S. Carr, the permanent settlement some what
secured the interest of the Zamindars, postponed those of the tenants and
permanently sacrificed those of the state. So it may be concluded that the
revenues thus increased from the land shall be squandered away not for the
benefit of India but for the benefit of Great Britain.
Ryotwari System
The opinion of the Home authorities on the question of extending the system of
Bengal permanent settlement to the newly annexed territories began to change
with the discovery of the errors, mistakes and its practical inconveniences. The
most important reason, for the change in the climate of opinion was consideration
of fiscal and commercial interests. The company was interested in more and more
revenue to finance the expenditure of its expanding empire. The conclusion of the
permanent land set had set a perpetual limit to their revenues from the land, and
the government was for ever denied the right to deriving any benefit from the
expansion of cultivation on wasteland or from agricultural improvements on
already cultivated land. The exigencies of British economic development also
influenced the shifts of policy in a more indirect and complex manner. During the
18th century, the principal economic advantage which Britain enjoyed in relations
to India was assessed in terms. Its magnitude was judged by the favourable
balance of mercantilist trade and the volume of tribute that was drawn from the

country, and remitted home. But in the wake of the industrial revolution, the
economic relationship between India and England was basically altered. India
was to be developed as a market for British goods and as a source of raw
materials for British industry. Gradually the company’s failures and weaknesses
regarding land tenures and land revenue was exposed. The Home authorities
praised the Ryotwari mode of land settlements. At this juncture, the utilitarian
movement began to exercise a decisive influence on Indian policies. The most
distinct influence which the utilitarians exercised on the Indian land and revenue
policy was through the application of the new science and political economy to the
practical tasks of land and revenue administration. The most important doctrine
of classical economy that was applicable to the agrarian problem was the theory of
rent, enunciated first by Malthus in 1815.Therefore the Home authorities within a
few years of the operation of the permanent settlement, realized that it had made a
large sacrifice of state revenue by settling the revenue with the Zamindars of
Bengal in perpetuity. The Home authorities noticed an alternative system of
revenue settlements, developed by the officers of the Madras presidency. The
conception was put forward that the government should make a direct settlement
with the cultivators, not permanent, but temporary or subject to periodical
assessment and thus avoid both the disadvantages of the permanent settlement,
securing the entire spoils itself without needing to share them with intermediaries.
This was the Ryotwari system and this system was advocated by Sir Thomas
Munro and it was put into force by him as the governor of Madras in 1820 as a
general settlement for the greater part of Madras. Under the Ryotwari system, the
individual cultivator was transformed into the owner of the land he tilled, Sir
Munro who felt that the landlord system was alien to the Indian tradition. He
advocated in its place Ryotwari system which, he thought, would more or less
harmonize with that tradition. The early settlement in the Madras presidency was
based on the principles of the Bengal permanent settlement. In some parts of that
presidency the permanent settlement on Bengal lines had even been established
during the period between 1802 and 1804. But about this time, certain new
territories came under the British rule in the presidency of Madras, in which land
was held by bodies of small proprietary cultivators organized in joint village
communities. Since no intermediate agency for revenue collection was available,
the British officers collected the revenue demand directly from the cultivators. The
system of Ryotwari settlement consisted in entering into contracts for payment of
government revenue assessed in money terms for every field with each individual
ryot, without joint responsibility and without the intervention of a Zamindar or a
village headman. That is why the system is known as ryotwar, which literally
means “according to or with ryots”.In this system; there is no middleman between
the government and the ryots. In the ryotwari settlement, the occupant signs an
agreement, and he can at the close of any year, relinquish his holding and so free
himself from responsibility whenever he pleases. The Ryotwari village was the
original type in India and that individual property was the rule in early land
settlement.Mukherjee asserts that these ancient Indian communities held all
property in common. In recognizing the Ryotwari system, the authorities gave
legal recognition to what was already in vogue.

The advantage of the Ryotwari system is that the cultivator is in direct relation
with the government. There are no intermediaries as in the Zamindari system. But
these advantages have tended to disappear due to the possession of large
landholdings in the hands of non-agriculturists and consequently the increase in
the number of landless labourers. According to this system the ryots is at liberty
to sub-let his land and can enjoy a permanent right of tenacy so long as he pays
the land revenue. Therefore some elements of Zamindari tenure did appear in this
system too. Besides, the ryots, being a virtual proprietor on a simple and perfect
title, had all the incentive to perpetuate the agrarian relations which had existed
for centuries in the past. To the government, the Ryotwari system ensued the
benefit of all future increases of revenue resulting from the extension of cultivation
and the rise of prices of agricultural produce. It helped to win over the mass of
the cultivating population to the support of British rule and free it from
dependence upon the support of a few big Zamindars. Ryotwari system was the
only land system that was possible under circumstances outside Bengal. Under
this system, the cultivator enjoyed exclusively without any sharing by the
government, the benefit which he derived from the employment of labour or
investment of capital in improvements of the land. The land revenue demand
being simplified and defined, there was no problem of the oppression of the
cultivators by the intermediaries. The Ryotwari system of revenue settlements
provided an opportunity for the revision of the theory of agricultural improvement
implicit in the Bengal permanent settlement. Due to the introduction of Ryotwari
system, the income of the government in the Madras presidency increased from £
32.90 lakhs in 1861 to £ 41.80 lakhs in 1874.
But this system is defective as regards the method of assessment of revenue by

settlement officers. The assessment of revenue is made on the following
considerations, the fertility of land, the availability of irrigational facilities and
nearness to market. But practically the assessment was made merely on the guess
work of the settlement officers. Moreover, separate assessment of each holding
had destroyed the collective basis of village life and community. According to R.C.
Dutt ancient village communities of Madras declined from this date. The land
settlements of Munro caused wide-spread oppression and agricultural distress.
The cultivator becomes poorer. He fell in the clutches of the moneylender for the
payment of land revenue. The moneyed class bought the land and crops under
control by loan. The ryots ignorance and improvidence were also exploited by the
money lender who kept him in perpetual debt by offering him facilities of credit.
Accounts were forged so that interest continued to mount in spite of payment by
the debtor. The courts usually awarded decrease in favour of the moneylenders,
as the moneylender’s accounts book is a valid proof of the debt. This system
brought in its wake the phenomena of the mortgage, the sale and the purchase of
land. When a landholder could not pay the land revenue due to the state out of
the returns of his harvest, he was constrained to mortgage or sell his land. Thus,
insecurity of possession and ownership of land, a phenomenon unknown to the
pre-British agrarian society – came into existence.

The minute of the Madras Board of Revenue’s memorandum is worth quoting

here:“Ignorant of the true resources of the newly acquired countries….. we find a
small band of foreign conquerors no sooner obtaining possession of a vast extent
of territory, peopled by various nations, different from each other in language,
customs and habits, then they attempt what would be called a Herculean task or
a visionary project even in the most civilized countries of Europe of which every
statistical information is available, and of which the government are one with the
people, viz. to fix a land rent not on each province, district or country, not on each
state, but on every separate field within their dominions. In pursuit of this
supposed improvement, we find them unintentionally dissolving the ancient ties,
the ancient usages which united the republic of each Hindu village, and by a kind
of agrarian law newly assessing and parceling out the lands which from time
immemorial had belonged to the village community collectively…. Professing to
limit their demand to each field, but in fact, by establishing such limit, an
unattainable maximum, assessing the ryot at discretion, and like the Musalman
government which preceded them, binding the ryots by force to the plough,
compelling him to fill land acknowledged to be over-assessed, dragging him back
to it if he absconded, deferring their demand upon him until his crop came to
maturity, then taking from him all that could be obtained, and leaving him
nothing but his bullocks and seed grain, nay, perhaps obliged to supply him even
with these, in order to renew his melancholy task of cultivating, not for himself,
but for them”.The rent laws introduced by the British were responsible for the
disruption of old agrarian structure. The new rent receiving land came to form the
nucleus of the new middle class that emerged in the country in the 19th century.
Mahalwari System.
Under the Mahalwari system, the land is held jointly by landlords who are
jointly and severally responsible for the land revenue. The object of the system is
to recognize the joint character of the village communities and common rights in
land. The principles of Mahalwari or joint village system, which closely resembles
Ryotwari in rural essence was first adopted in Agra and Oudh and later on
extended to Punjab. The whole estate of these joint villages known as Mahal is
assessed to one sum of land revenue. One of the co shares of standing is
generally is selected to undertake the primary liability of paying land revenue
exactly in proportion to the actual holding or share of the estate. In a typically
Mahalwari village, the co-shares are themselves the cultivators. According to J.S.
Mill the peasant proprietors compound with the state for a fixed period. The
proprietors do not engaged individually with the government but by villages…..
Baden-Powell, one of the authorities on land revenue system in British India
summarized the various interests in land under different system of tenures. In the
case of state land lordism, there was only one interest, the government, being the
sole proprietor of land. In Ryotwari system the interest in land was divided in to
two, the government and the ryots. In Zamindari it was three, the government the
Zamindars, and actual cultivating holders. In Mahalwari system the interest in

land was divided in to four – the government, landlord, tenant holders and actual
cultivating holders. These three systems, Zamindari, Ryotwari and Mahalwari
underwent lot of transformation during the course of years and this led to the
intermixing of characteristic which in fact tended towards Zamindari system. If
Lord Cornwallis and Sir Thomas Munro, the respective protagonists of the
Zamindari and Ryotwari were to look at the system in 1940 they would barely
recognize them as such. Evils of Zamindari system and absentee landlordism
percolated all the tenurial system in India. Sub-letting and rack-renting became a
common characteristic even in the Ryotwari areas. The Mahalwari system
acquired the features of Zamindari system in Madhya Pradesh and U.P. where the
government laid emphasis on joint responsibility of the village for land revenue
assessment.
General Consequences
Through the process of sub-letting, and through the dispossession of the
original cultivators by money-lenders and others securing possession of their land,
landlordism has spread extensively and an increasing pace at Ryotwari areas.
These land systems served as a built-in-depressor on account of which Indian
agriculture continued to be characterized by low capital intensity and antiquated
methods.This extending chain of landlordism in India, increasing most rapidly in
the modern period, is the reflection of the growing dispossession of the peasantry
and the invasion of money interests, big and small, which seek investment in this
direction, having failed to find effective outlets for investment in productive
industry. A new class of intermediaries in all areas except for Madras and Bombay
known as Zamindars, Malguzars came into existence. No doubt tenancy protection
acts were passed, but it failed to solve the problems. Further, the gulf between the
rural poor and rich increased. A still more serious consequence of the
impoverishment of rural India was the inability of agriculture to play an effective
role in the modernization of economy. Industrialization in all parts of the world
was accompanied with agricultural revolution. In India, on the other hand, the
surpluses of agricultural production were exported instead of feeding the growing
industries. The introduction of capitalist relations interacting with growing poverty
and the pressure of population led to the fragmentation and sub-division of land.
Another reason for the sub-division and fragmentation was the practice of renting
or sub-renting the land by the landholders. Besides, in the exercise of its right to
appropriate a share of the gross produce of the agriculture, the state created a
new form of property in land and its produce by vesting a right of private property
in the soil in the person who engaged for revenue as Zamindars. The nature of the
rights created and the power assumed by the government under the British
regulation were such that the composition of the proprietary classes was no longer
to be determined by the direct acts of the state. The right to property now became
one which could be bought and sold in the market for money at the instance of
the state. Although the nature of the state remained basically the same as in pre-
British India, the manner of exercising those rights as laid down in the British
regulations was completely different. The public auction of land for arrears of
revenue was a procedure totally unknown in pre-British India.

The consequence of the British land revenue settlements was an extensive,

melancholy revolution in the landed property of the country and a basic
transformation in the economic relations of the various classes in the agricultural
community. The wealthy and moneyed classes, due to the rapacity of former
governments, were not interested in the management of land and in holding rights
of collection of revenue in the pre-British India. But the new rights of private
property in land vested in the persons who collected there revenue attracted them
since it provided a remunerative source of investment for their capital. As a result
of these settlements, millions of people were deprived of the rights that they and
their ancestors had enjoyed for centuries. The government introduced this new
land settlement mainly with the intention to meet its increasing financial
requirements. Above all the agrarian system created the necessary pre-requisite
in the capitalist agriculture by introducing individual ownerships of land. Along
with this development, commerce and the new economic forces, which penetrated
the village, undermined both the agrarian and economic autarchy of villages of
pre-British India.
GROWTH OF PLANTATION ECONOMY
Evolution of modern Industry can be dated to the year 1833 when Charter Act,
1833 was passed. This Act divested the Company of its commercial charter.
European settlers and other British capitalists were permitted to invest capital for
expansion of trade. New industrial activities took two forms: Plantation and
factory industry. Plantation industry was the first to attract the Europeans.
Plantation industries:
Tea Industry: India is one of the leading tea-producing countries of the world at
present. It was in 1820 that indigenous tea-plants were found in Assam. As
Charter Act permitted Europeans to own land in India, there was the possibility of
the growth of this industry in India. Government started an experimental tea
garden in 1835, which was sold in 1839 to the Assam Tea Company which was
the first Indian Tea Company. But the competitive quality of the Indian tea was
not established until 1852. Thereafter, the progress in the development of tea
plantation was rapid. The first garden in Cachan was opened in 1855, in
Darjeeling in 1856, and in Chittagong and Nagpur in 1862.
During 1860s there was rapid expansion of tea plantations which suffered a
crisis in 1866, and recovered from it in 1871. Assam was the most important tea
production area in India. By the end of the 19th century Indian tea successfully
drove out Chinese tea from the markets in the United Kingdom. Due to increased
production of tea in India and Ceylon, there was heavy fall in the prices of tea
during the early years of the 20th century. New markets were therefore found in
the U.S.A. Australia, Canada and Russia. There was also increase in the domestic
consumption of tea. The Indian Tea Association was formed in 1899. This
Association sought to improve the quantity and standardization of Indian tea. Tea
Cess Act was passed in 1903 levying a cess on the domestic sale as also on export
of Indian tea.

The tea industry was doing well when the First World War broke out. Prices
rose impressively and production also rose. The average yield per acre more than
doubled. The way years were distinctly good years for the industry. But during
1919-21 there was severe depression in Indian tea industry due to rise in the
exchange rate and fall in the price of tea. But the period 1921-25 was a period of
rising prices, increasing production and therefore period of prosperity for Indian
tea industry. Great Depression of 1930s distinguished not initially affect the tea
industry, because the tea producers successfully entered into an agreement to
restrict the world output of tea. But since 1931 due to increased production of tea
in Java and Sumatra, the prices stated declining steeply. To check this, there was
agreement among the tea producing countries. Export quotas began to be fixed for
various countries from year to year. The outbreak of the Second World War gave
rise to a new condition: price fluctuated and export quotas revised; with the entry
of Japan into war in 1941; the supply of tea diminished: Hence the Indian tea
industry enjoyed certain amount of prosperity.
Indigo Industry: Since 18th century Indian indigo became an important export
article. The East India Company carried an extensive trade in indigo. But towards
the end of the 18th century trade in Indian indigo began to decline mainly because
of two reasons – competition from America and growing adulteration of the dye. By
the beginning of the 19th century. The East India Company brought indigo
planters from Western Indies and settled them in Bengal. Gradually in Gujarat
and Western India; up to 1850 the Indian indigo industry registered rapid
progress. It developed under the control of European planters. By 1860 the
industry had grown to its maximum capacity and it remained steady at that level
up to 1895. Since 1897 it began to decline because of severe competition from
synthetic indigo from Germany. During World War I, German dyes were shut off
from the allied markets; demand for Indian indigo experienced a revival. But after
the war German dyes reappeared and renewed the depression in Indian Indigo
industry.
Coffee Industry: The Moorish traders introduced coffee plants for the first time in
India in the 16th century, and its cultivation was undertaken in Southern India.
The systematic cultivation of coffee began in 1830s. But its progress started from
1860 onwards and continued up to 1880. During this period there was a
continual increase in export of coffee. After 1880, the competition from Brazilian
coffee deprived Indian coffee industry of many export markets. Brazil regained her
position as the most important exporter of coffee. This resulted in continual
decline in area under coffee in India since 1901.
During the world wars, European markets were lost to Indian coffee and there
were fear of depression in the industry. Consequently in 1942 The Coffee Market
Expansion Ordinance was issued. Under this ordinance of 1942, each registered
coffee estate was permitted to market freely only 40% of the production, the
balance being required to be handed over to the Indian coffee Board’s food. The
Indian Coffee market Expansion Act was passed in 1943. Under this Act the
Coffee Board was enabled to assume control over the entire coffee crops of coffee
estates. This Act thus enabled to keep coffee prices at reasonable levels.
Rubber Industry: Rubber plantation was introduced into India towards the close
of the 19th century, (in the place of the devasted coffee plantations).There was
rapid expansion in the production of rubber during and after the First World War.
Acreage under rubber increased and there was boom in rubber production. But by
the end of 1921, there was slump in rubber prices due to overproduction. As a
consequence ‘Stevenson plan’ of limiting exports was adopted thereby rubber
prices revived up to 1925. In 1928 Stevenson plan came to be abolished. New
restriction schemes were developed. After 1934, the internal consumption has
been mounting. To meet the increasing demand Indian Rubber Board was passed
in 1947.Now the Rubber Board fixes prices for different grades of rubber and
advices the Government on questions regarding the export and import of raw-
rubber.
ECONOMIC ROOTS OF THE 19TH CENTURY PEASANT REBELLION
The land revenue policy adopted by the English East India Company subsequently by the
British India government alienated the peasantry and deprived them of their traditional rights
over land. The increase in population at an average of 15% during the first half of the 19th
century contracted the available space for them. The actual incidence of land revenue, which
was the basic pillar of British colonialism, was the appropriation of the available agricultural
surplus. The rate of appropriation was pressing hard upon the producer and there was a sharp
decline in material conditions of life of the peasantry. The pressure upon the village
peasantry by way of high revenue had almost destroyed the Indian villages. The village
communities really concealed considerable stratification with the dominance of a body of
upper peasants and small zamindars over a number of cultivators and landless
labourers.Alongside many places in India, including Kerala, agristic bondage prevailed. This
process was intensifies by the increase in landless labour. Adding fuel to already boiling pot
was the role of moneylenders, trading class and intermediaries who took advantage of the
situation and massive land transfers took place. Sales and mortgage increased depriving the
hapless peasantry. The mutiny of 1857 and subsequent peasant revolts in various parts of
India was rooted in this agrarian discontent and exploitation of British regime. Indian
politics at this stage contained a complex series of fractures, over which were ranged
competing ideologies and loyalties. Protest movements, therefore, remained focused in a few
villages. Political methods ranged from religious and social orthodoxy to tenant rights and
nationalist aims. Some of these millenarian movements were interpreted as reactions outside
disturbances as phenomena of disjunction. Throughout 19th century, local and social
resistance to economic and political issues occurred in India. Protests were also visible at
changing conditions of agricultural production and against landlords and rents. (Examples;
Blue mutiny, Champaran protests, Pabna revolts etc.)

CHAPTER-111
TRANSFORMATION OF INFRA-STRUCTURE
The entire economic structure of India had undergone transformation during the phase
called ‘Imperialism of free trade’. This stage was marked by railway construction. The
British capital inflow to India with ‘guaranteed return’ increased the railway and transport
infrastructure. This was followed by capital accumulation required to cater colonial
requirements. The economic mechanism of colonial exploitation operated at three levels.
1. Direct appropriation of social surplus through revenue appropriation, the crude tools of
plunder and tribute and ‘employment of our boys’
2. The more disguised indirect and complex mechanism of free trade and unequal exchange.
3. The newly emerging form of investment of foreign capital in modern plantations means of
transport, mines, industries, banking and public debt.
BANKING
The house of Jagat Seths dominated the field of indigenous banking in Bengal
(and outside Bengal) before its conquest by the East India Company. Mir Kasim’s
ruinous expropriation, loss of the privilege to receive Government revenues after
1765, and transfer of the treasury to Calcutta in 1772 brought about the fall of
the house, and on its ruins sprang up numerous native shroffs like Hazari
Material,Dayal Chand and Monohar Das Dwarka Das. Meanwhile, the European
agency houses of Calcutta had added banking to their multifarious business, and
we hear of the Bank of Hindustan, run by Alexander & Co. (1770), the Bengal
Bank (1784), and the General Bank of India (1786), the last-mentioned being the
earliest joint-stock bank with limited liability. The Bengal Bank had official
proprietors and tried to secure Government patronage, but the General Bank was
more fortunate. On lending twenty lakhs of current rupees to Cornwallis, it
secured recognition of its notes and became virtual bankers of the Government.
There were runs on the Bengal Bank and the Bank of Hindustan when news of
British reverses in the Third Anglo-Mysore War reached Calcutta, and they failed
in 1791. The Government came to their assistance in view of the possible
disastrous effects on public credit, public contractors and holders of Government
securities. The latter survived with this help.
In 1806 Barlow proposed the establishment of a chartered bank at Calcutta to

be “of the greatest service to the commercial interests of this Presidency” and to
“afford the most essential aid to all the financial operations of this government, by
defeating the measures and combinations to which the numerous individuals at
this presidency…invariably resort, for the depreciation of public securities,
whenever an opportunity is afforded to them for that purpose, by the pressure of
public or private distress. Pending the Court’s decision, a provisional bank was
set up with nine directors, tree nominated by the Government and six nominated
by the subscribers (each share was worth Rs. 10,000), till a formal election should
take place on the Court’s approval. The notes of the Bank soon replaced the
depreciated Treasury Bills. But the Court suspected the move to be in the interest
of the agency houses, and withheld its sanction to a permanent institution till
1808.The Bank of Bengal, the first Chartered Bank in India, was launched on its
career on 2nd January, 1809 with a capital of 50 lakhs.It was entrusted with the
funds (10 lakhs) of the Government, its notes alone were recognized, and it
monopolized all business, with the Bengal Bank defunct, the Central Bank
dissolved, and the Bank of Hindustan moribund.
The tragic failure of the agency houses of Calcutta between 1826 and 1832
underlined the urgent necessity of expansion of commercial banking. Banking
business had always been an adjunct to their multifarious trading and financial
activities. Run on unscientific lines and drained of funds to bolster marginal
indigo concerns or to satisfy claims of departing partners, they could not cope
with the crisis. Cheaper and safer banking was a battle cry of the free-traders of
1833, and their victory was clinched by the grant of a charter to the Union Bank
in 1835.The first Bank of Bombay was established under a charter, similar to that
of the Bank of Bengal, in 1840, and the Bank of Madras followed in 1843. Until
1862 the three Presidency Banks worked under severe restrictions (a price for
their privileges), the most important of which was limitation on purchase or sale of
bills on London, China, etc. i.e. on exchange operations.
The Union Bank, however, crashed with many other private banking and
agency concerns during the crisis of 1847-48. “In the absence of established and
well-accredited means of conducting the exchanges, a system had arisen exactly
similar in its nature to that known at home by the term ‘accommodation
bills’…..Houses in Calcutta drew upon their own Houses in London and the
Houses in London to cover themselves drew new sets of Bills and, with the
proceeds of such Bills, purchased other Bills upon other Houses, ….and (Calcutta
Houses) transmitted them to the Houses in London to pay former Bills of their
own drawing”. Thus an enormous amount of cross bills became current,
representing no transactions, and, what was even worse, drawn without any
regard to the state of exchange, under the dire necessity to meet engagements at
all hazards. The crisis once again underlined the danger of a policy of
exclusiveness pursued by the Company. Until a liberal policy was adopted to
encourage commercial and exchange banking on legitimate lines, a fictitious and
unsound system was bound to reappear.
The Court opposed such a policy as late as 1852. Authority had been given to
the three Presidency Banks to issue notes to the aggregate amount of 5 crores of
rupees, but notes to the amount of only 2 crores were in circulation. Temple
minimum cash balance had been fixed at one-fourth of the outstanding

obligations, but the cash balances actually kept were only a little below the
obligations in two cases and in one case went above. The Presidency Banks could
easily enlarge their liabilities to three times under the so-called restrictive
system.Outside the Presidency towns the number of unchartered banks were 7 in
Bengal and 2 in Bombay – the biggest in the former being the Agra and United
Service Bank (est. 1833) with a paid up capital of 60 lakhs, the North-West Bank
of India (est. 1844) with 23 lakhs and the Delhi Bank (est. 1844) with 16 lakhs,
while the Oriental Bank (est. 1842) and the Commercial Bank of India (est. 1845)
of Bombay had a proposed capital of 2 crores and 1 crore respectively. Only the
Bombay banks issued notes to a small extent. The Court, moreover, considered
combination of banking and remittance operations unwise and refused to grant
the privilege of note issue to other than the Presidency Banks.
Whatever the Court might say, the rapid rise of the value of the banking shares
and the amount of dividends paid by the best banks showed a considerable scope
of expansion for ordinary banking, and the phenomenal increase of India’s trade
with Britain and the Far East had been calling for introduction of exchange
banking. The note circulation of unchartered banks was restricted because their
notes were not accepted in the treasuries. The cry against monopoly had been
raised in the forties, and the Oriental Bank (est. 1842) had secured permission
from the British Treasury (1851) to establish agencies in India “for the purposes of
exchange, deposit and remittance” to facilitate its banking operations in Ceylon,
Mauritius and Hongkong. The Court had opposed the charter but it had been
established in law that the Crown could grant it for the limited purpose of
exchange, deposit and remittance. The first round had been won and the second
round opened in the fifties, when memorials poured upon the India Board and the
Treasury for permission to establish more exchange banks. Wilson, Financial
Secretary to the Treasury, advised Wood to initiate a liberal policy. A grant of
limited liability (to double the amount of shares held) in exchange for checks and
safeguards (viz. capital to be entirely paid up in two years, etc.) would be much
safer than an insistence on unlimited liability without checks. The Chartered
Bank of India, Australia and China received the Royal Charter on 20th December,
1853, as a result of this debate, but commenced business only from 1858.
The whole position was reviewed in 1861 in connection with the passing of the
Act XIX. Till that year the Government had not issued any notes and the three
Presidency Banks were the most important note-issuing banks. When the
Government deprived them of the right of note-issue by the Act XIX, it relaxed the
statutory limitations on their business and granted them certain benefits as its
agents for transacting the paper currency. The avency was taken away in 1866.
The Bank of Bombay was dissolved in 1868, though a new bank of the same name
was floated in the same year. The Presidency Banks Act of 1876, amended in
1879, 1899, and 1907, governed them till the formation of the Imperial Bank of
India (1921). The Act of 1876 imposed severe restrictions on the charter and mode

of their business. They could not deal in exchange, borrow or receive deposits
payable out of India, or lend money for a period longer than three months (till
1907, then six months), or upon mortgage or on immovable property. In return,
the Government relinquished its share of capital and abandoned the policy of
direct interference in management. But they also ceased to enjoy the use of
Government balances by the development of the Reserve Treasury System, and in
1877 the Secretary of State refused to allow them to set up agencies in England.
In spite of this, their total deposits rose from 6.4 crores in 1870 to 14.76 crores in
1890, to 32.34 crores in 1910 and to 76.18 crores in 1921. They became bankers
for the Government and, increasingly, banker’s banks, i.e. the backbone of the
internal banking system. Keynes’ able advocacy for a Central Bank before the
Chamberlain Commission bore fruit in the amalgamation of these banks in 1921
in the Imperial Bank of India, though it differed in vital respects from his model.
As the Presidency Banks were precluded from dealing in foreign exchange, the
Exchange Banks came to fill the gap. To the Oriental Bank and the Chartered
Bank of India, Australia and China were added the National Bank of India (1863),
the Hongkong and Shanghai Banking Corporation (1864), and the Chartered
Mercantile Bank of India, London and China, etc. With the sudden fall of cotton
prices after the end of the American Civil War, Liverpool was hard hit, the Over
end Gurney & Co. failed, and the depression spread to Bombay.It overwhelmed
the Commercial Bank Corporation of the East, the Agra and Master man’s Bank
and the Asiatic Banking Corporation. At the beginning of 1866 there had been 23
exchange banks in Bombay and 22 in Calcutta. The following year there were only
seven left in India? The Oriental Bank (first Chartered Exchange Bank) crashed in
1884, and the new Oriental Bank, which replaced it next year, went into
liquidation in 1893. By the turn of the century the Agra Bank was liquidated. The
Exchange Banks suffered from the constant fluctuation of exchange rate during
these years and made a most important contribution to India’s economic
development by assuming responsibility for a large part of the exchange risks.
Besides, these, there were agencies of banking corporations doing business all
over Asia (major portion outside India), like Yokohama Specie Bank or Comptoir
National d’ Escompte de Paris. In 1921 the total number of banks of both these
varieties was 17. Their aggregate paid up capital had risen to £66, 369,000,
reserve and rest to £45,263,000, while their deposits outside India amounted to
£526,473,000 and in India to Rs. 75, 19, 61,000. When we remember that their
total Indian deposits in 1870 amounted to only 52 lakhs of rupees, the progress is
indeed striking. Their only defect was dangerously low cash balances which
invited Professor Keynes’ warning in 1913.
The Indian Joint Stock Banks form a third category. Official banking statistics
from 1913 have divided them into two classes – (1) those having a paid up capital
and reserves of and over 5 lakhs of rupees, and (2) those having a paid up capital
and reserves between 1 lakh and 5 lakhs. There were seven banks of the former

type in 1870, mostly under European management. Only three of them – the Bank
of Upper India (1863), the Allahabad Bank (1865) and the Bangalore Bank (1868)
survived. Seven more were added between 1870 and 1894 of which the Alliance
Bank of Simla (1874) and the Punjab National Bank (1894) were prominent. A
fresh outburst occurred from 1904 and many important banks like the Bank of
India (paid up capital – 50 lakhs, reserve, etc. – 5 lakhs), the Indian Specie Bank
and the Central Bank of India were founded.
CURRENCY AND EXCHANGE.

Under the Mughal Government the gold mohur and the silver rupya, without
any fixed ratio of exchange between them, were current as legal tenders. In 1542
Sher Shah had fixed the rupee’s weight at 100 ratis or about 175 grains of fine
silver, and the Mughals accepted it as the standard weight for both gold and silver
coinage. With the disruption of the Empire after 1707 the succession States
claimed and exercised an undefined political sovereignty, and began to debase
currency without altering the denominations, so that there soon ceased to be an
Imperial legal tender current throughout India. In Bengal, farming of mints,
adopted by Ratan Chand, Diwan of Farrukh-siyar, led to the decline in value of
the sicca rupee every year till, at the end of the third, it became a ‘sonaut’. Under
the Jagat Seths the undervaluation of all siccas of an earlier date than the current
year became established, so that they could earn huge batta or discount on them.
The siccas, however, were not the only rupees extant.The East India Company
found at currency confusion in Calcutta which was worse confounded in the
mofussil districts.
It was not till 1763 that the Company could wrest from a pliant Mir Jafar the
undisputed right to coin their own siccas at Calcutta. Meanwhile, scarcity of
silver had become notorious. Not only no bullion had been imported since 1757,
but drainage of silver had started towards China, Madras and Bombay. Bi-
metallism was introduced in 1766 to meet this problem and was further confirmed
in 1769. But the ratio between the gold mohur and the sicca was inadvertently
fixed, first at 1:14 and then at 1:16. Overvaluing of gold immediately resulted in
‘batta’ or discount on gold mohurs and made silver more scarce.To secure
uniformity of sicca coinage and prevent clipping by the money-changers, the rupee
was provided in 1778 with an inscription – ’19 Sanskrit (i.e. the 19th year of Shah
Alam) sikkah’ – and given a fine silver content of 175.927 grains troy. But this
arrangement of Hastings – one mint at Calcutta and use of one regnal year –
added to confusion which was duly exploited by the mofussil shroffs. He
suspended gold coinage altogether in 1777 for reasons discussed above, but
financial circumstances once again forced him to revert to gold in 1780 with the
same results. Cornwallis’ Committee on Curroncy diagnosed the disease – while
the market ratio between gold and silver coins had been 1:12 or 1:13, the mint
ratio had been fixed at 1:16. The Third Mysore War did not allow him, however, to
continue with mono-metallism and in 1793 the gold mohur reappeared, valued at
16 sicca rupees. This experiment, almost a counsel of despair under the prevailing
monetary stringency and the exigency of war-finance, was bound to fail like the
two earlier ones and for the same cause – overvaluation of gold.
In Madras, too bi-metallism was meeting with similar difficulties. The first
attempt was made there in 1749 when 250 Arcot rupees (each containing 166.477
grains of fine silver) were legally rated at 100 star pagodas (each containing
42.048 grains of gold), which were the traditional currency in that region.
Compared to the market ratio the star pagoda had been undervalued and, after a
few years of close proximity in the 1770 are the legal and the market ratios once
again swung apart when the Third Mysore War began to cause heavy import of
silver from Bengal. It had been a mistake to fix the ratio at 365 to 100 in 1790,
but it was aggravated in 1797 by raising the ratio still further to 350:100. Bi-
metallism on wrong lines ended in failure and caused disappearance of the
pagodas. In Bombay the mohur was at first overvalued, but the change in 1774
brought it down almost to the market ratio.The introduction of debased Surat
rupees at particular, however, frustrated the designs of the Government and drove
out Bombay rupees as also the gold mohurs. It was resolved to alter the standard
of the mohur to that of the Surat rupee so as to give a ratio of 1 to 14.9, but the
market ratio, inclined towards 1 to 15.5, caused the failure of the experiment.
In the light of this sad experience of bi-metallism in all the three Presidencies,
and under the influence of Lord Liverpool, the Court of Directors decided for a
silver standard in 1806, the rupee having a gross weight of 180 grains troy (pure
silver content being 165 grains).The principal object was fixity of value. The Court
believed that they were restoring the old Mughal Unit, which could also become a
unit of weights and measures and be easily assimilated to the English Unit.The
proposed standard of fineness agreed so closely with Bombay, Madras and
Furrukabad rupees that uniformity could be obtained without much dislocation.
The Court’s order was first carried out in Madras in 1818, when the Arcot rupee
and the star pagoda were replaced by a silver rupee and a gold rupee of the weight
and fineness decided by the Court. Bombay followed in 1824. Bengal eliminated
the Banaras rupee in 1819 and brought the Furrukabad rupee (current in
Lakhnau region) in line with Bombay and Madras rupees in 1833. With the
exception of the Bengal sicca and gold mohur, a uniformity of coinage had been
accomplished. The Bengal Government clung to the bimetallic standard and
Madras continued the system of double legal tender at a fixed ratio.
Rapid growth of internal and external trade, however, brought from the
European merchants and agency houses a persistent demand for a common
currency based on a single unit in place of a uniform currency composed of like
independent units. Secondly, the surplus of one Presidency was not available for
the deficiency of another without passing through the mint. By the Act XVII of
1835 a common silver currency was introduced in India as the sole legal tender,
with a rupee weighing 1 tola or 180grs.Troy and containing 165grs, of fine silver.
It was not substitution of gold standard by silver standard but of bi-metallism by
monometallism.That it was to be silver monometallism instead of gold was decided
by prevalent theories (of Locke, Harris and Petty) as well as practice (though not of

England), and popular preference played its part. Gold, however, continued to be
freely coined at the Mint and to increase the revenue from seignorage, the
Government authorized in 1841 receipt of gold mohurs of the same weight and
fineness at the treasuries at the gold-silver ratio of 1 to 15.Discovery of gold fields
in Australia and California, however, upset the ratio; gold became overvalued, and
the privilege granted in 1841 was withdrawn in 1852.
The British system of revenue and finance and the enormous increase of trade
called forth an increased demand for cash. But after 1850 the production of silver
did not keep pace with the needs of the world, especially of countries like India,
placed on an exclusive silver basis. To make matters worse, a large part of the
coined silver was diverted from monetary to non-monetary purposes. As Cassels
wrote in his minute on Gold Currency for India, “the mint has been pitted against
the smelting pot, and the coin produced by so much patience and skill by the one
has been rapidly reduced into bangles by the other”. The problem could not have
been solved by augmenting the import of silver which had already reached the
highest peak.The lack of credit was woeful. Issue of interest-bearing treasury
notes failed, as it was insufficient, confined in time to twelve months and in place
to the Presidency towns. By 1856 only twelve banks were in operation, of which
the Bank of Bengal alone had more than a million pounds worth of notes in
circulation.
Under these circumstances the demand for a gold currency grew stronger. But
Sir Charles Wood (President of the India Board) was against a double standard
and feared that a pure gold standard (where a sovereign worth 10 rupees would be
legal tender), when gold supply had become so abundant, would benefit the
debtors only. When he became the first Secretary of State for India, the situation
had worsened, and in 1859 he was “thinking of trying a paper currency
convertible at large treasuries and receivable as revenue”. He agreed with Wilson’s
(the first Finance Member of the India Government) paper currency plan except its
provision for a fixed bullion reserve and its dependence in crisis on sale of
securities. Wilson’s scheme of 1/3 silver reserve would end in issue of paper notes
to three times the amount of bullion paid in. “The danger of an ill-regulated paper
currency is that it is often issued beyond what would have been coined and not
diminished when coin would have been melted or exported….The quantity to be
fixed is not…..the quantity of bullion, but the quantity of notes to be issued
without bullion or coin”. In his view the sum beyond which all notes must be on
metal basis should be fixed at 4 crores.
Laing, Wilson’s successor as Finance Member, introduced some important

changes in the original bill. First, he raised the lowest denomination of notes from
Rs. 5 to Rs. 20. Secondly, he proposed to accept gold bullion or coin and issue
against that notes to an extent not exceeding one-fourth of the total amount of

issues represented by coin and bullion. Thirdly, he proposed that only the Bank of
Bengal (and other Presidency banks, if need be) would get notes for coin and act
as agent of issue, for which it will receive a commission of 3/4 %. Laing explained
in a minute that his object was “simply to leave the door open for cautious and
tentative experiments with regard to the further use of gold” for which there was a
popular demand. Wood was furious and stormed at the innovations. First, people
would bring gold; take notes against it, and then demand silver if the Government
rate of exchange held out any hope of profit. Secondly, higher denomination notes
were useless in a country of low wages. Thirdly, mixing up of Government note
circulation with banking business was not only dangerous but sheer throwing of
money on the banks. Lord Elgin agreed.Wood considered himself an expert on
paper currency. He dwelt on the danger of over-issue and he even suspected a
conspiracy between the promoters of the new plan, the British merchants, who
were its supporters, and the Bank. “I admit the infinite temptation to the Bank to
go on as usual in dangerous times, and to trust to issuing beyond the mark when
the pinch comes. The general body of the mercantile community is, I daresay, for
this system. It comes in aid of them when they have got into difficulty…..”
The paper currency, established under Act XIX of 1861, did not prove the
panacea it was avowed to be, and the value of total note circulation by the end of
1863 reached 6 crores of rupees, which, in Cassels’ view, was about 6% of the
whole metallic currency. An unprecedented demand for Indian cotton, caused by
the American Civil War, resulted in a heavy pressure for currency which proved
inadequate. Once again the cry arose for a gold currency and for restoration of the
clauses in Laing’s Paper Currency Act, ruled out as offensive by Wood. Sir Charles
Trevelyan, who had succeeded Laing, openly advocated a gold standard:
sovereigns and half-sovereigns should be legal tender at the rate of one sovereign
for Rs. 10, and currency notes should be convertible either for rupees or
sovereigns, but not for bullion. The Government of India accepted the proposal but
the Secretary of State would not allow any deviation from the mono-metallic
system, i.e. the transitional stage of double standard envisaged in Trevelyan’s
plan. He not only found flaw in the undervaluing of sovereign but objected on
principle to a double standard, in which the cheaper metal would prevail. “You
cannot by law make it cheaper to use gold, for that would be a fraud if done
intentionally, and if it is more convenient to use gold in spite of some small loss,
the people would do so without a law”. He would only concede acceptance of gold
coin at a rate to be fixed by the Government without making it a general legal
tender. As the notification of November 1864 fixed the value of a sovereign at Rs.
10, below the real particular, it remained inoperative.
The currency situation forced the Government to appoint the Mansfield

Commission in 1866 which advised acceptance of gold as legal tender. The
Government dared not act on this recommendation and only raised the exchange
rate for a sovereign to Rs. 10-4 annas (1868). As the cotton boom died down, the

excessive pressure for currency abated and the home authority congratulated
itself on its wisdom in sticking to the silver standard of 1835 now supplemented
by paper. A little too soon, as events proved. We find no evidence in the private
correspondence of the time of any sinister design of the India Office to make a
profit on remittances by retaining the silver standard. Introduction of a gold
standard might have been easier at this stage and might have averted misfortunes
occurring in further, but to criticize Wood with our knowledge of later events
would be unhistorical. His personal experience was against it, he found support
in the academic circles, he could never trust Laing or Trevelyan fully, and the
issue of note circulation was mixed up with the grant of a commission to, and
keeping of large Government balances with, the Presidency Banks, much to his
distaste. Wilson and his successors were well-known champions of British
planters and capitalists and their hobnobbing with the Bengal Bank was suspect
in the eyes of the Secretary of State. One of the reasons why the paper currency
did not assume a large proportion was neglect of Wood’s criticism of higher
denomination notes. On the controversy over the use of banks as commission
agents, both parties were wrong. Owing to the prevalence of internal exchange, the
profit on remittances on different centers was so great that the commission of 3/4
% proved to be little inducement to the banks and the agreement on this score
had to be dropped in 1866.No doubt the Independent Treasury System
contributed to the difficulty of encashability of notes, and keeping of Government
balance with the banks for this purpose and by way of compensation for the loss
of their right of note issue may not be inherently bad, but the failure of the Bank
of Bengal in 1863 and of the Bank of Bombay in 1874 to meet Government drafts
showed that Wood’s apprehensions were not unfounded. Moreover, there was little
bank credit available in India to supplement Government currency and credit. The
mistake lay in a slavish imitation of the English system which would not work
under Indian conditions.
The problem of the last quarter of the nineteenth century was not, however, the
lack of elasticity but the violent fluctuations of the rupee-sterling exchange. The
rate of exchange for a sicca rupee had been 2s. 6d. sterling before 1813.So long as
the excess of exports over imports remained equal to the annual private remittable
income and the annual home charges remittable by the Company (about two
crores and a half in 1818), the exchange would remain at par. If it rose above,
there would be a favourable exchange, and if it fell below, the exchange would
decline. Up to 1816 the actual excess of exports per annuam was sufficient to
convey the remittable capital. But with the increasing British imports since 1818-
19 the amount of remittable capital shot up to cause a fall of exchange. As
remittance through trade languished, the exchange fell further. The normal rate
ultimately steadied round 1 rupee for 1s. 10½d.So steady was this rate up to 1872
that few people were conscious that India and Britain were on different currency
standards. In 1873 gold-silver exchange lost its old moorings and this dislocation
was reflected in the rupee-sterling exchange. The rupee was worth 22⅜d. in 1873,
and by 1878 fell to 19¾d. There was a slight recovery in 1879 and 1880 and then
a slight fall to 19⅜d. in 1884. From 1885 began a period of rapid fall which
reached 14.5d.in 1893.

The fall in the gold value of silver, which caused this, has been explained in
either of two ways – (1) a great increase in the production of silver as compared to
that of gold, and (2) demonetization of silver by the principal countries of the
world. Rival schools of interpretation grew up round these alternative
explanations. It has been shown that silver had been most of the time falling in
proportion, and though the proportion began to rise since 1873, it did not reach
half the magnitude it had reached in the beginning of the 18th century. Secondly,
there was little correlation between the supply and value of silver. If over-supply
was the cause of fall in the value of silver after 1873, why did it not operate in the
same way in the case of gold in the 1850’s? Goschen concluded that fall in the
gold value of silver could be explained by (1) demonetization policy of Germany
and Scandinavia, (2) financial distress of Austria and Italy which has forced them
to inflate their paper currency beyond measure and so to drive out silver, (3)
cessation of silver purchase by France, and (4) the much diminished demand from
India (during depression following the cotton boom). Lord Salisbury considered
these factors temporary and optimistically prepared himself for a fall up to 18d. in
1876. The real crux in his view was not Bismarck but India which had absorbed
70% of the total production during the last 24 years. With the prosperity of the
Indian purchaser, the demand for silver would rise and, naturally, its value. He
would not listen to the cry for a gold standard raised by the European chambers of
commerce.
The question could not be shelved two years later. The fall continued and the
Government of India, with its expenditure account already swollen by the Afghan
War, was faced with a rapidly rising sterling commitment. Strachey proposed
limitation on coinage of the rupee. The Lords of the Treasury, to whom the draft
Bill was referred, were still undecided as to the cause of the fall in exchange, and
considered that the proposals aimed at relieving the India Government from loss
by exchange on the home remittances, the civil and military servants who desired
to remit money to England, and the British capitalists who had invested money in
India and wished to remit profits home. “But this relief will be given at the expense
of the Indian tax payer, and with the effect of increasing every debt or fixed
payment in India, including debts due by ryots to money-lenders”, while, so far as
the Government was concerned, its good effect would be qualified by enhancement
of its obligations contracted on a silver basis.
As the rupee fell very slightly over the next 6 years, there was a lull in the
currency debate. Early in 1886 the rupee began to show a steep downward trend
and the Government had to find out more and more rupees to meet its sterling
payments. Dufferin sent a frantic telegram for permission to establish a bi-metallic
currency. Randolph Churchill, the Secretary of State, confessed that it was a
question “of which…..I am as ignorant as a carp and of which I now have neither
the time nor the industry to commence the practical and effective study”. Others
seemed to be equally confused and “I can only harp again on the old

recommendation of economy”. The recommendation did not go well with the

Burma War. The Liberal Kimberley could offer nothing better than his
Conservative predecessor, and his Conservative successor, Lord Cross, would not
agree to bi-metallism. He referred the question to the Finance Committee of the
India Council, which urged on the appointment of a Commission of Inquiry, as fall
of rupee by every penny meant an additional charge of £1 million, and the only
remedy, reimposition of customs or increase of salt tax, would be politically
undesirable.The Treasury refused once again to countenance bi-metallism, and to
the objections, put forward by Sir Stafford Northcote six years earlier, they added
a positive argument, namely, the great stimulus which the fall in exchange had
given to India’s export trade. Temple rupee continued to fall. The International
Conference of Brussels in 1892, like its two predecessors of Paris (1878, 1881),
produced no change in the situation. It was, moreover, likely that the U.S.A.
would repeal the clauses of the Sherman Act, which provided for the annual
purchase of 54 million ounces of silver. There was a fall in the gold value of rupee
securities and the British investors fought shy of the Indian market, which
seriously affected the Government’s “extraordinary public works”. The
municipalities and the local boards suffered or reduction of central financial aid.
Though the official rate of exchange, somewhat higher than the market rate,
afforded some relief to the civil and military servants at the cost of the exchequer,
they could not remit as profitably as they had done before 1873.
Quite different, it has been assumed, was the effect on India’s trade. R.C. Dutt
and others held that, favoured by the fall in exchange, the total trade of the
country had more than doubled itself in 20 years. Secondly, the progress in the
direction of manufactures was marked, with a chain reaction on Indian
agriculture. Taking 1868-69 as the base year (=100) the exports of wheat had
grown to 11,001.44 in 1891-92, and of tea to 1,075.75.The Indian manufactures
were almost ousting the English products from the eastern markets. It is
debatable, however, whether a change in the real terms of trade between two
countries can take place without a change in the comparative cost of their
respective products. Fall in exchange would act as a bounty to the Indian
producer only if the fall of silver in England in terms of gold was greater than the
fall of silver in terms of commodities in India. Such an assumption was
groundless, and there was no extraordinary flow of silver to India, which must
have resulted if it were correct. If there was a bounty to exporters, it was
temporary, and it was at the cost of the wage-earners and the primary producers,
whose lot escaped the notice of the Indian historians, the members of the India
Council and the Lords of the Treasury? The repeated attempts of the India
Government to secure permission for bi-metallism came to nothing, and it was
treated as a villain in the International Conferences, maneuvering to pounce upon
the dwindling gold stock. In 1892 it was praying once again for the closing of the
Indian mints to the unlimited coinage of silver.

The Herschell Committee (1892-93) was satisfied with these proposals and its
recommendations were carried into effect on 26 June, 1893, by Act VIII and three
executive notifications. (1) Free coinage of silver was stopped but Government
could coin rupees in exchange for gold at 1s.4d. Per rupee. This was equivalent to
a bullion parity of 43.1 pence per ounce. (2) God sovereigns and half-sovereigns
would be received in satisfaction of public dues at the rate of 15 rupees and Rs.
7/8 annas respectively. (3) Currency notes would be issued in exchange for gold
coin at the above rate and gold bullion at one rupee for 7.53344 grs. Troy of fine
gold. (4) Gold coins and bullion would be received by the Mint Masters on certain
conditions. The British Treasury almost sacrificed Indian interests for an
agreement with France and the U.S.A. on a stable monetary par of exchange
between gold and silver (which would have nullified the Act of 1893), but the
Government of India’s strong stand saved the situation. Thus did India go off the
silver standard to which she has never returned?
Once, however, the rupee-stock was exhausted, the new arrangements began to
show strain. The discount in the Indian money market rose to 16%.In fact, the
currency system was still inelastic, hardly able to provide for expansion. The India
Government (Probyn plan) proposed additions to currency through the use of gold
by making the sovereign general legal tender, though the Government could
alternatively coin rupees whenever in need (Lindsay’s plan). Under the pressure of
the European Chambers of Commerce, Westland, the Finance Member, was
asking for a gold standard with a gold currency, while the advocates of the latter
course proposed a gold standard without a gold currency. The Fowler committee of
1898 was called upon to choose between them. It rejected both Probyn’s and
Lindsay’s plans. Instead, it recommended a gold standard with gold coins in
circulation, making the sovereign legal tender and a current coin. But stringency
in the money-market was against limiting the legal tender quality of rupees. The
Government should be ready to sue gold to support exchange and should coin no
more rupees until the proportion of gold in the currency exceeded the public
requirements. The Act XXII of 1899 was passed accordingly, making the British
sovereign and half sovereign legal tender and a current coin at the rate of Rs. 15
and Rs. 7½ respectively (1s. 4d. rupee) and authorizing issue of notes in exchange
for them.
But the Government of India’s scheme failed to materialize and its rival plan
(A.M. Lindsay’s) ultimately came to be adopted as the Gold Exchange Standard.
According to that plan the Government was to give rupees in every case in return
for gold, and gold for rupees only in case of foreign remittances. It was to be
worked through the sale of rupee drafts in London without limit (called Council
Bills) and of sterling drafts in India (called Reverse Councils) as rupees or gold was
wanted. The formed was launched in 1904 when the Secretary of State promised
to sell Council Bills at 1s.4⅛ d. the rupee (which was the normal gold import
point) without limit, and the latter came in 1908 when sterling drafts began to be

sold at 1s.3⅔ d. the rupee. The Gold Standard Reserve was instituted in 1900 out
of profits on coinage, and its rupee branch was opened in 1907 as an emergency
fund to avoid delay in shipping bullion from London and coining it in India. By
1913 it was already over £22 million, largely in liquid form, and ale to meet any
crisis. Besides this, the India Government built up two reserves, one of gold and
the other of rupees, out of cash balance and the paper currency reserve. The gold
part of the reserves was mainly located in London and the silver in India. The
plain effects were, therefore, that (1) the gold sovereign became full legal tender,
(2) the silver rupee remained full legal tender, (3) the rupee, unlimited in issue,
became inconvertible, till a fall in exchange, and, even the, without any guarantee
of convertibility, and (4) that the Government alone had now the monopoly of
coining silver did not prevent an over issue.
SCIENCE AND TECHNOLOGY
By the middle of the 19th century English capitalism in India had reached its high
watermark. British capital export to India was directed towards railway construction,
plantation and jute industries. The British government gave financial aid to the English
companies to install large scale industries in India. Among the positive effects of the British
rule on the Indian economy, the establishment of the infrastructure of large scale industries
was most significant. Both from strategic and economic point of view, the railways and
communication facilities stabilized British interests. The railways, telegraph and telephone
facilities enabled the British to exploit the Indian manpower and natural resources to
promote British commercial interests. The British capitalist economy modernized Indian
economy with large-scale industries, division of labour, a uniform system of currency,
modern banking, trade, commerce and shipping.
The British established universities in India and Indian’s felt the impact of western science
and technology. Indian scientists conducted research in various branches of science in India
as well as in the laboratories of western countries. Jagadish Chandra Bose who was a
student of St.Xaviours College, Calcutta became a distinguished scientist. In 1896 he
published a paper titled “The determination of the Indices of Electric Refraction” Calcutta
University College of science and Technology emerged. Similarly Bombay University also
started. In 1933 the Department of Textile Chemistry and Chemical Engineering was set up.
Many Engineering, Veterinary and Polytechnic were started in due course. Madras
University also started various courses in Medicine, Engineering and sciences. College of
Technology was started specially textile technology and chemical technology. In Allahabad
University under Dr.Meghnad Saha science and technology, advanced courses in
Agricultural Botany, Agricultural Zoology and agricultural Engineering etc. were started.
The Indian Institute of Science was established in 1909 at Bangalore. Dr.C.V.Raman

became the director of the Institute in1933. The Asiatic Society of Bengal established in
1784 by William Jones and published a large number of papers in Mathematics, Zoology,
Physical Sciences, Botany and Geology. The Institute of Engineering was founded at
Calcutta with Thomas Ward as its President. A Royal character was issued to promote
general advancement of engineering in India. With the decline of Indian indigenous
industries, the British dominated trade and commerce and drained away Indian economy.
The exposition of British exploitation through the writings of Dadabhai Naoroji, R, C.Dutt
and M.G. Ranade, the nationalist strengthened the Swadeshi movement. Eminent
industrialist lead by Jamshedji Tata began to start Indian Industries. Tata founded a cotton
textile mill and named it Swadeshi Mills.
URBANIZATION
The old order was challenged by the Colonial policies. The demilitarized country side, the
standardization of land as property and Europeanized. Administration challenged the old
order. The Indian merchants, land lords, professionals and clerks of Calcutta began to
perform layered society. Other Indian cities also followed the Calcutta suit. Among the
Hindu “bhadralok” were those whose status was chiefly defined by their access to English
education as well as by high caste. The “babus” who were engaged in professions like law,
journalism, the civil service and education formed a clan of their own. These groups mark
the beginning of “modern” politics in India.

CHAPTER-1V
ECONOMIC DEVELOPMENT DURING THE INTER WAR PERIOD
NATIONALISM AND INDUSTRIAL CAPITAL

Modern nationalism identified people by culture and assumed them to be entitled to self
determination and self government. It became a movement towards politicized, scientific,
secularized and industrialized cultures and societies represented and imagined in print and
mass media. The modern political classes formed very small minorities in India. These
forces used western technologies, reassessed identity, location and history the elite and
popular in India adopted Bande Matharam which became an anthem of Indian Nationalism.
Protest movements around class issues ranging from landlords and ratepayers to rural
labourers and trade union strikes occurred during the 20th century. Class and interest based
combinations had been occurring increasingly among higher tenants.
After the First World War, the Congress was able to harness the popular movements to
nationalist campaigns. The non -cooperation movement comprised a boycott of elections,
titles, state schools and courts. Boycott was a very significant weapon to fight against the
British along with swadeshi campaign against foreign products. Labour strikes occurred
over wages and conditions in the mills of Bombay, Calcutta and Madras, admist accusations
of war time and post war profiteering, and in a host of together industries. No-revenue
campaigns were begun and there were attacks on landlords, merchants and moneylenders.
The withdrawal of non cooperation movement and the formation Swaraj Party intensified the
Nationalistic upsurges and anti imperialist movements. The Swarajist could expose the
irresponsible and autocratic form of government. Between the mid 19th and the early 20th
century Indian economic policy stopped being largely restricted to infrastructure. Since
1900’s the government began to intervene in industry and commerce as well as agriculture.
The state now moved on to war time price and supply controls in both 1914-1918, and
1939=1945. The factory acts were passed in 18181 and 1891 partly due to pressure from the
British industrialists who feared Indian competition. The stayed intervention was seen in
various industries including indigo, tea and coal mining. Factory and labour commission
were set up in 1890 and 1908.The Indian industrial commission was set up in 1917. In the
aftermath of the war economic questions also became more strongly political. The Indian
nationalists were critical of British economic and fiscal policies. The political leadership
increasingly organized lobbies, sought tariff, price regulation, and workers rights and so on.
The Swadeshi movement in its various form articulated during the nationalist movements in
1920’s and 1930’s
INDUSTRIAL CAPITAL
As already stated earlier the British capital operated through presidency banks and
exchanges, helped short term finance to British firms. Later the European controlled capital
which was raised from investors in India. The British owned capital that had been raised in
India tended to return to Britain, expecting the profits to be sent to them. The capital was not
imported but the profits were expatriated the capital from European residents in India went
into plantations, imports and exports, trade and finance and very limited quantity to industry.
The other source of capital was land lords transferring rent into capital. In India, the
indigenous industrial capital organized mainly out of the merchant capital. “In 1911, of the
433 factories owned by Indians in the Bombay presidency as many as 277 were owned by
members of mercantile communities. Baniyas(125), Parsis (85), Bohras (40), Memons (13),
Khatris (9) and Jews (3)” Irfan Habib. For example, the Parsis who dominated textile
industry of Bombay, drawn their capital from opium and cotton trade.
Most of the modern industry were owned or controlled by the British. Foreign capitalism
was attracted to Indian industry by the prospect of high profit. Foreign capital easily
overwhelmed Indian capital in many of the industries. Only in cotton textiles did the Indians
have a large share from the beginning and in the 1930’s sugar industry was developed by the
Indians. Indian business men had a difficult time to raise capital as most of the banks were
controlled by the British financers. Indian’s found it very difficult to get loans in 1916
British government appointed the industrial commission the commission recommended that
the government should help large organized industries by providing research and accurate
economic data. It also recommended that the government should give loans for obtaining
services of experts. It also recommended for setting up of provincial and regional
departments of industries.
THE GREAT DEPRESSION AND ITS IMPACT
Already important features of the contemporary global macro-economy in the
aftermath of First World War and during the 1920s, both India’s counter-cyclical
role in the world economy and Britain’s determination to manipulate it as a means
of easing her own financial problems intensified in the course of the inter-war
Depression. With the onset of the slump and the decline in American overseas
lending, Britain’s external financial problems grew severe enough to force her off
the gold standard in September 1931, and sterling was never to return to its
traditional parity with gold. But thereafter, Britain adopted relatively unorthodox
exchange rate and monetary policies to counter the slump at home. Enabling her
o accumulate large reserves of gold whilst following ‘cheap money’ policies was the
dramatic outflow of large quantities of gold, among other places, from India where
orthodox deflationary policies reinforced the impact of the Depression. As incomes
declined, Indian households were forced to liquidate their savings held in the form
of precious metals to meet fixed obligations or finance consumption. With price
differentials too funnelling precious metals abroad, India, no longer a ‘bottomless
sink’, yielded up nearly £250 million (net) of gold between 1931 and 1939.British
policy-makers felt vindicated by the outcome but, thanks to gold being released on
a smaller scale elsewhere and increasing output from the mines, were soon
saddled with a greater supply of the metal than they and the American monetary
authorities could together handle. Fearing runaway inflation and for gold’s further
monetary role, officials in London began now to consider steps to reduce supplies
or increase the demand for the metal. For several months in the late 1930s until
the American economy went into recession and war became more imminent,
Britain’s policy-makers prayed for Indian gold exports to cease and for however
gold appetite to revive!

The relatively benign impact of the Depression upon the Indian economy masks
the considerable intersectoral shifts and dislocations which marked these years.
Although accounts of the Depression in India usually take note of her large
exports of gold, there is insufficient appreciation of their origins in agrarian
distress; or of the manner in which dissaving and gold exports from India, both of
which might have been checked through appropriate policy, helped the
metropolitan economy manage its own recovery in the slump. However, here does
not purport to be a general or comprehensive account of the Depression in India.
Severe as its impact was not at this time, nor was the particular aspect of the
policy regime it discusses peculiar to the 1930s.But the Depression was, first and
foremost, an international occurrence. Therefore, and despite the small size of
India’s foreign trade sector in her overall economy, our understanding of economic
developments in the colony during this decade might be usefully enhanced if they
were restored to the wider multilateral context whence the slump arose and its
impact transmitted across the world.
The next section presents a brief background discussion of Britain’s external

liquidity context during the early years of the Depression as it concerns us, and
her policy-makers’ growing apprehensions of a ‘gold shortage’. The third and
fourth sections respectively sketch the impact of the Depression on the external
account, and the official policies of the period. The following section deals with
India’s large gold exports after September 1931 and documents British efforts to
encourage the flow. The sixth section has a brief discussion of the effect of gold
exports on the Indian economy, while the seventh recounts the emerging official
approach to the threat of a gold deluge in 1937.
‘Gold Shortage’ and the Sterling Crisis

During the 1920s Britain and most of industrial Europe looked to the United
States to support economic growth by keeping interest rates low and increasing
overseas lending. The USA was indeed the major international lender during the
ten years following the Armistice; and the ‘fragile economic equilibrium’ of the
second half of the decade ‘rested squarely on [US] lending’. American overseas
lending began to decline from mid-1928. After reaching a peak of $1050 million in
the first half of that year, it fell to about $450 million each in the second half of
1928 and in the first half of 1929. It fell further to $229 million in the second half
of 1929.Europe, in particular, was badly affected by the decline, managing in
1929 to attract less than a quarter of the preceding year’s capital inflow. The
redistribution of world gold reserves set in train by American overseas lending was
also reversed, with the US gold stock beginning to rise from mid-1928 after having
declined for nearly three years. Though overall the creditor countries’ share of the
world’s gold reserves increased by 5 percentage points each year in 1929 and
1930, only the USA and France gained any gold during these years, almost equally
splitting Europe’s total gold gains over the preceding four years.

Lower American lending adversely affected Britain’s external finances. Thanks

to a weak current account, even her restricted overseas lending during the 1920s
led to Britain running up short-term debts to foreign countries.’ As a rule’ before
1914, the Bank of England’s gold reserves and Britain’s liquid and short-term
claims on foreigners were believed ‘at least (to) equal (or exceed)’ her short-term
liabilities. Whether or not this was true before the war, recognition grew during
the 1920s that Britain was following unsound banking practices – borrowing short
to lend long. Moreover the Bank of France, which bought sterling to limit the
franc’s appreciation in 1926-7, and private French speculators held a significant
share of these short-term debts, the former’s short-term claims on Britain alone
nearly equaling the Bank of England’s gold reserves. As became evident before
long, this pattern of distribution of Britain’s external liabilities was a major recipe
for sterling instability. Restoring a healthier look to the maturity structures of
Britain’s external assets and liabilities required a stable economic and financial
climate. But the worldwide decline in economic activity from the second half of
1928, growing defaults on overseas debts as Latin American primary producers
faced falling trade and capital receipts, and the introduction of exchange controls
in central Europe combined sharply to upset Britain’s external account at the
same time as the resulting international financial uncertainty increased short-
term capital outflows from London. Consequently, the Bank of England’s gold
reserves, which peaked at nearly £174 million in September 1928, fell to less than
£131 million in October 1929; and although they rose during 1930 and for some
part of 1931thanks to reserve liquidation by primary product exporters and to
capital fleeing the continent, British gold losses resumed in mid-1931.
It is not necessary to discuss sterling’s fall from gold at any length, since a
substantial body of work exists on various aspects of the subject. Apart from
fundamental macroeconomic imbalances and the limited, on-off character of
international cooperation, sterling’s plight during 1929-31 was worsened by deep
domestic political and policy divisions within Britain, particularly over the priority
to be attached to external stability when nearly a fifth of her workforce was
unemployed. Therefore domestic credit and expenditure policies excited great
controversy, and even as Montagu Norman, the Governor of the Bank of England,
joined his American and French counterparts to urge economies or the merits of
tight money upon his own government in order to stabilize the frail British
currency, British Treasury officials were remonstrating in Paris against French
gold withdrawals. As one Treasury official noted, though London was willing to
supply gold, yet ‘the situation here over unemployment and prices is so
acute…..that we cannot be indifferent to operations which have the indirect effect
of putting a further strain on the market’. The Treasury also ignored French
advice to put up the bank rate because, in Frederick Leith-Ross’s words, ‘to
propose dearer money in London (was) to suggest decapitation as a cure for a
toothache’. Even at the height of the run on its reserves following the collapse of
the Austrian Credit Anstalt, the Bank of England could secure Treasury consent
for a bank rate increase only after much argument concerning the instrument’s

ability to retain funds in London. In addition, the sharp cutbacks in public

expenditure, mainly unemployment payments, needed to reassure foreign
investors and stabilize sterling proved difficult to achieve despite a split in the
ruling Labour party and the formation of a National Government committed to
defending the gold standard. With foreign hopes evaporating of gold losses forcing
greater fiscal discipline on Britain, the run on London balances proved
unstoppable when they resumed in July-August 1931, and sterling had to be
taken off the gold standard and gold payments suspended over 19-21 September
1931.
As the world economy went into a slump, and particularly as the deflation
required to preserve sterling on the gold standard grew more prolonged, British
policy-makers began openly to express the view that ‘maldistribution’ of the
world’s monetary gold reserves was the chief source of the crisis. Offering a
respectable front for Britain’s bullionist inter-war agenda, the ‘gold shortage’ view
guided the activities of several prominent British academics, bankers, and public
officials since the early 1920s, and served as the basis for Britain’s monetary
reform initiatives at the Genoa conference. British officials remained nervous
about both the shorter – and the longer –term aspects of the gold problem through
the middle years of the decade, and not surprisingly as the Depression worsened,
the ‘gold shortage’ school began to emerge into the open.
It was largely at the prodding of British protagonists of the gold shortage view
that the Financial Committee of the League of Nations constituted a Gold
Delegation in 1928 to investigate the problem. Apart from Montagu Norman’s
advisor Henry Strakosch, who was its most active member, the committee
included, among others, Reginald Mant, who had recently retired from the India
office, O.M.W. Sprague, an American economist who acted occasionally as
Norman’s advisor, and the Swedish economist Gustav Cassell.Unable to shake off
suspicions that the exercise was a major British conspiracy directed against
France and themselves USA, Norman and the Bank of England were forced to
disclaim any interest in the delegation’s activities. But not only had the argument
that ‘maldistribution’ of gold was the chief cause of the world’s economic problems
gained new converts, it was also firmly in the public domain: bullionism was now,
as it were, out of the closet. As R.V. Nind Hokins, who stepped into Otto
Niemeyer’s shoes in 1927 after the latter left Whitehall for the Bank of England,
noted in the course of preparing material for the Macmillan Committee, the
general problem of prices, apart from the drop following the US slump, is mainly a
world central banking problem. An aggregate standard of gold reserves in excess
of gold supply means a perpetual inconclusive struggle for more gold in each
country.US and France from different angles have especially acquired more than
their share. The British (reserve)…..is an extremely moderate sum given
population and wealth and international market.

The influential Royal Institute of International Affairs (Chatham House)

organized a series of discussions on the distribution of international reserves
attended by leading British government officials and their advisers. The views
conveyed by several official witnesses, including Niemeyer and Norman, to the
Macmillan Committee – in particular the description of the inter-war gold
standard as a ‘competitive scramble for gold’ – also suggest the influence of the
gold shortage school. The Macmillan Committee’s report also endorsed the gold
shortage view, and attributed the slump to the ‘illiquidity’ of the world economy
caused by ‘international lending power’ shifting away from Britain. Such views
were widely held in Britain’s official circles through the next two decades, and
dictated British proposals not only at the 1933 London conference but also at
Bretton Woods more than a decade later. It is against the background of such
perceptions and of Britain’s failure to persuade the United States and France to
sustain a coordinated redistribution of the world’s gold reserves that one must
examine British-Indian macro-policies during these years and the effect they had
of forcing India to finance reserve needs at the ‘centre’. But first, a discussion of
temple Depression primarily as it affected India’s external sector.
The Depression and India’s External Sector

During 1923-6, the Indian trade surplus reached unprecedented levels, peaking
at Rs.1189 million in 1925-6.But the following year it fell to nearly a third, before
rising to about Rs.500 million in 1927-8. However attenuated the impact on India
of the global boom of 1938-9, her exports continued to rise, and as imports fell
slightly, the trade surplus too rose during the year. Further, thanks to reduced
gold imports which offset a large increase in interest and dividend outflows, India
also ran a lower current account deficit during the year (see Table 9.1).
Yet even in1928-9, India’s external account was showing definite signs of
strain. Trade remittances still did not cover external obligations which had to be
met out of fresh loans and transfers from the Paper Currency Reserve. The
medium-term portents were also none too happy, with a bunching of maturities,
mainly of loans floated during 1921-3 to finance sterling obligations under the
managed float regime, about to occur in the next two years. When temple
Depression intervened, therefore, India too depended on a steadily expanding
world economy to meet her external obligations in a non-deflationary manner.
Expectedly, India’s foreign trade was the first to be affected in the
Depression, her trade surplus declining steadily from 1929-30 until 1932-3, when
exports bottomed out at about 40 per cent of the 1928-9 level. Imports hit the
floor at Rs. 1360 million in 1933-4; down from about Rs. 3000 million in 1928-
9.But with the exception of 1932-3, India maintained a t4ade surplus throughout
the 1930s.With her gold imports falling further, India’s current account deficit too
continued to decline through 1929-30. In 1930-1, however, the trade surplus
dropped by more than gold imports and service outflows together, and the current
account deficit increased sharply. Even so, the 1930-1 deficit was only about a
tenth of India’s commodity exports during the year. This was not much higher

than the 1927-8 proportion, and indeed lower than the 1926-7 proportion of
nearly 15%.Therefore though perhaps unsustainable in the circumstances, India’s
current account position did not quite call for panic measures.
Table 9.1 Indian current account, 1926-7 to 1937-8
Year Commodity Commodity Interest Other Net gold Current
exports imports and services exports Account
dividend balance
1926-7 3320 2969 -194 -298 -347 -488
1927-8 3529 3016 -181 -314 -347 -329
1928-9 3663 2998 -325 -312 -212 -183
1929-30 3404 2867 -316 -180 -142 -100
1930-1 2442 2071 -336 -159 -128 -251
1931-2 1740 1518 -348 -179 580 275
1932-3 1460 1515 -344 -162 655 95
1933-4 1635 1364 -339 -122 571 380
1934-5 1707 1594 -325 -139 525 174
1935-6 1821 1628 -320 -160 374 88
1936-7 2175 1608 -324 -183 278 338
1937-8 2050 2050 -302 -181 163 -320
Note: All figures in nearest Rs. Million; (-) signifies net imports.
Source: ‘Government of India’s Estimates….submitted to the League of Nations’, in A.K.
Banerji, 1963, India’s Balance of Payments, Estimates of Current and Capital Accounts
from 1921-22 to 1938-9 (London), pp. 236-7
These, rather than Banerji’s own more methodical estimates, are used here since the
latter are available only from 1921-2; Banerji also does not report short-term capital
movements separately.
The most severe effects of the Depression were, however, felt on the capital
account (see Table 9.2).It is evident that with net long-term capital inflows
declining, short-term inflows financed almost the whole of the current account
deficit in 1928-9.Thanks to increased official borrowings, long-term inflows picked
up during the next 3 years, but from 1929-30 the volatility of short-term funds
became a major source of concern.Net short-term capital inflows of Rs.179 million
in 1928-9 became net outflows of Rs.33 million in 1929-30, Rs.181 million in
1930-1, and Rs.393 million in 1931-2.Short-term outflows grew smaller
thereafter, but by now net long-term flows had turned negative as the colonial
government suspended overseas borrowing and moved instead to reduce India’s

external debt. Enabling India to afford the luxury of debt reduction (and overseas
lending) in the Depression, when other non-industrialized countries were
responding to reduced capital inflows by defaulting on their external obligations,
were her large gold exports (see Table 9.1)
Table 9.2 India’s capital account, 1926-7 to 1937-8
Long Long Short Short Net

Year term term term term inflows
inflows outflows inflows outflows
407 92 107 3 488
1926-7
182 35 248 66 329
1927-8
145 140 179 - 184
1928-9
204 71 41 74 100
1929-30
484 52 - 181 251
1930-1
358 240 - 393 -275
1931-2
128 193 52 82 -95
1932-3
254 496 - 96 -312
1933-4
37 124 - 106 -192
1934-5
n.a. n.a. n.a. n.a. -121
1935-6
n.a n.a n.a n.a -333
1936-7
n.a n.a n.a n.a 53
1937-8
Note: All figures in nearest Rs. Million rupees; (-) indicates net inflows.
Source: Same as Table 9.1
As pointed out earlier, Indian gold imports began to decline from longer-term
trend levels in 1928-9, and continued doing so through the next 2 years. However,
from the middle of 1931 India emerged as a net exporter of gold. These exports
lasted until the end of the decade, and totalled over £250 million. Although gold
exports by her were not unknown, India’s gold exports during the 1930s were
unprecedented in size and duration. These exports enabled India to run a current
account surplus until 1936-7, discharge a part of her foreign debt, and lend
abroad. Given the conditions of the world economy and Britain’s external liquidity
position, Indian gold exports functioned as a useful variable, and contemporaries
welcomed them as the most powerful expansionary influence globally, and in
particular, on the British economy.

The Policy Response and Constraints

Scholars familiar with the 1930s would recognize that the outflow of short-term
capital was not peculiar to India. In addition to depressed trading conditions,
higher interest rates in New York and other leading financial centers, and the
climate of financial uncertainty worldwide, short-term rupee holdings were
affected also by the run on sterling. As sterling, to which the rupee was anchored,
weakened against the dollar and the franc, the flight from the rupee may actually
have reflected a flight from the sterling area. A run on Indian reserves due to an
attack on sterling had been foreseen in 1925 and it was to this that Osborne
Smith, General Manager of the Imperial Bank of India, attributed the rupee’s
weakness. The small amount of gold India exported in January 1931, bypassing
London and going directly to Paris, also supports this view. In the same month, a
British cabinet memorandum admitted that capital was fleeing the sterling area,
and by August 1931 it was becoming clear that even British firms were leaving
sterling for ‘dollars, francs and guilders’. Officials in Delhi were aware that the
flight from the rupee might owe to global conditions, in particular the volatility
that had beset even the developed capital markets. Whitehall too conceded
privately that short-term outflows were partly, at least, due to factors originating
outside India. British-Indian businessmen, notably Sir Thomas Catto and
exchange bankers, attributed the outflows to a number of factors, including the
Wall Street boom, the ‘disorganized’ world economy, and Indian inroads into
British positions, especially in jute, tea, and sugar. Yet, publicly, officials in Delhi
and London preferred to attribute the rupee’s weakness almost entirely to
nationalist agitation and the prospect of political reforms in India.
Undoubtedly, political agitation in the form of the Civil Disobedience Movement,

and nationalist threats to repudiate India’s sterling debts and devalue the rupee
were important features of this period. In addition, during these years,
negotiations were underway on a new constitutional scheme for India, central to
which was the idea of a federal arrangement balancing the greater powers allowed
to the government in New Delhi. Although these reforms were thought to be ‘the
best way…..of maintaining British influence’ in India, they were caught up in
factional squabbles within the Conservative party, while even those sympathetic to
them were concerned about safeguarding British interests in the proposed
dispensation. With alternative political and constitutional arrangements being
actively deliberated in Round Table Conference or select committees, it would have
been natural for investors and businessmen to take them into account. Moreover,
frequent government warnings regarding the financial consequences of Indian
political reforms may have been self-fulfilling in some degree. For example, the
speeches of Samuel Hoare, the Secretary of State for India and member of a
leading family of City bankers, could not have been better calculated to spread
alarm among investors about the colony’s credit situation.

On the other hand, the bureaucracies in Delhi and London had good reasons of
their own to play up political factors. While the Government of India used
temporary to resist London’s pressure to deflate, officials in London found them
handy to avoid transferring control over monetary affairs to Delhi. Further,
whatever the advantages of studying the ‘official mind’, insight into the decisions
of businessmen is not one of them, and there is little evidence of observers in the
main business centers, regarding politics as a major factor in the weak rupee. Sir
Thomas, no friend of nationalist politicians, explicitly ruled politics out, and the
communications from the currency controllers, who were in direct day-to-day
touch with the exchange markets in Bombay and Calcutta, contain hardly any
reference at all to political uncertainty depressing temple rupee. Montagu Norman
too thought financial factors were responsible for the run on the rupee. It is also
worth noting, in passing, that short-term capital outflows were not uncontrollably
large in 1935 when political reforms were finally implemented in India, because by
now, Britain’s capital account had grown much stronger. As capital outflows grew,
the Indian monetary authorities could have imposed restrictions on them as
several Latin American countries did. Some Indian government officials proposed
restrictive measures, but Whitehall and the Bank of England would have nothing
to do with them until September 1931. Maintaining India’s uninterrupted
repatriation of short-term balances was as vital for London as the servicing of her
sterling obligations, and other objectives were subordinated to these.In fact,
India’s ability to meet her external obligations and the state of the market for
rupees was the only criteria Whitehall officials used to measure the colony’s
recovery in the Depression. Monetary and fiscal policies were oriented towards the
former, and towards the financing of short-term outflows.
The factors determining London’s financial priorities in India have already been
anticipated. At a time of weakness on her current account, transfers from the
colony grew in importance. Besides, unable any longer to adequately regulate
short-term fund movements between the major money centers, the London bank
rate now depended upon the free flow of capital from the Empire. Above all,
however, with Britain’s short-term position unravelling and capital flows turning
more volatile, the signals which an Indian capital account embargo sent to sterling
holders would have been little short of catastrophic. As the India Office admitted
to the Government of India after swearing it to the ‘utmost secrecy’, sterling and
rupee are intimately connected and…..collapse of one might bring down temple
other….’ With short-term capital outflows gaining momentum, the exchange rate
controversy, never far from the surface, revived, as Indian politicians and
businessmen once again made it a focus of agitation. Officials in Delhi and some
advisers to the India Office such as F.C. Goodenough favoured the rupee’s
devaluation. But not surprisingly in the background of exchange rate policies
adopted in the 1920s and despite the Royal Commission on Indian Currency and
Finance (better known as the Hilton-Young Commission, 1926) having
recommended the step in the event of world prices falling, the India Office refused
steadfastly to concede a parity change. The arguments its officials used to justify
their stand were diverse and contradictory, and merit separate attention. Yet they
are worth summarizing in a few lines.
London officials apprehended a rupee devaluation to affect British exports to

India, but this was not the crucial argument against it. An internal India Office
memorandum warned that besides damaging the interests of British exporters,
rupee devaluation would ‘profoundly shock’ international trade and, rather than
reassuring the markets, accelerate the fight from the rupee. At a more general
level, the India Office adopted one of two positions. Its argument that devaluation
would not improve the economic situation was based on a model of a fully
monetized economy in which offsetting adjustments to exchange rate changes
were universal and instantaneous. But the India Office presented a different and
more realistic model to the League of Nations. According to this model, less than a
third of the transactions in India were mediated through the market and about
two-thirds of the marketed farm output went to settle fixed debt and revenue
obligations. Other payments, including wages, were made in kind. The India Office
did not extend this model to conclude, as its critics more logically did, that the
sluggish adjustment to an external shock implicit in it made devaluation more
rather than less necessary. At a meeting with India Office advisers, Indian
businessmen and politicians argued (using a similar model) that devaluation
would leave the large majority of rural Indian households better off. At this time,
the India Office not only rejected this argument, but embellished its own mode of
a fully monetized economy with a wage-bargaining process in which agricultural
labourers (paid in cash) sought to protect their real wages in an inflationary
environment!
The Bank of England was cold to the idea of rupee devaluation. Norman
consulted M.M.S. Gubbay on the effects of rupee devaluation; and interestingly,
Gubbay’s memorandum, unlike those prepared by the India Office, explicitly dealt
with gold flows to India, and suggested that devaluation might increase them.
With devaluation rejected, the authorities were now left with the option of
borrowing abroad to strengthen reserves, and enforcing further contraction in
India. Even in 1928, Norman had been unhappy about India issuing loans in
London when he was attempting informally to regulate British overseas lending,
and saw the colony’s need for sterling loans as evidence of its government’s failure
to contract credit. Despite Norman’s reservations, the Indian government
borrowed £31 million in three issues between May 1930 and February 1931. But
its credit in London suffered a major blow in May 1931 when nearly two-thirds of
another loan issue for £10 million had to be retained by the underwriters. Hence
the pressure grew to intensify contradiction, Norman seeking ‘money famine’ in
India’ to frighten bears of exchange…..’ Following contra dictionary policies, gross
currency circulation in India fell from Rs.1867 million in September 1929 to
Rs.1487 million in September 1931 (Table 9.3), while for all but four months
during this period (when it was 5%), the Imperial Bank rate remained at or above
6%, and by the end of 1930, even Norman’s hand-picked head of the Imperial
Bank of India was forced to protest London’s demands. The Depression also
affected the government’s budgetary position. Actual revenues fell short of
estimates by about Rs.110 million in 1930-1, and with actual expenditure
exceeding estimates; the year’s accounts yielded a deficit of Rs.115 million.
Although duties on many goods were increased in the 1931-2 budget and in the
emergency budget of September 1931, this year too ended with a deficit of similar
magnitude.

In addition, there were two further problems. As budget deficits grew, the
Imperial Bank found greater difficulty in hiking the bank rate since it affected the
government’s loan programme adversely. The Imperial Bank’s efforts to tighten the
market were often neutralized by banks discounting short-term government paper
– a practice the former could not discourage without damaging the market for
these securities. Secondly, as already noted the Depression and the government’s
pro-cyclical policies adversely affected incomes and forced Indian households to
sell their gold holdings in order to settle dues and debts and finance consumption.
As early as July 1929, there were reports from Hyderabad (Deccan) of substantial
sales of precious metals by the public, and though silver dominated in the early
months, significant quantities of gold were also released. According to the
Amritsar agent of the Imperial Bank of India, by July 1930, low grain prices had
led to ‘reverse gold business’ even in the more prosperous agricultural regions,
with farmers trying to sell ornaments and jewellers forcing down prices by refusing
to buy. By January 1931, some 1600 ounces of gold (‘mostly in the form of
jewellery’) were arriving every day in Bombay from up-country centers. Much of
this gold ended up in the government’s coffers since the bazaar price of gold was
lower than the official price, and by early 1931, monthly gold glows into the mint
amounted to nearly £1 million. These gold receipts increased the potential
resources available to the government to defend the rupee, but threatened, more
immediately, to undo the monetary contraction effected so far.
The process and the seemingly spontaneous manner whereby gold sales by
India’s private sector made up for reserve losses in intervention, invites
comparison with the 1920 stabilization episode. In 1919-20, a non-deflationary
solution to her currency crisis depended on India receiving adequate amounts of
gold or silver against her large sterling reserves. At this time London, seeking to
ease Britain’s already severe financial problems, revalued the rupee to deflate the
Indian economy and force households to liquidate their savings in the form of
precious metals, so that the colony’s currency system would be stabilized without
gold or silver imports.
Table 9-3 (Gross coin and note circulation, quarterly; 1929-34
Year March June September December
1929 - 1877 1867 1794
1930 1772 1637 1715 1613
1931 1608 1525 1587 1793
1932 1781 1708 1757 1748
1933 1769 1765 1797 1781
1932 1772 1808 1851 1839

Note: All figures in interest Rs. Million.
Source: Government of India, Report of the Controller of Currency, different years.

A converse of the above process was at work during 1930-1, as reserves were
being depleted in London, and accumulating in India. The logical course now, in
terms of the counter-cyclical 1919-20 precedent, would have been to devalue the
rupee to improve India’s trade position and reverse capital outflows, and expand
currency to reduce official metallic reserves in the colony. But in both periods,
Britain forced deflationary policies upon India, with this difference that they were
counter-cyclical with Britain again confronted with a financial crisis, the onus of
adjustment again fell on Indian households which were once more forced to
liquidate their assets to finance consumption or Indian households again financed
a transfer of liquid resources to Britain.
Gold Exports and Sterling Policy

As early as July 1929, when early reports arrived of gold sales in Hyderabad,
officials at the Bank of England sensed that unusual developments were afoot in
the Indian gold market. Hearing of the Hyderabad sales from the governor of the
Imperial Bank of India, Niemeyer at the Bank of England was ‘most interested to
know’ whether ‘India [was] at last beginning to be less of a measure hoarder’. In
the following months, the Bank of England closely followed gold arrivals in
Bombay; and as the run on sterling accelerated, Bank officials began to look
towards Indian gold exports to ease their plight. With intervention to defend the
rupee also leading to a sizeable decline in India’s gold standard reserve in London
and her government’s currency offices inundated by gold, Whitehall too, for its
part, began urging Delhi to export gold to Britain.
In 1931, the Bank of England had good reasons for looking to additional
supplies of gold from within the Empire to tide over a difficult summer. Apart from
financing the drain of short-term balances from London, larger gold arrivals would
have helped the Bank resolve its differences with the Treasury over allowing the
drains to affect money supply in Britain. Through much of July 1931, the Bank of
England was negotiating with the Federal Reserve Bank of New York and the bank
of France for credits to meet the outflow of short-term funds from London. One of
the conditions attached to these credit lines obliged the Bank of England to export
gold ‘in amounts sufficient to liquidate (the loan) at maturity’, if necessary by
replacing the gold backing domestic currency, with government securities. The
Treasury generally supported the latter course to minimize the domestic
deflationary impact of gold losses. Although the Bank of England was itself no
novice at conducting open-market operations to offset the effects of gold losses on
the money supply, its officials were convinced that carried ‘beyond a certain point’,
such adjustments encouraged short-term outflows. With widening differences on
monetary policy between the Treasury and the Bank of England, gold receipts
from India offered the possibility of reconciling the former’s distaste for monetary
contraction with the latter’s desire for effective intervention to arrest the run on
sterling.

Therefore official gold exports from India acquired an importance which, though
not disproportional to their potential size, was certainly not commensurate with
the size of the first shipments her government appeared likely to make. So much
so during these difficult days, the Bank obtained private intelligence from
shipping companies about the booking of official and non-official gold cargoes
from India. After the American and French credit lines were established, the Bank
came under increasing pressure from the New York Federal Reserve to ‘let some
gold go’ alongside using the credit. As reserve losses mounted and London’s crisis
worsened, senior Bank of England officials were looking, barely days before being
forced off the gold standard, towards ‘substantial’ gold arrivals from India to
relieve sterling.
In the event, India did not export much gold until sterling went off gold in
September 1931 and Whitehall decided, without consulting officials in Delhi and
to their great consternation to peg the rupee to sterling at the existing parity. As
sterling, and alongside it the rupee, depreciated, the price of gold expressed in
these two currencies rose. In addition, the metal’s price in London was higher
than in India, leading to the export of large quantities of privately held gold from
India after September 1931 (see Table 9.1). In 1931-2 Indian gold exports (about
£45 million) almost matched that of South Africa. They equalled 85% of South
Africa’s growing exports by value in 1932-3, 70% in 1933-4, 64% in 1934-5, 38%
in 1935-6, 25% in 1936-7, and 16% in 1937-8. Set against India’s earlier imports
of 15% to 30% of the world’s gold output, even the outflows of the last two years
are remarkable. While, undoubtedly, movements in gold prices stimulated these
exports, and there was another part to this process which should not be
overlooked. It was noted above that the Indian public began selling gold at least
two years before its price began rising in September 1931.These could only have
represented distress sales. Some gold was exported even in December 1930, and
India became a net exporter of the metal from the second quarter of 1931. Indian
commodity prices continued to fall until early 1933, returning durably to March
1931 levels only in 1937 (see Table 9.5). Hence, as some officials at the Bank of
England recognized, there is no reason to suppose that distress sales ceased after
September 1931. Besides, as Rothermund has stressed, higher gold prices
encouraged moneylenders to collect their debts in gold. In general, however,
officials in London and Delhi insisted that profits motivated gold sales and refused
publicly to concede that destitution may equally have been at work.
Some gold sales would doubtless have taken place, whatever the domestic
policies adopted. But the absence of measures to mitigate the Depression’s impact
on producers’ incomes ensured a steady outflow of gold saved up in better years.
In the event, with Indian macro-policies determinedly pro-cyclical in the slump,
the gold releases of the Depression years were the logical sequel to policy whose
aim was to check India’s demand for gold in the more expansionary 1920s. When
the world went into a slump in the 1930s, India became an exporter of gold and

an expansionary influence globally. Thus, India fulfilled Keynes’s prescription of

her role in the international economy, and his prophecy. It is not surprising, in
the circumstances, that Indian gold export were a major cause for celebration in
Whitehall and in the City. To those in London entrusted with the charge of Indian
finances, these exports were especially welcome. The rupee was easily stabilized,
and funds began flowing back to India by the end of October 1931. By January
1932 Whitehall was confident enough about these trends to discharge a £15
million loan that fell due that month. Now, at long last, officials handling Indian
finances had something to cheer, and the surge of gold and the resulting
improvement in the colony’s external accounts and credit led to an outburst of
self-congratulation. Viceroy Willingdon exulted that for the first time in….history
owing to the economic situation, Indians are disgorging gold…..We have sent…..to
London in the past 2 or 3 months…..25,000,000 sterling and I hope the process
will continue…..!The India Office claimed to have wrought a ‘miracle’ in the habits
of the ‘East’, and in a boastful note, the Secretary of State claimed credit for the
development. The British cabinet congratulated him for the ‘accomplish (ment)’.
The help which Indian gold exports provided to Britain’s balance of payments
and to sterling soon became evident. Earlier, officials at the bank of England had
considered offering ‘long-dated gold bonds’ to persuade the ‘more pro-British
[Indian] Princes to let us look after part of their gold for them’, since ‘even a small
percentage’ of India’s net gold imports during 1900-1930 (£400 million according
to Bank of England estimates)’ would be sufficient to repay the Bank of France
credit. But the flow of gold from India soon relieved the Bank of England from
having to resort to such desperate measures, and enabled it to meet the maturing
debt. As Neville Chamberlain, Britain’s Chancellor of the Exchequer, noted ‘the
Astonishing gold mine we have discovered in India has put us in a clover. The
French can take their balances away without our flinching. We can accumulate
credits for the repayment of our £80m loan and we can safely lower the bank rate.
So there is great rejoicing in the City…..Besides discovering that its immediate
problem of finding resources to pay off French and American credits was no longer
as daunting, the Bank also recognized that the ‘change of habits’ in India’……..will
prove of great practical significance in the future when the question of supplies of
Gold in relation to requirements again becomes of urgent practical importance’.
Not surprisingly therefore, policy-makers in London wanted to see Indian gold

exports continue without interruption. In January 1932 the Treasury opposed
lifting capital account controls in India to which it had earlier taken objection,
because it ‘may diminish the export of gold which is at present the only legal
method of exporting capital from India. The export of gold has been very useful for
the sterling’. London also refused, despite the Indian government’s continuing
budgetary problems, to allow a tax on gold exports because, as Niemeyer at the
Bank of England put it, ‘one of the great needs’ of the day was to ‘discourage
hoarding’, and the More gold can be loosened….in India…..or elsewhere …..Sent to

a place where it will…..tend to come into the hands of monetary authorities, the
better for everyone including India. For the same reason, suggestions that the
Indian government intervene in the local gold market or buy gold to strengthen the
reserves of the proposed Reserve Bank were turned down.
Besides, policy-makers in London were not entirely willing to wait upon events
in India, and were quite prepared to determine them. Within weeks of India
beginning to export gold, the Bank of England took steps to stimulate the outflow
and direct it towards London by instructing the Hongkong and Shanghai Banking
Corporation (HSBC) to ‘obtain a good percentage of all [gold] shipments’ from
Bombay on its behalf. The Hongkong Bank was also asked to provide ‘easy
facilities’ for financing gold shipments, with the Bank of England itself offering to
secure the necessary rupee funds through the Indian government. Following
protests by other firms that it was ‘monopolizing’ gold purchases, the Bank
advised the HSBC to lower its profile and limit its share to around 40 per cent of
each shipment. The ‘main objective at this stage’, the Bank of England told the
Hongkong Bank ‘is to ensure a continuance of outflow of gold from India’. Norman
confided to the Governor of the New York Federal Reserve, his desire to ‘gradually
accumulate some gold….from India’, and the Bank’s Bombay operations
continued for much of the 1930s. As British officials recognized the link
between sterling’s depreciation against gold and Indian exports of the metal, they
also learnt to manage sterling in a manner as to sustain these exports. The
availability of gold from India, in turn, enabled smoother management of sterling
in a climate marked by impending or actual competitive depreciation of rival
currencies.
By December 1931, Treasury officials were privately ruling out a large increase
in the sterling parity of about $3.40 unless world prices rose. Hence rather than
allow speculative short-term inflows to push up sterling, officials decided to buy
gold and strive rapidly to reduce the bank rate. If lower bank rates, easier credit,
and exchange intervention ‘do not cure the inflow, it will be necessary to let the
pound respond in some degree. But I should keep any rise slowly’, an official
noted. The most important device for managing sterling during these years was
the Exchange Equalization Account (EEA), set up explicitly to ‘keep down the
pound’. Enabling intervention in the gold and foreign exchange markets, the EEA
allowed Britain to insulate her economy from speculative capital flows and
preserve the cheap money conditions considered necessary for domestic recovery.
Indian gold exports played a noteworthy part in enabling the EEA to operate.
Although Britain’s capital account began to improve after she left the gold
standard, London continued to face unpredictable outflows until early 1933 when
the dollar came under attack, and when exchange uncertainty once again gripped
the major money markets. Therefore the British authorities were unable to buy
gold or foreign exchange without weakening sterling more than they desired to,
and Indian gold exports came handy in this respect. For example in February
1932, the Bank of England managed to avoid a fall in sterling while it bought
dollars and francs, thanks, among other reasons, to gold flows from India which
accounted for two-thirds of Britain’s total receipts of the metal during the month.
With….any diminution in supply (of gold)…. It would be by no means so easy to

continue heavy….purchase….(of foreign exchange)……. Our store of gold is low…..
(and if we) should fail to purchase sufficient exchange [needed to repay loans and
steady sterling in the autumn] it would be necessary to draw further on our gold
reserves. Continued gold arrivals from India sustained sterling through seasonal
drains the following autumn. Falling reserves and low interest rates caused a
greater weakening of sterling than the British authorities wished to see. But
‘…..Indian gold still…..comes in at a substantial rate. We continue to get the
advantage of it, and it is a material help at this difficult season of the year’.
Britain’s capital account no doubt improved after 1933.Yet gold receipts from
India remained a key factor in the management of sterling. In spring that year,
the Treasury, expecting widespread currency instability, greatly expanded the
EEA, and began substituting gold in place of its holdings of foreign exchange. With
the British demand for gold rising, Bank of England officials wondered whether
London should not announce gold buying prices from time to time in a way as to
‘afford a channel for the flow of gold from India’. In the event, the extreme step
was not taken. Yet, as Table 9.4 shows, additions to the account after 1933 were
almost entirely in the form of gold. Clearly, had gold from India not been available,
Britain would have been much more vulnerable to competitive American
depreciation, and the EEA would have lost its teeth. Thus, regardless of the
strength of Britain’s capital account, sterling management continued to depend on
greater gold availability.
Table 9.4 Official British holdings of gold and foreign exchange, half-yearly,
1931-8
Holdings as on Foreign Gold Holdings as on Foreign Gold

exchange exchange
30 Sept. 1931 12 167 27 Mar. 1935 -1 430
30 Mar. 1932 84 157 25 Sept. 1935 -2 497
30 Sept. 1932 26 226 25 Mar. 1936 0 522
31 Mar. 1933 48 314 30 Sept. 1936 -1 639
27 Sept. 1933 20 339 31 Mar. 1937 -10 716
27 Mar. 1934 0 422 30 Sept. 1937 8 820
25 Sept. 1934 -2 414 31 Mar. 1938 -2 835
Note: Amounts in £million; 0 indicate holdings less than £0.5 million.

Source: Howson, 1980, Sterling’s Managed Float: The Operations of the Exchange
Equalization Account, 1932-9, Princeton Studies (Princeton), -. 62.

Therefore the need to promote Indian gold exports became an important factor
in the management of sterling during this period. In instructing the Hongkong and
Shanghai Banking Corporation to stimulate gold exports from India and secure
‘around 40%’ of each shipment of the metal by ‘giving competition’ to other
purchasers, the Bank of England revealed a flexible attitude towards the sterling
price of gold. Subsequently, the principle of flexing sterling in order to increase
gold exports from India appears to have become quite general. As officials in
London saw it, the EEA’s tendency is to draw out gold from hoards here and in
India as has been seen in recent months. This results in an addition to gold stocks
available for monetary purposes in the longer run…..Opposing a rise in sterling or
its stabilization, Frederick Phillips, the chief Treasury adviser argued that
the……most desired objective is a general rise in world….prices and……the most
single powerful force to that end at the moment is the flow of gold from
India….that flows depends…..on the depreciation of the rupee, that is the
depreciation of the sterling. He added that at $3.60 or $3.70, gold exports from
India would not be checked, but at $3.90 they could cease’. A rise in the sterling
would have a deadening effect [on Indian gold exports] which would be most
unfortunate…..’
Gold Exports and the Indian Economy
While a major objective guiding sterling policy in the early years of the float was
to encourage gold releases from India yet, neither the low sterling nor the
liquidation and export of private stocks of the metal helped raise Indian prices. As
Table 9.5 shows, Indian prices did not bottom out until March-April 1933,
returning durably to the September 1931 level only in the middle of 1935 and to
the 1914 level (though not yet to the pre-Depression level) in March 1937.The
impact of India’s gold exports on her external financial position is easy to follow.
In the main, sterling receipts from gold sales were used to reduce India’s foreign
debt and replenish exchange reserves in London. But their effects on the domestic
economy can do with more research. In recent years attention has been drawn to
the relatively benign macro-effects of the Depression on the Indian economy;
according to both Sivasubramonian and Heston, real per capita incomes fell by
less than 3% over five years (from about Rs.171 in 1930 to Rs.166 in 1935), and it
is likely that gold dissaving and exports helped cushion the overall impact of the
slump. Attention has also been drawn to the rise in the deposits of commercial
banks and post-office savings banks during the Depression. This increase is no
doubt significant, but since banks and post offices were located overwhelmingly in
cities and towns, perhaps more as an indicator of changing urban asset holding
habits or of worsening distribution of incomes and wealth, than as that of general
prosperity. Note that deposits of rural cooperative banks did nor rise.

Table 9.5 Calcutta index of wholesale prices, 1929-37
Year/ 1929 1930 1931 1932 1933 1934 1935 1936 1937
Month
Jan. 145 131 98 97 88 90 94 92 98
February. 144 126 99 97 86 89 90 91 98
Mar. 143 125 100 94 82 88 87 91 100
Apr. 140 123 98 92 84 89 88 92 103
May 139 121 97 89 87 90 91 90 103
June 138 116 93 86 89 90 91 90 102
July 142 115 93 87 91 89 91 91 104
Aug. 143 114 92 91 89 88 89 90 105
Sept. 143 111 91 91 88 89 89 91 104
Oct. 140 107 96 91 88 89 93 93 104
Nov. 137 103 97 90 88 88 92 93 103
Dec. 134 100 98 88 89 88 93 94 101
Ann.av. 141 116 96 91 87 89 91 91 102
Note: All 1914=100.

Source: Statistical Abstracts for British India, 1937-9, p. 383; the index averaged
145 in 1928, with a peak of 146 (April, July, and November) and a trough of 142
(September).
Although few detailed studies are available, the Depression appears on the
whole to have been a grim event for the large majority of people in rural areas from
whom the bulk of the gold is said to have originated, and on whose behalf the
British authorities claimed to be framing their policies. Commercialized segments
of agriculture such as jute may have done worse than others, but elsewhere too
the Depression extracted its price. The burden of rural indebtedness, in
particular, became more crushing. According to Goldsmith, the nominal value of
agricultural debt increased from Rs. 11,500 million in 1929 to Rs. 18,000 million
in 1939. The rural debt-income ratio also doubled. A quarter of the farmer’s
income went towards debt servicing in 1939, as against an eighth in 1929.In the
economy as a whole, not surprisingly, there was net dissaving.

London officials were however interested only in the state of India’s external
account and obvious to other indicators. In January 1932 Norman’s advisor,
Charles Addis warned the Bank of England that India’s gold exports were leading
to currency expansion which might combine with low interest rates to cause a rise
in her internal prices. In 1932, the Indian government attempted to impress upon
Whitehall the need for policies to stimulate the economies of the sterling area.
Rejecting Delhi’s contention that India might otherwise be unable to meet her
external liabilities after gold exports dried up, a Treasury official noted on the
margin of the Indian government’s memorandum, ‘430 million (ounces) of gold
absorbed in last 70 years, 55 million (ounces) so far exported’. Earlier, George
Schuster, the Indian Finance Member, had urged Britain to keep primary
producers’ interests in mind whilst managing sterling. The official reply was non-
committal, but privately the Treasury reaction was: ‘….the (Indian tail can’t expect
to wag the Bulldog’.
Whitehall’s perspective on the necessary constituents of an Indian recovery had

not changed even two years later. In July 1934 Strakosch expressed concern
about the weakness of India’s economic recovery, and suggested that sterling be
so managed as to promote expansion in India and elsewhere in the Empire.
Disregarding the price evidence, a Treasury official responded that he did not
attach much weight to Strakosch’s views as to the desperate plight of India; Cecil
Kisch finance official at the India office tells me the financial position is greatly
improved, and there is no doubt that India is getting through the crisis better
than….any other country.
A Gold Glut?
The counterfactual can be an interesting tool in economic history. Were it
possible to use it here, the following might seem an obvious question to ask: had
she faced the opposite kind of a financial problem that is an excess supply of gold
pushing up the costs of stabilizing it or threatening runaway inflation, might
Britain have wished to see Indians revert to their habit of ‘hoarding’ gold?
Fortunately, there is no need to invent this counterfactual because a similar
situation arose in real life. Once the early shock passed, officials at the British
Treasury came to value the ability a floating sterling gave them, of pursuing
domestic stability without paying much heed to the external account. They also
resolved that a return to fixed exchange rates and the gold standard should not
take place ahead of a sizeable increase in Britain’s share of the world’s gold
reserves; until, that is, she had a ‘gold basis larger than that required by any
other country’. As a Treasury official put it ….however inconvenient [it]….may be
when we are…..advocating economy in the use of gold, we have to face the fact
that we could not risk going back to a …..gold standard without a larger share of
the gold supply of the world…..But within four years, the avalanche of gold
pouring into Britain’s reserves forced her officials to reconsider the issue. This
section briefly recounts their response to this qualitatively new crisis.
Britain’s efforts to accumulate gold during temple 1930s were largely

successful. As Table 9.4 shows, her gold holdings more than doubled between
September 1933 and March 1938, rising also in relation to her imports and
external liabilities (see Table 9.6). Meanwhile, as commodity prices and world
trade volumes stagnated, monetary gold reserves rose both in real terms and in
relation to world trade. Britain’s Economic Advisory Council (EAC) estimated that
the gold value of world trade in 1936 was only 40% of the 1929 level while the
share of annual gold output going into official reserves had risen from 33% to
125% over the same period. This unusual situation now exercised British policy-
makers. As the EAC pointed out, temple accumulation of gold in New York and
London was an embarrassment’. Regretting that the minor central banks no
longer held gold reserves, the council expressed fear that the burden to Britain
and the USA of purchasing gold ‘might eventually become intolerable, if the
……output of gold remains at its present level, still more if it increased’. The
balance of payments of the sterling area depended on gold exports, but if the USA
decided to reduce her gold burden. Britain too would have to follow. Whatever the
course of action adopted, it would have serious implications for Britain, global
stability, and the future of gold as a monetary metal.
Table 9.6 British gold and foreign exchange reserves as proportion of net
external liabilities and imports
As proportion As proportion
year (1) of net (2) of year (1) of net (1) of net

external imports external external
liabilities liabilities liabilities
1931 51 18 1935 82 68
1932 53 27 1936 98 90
1933 69 38 1937 102 87
1934 71 60 1938 105 73
Source: Howson, 1980, Sterling’s Managed Float, pp. 53-
Treasury officials expressed similar sentiments.They feared gold following in the

wake of silver as excessive gold supplies damaged the metal’s monetary role.A
‘gold buyers’ strike….(was) a real imminent danger’, but if increased gold supplies
must not lead to uncontrolled inflation, ‘other means of absorbing gold must be
found or developed’, supplies checked, or its price gradually reduced. Central
banks could absorb gold, but those that could afford it already had all the gold
they wanted.The ‘industrial arts and Eastern hoarders’ were another prospect, but

the high price was inhibiting demand from these quarters, and hastening release
of the metal. After considering possible ways of easing the flood and highlighting
the need for coordinating policy with the USA, an official recognized that the
problem would not be resolved quickly or easily. Even though undecided as to the
means of achieving it, he was nevertheless very clear about the desired outcome.
Policy, he concluded, should aim to ‘stimulate consumption for industrial
purposes and…..check or reverse the flow of gold from the East’.
The gold glut continued to be debated in Britain and temple USA through much
of 1937. But the indications were that an Anglo-American agreement to relieve the
glut would be as difficult to achieve now as a coordinated solution to the opposite
problem had been a decade earlier. However, before the position could become
serious enough to force Britain’s economic policy-makers to consider influencing
macro – and reserve-policies in the ‘east’ in order, now, to increase gold absorption
there, the issue was taken out of their hands by the American economy going into
recession, and by the evolving political situation in Europe. London’s gold stocks
ceased to grow as rapidly after the autumn of 1937, and as war grew more
imminent, short-term drains from London resumed. The Bank of England also
resumed buying gold in Bombay through the newly-formed Reserve Bank of India,
both to steady sterling and to build a war chest. Assuring temple governor of the
Bank of England that India still possessed large quantities of gold, the governor of
the Reserve Bank of India pointed out that ‘The net decrease…. (in Indian gold
stocks) since 1931 has been barely sufficient to cancel the increase during the
preceding seven years, and the total amount of gold in India at the end of 1937
is…..approximately the same as it was at the end of 1923’.
Conclusion
The evidence that Britain regarded private Indian reserves of gold as an
important counter-cyclical device during the Depression is inescapable. Britain’s
objective during the Depression (and more generally during the entire inter-war
period) of a redistribution of the world’s monetary gold reserves could have been
achieved through a combination of domestic adjustment and US-induced global
expansion. But the former was a contentious issue at home, while the USA was
yet to grow into the global financial role that First World War thrust upon it.
Britain’s dependence during the 1920s on global expansion had compelled her to
try and restrict the flow of gold to India which accompanied and checked a world
boom. When the world went into a slump in 1929, she turned her attention
towards the potential which India’s private reserves of gold held as an external
source of world expansion along the lines Keynes had anticipated. The behaviour
of these reserves, far from being entirely spontaneous, was to a large extent
assisted and encouraged by policy.

Thus apart from the primary effects of the Depression, macro-policy (anti-
cyclical during the relatively expansionary 1920s but pro-cyclical during the
1930s) ensured that private Indian reserves would be liquidated to finance
consumption or settle debts. Before 1931 this gold accumulated almost wholly in
the Indian portion of the gold standard reserve. In other words, the Indian
householder made up for reserve losses sustained in exchange intervention in a
manner that would have pleasantly surprised even the most convinced advocates
of a ‘pure’ gold standard. The pressure that was then mounted on the Indian
government to export this gold to London should therefore be seen as the second
of the two-part process by which India was expected to relieve Britain’s problems
in a fixed exchange-rate regime.
When sterling went off the gold standard in September 1931, the process,
though not the underlying dynamics, changed. The pressure on the rupee eased
and defensive intervention was no longer necessary. But distress gold sales
continued in India, while sterling depreciation stimulated private exports of the
metal. Thereafter, sterling policy was driven by the need to ensure the
continuation of these exports. Thanks to private reserve liquidation and increased
production of the metal during the Depression, Britain was only too successful in
increasing her gold reserves. So much so, that by 1937, the problem plaguing her
was no longer one of ‘gold shortage’ and deflation. Rather, the problem was a
potentially inflationary gold glut, to eliminate which British officials began to pray
for the revival of the very tendency they had earlier tried so hard to check, that is,
India’s large demand for gold. By now the latter, far from being alarming, had
become positively alluring. The wheel had come full circle.
ECONOMIC CRISIS
The inter war period witnessed very slow industrial progress. The economic recession
adversely affected the people of India in general. Most of the financial gains were confined
to foreigners. India only witnessed emergence of a new class of unskilled workers. Most of
the workers were very low paid and they worked under extreme harsh conditions. Most of
the Indians lived on the verge of starvation during these periods. There had been several
famines during the British rule. There was very little material improvement particularly for
farmers and workers.
FAMINES IN INDIA AND DEVELOPMENT OF FAMINE POLICY

India has suffered from famines since time immemorial. It appears that in
earlier times, a major famine occurred once in every 50 years. From the beginning
of the 11th century to the end of the 17th century, there were 14 famines almost all
of which were confined to small local areas. The frequency of famines increased
during the 19th century. In a period of about 90 ears from 1765 to 1858, the
country experienced 12 famines and four “severe scarcities”. Between 1860 and
1908, famine or scarcity prevailed in one part of the country or the other in 20 out
of a total of 49 years. There was not only an increase in the frequency of famines;
there was also a change in their nature. The nature of famines in the latter half of
the 19th century changed from a shortage of food supply as in the past, to a lack of
purchasing power with those who suffered from starvation. In reality, it was both.
The abnormal rise in food prices during the years of drought was itself a measure
of the shortage of food grains in the country as a whole. The railways only helped
in the distribution of the available supplies throughout the country. Instead of an
extreme scarcity in one region, one could expect more even shortage over the
country as a whole and consequently a mild rise in prices. The emergence of
“destructive” instead of “constructive” speculation in food grains which
accentuated price fluctuation through stock-holding in the face of rising prices
and disholding of stock on a falling market, the disappearance of domestic stocks
which people were accustomed to keep in the past and the development of a large
export trade in grain were factors which contributed to the rise in prices of food
grains during the period of famine. As a result of these developments, the rise in
prices and the consequent suffering of the people were out of all promotions in the
natural scarcity. The human and institutional factors were becoming more
important than the natural calamity in causing distress and starvation.
BENGAL FAMINE (1943)

There was a famine in Bengal in 1943. It has been called a tragedy in
unpreparedness. Due to neglect, the food situation in India had been allowed to
grow from bad to worse. In spite of the low standard of living of the people of
India, the country was unable to face the population from domestic production of
cereals. No steps were taken in India at the beginning of the World War II to meet
any dislocation in production, supply and distribution of food that War might
cause. When imports of rice from Burma stopped due to its occupation by the
Japanese and the system of distribution of domestic supplies broke down on
account of the “Denial policy” of the Government and activities of traders, a
tragedy of great magnitude overtook Bengal. The country, the people and the
administration, both at the centre from the provinces, were found unprepared to
meet the challenge. The result was chaos which gave antisocial elements an
opportunity to make individual fortunes and hold their countrymen to ransom
while a million and a half poor, helpless and innocent people died due to sheer
hunger. The Famine Enquiry Commission observed, “It has been for us a sad task
to enquire into the course and causes of the Bengal famine. We have been
haunted by a deep sense of tragedy. A million and a half of the poor of Bengal fell
victims to circumstances for which they themselves were not respect. Society,
together with its organs, failed to protect its weaker members. Indeed, there was a
moral and social breakdown, as well as administrative breakdown”.
It has been rightly said that both man and God joined hands to produce the
tragedy in Bengal. The famine might be called “more man-made than an act of
God”. Man merely exploited the situation created by nature and World War II. The
root cause of the famine is to be found in the series of crops famines that Bengal
experienced beginning from 1938 and in the conditions created by the War. There
was the stoppage of normal imports from Burma, dislocation of trade and
movements of food grains on account of controls and the nearness of Bengal to
the theatre of War in the East, the building up of provincial and even district
barriers against the movement of grains and other essential supplies, the increase
in the demand for food on account of the demand from the army and refugees
from Burma and the rise in prices. None of these was a man-made factor. The
fault was with the Government which did not take into consideration the change
in circumstances in Bengal and did nothing to control the situation so long as
Lord Linlithgow was the Governor-General and Viceroy of India. It was only when
Lord Wavell took over from him as Governor-General that the situation was
tackled on a war footing. However, the famine took a heavy toll of life in Bengal.
From July to December 1943, the death rate rose by 108.3%. The view of Prof.
K.P. Chattopadhyaya of Calcutta University is that as many as 3.5 million people
died during the famine. The estimate of the Famine Enquiry Commission was 1.5
million deaths. Almost the whole of Bengal, in greater or less degree, was affected
by the famine and suffered loss of life.
BOMBAY PLAN AND ITS LIMITATIONS
The Indian industrialists too recognized the arch-need of planning national

economy. The Bombay Plan was the most outstanding among the various plans
projected by the Indian industrial groups. Realizing that political power was vital
for implementing any such plan, the sponsors of the Bombay Plan looked forward
to a national government to aid them in its fulfillment. There were some serious
defects in the Bombay Plan. Its protagonists hoped to achieve the programme of
extensive industrial expansion without any radical revision of land relations
extant in the country. This was a vital pre-condition for liquidating the poverty of
the agriculturists thereby elevating their purchasing power. A revolution in land
relations was necessary, to save the agrarian economy from further deterioration
and even collapse and the agrarian population from deeper impoverishment.
The sponsors of the Plan further hoped to implement it within the framework of
the categories of capitalist economy such as competition, production for profit,
private ownership of productive apparatus and others. Though planning on a
limited scale is possible on a capitalist basis, a comprehensive and nationwide
planned economy requires as its prerequisite social ownership of land, industries,
transport and other material means of production. A free, planned, and maximum
manipulation of resources in the interests of and for the use of the people rather
than the profits of a few owners, demands that these resources should be owned
by the society as a whole. The entire motive of production must be shifted from
that for profit to that for use.

Even then, due to the fact that we live in an epoch of international division of
labour and, more or less, a world-wide unified economy, the well-planned national
economy will be subject to the forces of world economy. A fully well-planned
national economy can therefore become only a part of a planned world-wide
economy. However, planned national economy was substantially possible in a
country like India with its tremendous manpower and rich natural resources. But,
for its realization, it presupposed as an inescapable premise – national freedom;
power, not in the hands of vested interests but in those of the producing strata
and social ownership of the means of production. The exponents of the Bombay
Plan, however, conceived it in a different way. “May we suggest that this plan
definitely rejects the idea of the control of the economic org in the interests of the
consumers on the socialist basis, and only contemplates planning within the
present economic structure? So long as the profit motive functions in a capitalist
structure, the possibility of periodic crises and chronic unemployment cannot be
overcome. Nowhere in the present scheme do we find a reference to this inherent
weakness of a capitalist order. But it is naively assumed by the authors of the
plan that they can organize economic life in such a way that some parts would be
fully owned and managed by the state, others merely managed, while others
would be only controlled. In other words, they propose a sort of dual or mixed
economy, one sector being fully free, others partly controlled and/or managed by
the state. But it is forgotten, attempts at the regulation of one part of the economic
structure may serve to sharpen the conflicts of competition in the structure as a
whole”.

CHAPTER-V
INDEPENDENCE AND YEARS IMMEDIATELY FOLLOWING IT
MIXED ECONOMY.
Mixed Economy is neither pure capitalism nor pure socialism but a mixture of
the two. In this system, we find the characteristics both of capitalism and
socialism. As Samuelson observes, “Within the advanced countries themselves,
the scene was drastically changed from the Victorian days of laissez-faire
capitalism. Almost unconsciously, undiluted capitalism had been evolving into a
mixed economy with both private and public initiative and control. The clock of
history sometimes evolves so slowly that its moving hands are never seen to
move”.
In the modern world, what we find mostly are mixed economies. Mixed
economy means that it is operated both by private enterprise and public
enterprise. That is, private enterprise is not permitted to function freely and
uncontrolled through price-mechanism. On the other hand, the government
intervenes to control and regulate private enterprise in several ways. It has been
realized that a free functioning of private enterprise results in several types of
evils. For instance, free functioning of private enterprise produces trade cycles,
i.e., sometimes depression and unemployment and at other times booms and
inflationary situation. Besides, free functioning of private enterprise results in
extreme inequalities of income and wealth. Under the laissez-faire policy pursued
by the State in the free enterprise economy, the weaker and vulnerable sections of
society as well as the indigenous industries do not get protection. It is also
realized that in the under-developed countries, like India, economic development
cannot be achieved at the desired rate of growth without any active government
help and guidance. Therefore the government in such countries actively
participates in economic activities in order to minimize the evils of unadulterated
capitalism and to accelerate economic growth. That is why most of the capitalistic
economies of the world have become mixed economies, because in all economies
the economic functions of the State have increased.
The laissez-faire policy propounded by Adam Smith and other classical

economists has been almost altogether abandoned and the economies even of the
U.S.A. and the U.K. have become mixed economies. Eminent American economists
like Prof. Samuelson and Hansen call the American, English and the French
economies as “Mixed Capitalist System” or “Mixed Enterprise System” because
their governments interfere in the working of the economy by controlling and
regulating it and they actively participate in economic activities.

Two Types: In one type, the means of production are owned by private
entrepreneurs. But the government directly controls and regulates the working of
the economy through its monetary and fiscal policies. For example, it institutes
price control, licensing system, import control, exchange control, control over
capital issues, etc. The government does not take over the ownership of the
means of production to undertake production itself. Even if it undertakes
production directly, it is comparatively very little as compared with the volume of
production under the control of private entrepreneurs. That is why such a mixed
economy is called ‘mixed capitalist system’. It is predominantly capitalistic and
the government only influences its working and growth through appropriate fiscal
and monetary policies. It controls and regulates private enterprise so that the evils
of free private enterprise and of the price system are avoided and some pre-
determined objectives are achieved. In such mixed enterprise systems the
government confines its productive activity only to the production of defense
equipment and provision of public utility services like water, gas and electricity
and transport facilities. Such a mixed economy is also called ‘mixed capitalism’ or
‘controlled capitalism”.
Another type of mixed economy is one in which the government does not merely
control and regulate the private enterprise system by means of direct controls and
appropriate fiscal and monetary policies but it also plays vital role in the actual
production of commodities. In such a mixed economy, several basic and strategic
industries are owned by the State and their operation and management is in the
hands of the government. The remaining industries are owned by private
entrepreneurs and they operate and manage them. But the government controls
and regulates the private sector through direct controls and appropriate monetary
and fiscal policies.
The main difference between the mixed economy of this type and of the former
type is that in this type of mixed economy, the government controls the means of
production in a much larger measure and itself undertakes production. Whereas,
the first type of mixed economy is biased more towards capitalism, the latter type
is biased more towards socialism; the Indian economy is an example of this
second type of mixed economy.
In the Indian economy, both the public sector and private sector are in
operation. The foundations of mixed economy in India were laid by the Industrial
Policy Resolution of 1948 which was modified by the Industrial Policy Resolution
of 1956.According to these resolutions; the various industries were divided
between the two sectors, viz., the private sector and the public sector. The
responsibility for the development of several basic, heavy and strategic industries
was assigned to the State and the development of the rest of the industries was
left to the private sector. Even the private sector is controlled and influenced by
the Government of India by means of direct controls or through appropriate fiscal
and monetary policies.
It is clear from the above that the mixed economy is a mixture of capitalism and
socialism. The mixed economy tries to avoid the two extremes of pure capitalism
and pure socialism and the evils associated with each. In other words, it strikes a
middle path between capitalism and socialism. We have mentioned above that in
pure capitalism only private sector establishes and runs industries and the
government does not interfere in any manner. As against this, under pure
socialism all the means of production, i.e., industries, agriculture, land, mines,
etc., are owned and controlled by the State and the State operates them. In the
mixed economy, on the other hand, both private and public sectors operate. Some
industries are owned and managed by the State and other industries are owned
and managed by the private sector. It is thus clear that, in a mixed economy, all
industries are not nationalized. Only those industries are nationalized and put
under the operation of the public sector which are very essential for the speedy
economic development of the country but in which the private entrepreneurs are
reluctant to invest because either the return is insufficient or long delayed. In a
mixed economy, the sphere of the two sectors, i.e., the private sector and the
public sector are clearly demarcated, and they combine and co-operate in the
work of economic development of the country. As we have said already, the
economies of the U.S.A. and the U.K. have also today become mixed economies.
But the Indian mixed economy is different from them, because in the Indian
economy, the public sector has been assigned a much more extensive, more
active, and more strategic role to play.
Main Features of Mixed Economy
Having understood the meaning of mixed economy, we are now in a position to
bring out the main features or characteristics of such an economy. It will also be
clear from these characteristics how a mixed economy functions. The following are
the main characteristics of a mixed economy.
(i) Co-existence of the Public and Private Sectors: The chief characteristic of a
mixed economy is that in this economy both public sector and the private sector
function together. They co-exist. The industries of the country are divided into two
parts. In one part are the industries the responsibility for the development of
which is entrusted to the State and they are owned and managed by the State.
Other industries are left under the authority and control of the private
entrepreneurs. The private sector is free to develop them and start new
enterprises in this sector. Generally, the basic and heavy industries, the
industries concerned with the production of defense equipment, atomic energy,
heavy engineering, etc., are put in the public sector. On the other hand, the
consumer goods industries, small and cottage industries, agriculture, etc., are
generally assigned to the private sector. It may be borne in mind that the
government does not work against the private sector. On the contrary, the
government helps and encourages the private sector by providing them several
incentives and facilities so that the industries in the private sector are able to
develop properly and make the country’s economy efficient and strong.

(ii) Role of Price System and Government Directives: Another characteristic of

mixed economy is that it is operated both by the price system and the government
directives. So far as the public sector is concerned economic decisions relating to
production, prices and investment are made by the government or authorities
appointed by the government. But the private sector in the mixed economy is
operated by price-mechanism. In other words, in the industries in the private
sector, the decisions regarding investment, production, prices, etc., are made by
private entrepreneurs – capitalists and industrialists – with the object of making
maximum profits on the basis of the price system. It is clear that in the mixed
economy the allocation of productive resources is partly determined by the price
system and partly by the government directives.
(iii) Government Regulation and Control of Private Sector: In a mixed

economy, the government adopts necessary measures to regulate the influence the
private sector, so that it may function in the interest of the nation rather than
exclusively in the interest of the private entrepreneurs. For this purpose, it
introduces the licensing system according to which government approval or
license is essential for setting up a factory. If the government considers that in a
certain industry already there is excessive investment or excess capacity, no new
licenses are issued for setting up factories in that industry. Licensing system is
the instrument by which the government controls and regulates industrial
investment and output. The government also controls and regulates the private
sector through appropriate monetary and fiscal policies. For this purpose, the
government gives rebates and tax concessions and credit facilities at low and
reasonable rates so that the private entrepreneurs are induced to invest in those
industrial lines.
(iv) Consumers’ Sovereignty Protected: In mixed economy, the sovereignty of

the consumers is protected. Like socialism, the mixed economy does not put an
end to consumer’s sovereignty. The consumers are free to buy commodities of
their choice and the private entrepreneurs produce commodities according to
consumers’ demands or preferences, although the government can control their
prices in public interest so that they can be prevented from rising unduly high. In
fact, the aim of price control is to protect the consumers from exploitation by
private producers and capitalists. Besides, the government can also ration the
commodities in short supply so that the limited available quantities can be fairly
distributed.It is clear that, in spite of some restrictions imposed by the
government, the consumers are free to purchase the goods they like. It is their
demand or preferences which guide production in the private sector.
(v) Government Protection of Labour: In a mixed economy, government protects

the weaker sections of society especially labour. That is, it saves labour from
exploitation by the capitalists. In the developed countries, in the beginning of
Industrial Revolution, the greed and selfishness of the factory owners inflicted
untold hardships on male labour, women and children. Social conscience was
roused on seeing the pitiful and miserable working and living conditions of such

labour. The government realized its responsibility for protecting labour from
exploitation by industrialists and factory owners. Now several factory Acts have
been passed to regulate the working conditions of labour. Minimum wages and the
working hours have been fixed. Restrictions have been imposed on the
employment of small children in factories.Labour is paid compensation for
accidents while at work. The government also takes necessary steps to prevent
industrial disputes. These things are done even in mixed economies of ‘controlled
capitalism’ type.
(vi) Reduction of Economic Inequalities: The governments in mixed economies

take necessary steps for the reduction of inequalities of income and wealth.
Extreme inequalities of income and wealth are socially unjust, politically
undesirable and economically harmful. Extreme inequalities of income reduce
social welfare. Income inequality creates inequalities of opportunities for
education and training in favour of high-income groups. The extreme inequalities
of income create class distinctions and generate class-conflict which splits the
whole society into two warring camps – the rich and the poor or the ‘haves’ and
the ‘have-nots’. The rich exploit the poor. Modern governments try to reduce
economic inequalities for promoting social justice, and social stability and social
welfare, increasing production and for providing equal opportunities for all. For
this purpose, government levies progressive taxation, wealth tax, death duties, gift
tax, etc. On the other hand, free education, free medical aid and old-age pensions,
for the poor, stipends for poor students are some of the remedies adopted for
distributing the extra income of the rich among the poor.
As a result of the above-mentioned measures, which have been adopted by the

governments of different countries like the U.S.A., the U.K., Norway and Sweden,
inequalities of income and wealth have been somewhat reduced. The Government
of India also has decided to introduce a socialistic pattern of society and for that
purpose reduce inequalities of income and wealth. This is a major objective of our
Five-Year Plans. But so far the Government has not succeeded in achieving this
desirable objective. In fact, it is said that in India economic inequalities have
increased instead of decreasing in the planning era. The fruits of economic
development are concentrating in the hands of a few rich people. Our Government
is now fully seized of the problem of growing economic inequalities and it may be
hoped that in future strong measures will be adopted for reducing economic
inequalities. In this way, it will be fulfilling one of the main purposes of a mixed
economy.
(vii) Control of Monopoly: In a mixed economy, the government tries to control

and regulate monopolies. A charge against monopolies is that they reduce output
and raise prices in order to get maximum profit. The monopolist thus uses his
monopoly power to exploit the consumers. He fixes a price which is above the
marginal cost of production and in this way reduces consumers’ welfare. Such a
price-output policy results in misallocation of productive resources of the
community.Besides, the excessive profits made by monopolists result in

accentuating economic inequalities in the country. Moreover, monopoly creates

unemployment by reducing output and thus hampers industrial development. The
government tries to control and regulate monopolies in order to remove the above
evils and make them function in public interest. It appoints an ad hoc or
permanent commission to fix a fair price of the monopolized products. Only a
reasonable return is permitted on investments made by monopolists. In other
words, a monopolist can earn only a fixed rate of dividend. Also, when the
government considers it necessary in public interest, it takes over monopolies and
operates them in public interest. Moreover, some governments have passed
legislation to prevent the establishment of business combinations which lead to
the creation of monopolies.
Conclusion: We have studies above that in a mixed economy public sector and
private sector operate side by side. In the public sector, the development of
industries is directly under the government; hence it is possible to make sure of
their operation according to plan and with proper organization.In the private
sector, however, there is need for some controls and incentives so that they are
also developed according to plan, e.g., price controls, influencing them by means
of proper investment, licensing of new industries control over capital issues,
control over imports, prevention of concentration of economic power and creation
of monopolies, etc.
Critical Evaluation of Mixed Economy

Let us assess briefly the working of the mixed economy system. Although, as
we have said above, all capitalistic economies have become more or less mixed
economies, yet we do not propose to make a survey of the working of the system
elsewhere. We confine ourselves to the assessment of the working of mixed
economy in India, for, as India is the biggest democracy, it is also the biggest
experiment in mixed economy. We may notice two opposite views on the working
of mixed economy: one represented by the business community or ‘big business’
properly speaking and the other by the political leaders in the Government. These
views are usually given expression to in the annual conference of the Chambers of
Commerce which is addressed usually by the Prime Minister and other high
government spokesmen.There is usually a wordy warfare between the two. The
business leaders are frankly critical of the government and the government
spokesman of the business community. The government charges the business of
the community with black marketing, profiteering and not being patriotic enough
to play a proper role in the economy, whereas the business leaders hold the
government responsible for inflation, economic stagnation and for the ills of the
economy and of trying to squeeze out the private sector in a variety of ways.
For instance, in the annual meeting of the Associated Chamber of Commerce

and Industry held in April, 1975, J.R.D. Tata said that mixed economy was dead
or dying. He said, “Our economy will continue to stagnate while our population
grows and we shall end up before the turn of the century under dictatorship or in

a state of chaos and violence”. The Prime Minister, on the other hand, extolled the
virtues of the public sector and harped on its achievements. P.N. Haksar, Deputy
Chairman of the Planning Commission, addressing the annual session of the
Federation of Indian Chamber of Commerce and Industry termed Malabar. Tata’s
speech as a ‘funeral oration’ and said that this oration would be justified if mixed
economy was really dead. He said that the problems of the country could not be
solved by “composing lyrical passages on the death of mixed economy, raising
‘macabre’ vision of the hold of communists”. He further said that it would be doing
an injustice to argue that the concept of mixed economy obtained only abroad and
what obtained in India was “mixed-up economy”.
These charges and counter-charges only blur the true vision of mixed economy.
The reality is that despite the present ills of the Indian economy, the marriage of
the public and private sectors in Indian economy is merrily going on and doing
well. Both sectors are making a valuable contribution to the successful
functioning of the Indian economy. As pointed out by Malabar. Haksar, the
country produced in terms of output 90% of the goods and services through
private economy. This bears ample testimony to the vitality and virility of the
private sector. Far from being dead, it is alive and kicking. There is little danger of
its becoming extinct or being swallowed up by the public sector. While private
sector was a part of the national economy, State control is essential in the interest
of integrated growth of the economy. Mixed economy in India is a byproduct of the
government involvement in the task of economic development of the country.
There is no doubt that government has played a remarkable role in developing
infrastructural facilities and setting up big industrial units which have helped the
private sector a great deal in its functioning.
The fact is that the public sector and the private sector are the two necessary
limbs of the economy and both must be in good health and functioning properly.
There should be cordial co-operation between the two. Mixed economy cannot
function in a State of cold war. Besides, government regulation is essential to
bring about a proper co-ordination between the two wings of the economy. It may
also be borne in mind that mixed economy cannot function in a static framework.
It is a dynamic concept and the proper relationship between the two sectors must
go through a continuous evolutionary process to ensure that they do not work at
cross purposes. Both sectors must work in the interest of the economy as a whole
rather than promote their own selfish interests. “That mixed economy which
reflects the callous indifference of the omnipotent bureaucratic machine of the
public sector on the one hand and massive profiteering with unutilized capacities
and high prices of the private sector on the other, stands totally condemned in
the eyes of the people…….The amorphous opportunism of the political elite and
the greed of the private big business stare us in the face every day”. This situation
must change so that the economy is restored to full health and soundness.

MIXED ECONOMY IN THE CONTEXT OF INDIAN ECONOMY

In India, the commencement of the planning era saw the beginnings of mixed
economy. The First Five Year Plan laid down that the State must not only assume
the responsibility for providing the infrastructural facilities, but also enter directly
in the industrial field. It was recognized that the State must undertake to develop
basic and strategic industries. It was realized that both public and private sectors
must join in the common task of accelerating economic growth. The concept of
mixed economy envisaged the operation of both private and public sectors.
Barring certain key industries and industries of strategic importance, over a large
part of economic activities, including not only the organised industry but also
agriculture, small industry, trade and commerce, individual effort and private
initiative were considered necessary and desirable.
The Industrial Policy Resolutions passed in 1948 and 1956 gave a concrete
shape to the concept of mixed economy. According to the Industrial Policy
Resolution of 1948, industries in India were broadly divided into four categories:
(i) Exclusive government monopoly; (ii) Government-controlled sphere’ (iii)
Industries subject to State regulation and control; and (iv) the rest of the
industrial field which was to be the sphere of private enterprise under general
control of the State. In other words, the whole industrial field was split up into two
broad sectors viz., public sector which was exclusively reserved for the
government and the private sector in which private enterprise could operate freely.
The Industrial (Development and Regulation) Act, 1951 was the main instrument
by which the Government controlled and regulated private industrial enterprise
i.e., controlled the location, setting up and expansion of private industrial
undertakings.
In 1954, the Parliament accepted Socialistic Pattern of Society as the objective
of social and economic policy. In order to realize this objective it was considered
essential to accelerate the rate of economic growth, to speed up industrialization
and to expand the public sector. It was also necessary to reduce disparities in
income and wealth and to prevent private monopolies and concentration of
economic power in the hands of a small number of individuals. Therefore the State
had to assume progressively a predominant and direct responsibility for setting up
new industrial undertakings. All this necessitated a fresh statement of industrial
policy which was announced in 1956.
The main features of the 1956 – industrial policy were:-
(i) A new classification of industries putting a larger number of them in the public
sector and thus putting direct responsibility on the government for the future
development of industries over a wider area. There was to be another category of
industries which were to be progressively state-owned in which therefore generally
the State would take the initiative in establishing new under-takings but in which
private enterprise would supplement the effort of the State. In the remainder of
the industrial sector, the initiative and enterprise for development would be with
the private sector. The state would simply encourage and facilitate the setting up
new industries.
Although a demand for the revision of industrial policy was made from time to
time, but the 1956 resolution has continued to govern the industrial policy of the
government. Thus the framework of mixed economy has continued to be
strengthened. The Janatha Governments’ policy emphasized the prevention of
concentration of economic power (which means the strengthening of the public
sector) and investment policy designed to improve the efficiency of the public
sector.
The working of the mixed economy in India during the last few years has
established the basic soundness of the concept of mixed economy. The structural
transformation that has taken place in the field of Indian industry would not have
taken place unless both private and public sectors contributed.
BALANCE OF PAYMENTS PROBLEM OR CRISIS

MEANING OF BALANCE OF PAYMENTS.
A balance of payments statement is essentially a double-entry system of record
of all economic transactions between the ‘residents’ of a country and the rest of
the world carried out in a specific period of time. It presents a classified record of
all receipts on account of goods exported, services rendered and capital received
by residents, and payments made by them on account of goods imported and
services received from, and capital transferred to ‘non-residents’ or foreigners.
Thus, balance of payments is as much wider term as compared to balance of
trade. Whereas the latter refers only to merchandise imports and exports, the
former refers to all economic transactions with the outside world.
The balance of payments statement is divided into two major accounts
viz, current account and capital account. Transactions relating to goods,
services and income constitute the current account, while those relating to claims
and liabilities of a financial nature, which go to finance the deficit on current
account or to absorb its surplus, form the capital account. The sum of these
current and capital account transactions together constitutes the basic balance on
the balance of payments and theoretically it should be finally rounded up and the
double-entry accounting should be closed with the help of (a) purchases and
repurchases from the IMF essentially as an international agency for the country’s
Balance of payments support, (b) allocation of the IMF’s Special Drawing Rights
(SDRs) which was intended to supplement the relatively inadequate international
reserves and also serve as a principal reserve asset of the international monetary
system, and (c) the build-up or drawn-down of the country’s own reserve
assets.This is the theoretical position. However, because of inaccurate estimation,
clandestine capital flight and various other discrepancies, the credit side of the
double-entry accounting does not match the sum of all debt entries. Therefore, the
balancing act is performed by an item called ‘errors and omissions’ – a negative
sign in it implying an overstatement of receipts or understatement of payments,
generally a combination of both, and a positive sign signifying the reverse.

Current Account: The transactions relating to goods, services and income,

constituting the current account on the balance of payments, are functionally
classified into two broad categories: merchandise and invisible. As per the IMF’s
Balance of Payments Manual, imports and exports of goods (merchandise) should
be presented on a free-on-board (fob) basis, i.e., without including freight and
insurance costs. Such freight and insurance costs should logically be covered
under ‘invisibles’. However, due to data constraints, the Indian authorities
present imports on cif (cost, insurance and freight) basis while the exports are
presented on fob basis. As far as ‘invisibles’ are concerned, they comprise costs of
services, income, and transfer payments (i.e. payments and remittances
unrequited or without quid pro quo or without any repayment obligations).The
IMF Manual classifies invisible account into as many as 21 items while the Indian
authorities provide the ‘invisibles’ account data only under the following 8 heads;
(1) travel, (2) transportation, (3) insurance, (4) investment income, (5) government,
not included elsewhere, (6) miscellaneous (receipts/ payments for patents and
royalties), (7) transfer payments – official, and (8) transfer payments – private.
Capital Account: Capital account in India is classified into three main sectors (i)
private capital (ii) banking capital, and (iii) official capital. Private capital is sub-
divided into (a) long term and (b) short-term, with loans of an original maturity of
one year or less constituting the relevant dividing line. Long-term private capital
covers foreign investments (both direct and portfolio), long-term loans, foreign
currency deposits (FCNR and NRER) and an estimated portion of the unclassified
receipts allocated to the capital account. Banking capital essentially covers
movements in the external financial assets and liabilities of commercial and
cooperative banks authorized to deal in foreign exchange. Official capital
transactions, RBI’s holdings of foreign currency assets and monetary gold (SDRs
are held by the government), are classified into (i) loans, (ii) amortization, and (iii)
miscellaneous receipts and payments.
Since balance of payments accounts are prepared on the double-entry system

of accounting, sum of all debits equals the sum of all credits and the accounts are
always in balance. However, this does not mean that a country cannot face
balance of payments difficulties. If a country faces a deficit in its current account
and this is met by liquidation of its assets or through borrowing abroad, it is
indeed facing a balance of payments difficulty. If such steps have to be resorted to
repeatedly, a serious balance of payments problem can result forcing the country
to draw down its foreign exchange reserves and borrow at high rates of interest
from international markets (if requisite amount of concessional aid is not
available).The burden of debt repayment is likely to increase substantially under
such circumstances jeopardizing the long-run economic and political interests of
the country.

INDIA’S BALANCE OF PAYMENTS

When India became Independent, it had a ‘sterling balance’ of Rs.
1,733crore.This was the result of a sizeable surplus on balance of trade with the
U.K. during the Second World War Period when U.K. had made large-scale
purchasing from India to meet its war requirements. The foreign exchange
position of the country was therefore satisfactory. However, the immediate post
Independence period was characterized by the release of ‘pent-up demand’ for
imports (suppressed during the War) and shortages of food and raw materials.
Thus import bill increased substantially while exports remained stagnant. The
deficit had to be made good from the sterling balance. During the first plan period
the overall deficit in the balance of trade was Rs. 541.9 crore. However, due a
substantial surplus on the invisible account the balance of payments situation
was satisfactory. In fact, the deficit on current account was only Rs 42.3 crore.
Bimal Jalan divides the period after 1956-57 into three sub-periods depending
on the nature of the balance of payments problems, the overall macroeconomic
environment and the external aid situation. The three sub-periods are: 1956-57 to
1975-76 (period I), 1976-77 to 1979-80 (period II) and 1980-81 to 1992-93 (period
III). While periods I and III were characterized by persistent balance of payments
problem, period II saw a substantial improvement in the balance of payments and
the foreign exchange reserve position. Jalan used the following two criteria as a
rough measure of the balance of payments problem in a particular year: (i) the
current account deficit was more than one per cent of GDP and (ii) the foreign
exchange reserves were less than necessary to cover three months’ imports.
During period II, the current account deficit was less than one per cent of GDP
and reserves were sufficient to cover more than three months’ imports. As against
this, current account deficit was more than one per cent of GDP in periods I and
III. However, in both these periods, there were some years during which reserves
exceeded three months’ imports. But, on the whole, the overall balance of
payments situation continued to be difficult.
Period I – 1956-57 to 1975-76

This period comprising the Second, Third and Fourth plans and first two years
of the Fifth Plan saw heavy deficits in balance of payments and an extremely tight
payments position. This period witnessed three wars (in 1962 with China and in
1965 and 1971 with Pakistan), several droughts (the most severe being the
droughts foreign 1965-66 and 1966-67), and the first oil shock in 1973. Though
the government resorted to severe import controls and foreign exchange
regulations, the current account deficit stood at 1.8 per cent of GDP. Foreign
exchange reserves were at a low level, generally less than necessary to meet three
months’ imports. What is significant is the fact that substantial foreign assistance
was made available to India on concessional terms to tide over the balance of
payments problem. In fact, 92% of the current account deficit was financed by
such concessional assistance (See Table I).

Table 1
India’s Balance of Payments Problem: Some Indicators
1956- 1976- 1980- 1992- 1993- 1995- 1996- 1997-

57 77 81 93 94 96 97 98
Indicator to to to
1975- 1979- 1990-
76 80 91
(1) (2) (3) (4) (5) (6) (7) (8) (9)
1. Current 1.8 -0.6 1.8 1.7 0.4 1.6 1.1 1.6
account
deficit (as %
of GDP)
2. Foreign 20.4 65.8 27.3 40.4 72.0 49.7 54.0 57.4
exchange
reserves (as
% of imports)
3. Net external 91.8 N.C. 35.1 52.7 164.2 15.0 24.7 13.9
assistance
(as % of
current
account
deficit)
4. Imports, 9.6 22.3 8.2 15.4 10.0 21.6 12.1 4.4
dollar values
(annual
growth rate)
5. Exports, 8.7 12.5 8.6 3.3 20.2 20.3 5.6 2.1
dollar values
(annual
growth rate)
Note: 1. N.C. stands for not computed since the current account deficit was negative
in 1976-77 and 1977-78.
2. Annual growth rates of imports and exports in this table are different from
those given in Table 1 of the previous chapter. Rates of growth in Table 1 of
the previous chapter are based on statement 7.1 (A), p. S-81 of Economic
Survey, 1998-99 while rates of growth given here are based on Economic
Survey, 1998-99. Tables 6.2 and 6.3 pp. 76-77.
Source: Computed from (i) Bimal Jalan, “Balance of payments, 1956 to 1991”. In
Bimal Jalan (ed.). The Indian Economy – Problems and Prospects (New
Delhi, 1992), Table 1 p. 165; and (ii) Government of India, Economic
Survey, 1998-99, Table 6.2, p. 76. Table 6.3 p. 77 and Statement 6.1 (B),
pp. S-71 and S-72.

Let us now consider briefly the position in the different Plans falling in this
period. The development strategy adopted in the Second Plan gave primary
importance to the establishment and development of basic and capital goods
industries. These necessitated large-scale imports of capital equipment,
machinery and technical know-how. Throughout the Second Plan period, exports
were stagnant and the value of imports was almost double the value of exports. As
a result, the deficit in balance of trade was Rs. 2,261.3 crore.The only redeeming
feature was that receipts on invisibles remained positive as in the First Plan and,
as a result, the overall deficit on current account was reduced to Rs. 1,646 crore.
The structure of trade during the Third Plan was not very much different from
the structure obtained in the Second Plan. Exports were mainly traditional and it
was difficult to increase earnings through them. The last three years of the Plan
did witness an increase in the money value of exports but this was too insufficient
to fill up the gap in the balance of payments because, in the meantime,
developmental imports (especially maintenance imports) had increased
substantially. The Third Plan had deficit in balance of trade during Third Plan was
Rs. 2,400 crore.Since there was a surplus of Rs. 428 crore on the invisible
account, the overall deficit in the balance of payments during the Third Plan was
Rs.1,972 crore.This deficit had to be financed through foreign aid flows. The
period of three Annual Plans following the Third Plan also witnessed a substantial
deficit of more than Rs. 2,000 crore in the balance of payments. The period of the
Fourth Plan was characterized by continuous increase in imports. Increases in
international price were mainly responsible for an increase in the value of imports.
The prices of petroleum products, fertilizers, iron and steel, non-ferrous metals
and various types of capital equipment increased inordinately in 1972-73 and
1973-74. As a result, the value of imports increased from Rs.1,582.3 crore in
1969-70 to Rs. 2,729.3 crore in 1973-74.Increase in international prices also
pushed up the value of exports. Whereas goods worth Rs.1, 403.9 crore were
exported in 1969-70, goods worth Rs. 2,350.7 crore were exported in 1973-74.
The deficit in balance of trade during the Fourth Plan amounted to Rs. 1,563.9
crore. Since there was a deficit of Rs. 670.2 crore on invisible items as well, while
non-monetary gold movement (net) was positive at Rs. 13.1 crore, the current
account deficit in the Fourth Plan stood at Rs. 2,221 crore.
The Organization of Petroleum Exporting Countries (OPEC) resorted to a

substantial increase in the price of crude oil from $2.50 and $3.00 per barrel in
the middle of 1973 to $11.65 per barrel in early 1974 i.e., by about four times.
Naturally this had a severe adverse effect on the oil importing developing countries
as their import bill soared to new high levels. For instance, the import bill of India
increased from Rs. 2,729.3 crore in 1973-74 (last year of the Fourth Plan) to Rs.
4,156.9 crore in 1974-75 (first year of the Fifth Plan) i.e. by Rs. 1,427.6 crore in a
single year. Of this increase, Rs. 596.6 crore (i.e. 42%) was contributed by
petroleum oil and lubricants. Because of the unprecedented rise in oil prices, the
country experienced a record deficit of Rs. 977.2 crore in the balance of trade in
1974-75. Despite the positive net receipts of Rs. 216.6 crore on invisible items, the
deficit on current account in this year amounted to Rs. 760.6 crore.

Period II – 1976-77 to 1979-80

This relatively short period was a golden period as far as the balance of
payments is concerned. As is clear from Table 1, India had a small current
account surplus of 0.6% of the GDP during this period and also possessed foreign
exchange reserves equivalent to about 7 months’ imports. The relatively
comfortable position on the balance of payments front was due to the following
factors: (1) First and foremost was the rapid increase in private remittances from
oil exporting countries. A large number of Indian workers temporarily migrated to
the oil – rich Middle East countries to work there as unskilled workers, skilled
technicians, office assistants, nurse etc. They kept sending their net earnings to
their families in India. As a result, transfer payments to India on private account
aggregated Rs. 3,128.7 crore over the Fifth Plan period. Since the total receipts on
invisibles account were Rs. 8,877.9 crore, the share of transfer payments on
private account in total receipts from invisibles stood at 35.2%; (2) There was a
strong growth in exports of nearly 31% in 1975-76 over 1974-75 and of 23% in
1976-77 over 1975-76 (in rupee terms).The international environment was also
conducive as world trade rose by over 8% a year in value terms during this period.
In volume terms, world trade declined by 4% in 1975 but rebounded next year
with a rise of 11%. India’s export effort was also aided by the fact that after the
sharp increase in price during 1973-74 and 1974-75, price increase was modest
in the following four years (the average rate of increase in wholesale prices
between 1975-76 to 1978-79 was only 1.5% per annum).This made Indian exports
competitive in international markets; (3) As a result of the conservation measures
adopted domestically and increase in oil production, the country was able to
arrest the growth in oil imports. In fact, imports of crude oil and petroleum
products did not grow at all in volume terms during the four year succeeding
1973. Only after 1977-78, when the country attained a comfortable position in its
balance of payments and foreign exchange reserves did the import of crude oil
pick up. Another item of imports immediately related to petroleum is nitrogenous
fertilizer. Here import-substitution took care of the problem as domestic
production grew at the rate of 13.6% per annum between 1969-79 against
increase in imports at the rate of 4.2% per annum.Similar successful import-
substitution programmes were carried out with respect to electric motors,
machine tools, casting and forging, non-ferrous metals and certain groups of
machinery; (4) there was a substantial expansion in the activities of Indian firms
in the oil exporting Middle East countries. Indian firms were building roads,
airports, housing estates, power stations, steel mills, etc., in a number of middle-
east countries. These exports of construction services as well as of some materials
contributed substantially to India’s foreign exchange earnings; (5) in the mid-
seventies, the international price of gold shot up dramatically. There were even
periods when the domestic price of gold (at the official exchange rate) was lower
than the international price. The elimination of the large price-gap between the
domestic and the foreign market of gold led to a fall in smugglers’ trade, resulting
in a better showing in the receipts and payments statistics of the Reserve Bank of
India; and (6) Aid receipts were reasonably buoyant and India drew on various
International Monetary Fund facilities during the years 1973-74 to 1975-76.Over
the next three years, by the time of the second oil shock, India had already
repurchased the Fund drawings.

As a result of these factors, the Indian economy adjusted to the first oil shock
rather quickly. In fact, during two years of the Fifth Plan 1976-77 and 1977-78,
there was a surplus on current account. Taking the Fifth Five Year Plan as a
whole, there was a deficit of only Rs. 1,146 crore on current account. However, the
second oil shock came in 1979-80 as the oil prices were hiked by the OPEC from
around $13.00 per barrel in late 1978 to around $35.00 per barrel in 1979.This
had a serious negative impact on the Indian economy. The full impact of the
increase in oil prices was reflected in the trade balance of 1980-81. Trade deficit
rose from Rs.1,843 crore in 1978-79 to Rs.3,374 crore in 1979-80 and further to
Rs. 5,967 crore in 1980-81.However, because foreign substantial earnings from
invisibles, the deficit on current account was only Rs. 234.5 crore in 1979-80 and
Rs. 1,657 crore in 1980-81.
Part III – 1980-81 to 1992-93

This period was marked by severe balance of payments difficulties. In fact,
during the first four years of the Sixth Plan (1980-81 to 1983-84), the deficit in
balance of trade was around Rs. 6,000 crore per annum. In the last year of the
Plan 1984-85 this shot up to Rs. 6,721 crore. The trade deficit in the first three
years of the Seventh Plan (1985-86 to 1987-88) exceeded Rs. 9,000 crore per
annum and in the fourth and fifth years (1988-89 and 1989-90) exceeded Rs.
12,000 crore per year. In 1990-91 the deficit touched the astronomical figure of Rs
16,934 crore. It came down to Rs. 6,495 crore in 1991-92 but again shot up to
Rs. 12,101 crore in 1992-93.This shows the difficult position that the country
faced on the balance of payments front. Earnings from invisibles were substantial
throughout the Sixth Plan period. They touched the highest level ever in the
planning period during 1980-81.In that year they stood at Rs. 4,311 crore. In
subsequent years of the plan, earnings from invisible declined somewhat but in
each year they were Rs. 3,500 crore or more. However, during the Seventh Plan
period private remittances from middle-east countries showed tens of flattening
out. As a result, earnings from invisibles declined consistently and fell to Rs.
1,025 crore in 1989-90. Whereas, net invisibles financed, on an average more
than 60% of trade deficit during the Sixth Plan, they financed only 24% of trade
deficit during the Seventh Plan. In fact, during the last year of the Seventh Plan,
invisibles financed only 8.3% of the trade deficit.
The Gulf crisis during the year 1990-91 further worsened the balance of
payments problem. In addition to a massive trade deficit of Rs. 16,935 crore, there
was deterioration in the invisibles account as well because of lower remittances
and higher interest payments. The current account deficit soared to Rs. 17,369
crore. The government had to impose a strict import squeeze. As a result, the
value of imports declined by 24.5% in 1991-92 in dollar terms as compared with
1990-91 while exports were almost constant. Therefore, the current account
deficit was only 0.4% of GDP in 1991-92.The foreign exchange reserves were
sufficient to meet more than five months imports. Therefore, on Jalan’s criteria
mentioned earlier, the situation can be said to be satisfactory. However, the fact is
that the balance of payments situation had been brought under control only by
resorting to a massive import squeeze. This had a strong decelerating effect on

industrial activity and the government was obliged to open up the imports of a
number of capital goods, raw materials and intermediates and other goods
required by industries. Import liberalization was also a follow up of the new
industrial and trade policies adopted by the Government of India under the
structural adjustment programme of the IMF (whose adoption was made a
condition for assistance to India by the IMF and the World Bank).Thus, the year
1992-93 again saw a rapid increase in imports. As is clear from Table 1, imports
increased by 15.4% in this year against a 3.3% increase in exports in dollar terms.
As a result, the current account deficit in 1992-93 was 1.8% of GDP (higher than
the safe limit of 1% prescribed by Jalan).
Period after 1992-93

As stated earlier, the conditions in later years (i.e. the years after 1992-93) were
distinctly different from he conditions obtaining in the period 1980-81 to 1992-93.
This would be clear from a glance at Table 1. The situation seems favourable on
all counts in 1993-94.Thus, the current account deficit was only 0.4% of GDP.
Foreign exchange reserves were as high as $19,254 million (including gold and
SDRs) while imports were $26,739 million. Thus the foreign exchange reserves
72.0% of imports. The foreign exchange reserves in 1993-94 were equal to eight
and half months’ imports – a highly satisfactory situation. External assistance
(net) in this year stood at $1,901 million while current account deficit was $1,158
million. Thus external assistance was substantially higher than the current
account deficit. Another important development in 1993-94 was the exceptionally
good performance on the export front. Exports recorded a growth of 20.2% in
dollar terms against a modest increase of 6.5% in imports (see Table 1). As a
result, current account deficit fell from $3.5 billion in 1992-93 to $1.2 billion in
1993-94.All these facts show that there was a marked ‘turnaround’ in the balance
of payments situation during 1993.94.The situation in 1994-95 was also
satisfactory on many counts. Current account deficit was only 1.10% of GDP and
foreign exchange reserves were 70.1% of imports. In fact, these reserves were
enough to finance 8.4 months’ imports. However, there was a sharp rise in
imports due to pick up in industrial activity while the rate of growth of exports
decelerated a bit.
The growth in imports continued unabated in 1995-96 as well due to renewal of

economic growth. Imports in dollar value, grew by 21.6% in this year. However,
exports with a growth of 20.3% almost matched the rate of increase in imports
(see Table 1).Foreign exchange reserves in 1995-96 were 49.7% of imports and
were enough to finance six months’ imports. However, the current account deficit
which stood at $3.4 billion in 1994-95 rose to $5.9 billion in 1995-96. This was
1.6% of GDP. In fact, 1995-96 was the only year in the post reform period to
register a foreign exchange reserve draws down of $2.5 billion. The year 1996-97
witnessed a reduction in current account deficit from $5.9 billion in 1995-96 to
$4.5 billion. This was only 1.1% of GDP. The balance of payments situation
improved considerably and there was a reserve build-up of $5.8 billion. However,
in 1997-98, the deficit on current account of the balance of payments widened to
$6.5 billion or 1.6% of GDP.The widening of the current account deficit in 1997-98
was largely attributable to poor export growth which was merely 2.1%.But the
balance of payments position remained comfortable with reserve accumulation of
$3.9 billion supported by strong private capital flows.
Table 2
India’s Balance of payments: 1992-93 to 1997-98
(US S million)
Trade Invisibles Current Capital Reserve
balance (Net) Account Account Use
Year
(Net) Total (Net) (-
increase)
(1) (2) (3) (4) (5)
1992-93 -5447 1921 -3526 4224 -698
1993-94 -4056 2898 -1158 9882 -8724
1994-95 -9049 5680 -3369 8013 -4644
1995-96 -11359 5460 -5899 2963 2936
1996-97 -14815 10321 -4494 10312 -5818
1997-98 -16277 9804 -6473 10366 -3893
Source: Government of India, Economic Survey, 1998-99(Delhi, 1999), Table 6.2p.

76.
A noteworthy feature in the country’s balance of payments in recent years has
been the improvement in the invisibles account. In 1990-91 there was a net
outflow of $0.24 billion on this account. However, in all subsequent years there
has been a substantial inflow. As shown in Table 2, the net inflow on invisibles
account was $1.9 billion in 1991-92 which rose to $5.5 billion in 1995-96 and
$10.3 billion in 1996-97. In 1997-98, it stood at $9.8 billion. On an average,
invisible receipts have grown at the rate of about 20% per annum from $9.3 billion
in 1992-93 to $23.0 billion in 1997-98. The upsurge in invisible receipts has been
led by the inflow of private transfer receipts. These recorded a growth of about
25% annum from $3.9 billion in 1992-93 to $11.9 billion in 1997-98. Thus, as
noted by Economic Survey 1998-99, “net inflow of invisibles continued to provide
major support to the viability of the balance of payments”. As can be calculated
from Table 2, the net inflow under invisibles financed about 70% and 60% of trade
deficit in balance of payments (in dollar terms) in 1996-97 and 1997-98
respectively, compared with only about 35% in 1992-93.According to the
Economic Survey, 1998-99, the balance of payments situation is manageable in
1998-99 despite the continuing slow down of exports and a marked deceleration
in capital flows. In 1998-99, the current account deficit, as a per cent of GDP, in
expected to decline somewhat from the 1997-98 level, mainly because of slower
growth of imports on a balance of payments basis.

CAPITAL ACCOUNT: FINANCING THE DEFICIT
The structure of capital account in India has changed considerably over time.
In perspective I and II almost the entire deficit was financed through inflows of
concessional assistance and this kept the debt servicing burden low. In contrast, a
substantial part of the deficit (indeed almost the entire incremental deficit, in
dollar terms) had to be financed through non-concessional loans obtained on
market related terms during period III.As noted by Jalan, disbursements on
concessional terms constituted more than 89% of assistance to India from
multilateral sources in 1980. This proportion declined to about 35% in 1990.The
average maturity of loans from official sources also declined from 40.8 years in
1980 to 29.1 years in 1990. At the same time, the average rate of interest
increased.Thus there was deterioration in the ‘quality’ of external financing. As a
result, the total debt increased from Rs. 19,470 crore in 1980-81 to Rs. 3,36,646
crore (corresponding to $92,883 million) at end September 1997. After 1984-85,
the large current account deficit had to be financed through substantial inflows of
capital by way of commercial borrowings and deposits by non resident Indians
(NRIs). For instance, the share of external commercial borrowings and NRI
deposits in external assistance rose from 16.1% in 1980 to 29.4% in 1986 and
further to 39.9% in 1991.This increasing share of external commercial borrowings
and NRI deposits raised the cost of external debt considerably over time. As a
result, the debt service ratio rose to 35.3% in 1990-91 and stood at 30.2% in
1991-92.The debt-to-GDP ratio also rose significantly to 41% in 1991-92.
Expecting prolonged balance of payment difficulties, the Government of India

entered into an arrangement with the International Monetary Fund IMF) under the
Extended Fund Facility (EFF) in early eighties. The EFF provides for assistance to
member countries that need to make structural adjustments in their economies
with a view to achieving balance of payments viability in the medium term. This
facility enabled India to draw up to SDR 5 billion over a period of four fiscal years
from 1980-81 to 1984-85. The availability of EFF helped India considerably in the
financing of the current account deficit during 1980-81 to 1983-84. In 1982-83,
60% of the current account deficit was financed through EFF drawings and the
proportion was 50% during the next year. In 1984-85, India terminated the EFF
before fully utilizing the amount originally contemplated. Following the Gulf crisis
and deteriorating balance of payments situation, the Government of India resorted
to substantial drawals from the IMF from 1990-91 onwards under one or other
facility. Besides the Reserve tranche drawings of Rs. 1,168 crore. India drew Rs.
3,334 crore from the Fund in 1990-91 under compensatory and contingency
financing facility (CCFF). In 1991-92, the drawal was Rs. 3,205 crore. Under the
standby arrangement with the Fund, India received Rs. 2,077 crore in 1991-92
and Rs. 3,363 crore in 1992-93.

The above discussion shows that the balance of payments situation turned grim
in Period III.With increasing trade deficits, flattening out of private remittances
and a fall in concessional aid to finance the ever increasing deficits. India had to
depend on high cost methods of financing the deficit, viz. external commercial
borrowings.NRI deposits and assistance from IMF.The conditions attached to the
IMF loans are generally not known but it is a common knowledge that such loans
are packaged with high conditionalities.As far as external commercial borrowings
and NRI deposits are concerned, they represent a ‘substantial future liability’.
Moreover, large outflows in any year would seriously deplete reserves. This
happened in 1990-91 and 1991-92 as temple international confidence in India’s
abilities was shaken leading to a downgrading o India’s credit rating. Bimal Jalan
has estimated that, on an annual basis, in1990-91, these was a net erosion of Rs.
4,094 crore in receipts from commercial banks and NRI deposits as compared with
total receipts from these source in 1989-90. On a proportionate basis, for
themselves 18 month period, July 1990 t December 1991, the erosion in receipts
from these sources could be of the order of Rs. 6,000 crore.
As discussed earlier, an important difference between Period I and Period III

was with regard to the difference in the sources of financing (ie. Concessional vs.
non-concessional assistance).Bimal Jalan points out another difference. In
contrast to Period I, the macroeconomic policy in Period III was highly
expansionary. The combined fiscal deficit of the Centre and States which was less
than 6% of GDP in Period I rose considerably in Period III and reached 12.1% in
1990-91. During Period III the government also resorted to a policy of import
liberalization and industrial liberalization. In fact, over the second half of the
eighties (1985-86 to 1990-91) imports, in rupee terms, grew at an average annual
rate foreign 17%.This sharp growth in imports could not be supported by our own
exports, other receipts and normal aid flows. Consequently they had to be
financed by commercial borrowings or other borrowing on hard terms. As noted by
Jalan, even this could be sustained only as long as such loans were available. The
economy was plunged into a crisis as soon as these sources of financing dried up.
‘The roots of the crisis, therefore, do not lie in import liberalization per se but in
the overall framework of macroeconomic policies including fiscal policy, which
permitted an expansion of internal demand for the home market without
generating adequate exports during a period when the external environment for
aid to India was deteriorating. Such liberalization, as there was, was ‘inward
looking’ and higher growth of the domestic economy was financed by external
loans on hard terms. As events have unfolded, this has proved to be a mistake”.
As is clear from Table 2, there has been a substantial surplus on capital

account in recent years (particularly since 1993-94) excepting 1995-96.This is due
to sustained buoyancy in foreign investment following the policy of economic
liberalization since 1991.The government has given a number of incentives to
foreign investors with the result that foreign investment has risen considerably

from $557 million in 1992-93 to $4.2 billion in 1993-94 and $5.8 billion in 1996-
97. It 1997-98, it stood at $5 billion. External commercial borrowings have also
risen considerably in the last couple of years. The net result of all these trends has
been a substantial surplus of $9.88 billion on capital account in 1993-94, $10.3
billion in 1996-97 and $10.4 billion in 1997-98. These surpluses on capital
account far exceeded the deficits on current account of the balance of payments
with the result that there was a substantial build up of reserves as shown in Table
2.The accretion to foreign exchange reserves was $8.7billion in 1993-94, $5.8
billion in 1996-97 and $3.9 billion in 1997-98. According to the Economic Survey,
1998-99, total net capital inflows in 1998-99 is expected to be substantially lower
than the levels in 1996-97 and 1997-98, reflecting considerable deceleration in
the inflows of foreign direct investment and commercial borrowing and significant
outflow of portfolio investments by foreign institutional investors. The deceleration
in private capital flows in 1998-99 was offset by an inflow of $4.2 billion from
Resurgent India Bonds (RIBs) to non-resident Indian Overseas Corporate Bodies.
SOLUTION OF BALANCE OF PAYMENTS PROBLEM –

EXPORT PROMOTION OR IMPORT SUBSTITUTION?
Important measures for maintaining balance of payments in order are the
following: (i) foreign assistance, (ii) private remittances from abroad, (iii) external
commercial borrowings and NRI (Non-Resident Indian) deposits, (iv)foreign direct
investment, and (v) trade policy comprising export policy and import policy. In the
immediate post-Independence period, the Government of India used the sterling
balances to cover the deficit in balance of payments. However, by the end of the
First Plan, this source had already dried up. Therefore recourse had to be made to
above mentioned methods of meeting the balance of payments deficits. India has
received substantial amounts of foreign assistance in the planning period from a
number of countries like the U.S.A., the U.K., France, Germany, U.S.S.R etc and
from international institutions like IMF, World Bank and I.D.A.This assistance
was made available on concessional terms and is therefore also known as
concessional assistance. It has helped India considerably in tiding over the
balance of payments difficulties in years of distress. In fact, in 1980 about 89% of
India’s external debt owed to official bilateral and multilateral creditors was on
highly concessional terms as interest rates averaged 2.2% and maturities averaged
35 years. During Period II (1976-77 to 1979-80) an important role was played by
private remittances from abroad (particularly by private remittances from Indian
workers settled in oil-rich Gulf countries).However, as is clear from the discussion
in the previous section, environment for concessional assistance became very
much unfavourable during the eighties and the private remittances from Indians
working abroad also lost their buoyancy. As a result, the country was forced to
depend more and more upon ‘high cost’ methods of financing the deficit in the
eighties – the Extended Fund Facility, external commercial borrowings and non-
resident deposits. This has considerably increased the debt burden on the
economy.

The above discussion shows that external borrowings and private remittances
from abroad cannot be relied upon to solve the problem of balance of payments.
Therefore India will have to rely basically on trade policy (import policy and export
policy) and foreign direct investment in coming years to tackle the problem of
balance of payments. It is in this context that the policy initiatives undertaken in
the recent period in the external sector have to be seen. In the remaining part of
this topic we shall discuss the role of the outward oriented trade strategy vis-a-vis
the inward oriented trade strategy in solving the problem of balance of payments
in India. This discussion has assumed a new urgency in the changed international
scenario with international agencies like IMF and World Bank pressurizing the
developing countries to opt for policies aiming at globalization. Moreover, many
studies have been carried out in recent years to compare the performance of the
countries that adopted inward oriented strategy and the countries that adopted
outward-oriented strategy.
Meaning of Outward Orientation and Inward Orientation

Trade strategies can be broadly divided into two groups, outward oriented and
inward oriented. An outward oriented strategy is one in which trade and industrial
policies do not discriminate between production for the domestic goods and
foreign goods. Against this, inward oriented strategy is one in which trade and
industrial incentives are biased in favour of production for the domestic market
over the export market. While outward oriented strategy is often designated as the
export promotion strategy, inward oriented strategy is designated as the import
substitution strategy. The general instruments of as inward oriented strategy are
commercial policy, industrial policy, and exchange rate policy. The inward
oriented regimes are characterized by high levels of protection for manufacturing,
direct controls on imports and investments, and overvalued exchange rates. As
against this, outward orientation links the domestic economy to the world
economy. The discriminatory use of tariffs, quotas, investment licensing, tax and
credit subsidies, and so on, is incompatible with the purest form of outward
oriented strategy. However, outward orientation does not necessarily mean less
government intervention. As pointed out by the World Development Report (WDR),
“Some countries have pursued outward orientation by offsetting some of the anti-
export bias of import barriers: they have promoted exports while dismantling
import barriers only slowly”.
Trade Strategy and Economic Performance

The WDR (1987) has studied data for 41 countries over the period 1963 to 1985
to examine the links between trade strategy and economic performance. These
countries have been divided into four categories – strongly outward oriented,
moderately outward-oriented, strongly inward-oriented, and moderately inward-
oriented. Hong Kong, Korea and Singapore fall in the group of strongly outward-
oriented countries while India (along with some other countries) falls in the group

of strongly inward-oriented countries while India (along with some other countries)
falls in the group of strongly inward-oriented countries. The study reveals that
outward-oriented economies have performed distinctly better than the inward-
oriented economies in almost all respects. For instance, while the strongly
outward oriented economies achieved a 7.7% per annum growth rate of GDP in
the period 1973-85, the strongly inward-oriented economies could manage a
growth rate of only 2.5% per annum during the period. Similar tendencies have
been observed in the case of other crucial indicators of development also like
trends in per capital income, gross saving rate, incremental capital output ratio,
development of the manufacturing sector, price stability, growth of manufactured
exports, etc.Not only this, according to the WDR, outward orientation also leads to
a more equitable distribution of income.“First, the expansion of labour-intensive
exports means higher employment. Second, reinforcing this, outward orientation
removes the bias in favour of capital-intensive industries which is often implicit
under inward-oriented policies. Third, the direct controls of an inward oriented
strategy generate rents that channel income to those with access to import
licenses or subsidized credits”.
The basic rationale for adopting a strongly inward oriented strategy in India (in
the fifties and sixties) was that such a strategy would help rapid industrialization
through import substitution. However, WDR shows that countries adopting the
outward oriented policies have industrialized faster. In this context WDR
considers the following indicators of industrialization – growth of manufacturing
and agricultural value added, the share of manufacturing value added in GDP, the
share of the active labour force employed in industry, and the growth of
employment in manufacturing. In all these respects, outward oriented economies
show a better performance. To take just one indicator, average annual growth of
manufacturing value added was 15.6% in strongly outward oriented economies
during 1963-75 against only 5.3% in strongly inward oriented economies. During
1973-85, these rates were 10% and 3.1% in the strongly outward-oriented and
strongly inward-oriented economies respectively. According to the WRD, the
outward-oriented economies fared better not only in industrialization and
manufactured export growth, but also in agriculture. Thus, “their agricultural
value added grew by 3.7% in 1963-73, compared with 2.6% in the inward-oriented
economies, and by 3.3% in 1973-85, compared with 2.1% (in inward-oriented
economies)”.
Why Is Outward-Orientation More Successful Than Inward-Orientation?

According to the WDR, the main advantage of the outward-oriented strategy
over the inward-oriented strategy is that it promotes the efficient use of resources.
As against industries under inward-oriented strategy (which are provided
protection and sheltered home market), industries under outward-oriented
strategy face greater competition and therefore try to utilize their resources in the
best possible way. Not only this, in a bid to improve or maintain their market
position, the exporting firms need to keep up with modern technology and bring
managerial skills up to international standards. These firms also benefit from a
considerable transfer of technology from abroad. Data presented by the WDR on
productivity growth in developing countries show that total factor productivity
increased much faster in the strongly outward-oriented economies than in the
strongly inward-oriented economies. Outward-oriented also contributes to
economic growth by relaxing the foreign exchange constraint on growth. In the
models of Chenery, Bruno and Strout, the foreign exchange constraint is said to
be binding if the foreign exchange gap is greater than the investment-savings gap.
Under this condition, for any given amount of foreign aid, the rate of growth
determined by the foreign exchange gap will be lower than that determined by the
investment-savings gap. By increasing the exports, outward-oriented strategy
helps in reducing the foreign exchange gap and this enables the country to
achieve a higher rate of growth.
As against the above, inward-oriented strategy (i.e. import substitution strategy)

leads to high levels of effective protection. The currency becomes over-valued and
exports are discouraged. Under this strategy, relatively capital intensive and
intermediate input intensive techniques of production are encouraged. High
capital intensity leads to under-utilization of capacity and slow growth in
industrial employment. Despite low capacity utilization, high protection ensures
high profitability in domestic markets. This acts as a disincentive to export. Trade
interventions encourage resource misallocation while excessive government
intervention leads to corruption, uncertainty and delays.
Trade Policy Options for India

The message of the above discussion is clear enough – India should go in for
globalization and open up its economy considerably by liberalizing the import-
export regime.This would imply the conversion of quantitative restrictions to low
and uniform tariffs, and the use of the exchange rate (rather than quantitative
restrictions or tariffs) for bringing about balance of payments equilibrium. There is
a strong support for this policy among many economists and international
financial institutions. In fact, the policy package offered by the World Bank and
IMF to the developing countries facing balance of payments problems in the
eighties, specifically included import liberalization and a more ‘open’ trade and
industrial policy as a condition for the grant of assistance. However, as in now
well documented, several structural adjustment programmes (implying massive
import liberalization) introduced by the developing countries at the behest of the
World Bank and the IMF have run into trouble. The reasons are not far to seek.
While liberalization of imports pushed up the import bill immediately, the export
sector failed to respond at such a fast pace. This is due to the reason that
favourable impact on exports can occur only after some time when resources have
moved from non-tradable to tradable sectors. Therefore the deficits actually
increased. It is thus obvious that such a programme can be undertaken only if
adequate financing for a sufficiently long period is available. Even in countries

like Japan, Korea and Taiwan which are the leading success stories of outward
oriented strategy, import liberalization was not done suddenly. In all these
countries the post War period began with an initial phase of macro economic
instability, followed by several years of stabilization and import substituting
growth and eventually by a turn to export led growth in the early sixties.
Much more positive action is needed on the export front. According to Bimal
Jalan, a feasible goal is to raise India’s share of trade to at least 1.5% in the world
trade in the next ten years, i.e., by about 0.1% per annum (India’s share in world
trade which stood at 2% in 1950 fell to less than half per cent by the mid-
seventies and has risen slightly to 0.6% during the last two-three years). “This
would require that India’s exports and imports should increase substantially
faster than the growth of GDP or that of international trade in general. Both
exports and imports have to grow in a balanced manner so that there is no
recurrence of a balance of payments problem or a substantial addition to
commercial debt. Steps indicated by Jalan to accomplish this task include: (i)
further reductions in tariff rates to international levels in order to remove the
remaining bias against production for exports; (ii) allowing exporters to borrow
abroad at international rates as domestic interest rates are substantially higher
(which increase the cost of production and lower the expected returns from
investments); (iii) creating special domestic financing facilities in term-lending
institutions for export-related investments in a bid to insulate the exporters from
high domestic interest rates; (iv) providing adequate and improved infrastructure
for exporters; and (v) aggressive State intervention to promote exports (as is being
done by most other countries, including industrial countries like Japan and
USA).Such intervention should be strategic and should be directed at improving
the domestic environment for exports and opening markets abroad. According to
Jalan, while India has intervened heavily to promote exports in the past, the
‘quality’ of such intervention has been poor as compared with the policies pursued
by successful exporters like Japan, Korea, Malaysia and China.“Unlike India, their
intervention was strategic and not detailed. They encouraged competition in the
domestic market; India fragmented its markets. India concentrated on identifying
products and providing specific amounts of assistance on a case-by-case basis.
The Japanese or the Korean system, on the other hand, was concerned with
altering the generalized incentive framework in favour of exports rather than with
specific products and specific markets”. As regards the proposal for liberalizing
agricultural exports is concerned, Jalan favours moving cautiously in view of the
importance of the agricultural sector in terms of GDP, employment, poverty levels
and consumer welfare. For example, a sudden freeing of exports of food grains
could lead to a sharp increase in domestic prices, reducing levels of real
consumption of the poor, who are net buyers of food. Similarly, a sudden change
in import policy for cotton or sugar might put millions of farmers out of work if, in

that year, world prices are at a low level and there is glut in production. Moreover,
extensive subsidies granted by the USA and the countries of the European Union
to their agricultural exports further complicate the picture. On account of all these
reasons, Jalan advocates that “trade liberalization should first be introduced in
regard to those non-food commodities which do not figure heavily in the
consumption of the poor”.
According to the Ninth Five Year Plan Document, the first, and possibly the
most important, pre-condition for creating a more open economy is to create an
expanding production base of tradable goods and services which can not only
withstand external competition, but can also create a surplus to generate
sufficient export earnings for meeting the import requirements of the economy.
The second pre-condition is to create the conditions under which the export
market becomes increasingly more attractive so that there is both a shift from
selling in the domestic market to exports and that capacities are developed to
specifically target such export opportunities. According to the Plan, “both these
conditions are inextricably interlinked, and involve the reduction and eventual
elimination of the anti-export bias that has characterized the Indian economic
system in the past and continues to exist is some degree even at investment in
tradable goods and services and away from non-tradables.Second, the relative
profitability of exports vis-a-vis domestic sales has to be improved”.

FURTHER READINGS:
1. R.P. Dutt: India Today
2. R.C. Dutt: Economic History of India (2 vols)
3. Dharma Kumar: Land and caste in South India
4. Ranajit Guha: A regime of property for Bengal
5. Holden Furber: Rival companies of the Orient
6. R. Frykenburg(ed): ``Land Control and Social Structure in Indian
History
7. E. Stokes: English Utilitarians and India
8.……………: Peasants and the raj
9.……........... Peasants armed
10. D.R. Gadgil: Industrial revolution of India in recent times:
11. A.K. Bagehi: Private Investments in India
12.……... Political economy of Underdevelopment
13.……... Capital and Labour
14. Daniel and Alice Thorner: Land and labour in India
15. Bipan Chandra: The rise and growth of Economic Nationalism in India
16. Dharma Kumar (ed): Cambridge Economic History of India Vol. 2
17. V.B. Singh: Economic History of India 1857-1947
18. C.A. bayly: Indian Society and the making of the British empire
19.…………….: Rulers, Townsmen and Bazaars
20. David Ludden: An Agrarian History of South Asia
21. Utsa Patnaik: The painful Transition
22. B.R. Tomlinson: The Economy of Modern India
23. Sugata Bose: The World of Indian Capital
24. Claude Markovits: the Global world of the Indian merchants 1750-
1947.
25. Aditya Mukherjee: Imperialism, Nationalism and Making of Indian
Capitalist Class.
*****************

Economic History of Modern India

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School of Distance Education

FOURTH SEMESTER M.A. HISTORY

SCHOOL OF DISTANCE EDUCATION

MA HIS Pr.4.3 (E.H.M.I.)

Type Setting and Layout :

Economic history of modern india Page 2

CHAPTERS CONTENTS PAGES

1 INDIAN TRADE AND EUROPEAN COMPANIES 05-47

11 COLONIAL AGRARIAN SETTLEMENTS 48-62

111 TRANSFORMATION OF INFRA-STRUCTURE 63-76

1V ECONOMIC DEVELOPMENT DURING THE INTER 77-102

V INDEPENDENCE AND YEARS IMMEDIATELY 103-128

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INDIAN TRADE AND EUROPEAN COMPANIES

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FACTORS RESPONSIBLE FOR THE GROWTH

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5. Scientific and Technological Factor: Inventions and discoveries

BASIC PRINCIPLES AND POLICIES OF MERCANTILISM

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5. A country should give more importance to the development of

HECKSCHER’S VIEWS ON MERCANTILISM: PLENTY OR POWER?

countries, the creation of a national customs system was found to be

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5. Mercantilism is a system of national economic unity. National unification

FOREIGN TRADE AND SPECIE FLOW

Why Foreign Trade?

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Trade Regulations and Policies: Export-Import Policy

protection should be guided by the consideration of self-sufficiency. Those

MONEY, PRICE LEVEL AND INTEREST RATE

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system of commercial/merchant capitalism which was primarily based on the

1. Money is a form of working capital and wealth.

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WAGES AND EMPLOYMENT

There is the existence of the backward-sloping supply curve of labour. The

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BRITISH ECONOMIC POLICIES AND THEIR IMPACT

primarily interested, and that a separate department of agriculture should be

Therefore, the village money-lender occupied an important place in the village

3. Growth of Agricultural Labour

The disproportionate rise in the growth of agricultural labour brought about

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Thus, economically, India suffered miserably during the Company’s rule in

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competition and seldom depression. It remained a growing and profitable concern.

Revolution in Britain. As much as the Company extended its political power in

Economic History of India, wrote: “The effort of the Parliamentary Select

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• To shift the capital of India from Calcutta to Delhi.

Devastation of the Bengal Economy by the British

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COLONIAL AGRARIAN SETTLEMENTS