Economic affairs during British rule

The British rule in India was based upon common sense and pragmatism. They were known as disinterested rulers due to the fact that they had no intention of settling down in India and the preeminent element of their colonial rule was economic and they were not avidly ideological.

The British pursued varied economic policies and the most important was to achieve a monopolistic trading position.

This practice later transformed into a regime of free trade with the underlying purpose of making India a major market for British goods and a source of raw materials. One important economic prop they assiduously followed was a flow of remittances by the British working in India to Britain that contributed a sizeable contribution to Britain’s balance of payments and also created avenues of saving.

The British emphasized efficiency in their economic management with the result that they succeeded in bringing about a substantial reduction in the fiscal burden and a bigger share of the national product was available for landlords, capitalists and the new professional classes. It seems likely that there was some increase in productive investment which must have been near zero in Mughal India: government itself carried out productive investment in railways and irrigation and as a result there was a growth in both agricultural and industrial output. Because of the small size of the administration and its philosophy of minimal government responsibility outside the field of law and order, India ended the colonial period with a very low level of taxation.

The British had inherited the Mughal tax system which provided land revenue equal to 15 per cent of national income but by the end of the colonial period land tax was only 1 per cent of national income and the total tax burden was only 6 per cent.

During the period of British rule, agricultural production grew substantially in order to feed a population which grew from 165 million in 1757 to 420 million in 1947. The new system of land ownership offered some stimulus to increase output and there was substantial waste land available for development. The colonial government made substantial contribution towards increased output through irrigation.

The irrigated area was increased about eightfold, and eventually more than a quarter of the land of British India was irrigated. Irrigation was extended both as a source of revenue and as a measure against famine. A good deal of the irrigation work was in the Punjab and Sindh. These areas, which had formerly been desert, became the biggest irrigated area in the world and a major producer of wheat and cotton, both for export and for sale in other parts of India. Apart from government investment in irrigation, there was substantial private investment and by the end of British rule private irrigation investment covered nearly 25 million acres of British India.

Improvements in transport facilities helped agriculture by permitting some degree of specialization on cash crops. This increased yields somewhat, but the bulk of the country stuck to subsistence farming.

Plantations were developed for indigo, sugar, jute and tea and these items made a significant contribution to exports. In 1946, the two primary staples, tea and jute, were 3-5 per cent of the gross value of crop output. The new manufactured textile goods were considerably cheaper and of better quality than hand-loom products, so their advent increased textile consumption. At the end of British rule, there can be no doubt that cloth consumption per head was substantially larger than in the Mughal period.

In time, India built up her own textile manufacturing industry which displaced British imports. But there was a gap of several decades before manufacturing started and a period of 130 years before British textile imports were eliminated. British imports entered India duty free, and when a small tariff was required for revenue purposes Lancashire pressure led to the imposition of a corresponding excise duty on Indian products to prevent them gaining a competitive advantage. The British were lenient in respect of customs duties as in the 1880s, Indian customs revenues were only 2-2 per cent of the trade turnover, i.e. the lowest ratio in any country.

The first textile mills were started in the 1850s by Indian capitalists who had made their money trading with the British. Cotton textiles were launched in Bombay with financial and managerial help from British trading companies. India was the first country in Asia to have a modern textile industry, preceding Japan by twenty years and China by forty years.

Cotton mills were started in Bombay in 1851, and they concentrated on coarse yarns which were sold domestically and to China and Japan; yarn exports were about half of output. Modern jute manufacturing started about the same time as cotton textiles. The first jute mill was built in 1854 and the industry expanded rapidly in the vicinity of Calcutta. The industry was largely in the hands of foreigners, mainly Scots. Between 1879 and 1913 the number of jute spindles rose tenfold—much faster than growth in the cotton textile industry. The jute industry was able to expand faster than cotton textiles because its sales did not depend so heavily for export.

Coal mining, mainly in Bengal, was another industry which achieved significance. Its output, which by 1914 had reached 15-7 million tons, largely met the demands of the Indian railways. In 1911 the first Indian steel mill was built by the Tata Company at Jamshedpur in Bihar. The Indian steel industry started fifteen years later than in China and the first Japanese mill was built in 1898. In both China and Japan, the first steel mills and the first textile mills were government enterprises. Indian firms in industry, insurance and banking were given a boost from 1905. During the First World War, lack of British imports strengthened the hold of Indian firms on the home market for textiles and steel. After the war, under nationalist pressure, the government started to favour Indian enterprise in its purchase of stores and it agreed to create a tariff commission in 1921 which started raising tariffs for protective reasons.

Between 1930 and 1934 the tariff on cotton cloth was raised from 11 to 50 per cent, although British imports were accorded a margin of preference. As a result of these measures, there was considerable substitution of local textiles for imports. In 1896, Indian mills supplied only 8 per cent of total cloth consumption; in 1913, 20 per cent; in 1936, 62 per cent; and in 1945, 76 per cent. By the latter date there were no imports of piece goods. Grain exports were also built up on a sizeable scale, mainly from the newly irrigated area of the Punjab. The tea industry was introduced to India from China and built up on a plantation basis. Tea exports became important from the 1860s onwards. Hides and skins and oil cake, used as animal feed and fertilizer were also important raw material exports.

Until 1898 India, like most Asian countries, was on the silver standard. In the 1870s the price of silver began to fall and the rupee depreciated against sterling. This led to some rise in the internal price level but it helped to make Indian exports more competitive with those of the U.K. In 1898, India adopted a gold exchange standard which tied the rupee to sterling at a fixed value of 15 to 1.

This weakened her competitiveness vis-à-vis China which remained on a depreciating silver standard, but its potential adverse effects were mitigated because Japan went on to the gold exchange standard at the same time. In the last half century of British rule, the output of factory industry rose about six-fold whereas the output of small-scale industry declined. Their joint output rose about two-thirds and per head of population, joint output was rising by 0-4 per cent a year. Some increase seems plausible in this period of railway development and expanding international trade. It therefore seems possible that in the last century of British rule, per capita output of industrial goods rose by a third.