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ECONOMIC HISTORY OF INDIA

1857-1947

Authors:
Gaurav Poddar
Jalnidh Kaur
Devika Bhalla

As per the Delhi University syllabus, 3rd Semester for B.A. Economics (H).
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©Authors

Price: 100 INR

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ABOUT THE AUTHORS

The authors of the book Gaurav Poddar, Jalnidh Kaur and Devika Bhalla
are currently third year students of B.A. (Hons) Economics at St. Stephen’s
College, Delhi. Having scored more than 80 % in the second year
examination, the trio has been vying for spreading the concept of
knowledge sharing and this book is a baby step in the direction, an
attempt to make life simple for the upcoming batches of Economics.
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PREFACE
If you think the paper ‘Economic History of India’ in the course of the
Economics Honors is a monster, something that an innocent economics
lover has to grapple with, day in and day out in his sophomore year, and
that things could be made much simpler, then you are the person this
book has been written for.

We have consolidated, crystallized, summarized and organized the

material to be read in a friendly format. The book will provide a heavenly
respite from the spiral reading and in some probability act as a perfect
substitute to the reading, as far as the examination is concerned.

The authors are third year students (rolling in the annual mode) who
went through the ordeal of the paper and felt an empathy deficit in the
system when the market would have no worthwhile help books or notes
for the students. This is a humble attempt to share our knowledge that
we gained over the entire year and the notes that we individually made
for our personal reference. We also thank Anshuman Kamila for his help.

However history lovers are strictly warned against the shallowness of the
text. Probably you could search for some extra references on Indian
Economic History in the library for strengthening your knowledge and
then get back to us for helping write the successive editions of this book.

How to Study?

1. It is advisable to read the prescribed reading to get a

feel of the time period which has been described.

2. Then check out the corresponding chapter in your

EurekaWow help book and go through thoroughly. You
will find that the chapter in many places may be a
repetition of the original reading but that it very
elegantly puts paras and paras of useless babbling in the
text in perspective and arranges them in neat
paragraphs.
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Since most economics students are not adept at the art of writing long
digressive answers, we offer you enough material to remember for
writing your final answer in the exam. Since the material is structured,
you would be able to have the twin qualities of length and structure in
your answer!

A word of advice - shh…please don’t tell anyone

Logically thinking, any sensible individual would get tired of reading

sheets after sheets of cursive writing blurting out the same thing. The
trick here to score is – product differentiation. Make your answer
different from a clichéd one. Write the same material, don’t digress
much, but write it in a manner which pleases the eyes of examiners.
Leave enough spacing, margins at the corners, give a lot of sub headings,
try making little flow charts here and there just to put your point across
and be sure to extract a decent score for each answer.

P.S. Any opinions expressed are those of the authors. All errors are our
own.

Sincerely,

Gaurav Poddar
Jalnidh Kaur
Devika Bhalla
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SYLLABUS
Paper 11: ECONOMIC HISTORY OF INDIA: 1857-1947

Course Description
This course analyses key aspects of Indian economic development during
the second half of British colonial rule. In doing so, it investigates the
place of the Indian economy in the wider colonial context, and the
mechanisms that linked economic development in India to the
compulsions of colonial rule. This course links directly to the course on
India’s economic development after independence in 1947.

Course Outline
1. Introduction: Colonial India: Background and Introduction
Overview of colonial economy.
2. Macro Trends
National Income; population; occupational structure.
3. Agriculture
Agrarian structure and land relations; agricultural markets and institutions
– credit, commerce and technology; trends in performance and
productivity; famines.
4. Railways and Industry
Railways; the de-industrialisation debate; evolution of entrepreneurial
and industrial structure; nature of industrialisation in the interwar period;
constraints to industrial breakthrough; labor relations.
5. Economy and State in the Imperial Context
The imperial priorities and the Indian economy; drain of wealth;
international trade, capital flows and the colonial economy – changes and
continuities; government and fiscal policy.

Readings:
1. Lakshmi Subramanian, History of India 1707-1857, Orient Blackswan,
2010, Chapter 4.
2. Sumit Guha, 1991, “Mortality decline in Early 20th Century India”,
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Indian Economic and Social History Review (IESHR), pp. 371-74 and 385-
87.
3. Tirthankar Roy, The Economic History of India 1857-1947, Oxford
University Press, 3rd edition, 2011.
4. J. Krishnamurty, Occupational Structure, Dharma Kumar (editor), The
Cambridge Economic History of India, Vol. II, (henceforth referred to as
CEHI), 2005, Chapter 6.
5. Irfan Habib, Indian Economy 1858-1914: A People’s History of India,
Vol.28, Tulika,2006.
6. Ira Klein, 1984, “When Rains Fail: Famine Relief and Mortality in British
India”, IESHR,21.
7. Jean Dreze, Famine Prevention in India in Dreze and Sen (eds.) Political
Economy of Hunger, WIDER Studies in Development Economics, 1990,
pp.13-35.
8. John Hurd, Railways, CEHI, Chapter 8, pp.737-761.
9. Rajat Ray (ed.), Entrepreneurship and Industry in India, 1994.
10. AK Bagchi, 1976, “Deindustrialization in India in the Nineteenth
century: Some Theoretical Implications”, Journal of Development Studies.
11. MD Morris, Emergence of an Industrial Labour Force in India, Oxford
University Press, 1965, Chapter 11, Summary and Conclusions.
12. K.N. Chaudhuri, Foreign Trade and Balance of Payments, CEHI,
Chapter 10.
13. B.R. Tomlison, 1975, India and the British Empire 1880-1935, IESHR,
Vol.XII.
14. Dharma Kumar, The Fiscal System, CEHI, Chapter 12.
15. Basudev Chatterjee, Trade, Tariffs and Empire, Oxford University
Press, 1992, Epilogue.

Background reading for students:

Irfan Habib, Indian Economy 1858-1914: A People’s History of India,
Vol.28, Tulika 2006.
Daniel Thorner, Agrarian Prospect in India, 1977.
L. Visaria and P. Visaria, Population, CEHI, Chapter 5.
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CONTENTS

1. Overview of Colonial Economy ………………………….11

2. National Income ………………………………………..……..21
3. Occupational Structure ……………………………………..27
4. Population ………………………………………………………..36
5. Famines ………………………………………………………….…42
6. Agriculture ………………………………………………………..54
7. Railways ……………………………………………………………96
8. Deindustrialization …………………………………………..109
9. Bombay Cotton Mills 1854-1947 ……………………..115
10. Industries (Rajat Ray) ……………………………………….121
11. Industries (T. Roy) …………………………………………….140
12. Foreign Trade and Balance of Payments …………..154
13. Fiscal Structure …………………………………………………176
14. Exam Paper 2012 ……………………………………………..198
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UNIT 1
Introduction: Colonial India: Background
and Introduction
References:
1. Lakshmi Subramanian, History of India 1707-1857, Orient
Blackswan, 2010, Chapter 4.

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Chapter 1
OVERVIEW OF COLONIAL ECONOMY
In colonial period, silver was a major currency. With China there existed
Porcelain and Silk trade. Silk was heavier and could not be worn always
whereas cotton from India was more favorable and wearable. Silk was
demanded by certain sections in India. In the 16th century, India was
trading with all nearby countries. It was in the 17th Century that the
European trade started. Indian traders traded goods like spices with South
East Asian countries, etc. But, the reach in global markets was limited. In
18th century, there was trade with West Africa and America.

Gold was cheaper in China and silver was cheaper in India, so the silver
coming to India was exchanged for gold with China. Among the various
currencies, gold was also used extensively in India. According to A.G. Frank,
138 tons of silver was coming to India yearly. During 1600-1800s, 28000
tons of silver and gold came into India which was equal to 1/5 th of the
silver production in the world.

In 1757, after Battle of Plassey, Bengal shifted to British hands. Opium was
grown in India and sold at a high price in China and the revenue was used
to pay for the China’s silk and tea. Thus, there emerged a triangular
pattern of trade.

Indian Economy Pre 1850 Post 1850

Export Cotton manufactures, Spices, food
spices, food items items, raw
materials
Import Food stuffs, imported Manufactures
items

Before 1850, there existed an export surplus, which declined post 1850.

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NOTES
 Existence of Indian and
European traders – Arrival of
European traders in Asia did
not diminish the role of Asian
traders. In fact European
traders had to adapt and fit into
the existing commercial order.
 Asia as a hub of international
trade – Contrary to Euro
centrism, there is evidence that
regions in Asia were busy
destinations on the
international trade map.

Chiefly, focus has been on China and India as being two important
centres of international trade, China (famed for porcelain and silk) and
India (famous for its cotton varieties) therefore became sinks of silver
as an outcome of this “Bullion for goods trade”

It is noteworthy that both India and China had limited demand for
imports; thus leaving silver as only medium of payment for exports
from these countries. The Indian cotton enjoyed more craze than its
chief competitor Chinese silk because of the following merits –
- It yielded a fabric suited for a variety of climates (best for tropical
climate and is also useful in colder climates).
- It held dyes and designs better than wool/silk and retained the
glaze after repeated washings.
- It was lighter than the lightest woolens.
- It was cheaper than Chinese silk.
 Major destinations for Indian cotton before 17th century-
1. East Africa for slave trade – European traders bought Indian cotton
and exchanged them for slaves in East Africa.

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2. South East Asia for spices – Cotton exchanged for spices.
 New destinations for Indian cotton with arrival of European traders –
Three new destinations emerged 17th century onwards.
1. Europe – Dutch and English traders tried to experiment, carrying
back cotton to their homeland, instead of exchanging in East
Africa. Cotton found great market in Europe – upper classes
demanded finer versions and the poor preferred coarser weaves
(social leveling through consumption of cotton)
2. West Africa – West Africa, after having tasted Indian cotton from
East Africa over land routes, started exchanging slaves for Indian
cottons.
Evidence: In 18th Century, 2/3rd of British exports to West Africa
were textile. (50% of India) Although this percentage declined to
30-40% absolute volume of Indian textiles increased because
number of slaves purchased and their price increased.
Also, Indian cotton was integral to French slave trade with West
Africa. They comprised 1/3rd of the French cargo to West Africa.
3. America – There were chiefly two routes:
- Exports from North West Europe to Caribbean and other islands
of North and South America (primarily for dress of house slaves)
- To Spanish America through Manila over the Pacific.

Summarizing, Indian cotton found its way into SE Asia, West and East
Africa, Americas, Middle East etc. Payment for this was mostly in silver,
gold and other metals as Indians had almost nil demand for imports.

 China or India as ‘ultimate sink’ for world’s silver – There is a debate

and disagreement over whom among India and China received the
bulk of silver.

A.G. Frank, echoing other historians like him, argues that China was
the ‘ultimate sink’ for world’s silver. It was observed that even the
silver that flowed into India went to China in exchange for gold which
was cheaper in China than in India.

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However, facts and figures distort such a version:

- In 1600-1800, 28000 tons of silver equivalents (majorly silver)
flowed into Indian subcontinent. This was nearly a fifth of world’s
production of 142000 tons.
- Silver also came to India from Manila to South India.
- There is evidence that silver also flowed in from China (diverted
from Chinese flow to Central Asia) and Japan (Dutch East India
Company carried Japanese silver for sale in Bengal)
- Silver also flowed into India for coinage and minting, such as under
Mughals’ rule in India.

Further, other metals like copper and gold were also imported into India
for use as currency for smaller transactions. Additionally, couriers and
badams (bitter and inedible almonds) were imported for same purpose.

Debate on the 19th Century Indian economy: There is a divergence of

views on the factors responsible for the state of Indian economy in the 19th
century.
Externalists’ view Internalists’ view
It is said that age old industries of India Others held social factors and
declined under the commercial policies religious conventions
of East India Company, and agriculture prevalent at that time as chief
remained the only Indian industry. No deterrents to industrialism in
efforts were made to revive/fester the India. There was lack of
new industries after 1858, so enterprise and weak economic
manufacturers and artisans were in a motive.
state of decline and poverty.

Impact of colonial state on Indian economy -

- Colonial trade policies checked industrial activity and channeled it
into less fruitful ones.
- State failed to invest in education and institutions to promote and
impart technical education.
- As a result, skilled and knowledgeable workforce dissipated.

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Potential for modern industry in the early colonial period in India –

The following observations have been made
1. Indian entrepreneurial activity was not short in supply. In fact,
traders from Gujarat had more extensive networks and better
connections with production houses back home. They traded on
own capital as opposed to borrowed capital and lived frugal lives.
Evidence points to an abundance of entrepreneurial initiative and
skill.
2. Apart from a profusion of capital availability, British East India
Company and the French lent capital to entrepreneurs proving
that capital for investment in new manufacturing firms was never
short in supply.
3. Indian entrepreneurs also evinced interest in newer methods and
machines. Europeans, however, were primary conduits of transfer
of modern technical know-how from Europe to India.
4. There was an abundance of skilled labour to run and maintain
imported machines. Indians soon took over from Europeans in
operating and maintaining steam engines, spinning machines,
rolling mills, etc. Some of them even out-sourced their European
competitors.

Impact of British East India Company on state of industry:

The British East India Company was criticized for its deliberate policies to
cripple Indian industry. For example – products from power looms from
London were allowed at nominal duties, but prohibitory duties were
imposed on hand wrought fabrics from Behar and Bengal.

There was worldwide state intervention in heralding the progress of local

modern industry – manifesting in forms like protection of local industry,
establishment of institutions for technical knowledge, recruitment of
skilled workers from abroad, etc.

State (in) action towards local industry in India:

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1. Instead of protection to local industry, the Company state imposed
taxation such that imported goods turned out to be more
competitive than Indian goods. In regions such as Australia,
Ceylon, and Cape of Good Hope, Indian manufacturers attracted a
maximum of 10% tax and British goods as low as 3%.
2. The Company state took little initiative to equip Indians with
modern technical know-how or expertise unlike earlier, when
kings ensured that Europeans imparted such knowledge during
their transit.
3. Learning/education received very little patronage, in stark contrast
to pre-colonial practices. Lord Minto documented such neglected
and loathed absence of Company state’s patronage to learning
centres and circles.

Two policies that led to the decline of technical knowledge

1. Armaments policy – Most guns were imported. Towards late 18th
century only, brass guns were manufactured in Bengal. Muskets
were all imported from Britain and a rifle factory came up on a
very small scale.
2. Railways policy – Metal used for the vast Indian railway was
imported from Britain as British urged companies to ‘buy British’
Very little attempt was made to procure locally made material.

Reasons for British dis-interest in developing Indian industry:

1. Desire to govern with minimal expenditure: Reluctance to invest in
education/learning was rooted in a desire to govern with minimal
expenditure. Investment in industry, agriculture or education was
a drain on earnings.
2. Desire to monopolize knowledge: Colonial control was believed to
be based on monopolization of knowledge and denial of
education/learning to natives. Example – efforts made to keep
natives out of gun-making in Bengal and out of surveys.
3. Colonial economy was subservient to British economy: Since India
was supposed to be a market for British manufacturers and

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supplier of raw material, there was no point in stimulating Indian
economy.
As a result, India was a very open economy while Indian goods
were prohibitively taxed abroad esp. Britain and within. This was
despite fervent pleas to undo it from Britain nationals and Indians
of high respectability.

Positive features of colonial rule in India

1. After 1st World War, import substitution was taking place in
consumer goods industries such as soaps, sugar, paper, etc. India
became self sufficient in major consumer goods industries by
1939.
2. Surplus was going into the hands who would invest. Shift of capital
from usury and landlordism to industry.
3. There was diversification and sophistication in industrial
production. Post 1907, Iron and Steel industry was developing and
in 1930s sugar and paper industry was coming up.
4. RAILWAYS – Which resulted in “Nation on Wheels”
5. Towards the end, India was no more a debtor country. Debt of 450
crores rupees was paid. Also sterling assets of over 1700 crores
rupees (because of wartime purchases) were paid.
6. Financial capital improved. By 1947, 75% of the insurance
business was controlled by Indian owned life insurance companies.
Financial infrastructure improved.
7. Technical and scientific manpower developed. There was a small
but well trained skill labor force.
8. Internal trade increased because of link between indigenous
industries and agriculture at a time when international trade was
declining.
9. Investment under Indian control grew faster than European
investment. MNCs were coming after 1918. The growth of foreign
capital was slower than Indian capital.

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10. Indian capitalists had an independent economic and financial base
and not as intermediaries or subordinate position. They were
dependent on world capitalism only for imports of machinery.

Impact of colonial rule on Agriculture

1. There was subdivision of land holdings which decreased
productivity. There was stunted and stagnant agriculture because
of regressive agrarian structure – Zamindari system, Ryotwari
System and Rack Renting System.
2. There was lack of investment in agriculture. The technology used
was poor and obsolete. Modern machinery was absent. If seeds
were improved, it was mainly to non-food cash crops.
3. No capitalist farming developed. Agriculture was affected because
savings was reduced due to famines, scarcity and economic
depression.
4. Agricultural surplus was not appropriated. It went into the wrong
hands and did not have extended reproduction. There was Drain
of capital.
5. Agricultural education was less. There was no investment to
improve drainage, desalinization of soil, terracing, flood controls,
etc. Lands were mostly dependent on “rain gods”
6. More land was brought under cultivation, but change in yield per
acre was near zero. Per capita agricultural production
deteriorated. The per capita food grain output also fell. Yield also
declined.

Impact of colonial rule on Industries

1. There was stagnation in occupational structure, national income
and level of urbanization. This implied stunted character of
industrialization.
2. There was virtual absence of capital. In 1950, 89.8% of the
machineries were still imported.
3. Modern banking and insurance were underdeveloped. This meant
Indian entrepreneurs could not mobilize the capital.

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4. Percentage of workforce in industries fell as women who were
employed in handicraft industry lost jobs after coming of Iron and
steel industry. The modern industry did not compensate for the
displacement of traditional handicrafts.
5. After 1918, giant MNCs were coming up. Foreign investments were
made.
- There was drain from India. Unilateral Transfers. There was
rarely a transfer of capital to India from abroad.
- The multiplier effect of income, employment, capital, technology
and growth were exported back to developed countries.
- Foreign investment in sectors which catered to the foreign
market and not to India’s home market.
- Guided under development of India by concentrating on
production and export of raw materials and food stuffs.

Questions
1. In spite of there being a potential of development of industries,
Britishers were not interested. What was the impact of this policy
of Britishers on Indian industries during the colonial rule?
2. Discuss the cotton trade in the colonial India and the triangular
pattern of trade that emerged. What were the motives behind an
emergence of such a pattern of trade and did it reduce India to a
mere appendage at the hands of the Britishers?

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UNIT 2
Macro Trends
References:
1. Sumit Guha, 1991, “Mortality decline in Early 20th Century
India”, Indian Economic and Social History Review (IESHR),
pp. 371-74 and 385-87.
2. Tirthankar Roy, The Economic History of India 1857-1947,
Oxford University Press, 3rd edition, 2011.
3. J. Krishnamurty, Occupational Structure, Dharma Kumar
(editor), The Cambridge Economic History of India, Vol. II,
(henceforth referred to as CEHI), 2005, Chapter 6.

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Chapter 2
NATIONAL INCOME
India’s national income in the period 1900-47 (inclusive) of taxes was given
by GDP+NFIA+Taxes.
Official estimates of the national income of colonial India do not exist,
however Sivasubramaniam’s estimates are more reliable and descriptive.
National income was measured through ‘Agricultural Production’. Land use
data was used where
Estimated yield= Standard or normal yield X “Conditional factor” where
conditional factor could be anything like monsoons.

Introduction
 Between 1920-1925 and 1947, national income grew
approximately 1% per year, which when adjusted for population
growth, yielded a near zero growth of average income.
 The growth rate of employment also did not change in the two
periods and was 0.5%
 There was a slowdown in agriculture, commerce, mining and
infrastructure but acceleration in industry and finances.
 Agriculture stagnated, however there was no stagnation in non-
agricultural activities. In the first half of 20th century share of
agriculture in national income declined.

Growth rates of real national income

National Income Population(RoG) Per capita income
1860-1885 1.76 0.53 1.23
1885-1900 1.01 0.55 0.46
1900-1914 1.45 0.45 1.00
1914-1947 1.14 1.08 0.06

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 The national income did not grow much from 1914-47 because of
world agricultural crisis after 1925 and resource crisis. However it
increased before this because of railways and irrigation.
 The per capita income declined in 1914-47 (almost 0%). It was
stagnant because of increase in population.
 The increase in population in 1914-47 was because of decline in
mortality rate because of stable agricultural output. The decline in
population in 1900-14 was because of Gujarat famine.

Sectoral share in income

The share of 1900 1925 1946
agriculture in Agriculture 51 42 40
national income Industry 11.5 13 17
declined in the (i) SSIs 9 8 6
inter-war period (ii) Modern 2.5 5 11
Others 37.5 45 43
while share of other
sectors rose. This can partly be explained as follows.
Agriculture
 Pre war period
Agricultural expansion was the mainstay of economic growth. Real
agricultural output increased by 33%. There were more exports
than imports and the ratio of agricultural price to import price
rose. By selling a constant basket of goods, peasants had access to
an expanding basket of goods.
 Inter war period
Agricultural stagnation resulted in a decline in economic growth.
The world agricultural trade crisis after 1925, resource crisis and
increasing population, all of these resulted in no increase in land
under cultivation. The average product per acre was stagnant but
average product per person was falling. The food production was
depressed and world’s demand for Indian agricultural exports
stagnated and the imported goods were now costlier in terms of
agricultural goods. Hence, there was stagnation in agriculture
which in turn affected its share in national income.

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Non Agriculture
Industries were growing at a comfortable pace before and after the war.
Large scale industries were growing at 4%, while small scale industries
were growing at less than 1%. The tertiary sector (government
administration) was growing at 2%. The real estate, transport and
commerce were growing at 1.5%. Some of the positive features which led
to this growth were
 Industrialization
 Growth of the government
 Growth of long distance trade
However, there was a slow growth of real income in a small scale industry.
But, there was no decline. Rather, a labor-intensive industrialization with
respect to craft skills took place.

In the first half of 20th century, agriculture’s share in national income

declined and that of non-agriculture increased. But these non-agricultural
sectors had marginal weights and hence agricultural stagnation could still
pull down the overall rate of growth in the inter-war period.

Now, let us look into change in national income, by looking at the

components of national income.
Components of National Income
1901-13 1930-39 1970-75
National income 100 100 100
Consumption 84.3 85.7 Decreased
Investment 6.9 9.3 Increased
Government expenditure 5.4 3.5 Increased
Net exports 3.4 1.3 Negative
 Colonial India had a small government and a high proportion of
consumption in national income – a typical characteristic of a poor
country. The real wages of agricultural laborers were stagnant
though that of mill workers increased because of trade unions
movement. There was stagnancy in wages because of two reasons:

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- The artisans were moving towards rural labor, therefore there
was crowding out which led to low wages. This is faulty as we
don’t see a convergence in the wages of artisans and rural
laborers, rather there is a divergence.
- Wages were no more set by custom and were negotiable.
Thus, India was a poor country and major component of national
income was consumption which increased slightly over the
decades in the first half of 20th century.
 India was a net exporter in the first half of the 20th century, i.e. in
colonial India. The Indian economy was open to trade as against
the post-independence era where there were restrictions and
India became a net importer.
This trade created incomes in India and if we look at pre-war and
inter war period, the direction of trade changes. Imports into India
from China declined. Also in the pre-war period Indian exports to
Britain fell, however after war, it slightly increased. Also, in the 2nd
quarter of 20th century, there was diversification, i.e. trade with
Japan, USA, Germany and Italy increased and also there was
diversification in terms of India’s capability.
 The investment was little of what economy became later.
- Investment is essential for sustained economic growth and low
level of investment indicates low level of growth in the first
half of the 20th century. Investment are financed from
‘domestic savings’ partly.
- Forms of domestic savings were deposits and securities.
However, Indian savings also consisted of hoarded up precious
metals. Smaller parts of savings also occurred as investment
abroad and purchases of government.
- Net capital formation and savings were together 2-4% of
national income in the first half of 20th century. There was low
investment in machinery and agriculture. However, there was
high proportion of depreciation or replacement expenditure.
- Investment was low because of ‘gold’ which was a drag on
rural investment. Because of climatic and price risks people

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preferred to hold gold, thereby a leakage from savings-
investment channel.

Conclusion
Stagnation or little growth in national income was due to stagnation in
agricult
ure that Investment in agriculture Ratio of net investment
overpo as a percentage of to income in
wered national income agriculture
the 1901-13 0.9 1.2
1930-39 0.8 2.0
growth
1940-46 0.5 1.4
in
industries, net effect being slowdown. Stagnation in agriculture can also be
attributed to low levels of investment in agriculture that declined over the
first half of the 20th century. Overall 8% of the rural income was saved.
Quarter of this went to purchase of gold, one-half/two-third to
replacement of capital stock or hoarded coins and very small was left
towards addition to capacity. Investment in agriculture was also low due to
nature of rural credit and capital market.

Summary
- Before 1914, national income was growing because of railways and
irrigation.
- However, after 1914, there was stagnant national income in the
first half of the 20th century. The per capita income declined.
- The share of agriculture in national income fell while that of non-
agricultural sectors increased.
- It was the world agricultural trade crisis after 1925, resource crisis
and increasing population that basically led to the fall in the share
of agriculture.
- Non-agricultural sector were growing because of industrialization,
growth of the government and growth of the long distance trade.
- The stagnation in agriculture overpowered the growth of
industries, the net effect being slowdown.

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- There was a high proportion of consumption in national income
while the share of the government was small.
- India was a net exporter in the first half of the 20th century;
however in the 2nd quarter of 20th century, there was
diversification in terms of India’s capability. Trade with other
countries like Japan, USA, Germany and Italy increased.
- Indian savings mainly consisted of gold which was a drag on
investment. Overall 8% of the rural income was saved of which
very little (less than a quarter) went to addition of capacity. Thus,
private investment in agriculture was low.

Questions
1. How did India’s national income change over the first half of the
20th century?
2. Stagnant per capita income since 1920 and unchanging structure
of workforce in the first half of the 20th century indicates the
stagnation of the Indian economy. Comment.
(Note: Read occupational structure before answering this
question)

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Chapter 3
OCCUPATIONAL STRUCTURE
While in countries such as Great Britain, the share of agricultural sector
has declined to less than 4% and even in Australia, Denmark, the share of
agriculture has fallen to 10% or 15% but according to Kuznets, there has
been stagnancy in regards to the employment structure in India.

1881 1911 There has been a slight

Agriculture 72.4 74.5 increase in the agricultural
Manufacturing 15.5 14.6 sector and a slight decline in
Services 9.8 7.7 the share of manufacturing
and services in the employment structure. However, these slight changes
should not be paid much attention as the real output has not declined.
Actually, the real output, NDP has increased.

From 1872-1911, NDP increased by 53% and population increased only by

18%. Even in the 20th century, the NDP increased by 12% but if we exclude
services, NDP did not change. Moreover, output and employment
estimates are not independent.

There has been virtual stagnancy of real output per head but a relative
shift away from agriculture to industries and services. The output per
worker in 1911-1951 has changed as follows.
 Agriculture – From below average to more below average
 Industries – From above average to more above average
 Services – From below average to well above average
The relative product per worker in agriculture is less than 1 and for
services it has increased from below 1 to above 1.

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The changes in occupational structure observed are because of the
following broad reasons:
 Intersectoral Inequalities
 Unequal distribution of income
 Urbanization after 1931
 Lop-sided pattern of development in India

During this period the relative shares of agricultural laborers, cultivators,

transport, storage and communication has increased. The relative share of
trade and commerce has also increased but at the expense of the female
employment. The share of construction has increased, though it has
remained small. Same is the case with mining and quarrying. In Bihar, it
increased by 40% of the increase in employment while in West Bengal it
declined. The relative share of plantations, fishing, forestry and other
services like public, educational, health and legal services declined.

Manufacturing
1901 1951 The average
Factory employment 0.6 million 2.9 millions output/worker
Small Scale Industries 12.6 millions 11.4 millions in
manufacturing increased and aggregate manufacturing output also
increased. Change in real output in manufacturing was 98% and in small
scale industries was 14%. However the change in SSIs is underestimated as
 There was technological change.
 New small scale industries were emerging.
 If there was a decline in employment, it was in low producing
activities.

In 1911-1951, employment increased in:

 Beverages and tobacco (because of tastes as urbanization was
taking place after 1931)
 Miscellaneous textiles (because of preference for stitched clothing)

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 Wood and products (because of development of construction
industry)
 Paper and paper products, printing/publishing, rubber, coal and
petroleum, metal products (because of relative novelty and
absence of pre-existing traditional sector made for expansion)
Employment decreased in:
 Food stuffs – milling, dehusking, processing of grains
 Cotton textiles – because the hand spun yarn was replaced by
machine spun yarn and fly shuttle was replaced by throw shuttle.
The employment decreased from 2.4 million to 2.2 millions.
Employment was been generated in the power loom industry.
 Leather and leather products – Tanneries, boot and shoe industry
were replacing traditional labor-intensive village workers. The
demand for traditional leather articles, bags, jars, etc. went down.
 Non metallic mineral products – Coming of china and glassware,
metals etc. led to its decline in demand and hence decline in
employment.

There was small decline in manufacturing sector, but it cannot be termed

as deindustrialization as there was a rise, relative and absolute in
manufacturing output.

Significant regional variations were hidden in the stagnant occupational

structure of India from 1881-1941.

The occupational structure of India showed little signs of change during

1881-1941. Agriculture’s share remained at 70%, manufacturing at 10%
and services at 15-20%. Between 1901 and 1950, within manufacturing
factory employment was increasing at the cost of the non-factory sector,
modern branches were coming up replacing the traditional ones.
Manufacturing output per head increased, transport and communication’s
share rose, public, educational and health services also rose but there was
stagnancy in the sectoral distribution of the workforce.

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However, significant regional variations were hidden in these stagnant
sectoral distributions of the workforce.
 States with no change in workforce – Uttar Pradesh, Bihar,
Madhya Pradesh, Andhra Pradesh and Gujarat.
 States with shift away from agriculture – Kerala, Madras,
Maharashtra and West Bengal
 States with shift towards agriculture – East Bengal, East Punjab,
Orissa and Rajasthan

Thus, it becomes essential to look as to why agriculture boomed in certain

areas whereas in other areas it was manufacturing. The broad points on
which it depends are
 Availability of resources
 Transport facilities
 Foreign and inter-regional trade
 Expansion in cultivable areas

KERALA
 In Kerala there was a shift away from agriculture, not because of
infertility of soil or unsustainability of agriculture but because of
natural advantages. They had backwaters which were suitable for
fishing, valuable forests which gave a boost to wood-industry and
coconut palm for jaggery making.
 In Kerala, less than 60% of the population was engaged in
agriculture, 12-15% in manufacturing and around 6% in fishing,
plantation, forestry and livestock.
 Employment in manufacturing more than doubled. More than half
of the population engaged in manufacturing was women. It was
‘labor-intensive’ manufacturing using locally available and
abundant raw materials.
 There was substantial amount of exports which led to increase in
the demand for services, which in turn led to the expansion of

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employment in transport, storage and communication.. Also, there
was trade of cashew nuts in 1930s because of growing demand.
 In Kerala, literacy rate increased from 26% to 53% in 1951, while
the national average remained less than 20%. The death rate in
Kerala also declined.
 The per capita income did not increase because of ‘labor-intensive’
manufacturing, which developed in response to foreign demand.

WEST BENGAL

 In West Bengal, there was a shift away from agriculture because of

development of jute industries and also iron and steel and
engineering industries.
 There was employment in tea plantations mainly in Assam and jute
mainly in East Bengal. In West Bengal, employment in jute was
40% of total manufacturing employment in 1911 which reduced to
24% in 1951.
 There was enormous increase of iron and steel during Second
World War. There was iron and steel company at Asansol and Steel
Corporation of Bengal.
 It was possible because of availability of coal and iron and
extensive railways connecting ports to cities which favored
development in Asansol-Calcutta belt.
 Employment quadrupled between 1911 and 1951. Expansion in
manufacturing was mainly due to factory employment which
increased tremendously. However employment in small scale
industries remained unchanged. Factory employment (83%) was
concentrated in Hooghly, Howrah and 24 Parganas. Over half the
workforce in manufacturing worked in factories.
 In rural Bengal there was no progress; Railways did not connect
the interiors. Development bypassed the countryside. Growth of
jute industry did not alter the living standards in rural Bengal,
partly because of the monopsonistic structure of the jute market.
It reinforced rather than overcome rural-urban dichotomy.
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 Therefore, in Bengal positive changes were concentrated in urban
areas. There was dualistic development. The backward linkages for
jute were unfavorable and iron and steel came from Bihar. The
new industries depended on Marwari capital.

RAJASTHAN

 In Rajasthan there was a shift towards agriculture.

 Railways: Earlier camels were the mode of transport. Due to lack
of transportation, there was self-sufficiency, diversified workforce
and employment structure. With the coming of railways, there was
national and international competition. Employment declined in
cotton textiles, leather and leather products, earthenware, etc.
The industries were ‘disappearing’. The camel hair bags and the
vessels of camel hide were replaced.
 Agriculture expanded: Irrigation facilities were expanding, area
under cultivation was also expanding. There was multiple cropping
and the focus was on high value crops. (wheat, pulses, oilseeds) It
was more labor intensive than the dry crops replaced.
 Per head income in agriculture increased while that in local
manufacturing and services fell. The transport revolution was
redundant on a range of local industries and services.

PUNJAB

 In Punjab, there was a shift towards agriculture. In East Punjab,

though there was a shift towards agriculture, the rate of growth
was 1% p.a. between 1900 and 1947. Effects of irrigation
developments tapered off in this region.
 Male employment in East Punjab declined. Decline was mainly in
foodstuffs, wood and products, leather and products, non-metallic
mineral products.

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 Focus of growth was in West Punjab (new canal colonies came)
Therefore, men, materials and enterprises gravitated westwards
leaving behind a stagnant east.
 In the west, crop production increased, new population
settlements expanded. The rate of growth of agricultural output
was 4% p.a. between 1900 and 1947.
 Manufacturing did not expand in West Punjab also because of
imports of manufactures at the cost of pre-modern manufacturing.
 There was increase in agricultural output which led to an increase
in demand for non-agricultural goods which was met through
imports.

CONCLUSION
 In Kerala, there was development of ‘labor-intensive’ industries as
against West Bengal where foreign demand stimulated jute
industry.
 In contrast to Kerala, development in West Bengal bypassed the
country side.
 In West Bengal, railways encouraged manufacturing, while in
Rajasthan, railways led to the destruction of pre modern industry
(compensated by expansion in agriculture)
 In Kerala, rainfall/ water transport led to exports which were
demand-driven, while in West Bengal, the trade expansion was
because of railways.
 In Rajasthan, irrigation moderated the effects of breakdown of
pre-modern manufacturing by making agriculture a viable
proposition, while in Punjab; it transformed the west and drained
away the resources from the east.

Why did the growth not spread rapidly from the coast to the hinterland?
Why was there a lop-sided pattern of development? Why were handlooms
declining in Rajasthan and expanding in Madras? These are some of the
questions that remain unanswered.

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Summary
- Stagnant occupational structure.
- Increase in factory employment, while a decline in SSIs
- Virtual stagnancy of real output per head but a relative shift away
from agriculture to industries and services.
- Inter sectoral inequalities, unequal distribution of income,
urbanization after 1931, lop-sided pattern of development in India.
- Employment increased in beverages, tobacco, miscellaneous
textiles, wood and products, paper and products, rubber, printing,
coal, metal products
- Employment decreased in food stuffs, cotton textiles, leather and
leather products, non-metallic products.
- Regional variations

Kerala West Bengal Rajasthan Punjab

- Shift away - Shift away - Shift - Shift towards
from from towards agriculture
agriculture agriculture agriculture - Stagnant east
- Natural - Iron and steel - Railways - Manufacturing
advantages and led to did not expand
- Increase in engineering disappearin in West Punjab
women industries g industries - Male
employme - Dualistic - Agriculture employment in
nt development expanded, East Punjab
- Labor - Employment per head declined
intensive quadrupled income in - Increase in
manufactur - Monopsonistic agriculture agricultural
ing nature of jute increased output
- Exports market
increased - Bypassed the
- Per capita countryside
income did
not
increase

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Questions
1. Analyze the trends in sectoral distribution of work force in India
between 1881 and 1951. What does it indicate about the character
of colonial economy in the same period?
2. Significant regional variations were hidden in the stagnant
occupational structure of India over the period 1881-1951.
Comment.
3. In his seminal work “Economic Growth of Nations”, about the long
terms trends in the growth of 25 nations, Simon Kuznets finds
India to be the only one characterized by a virtually unchanged
employment structure. How do you explain this phenomenon in
the first half of the twentieth century?

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Chapter 4
POPULATION
The first phase of demographic transition took place in India in the early
20th century. After 1921, the mortality rates began to fall drastically. Sumit
Guha tries to explain the reasons for this mortality decline. From 1871-
1921, there was a slow rate of growth of population, whereas there was a
very fast rate of growth of population in the period 1921-51. In the 20th
century, rate of growth of population was increasing with initially stable
and then slowly declining fertility. Hence, increase in population is majorly
accounted for by fall in mortality.

Year Death Rate Kingslay Davis based on his estimates for the
1881-91 41.3 period 1911-1948 concludes that the crude
1891-01 44.4 birth rate was above 40. Death rate was only
1901-11 42.6 slightly less than 40 pre 1921, but fell
1911-21 48.6
significantly below birth rate post 1921. Sumit
1921-31 36.3
Guha established Death Rate above 30 pre
1931-41 31.2
1941-51 29.4 1921 and at 24.7 and 22.4 in the subsequent
decades.

Explanations for mortality decline

Davis attributed Mortality decline to two reasons:
 Control of famines by development of roads, railways and
irrigation.
 Checking of ravages of epidemic disease by modern medicines.
Analyzing these explanations
 Famines were controlled in the 20th century and there were no
devastating famines between 1901 and 1943. But attribution of
this to better irrigation may not be appropriate because of two
reasons:

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1. Only about 20% to 23% of cultivated area was irrigated in from
1901 to 1930 which is hardly an increase to banish famines.
2. Railways and transportation developed but they connected ports
to cities rather than interiors.
 As far as epidemic diseases are concerned, India was being
exposed to foreign contact in the last two centuries for the first
time and hence became home of epidemics. Given the nature of
the bacterial parasites, a natural immunity to combat it develops
after its exposure to several generations. So, the new generation
was immunized to such upcoming diseases. However, initially not
much medical aid was available, but later medicine also
developed.

Ira Klein, considering these aspects concluded that government health

measure had only limited impact in containing mortality from major
diseases.
McKneown attributes mortality decline to improvement in nutritional
status of the population which led to improved resistance to diseases.
This may be arguable for Britain, but certainly not for India. According
to Ira Klein, per capita income in India stagnated in the first phase of
demographic transition when life expectancy was increasing by 60% in
the two decades. Also, food grain availability in this period declined
and a large gap existed between recommended consumption and
actual availability of food.
In Ira Klein’s view, Mortality decline was not due to change in
economic or sanitary conditions, but because of changes in host
parasite relations and growth of biological immunities.

However, Sumit Guha has different explanations. He considered

mortality decline in the context of Western India (Bombay Deccan) and
concludes that it is immunity in rat and human population that is
leading to decline of plague and influenza. The interwar years also saw
no crop failure. Since these causes of crisis mortality were inoperative,
population increased.

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S.R.Sen in 1967, comparing period 1900-01 to 1923-4 with 1924-5 to

1950-1 observed that while food grain output was rising in the first
period, yet the divergence between the peaks and troughs of output
was also increasing. On the other hand, the second quarter saw
stagnation in output accompanied by convergence between peaks and
troughs, so that agriculture was stagnant but stable. Overall, relatively
stable food grain production led to improvement in mortality between
the two wars.

However the hypothesis “stability in output led to mortality decline”

depends on two propositions.
 Immunity is weakened by fall in food intake to below some
minimum level.
 Severity of illness is related to intensity of exposure to infections.

Scrimshaw points out that the interactions between nutrition and

infection can be synergistic or antagonistic. Antagonistic relationships
require highly specific and severe deficiency obtained under
experimental conditions and are rarely observed in human or animal
populations under normal conditions. Thus, inadequate diets lead to
synergism, which is a gradual increase in infection as a consequence of
worsening nutritional status.

Looking at the second proposition, in any population with previous

exposure to diseases, many people will possess antibodies to it, but
not sufficient to escape a severe infection. S.R.Christophers showed
that mosquitoes that fed on lightly infected birds were poor
transmitters of infection as compared to those that fed on heavily
infected birds which caused death in every case. Each severe case
would tend to generate more severe cases. He also observed that poor
people, in times of scarcity adapt themselves by proportionately
restricting the amount of food they take.

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Thus, weakened people would fall prey to infections present around
them or dormant within them leading to primary infections. Secondary
infections would follow. So, death would reach out from those
immediately affected by the scarcity and chains of infection will be set
up persisting beyond the season of crop failure itself, thereby creating
joint peaking of various diseases. This was observed in 1900-01, 1907-
08 and 1924-25.

Greater agricultural stability would feed back into lower mortality via a
reduction in the morbidity of the more vulnerable sections of the
population. Also, neonatal death rate would decline as mothers will be
healthier now and less likely to suffer from birth complications.

Hence, Sumit Guha suggests that in 1920’s and 1930’s the bulk of the
population managed to remain just above the lower range (the range
of variations in energy requirements to which human beings can adjust
their food intake) whereas earlier at least a significant minority had
periodically fallen below the lower limit.

Chen carried a study of Bangladeshi children and concluded that

children with mild to moderate malnutrition exhibited death rate
scarcely different from those of normal nutritional status while severe
malnutrition trebled death rate. Hence, Indian population in the
second quarter of 20th century lived longer because the weather gods
enabled that there was a stable level of moderate malnutrition rather
than having severe malnutrition at some times and adequate nutrition
at other times. According to Sukhatme, energy requirement is not
static and can be dynamic over a wide, tough limited range.

Thus, climatic change was the most important source of

improvement in mortality. Ofcourse, it was supplemented by
withdrawal of plague, non recurrence of influenza and public health
measures checking diseases like cholera, kala azar and small pox.

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Summary
- According to Sumit Guha, it was the climatic change that led to
the decline in mortality rate after 1921.
Climatic change => Stable agricultural output => Less number of
people below the minimum limit in terms of energy/nutrition
=> Fall in mortality rate.
- Weak links – Less number of famines, improvement in health
facilities which controlled epidemics, improvement in
transportation and irrigation system, changes in host parasite
relations and improvements in biological immunity or
improvement in nutritional status of the population.
- Interactions between nutrition and infection are synergistic
rather than antagonistic. Primary infections lead to secondary
infections which in turn lead to joint peaking of diseases.

Questions
1. Do you agree with Sumit Guha that the decline in mortality rate
in India between 1921 and 1951 cannot be explained simply in
terms of the improvements in medical science and the
development of transport and irrigation facilities? Explain.
2. There were two phases of population growth in India 1871-
1921 and 1921-1951. How would you explain the rapid growth
of population in the second phase?
3. How would you account for the Great Divide in the population
history of the sub-continent before independence? Discuss the
view that the theory of demographic transition with obvious
and trivial modifications (fall in mortality rate) is central to
understanding of the Divide.

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UNIT 3
Agriculture
References:
1. Irfan Habib, Indian Economy 1858-1914: A People’s History
of India, Vol.28, Tulika, 2006.
2. Tirthankar Roy, The Economic History of India 1857-1947,
Oxford University Press, 3rd edition, 2011.
3. Ira Klein, 1984, “When Rains Fail: Famine Relief and
Mortality in British India”, IESHR, 21.
4. Jean Dreze, Famine Prevention in India in Dreze and Sen
(eds.) Political Economy of Hunger, WIDER Studies in
Development Economics, 1990, pp.13-35.

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Chapter 5
FAMINES
BROAD TIMELINE:
1860-1880: Calamitous
1880-1896: Success in preventing crop failures from converting
into famines
1896-1897: Disaster
20th century: Less frequent famines
In detail
1770 Formidable famine in Bengal
1770-1858 Frequent and severe famines
1861 Report of Baird Smith on the 1860 famine
1861-80 Frequent and severe famines
1880 Famine Commission Report followed by introduction of
famine codes
1880-96 Very few famines
1896-97 Large scale famine affecting large parts of India
1898 Famine Commission report on the 1896-97 famine
1899-1900 Large scale famine
1901 Famine Commission report on the 1899-1900 famine
1901-43 Very few famines
1943 Bengal famine
1945 Famine Commission Report of Bengal famine
1947 Independence

OVERVIEW
Before 1921: The five decades from 1871 to 1921 saw a crescendo of
death due to famines which were multi provincial ordeals of crop failure,
starvation and epidemics. The life expectancy was down to 20 years and
population growth was low despite high fertility.

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After 1921: There was a MORTALITY REVOLUTION after the World War 1.
This period saw long term decline in death rates and rapid population
growth.

Population growth & famine: The leading historical demographer Davis

cited famines as an extremely important factor for population growth
being the main determinant of human demise. He attributed 19 million
deaths in 1890s to famines alone.

REASON FOR THIS INTENSITY OF FAMINES IN CAUSING DEATHS –

DIVERGENT VIEWS ABOUT MODERNISATION:

1. B.M. Bhatia- In the interpretation by B.M. Bhatia, famines were

intense because of western impact which disrupted traditional society
& its protection against death. According to this view, modernization
brought capitalist and competitive relations in the countryside and
destroyed the social cohesion that hitherto existed. It induced class
structure among the villagers and proved socially cataclysmic.
2. Klein - Klein attributed the deaths to natural forces through monsoon
failures & withering of crops. However the cruelty of nature now
intensified due to social forces. Social Darwinism and Malthusianism
were the reigning ideologies of the time which led to frugal spending
on relief measures. Expenditure thus had a direct causal link with
survival.
3. Davis – Davis was of the view that modernization helped famine
control. It led to the development of infrastructure – railways and
canals proved beneficial for famine relief efforts. Above all, the spread
of modern ideas overcame caste barriers and feudal relations.
4. Klein – According to Ira Klein, the final conquest of the famine became
possible because of abandonment of narrow ideologies of Darwinism
and Malthusianism and the eventual
humanization of famine policies. There was a direct link between
money & survival and sufficient funds were the sine qua non for saving
lives. Of course modernization increased vulnerability and millions

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were squeezed below the margin of subsistence, but it was not the
sole culprit, just one among many factors.

CAUSAL LINK: Droughts => Crop Failure => Famine of food and famine of
work => Fall in employment => Fall in real wages
Agricultural laborers and artisans were the section most hit by the
vulnerability of the famine.
What would ensue were ‘Entitlement Failures’ amidst plenty. There was
availability of food at the national level and the infrastructure was in place
in the form of railways to even out access. But what came in the way was
‘lack of will’ to intervene in grain trade.

There are evidences when food was available at the margin and was
exported (1898) despite famine in local areas. Since there was no effective
demand within the country, so food was exported out of the country.

However, 1896, 1899 were the years of exception as food stocks depleted
in reality.

INDIAN FAMINE POLICY - ROLE OF IDEOLOGY

IDEOLOGY RATIONALE SPECIFIC INSTANCES

Laissez faire To forbid any direct 1870s: multi-

interference by state in provincial famines.
moving grain or providing Declared government
relief policy not to save
lives at any cost &
relief was limited.
(Although food was
available & transport
was sufficient)
1890s: Powers of
modernization not
used fully.

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SOCIAL DARWINISM Helping those most fit to
survive excluded helpless
and injured persons.
Strict inclusion &
exclusion observed.
Inclusion of those who
could contribute to
economic development.
Exclusion of those
provisions of relief to
which would direct
resources from
development.

MALTHUSIAN Food for work programs Late 1870s famines

ORTHODOXY was started. The idea was South India. ‘Temple
that wage’-cutback of the
‘ The duty of the govt. subsistence food
could not be performed if wage on relief worns
it involved an expenditure in South India.
beyond the power of
country to bear’ Mysore,1877
- starvation was to be Chief engineer
prevented created irrigation
-relief was to be limited projects so far from
to bare minimum – that the famine tracts that
absolutely necessary for they had to walk 100
survival, miles or more to
- strictest tests were reach.
applied Rigid departmental
-in reality, relief was system - only able-
confused, discriminatory bodied workers were
and destructive. allowed to work.
That is why few, large People would work
relief works, some miles for 2 days and then
distant from the famine leave to beg like
affected villages were skeletons.
created. Promises dishonored
at relief works which

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Completely subjugated created madness,
famine relief to high- horrible desperation
priority development caused by starvation
projects. at the camps.

HUMANITARIANISM Fiscal conservatism Liberal Social

eventually led in some Activism 1873 in
instances to Bengal and Bihar
humanitarianism. Under Lord
Lawrence, a highly
- Liberal, effective policies interventionist &
- Under Lord Lawrence expensive policy of
- Victorian economic famine combat was
boom eased concerns undertaken.
about diversion of Government
resources purchased ½ million
- Private charity was seen tons of rice from
as insufficient Burma and
-some responsibility was distributed it to the
taken for helpless & population.
infirm, but on the ground developed
the efforts were still infrastructure (boats,
incomplete and rather steamers and
chaotic. bridges)
½ million people
were provided
gratuitous relief daily
for 6 months

But the bill was high

6.5 million pounds
sterling. This was
ORGANISED RELIEF Extreme starvation, seen as a significant
POLICY: disease, misery pricked deterrent to equal
the conscience of western bounty in future.
regime and led to the
emergence of some Emergence of famine
organized relief policy. codes, 1880

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FAMINES CODES AND BASIC PRINCIPLES

Idea: The idea was to generate purchasing power in affected areas and let
the private trade supply food.
Codes: These were authoritative guidelines to the local administration for
the anticipation, recognition and relief of famines. These provided a plan
of action under these circumstances.
Underpinnings: The fundamental problem was that price moderation
alone could hardly suffice to restore the entitlements of masses of laborers
and artisans whose cash earnings virtually vanished for long periods during
droughts. So there was need for a mechanism of income generation. This
was to be done through:
 Organization of massive public works
 Employment to all at subsistence wages
 Gratuitous relief for those who were unable to work in the form of
doles and free kitchens
 However all eleemosynary (charitable) aid was to be avoided since
it was against the classical ideas of economics i.e. free markets and
no intervention.
Tests: To ensure minimal discrimination, discretion on the part of officials
disbursing entitlements was to be avoided. This was ensured through 4 self
acting tests.

1. Distance Test – Relief was provided in far off places on the

assumption that only those in greatest need will take the pain of
travelling long distances to avail themselves of it.
2. Residence Test- Beneficiaries were required to reside at the place
of relief and thereby forgo the presumed pleasure of ordinary
social life
3. Test of cooked food – Relief was based on the distribution of
cooked meals, a source of repulsion of many starving Hindus at the
time since they had sit along with people from lower castes to
receive food.

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4. Labor Test – Relief took the form of subsistence wages in return
for hard manual labor.
However the first two were recognized to be ‘too dangerous’ and
were hence rejected while labor test was given precedence over
cooked food test.

INTERMITTENT FAILURES IN THE RELIEF SYSTEM

There were four broad reasons for the failure of the relief system in
addressing large scale famines.
1. The existence of the codes did not translate into their application.
There were cases when famine codes were simply ignored, stress
signals undermined due to laxity on the part of the administration.
2. The very nature of the famine codes was punitive. So during the
most severe crises, the availability of work did not always prevent
a considerable enfeeblement of affected people and rather
enhanced their vulnerability to epidemics.
3. Strict non-interference and the refusal to prohibit exports or
arrange for imports worsened the situated during crop failures
leading to further shooting up of prices and erosion of purchasing
power.
Apart from the above defects in the entitlement system, there was one
independent factor also.
4. Epidemics often exacerbated food entitlement failures. These
epidemics spread due to contaminated water and unhygienic
conditions etc.

THE CAUTIOUS LIBERALISATION OF RELIEF

Now the main question at the end of the nineteenth century was whether
and to what degree liberalization of the famine code would take place.
There were frequent lurches of policy from caution to humanitarianism
and back again.

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Below are four glaring examples describing the fickleness of the policy at
the time:
1. 1896- Famine at Damoh and Jabalpur, Central India
Parts of central India had experienced continuous crop failures
since 1893. There was actual starvation in Damoh and Jabalpur by
1896 and death rates had doubled. Distress widened its net and
there were grain riots and high fatalities especially among the
‘outcaste classes’. When rains came, due to malarial mortality,
death rate was 70 per mile.

But ‘dangerously little was done by the government’.

- When village doles were finally started in 1897, they were
limited to cash allotments.
- The government underestimated food prices.
- Only 2/3rd of a ‘bare subsistence’ ration set by the
government could be bought with these doles.

2. 1897 – Central Indian Famine Policy

Lessons were learnt from the above experience and a creative
expansion of village anti-famine measures in the next famine
accomplished the salvation of many.
- Death rates were considerably reduced
- Able bodied famine victims were brought to the cash relief list
of their village for performing ‘any’ work which the headman
of the village may prescribe. This innovation was a major break
from the development orientation of the famine code.
- There was ready admission of afflicted individuals for
‘gratuitous relief’ for which NO work was required to be
performed to obtain a bowl of grain.
- An extensive system of kitchen relief system was established.

3. Western Indian Famine Policy

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The two ordeals in western India (Bombay Deccan and Bombay
Castle) show that the famine policy here plunged from moderately
successful to quite ineffective here.

Bombay Deccan:
There were conspicuous departures from code orthodoxy as
government officials realized the special needs of the region. Given
the vulnerability of the region to famine and the turbulence of the
Maratha population, the administration took the following steps.
i) Reacted quickly and decisively when droughts hit
ii) Disbursed relief at developmental works
iii) Provided special relief for weavers – they
recognized that the sedentary existence and
physical frailty of the class made it ill equipped to
perform manual labor at developmental works
Bombay Castle (Gujarat):
The administrators were rigid in applying code principles here.
They believed that Gujarat’s petty agrarian elite remained
prosperous; they suspected a conspiracy among moneylenders
and village patels to refuse the payment of land revenue on a false
account of a famine.
The government went in for forceful collection of land revenue.
They obtained a steady increase in the flow of land revenue
collections but only at the cost of greater agrarian indebtedness
and suffering.

There was an inherent belief that people of Gujarat were ‘soft’ and
hence unable to withstand difficulties. Eventually the death rate
here reached 70 per mile and famine-induced fatalities rose to
four-fifths of a million.

4. 1907 – North Indian Famine Policy

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Increased liberalism led to successful combat of the famine in
1907. Departing from the laissez-faire trade policies, the
government
- Tattered the famine code
- Took special measures to encourage the import of grain
- Encouraged the grain credit system and gave interest free
advances
- Abandoned the guidelines of the past Famine Commissions
- Gave unconditional relief
- Also extended charitable relief for the Chaukidars
This famine had the potential to destroy millions of lives but their
survival attested that modernization and partial liberalization of
policy almost conquered this famine.

CONQUEST OF THE FAMINE – INITIATION OF LIBERAL FAMINE POLICIES

What changed in the twentieth century was the sociology of famine relief
more than the technology.

There were no technological breakthroughs suddenly at the turn

of the century. Britain India’s irrigation system was the world’s
largest by the beginning of the twentieth century and server 20%
of tits crops. But still many crops were unirrigated and irrigation
was not drought-resistant, so weather still remained a capricious
determinant of famine. Similarly, the expansion of development
projects after the World War I cannot account for the conquest.

However, the sociology i.e. the will and social conviction of the
administrators changed and more and more generous reliefs
started pouring out. Two main factors were responsible:

1. Fading of Laissez Faire Development Policies

The aim of laissez faire famine policies was to bring
development. However the inability to control famine resulted

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in failure of the famine policy to bring dramatic material
progress and generalized prosperity.
Also, now the need declined to concentrate on development
works as simple existence of modern infrastructure of
transport and irrigation along with Malthusian context proved
insufficient to contain mortality.

2. Rise of Welfare-oriented liberalism in the West

At the same time, in the west, development through
industrialization had proceeded rapidly and profitably and so
too had the transformation of masses. There was in this sense,
a restructuring of liberalism through
- Growth of trade unions and labor activism
- Broadening of suffrage
- Rise of socialism
- Demands for humanitarian change became strong.
Later in the inter war period, there were no monsoon failures and
hence no overwhelming crop shortfalls, so we cannot really compare
with the counterfactual. But the fact remains that government
policies still remained the touchstone of effective famine combat in
the interwar era.

THE END OF FAMINES AND THE DEMOGRAPHIC REVOLUTION

The thesis that prevailed on the demographic side was this – ‘Terrible
famines’ caused ‘immense mortality’ and hence dominated demography.
However this wasn’t exactly so.
1. Despite all the caveats, relief measures had a role to play. In
many tracts of India, famines were not very severe.
2. Had it been the case that famines caused huge demographic
change, and then they would have depopulated villages, districts,
despoiled locales, caused total collapse of local agriculture, trade
and land revenues and would have decreased population density

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in the Deccan. However no such cataclysmic results emerged
from Census reports.
3. The view of the Famine Commission was that famines in 1890s
were grim ordeals but the only important depressants to
population growth since high death rates were observed in non
famine areas too.
4. Famines were simply more conspicuous than epidemics but not
as deadly.

Thus, famines were devastating, murderous but occasional – so they were

not the culprit for the demographic revolution.
Questions
1. Would you agree that the most striking feature of India’s post
World War I mortality revolution was the conquest of famines? In
this context assess the role of the government of India’s famine
administration policy and its search for long term solutions in
agriculture.
2. Discuss the nature and causes of famines in India during the British
period. In this context evaluate the role of famine relief policy of
the government of India.
3. Discuss with special reference to the changed nature of famines in
India after the 1860s, the view that the containment of famines in
the 20th century was essentially due to improvements in relief
policy and allied measures rather than due to economic
development.
4. Famine policy in British India was constrained not by the lack of
infrastructure but by the notions of what city can bear, Discuss
what led to the eventual conquest of famine in the 20th century.
5. Account for the apparently dramatic increase in the famines during
the British period in India and critically examine the efficacy of
famine policy adopted by the government of India.

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Chapter 6
Agriculture
OVERVIEW

Agriculture provided livelihood to two thirds of the economically active

population. Yet the growth rates of the sector as a whole remained
unimpressive – at most 1 % in the prewar years and disastrously low in the
inter-war period. Regional inequality also increased.

STATE OF TECHNOLOGICAL ADVANCEMENT 1890S (Irfan Habib)

1. Use of Primitive Techniques

a. Peasants used traditional knowledge of crops and soils.
b. Simple tools
c. Mixed crop sowings
d. Rotation regimes
e. Wooden plough and seed drills.
2. Later, iron cane-crushers were introduced in 1873-74.
3. Still, the peasants were open to new ideas and introduction of new
technology.
4. Sources of manure were constantly shrinking due to export of
oilseeds, decline in indigo ‘seet’ and the increasing diversion of
cow dung for use as fuel than manure.

So, the additional increase in area at the end of the century had to
come through canal irrigation i.e. by bringing wastelands under
cultivation.

CANAL IRRIGATION
After 1858, the initial impulse on the part of the new regime in London
was to expedite the work of canal-building by introducing private British
capital through a guarantee system akin to the one created for railways.

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- GUARANTEE SYSTEM
In 1859 and 1860, two British companies were authorized to
raise 2 million pounds each for works in Madras Presidency
and in Orissa at a government guaranteed return of 5 % on the
outlay. However, the arrangements proved a FINANCIAL
DISASTER! The government was compelled to buy out the
Orissa enterprise in 1869 for over 1.04 million pounds and the
Madras one for over 2.16 million pounds.

- GOVERNMENT CANALS
Now the canals had to be dug at government expense entirely.
There was continuous anxiety in London that the canals should
be ‘productive works’, that is profitable undertakings with at
least a 4% annual return on the outlay.
By 1892, a length of about 70, 500 kilometres of canals and
distributaries had been laid, that irrigated 5.42 million
hectares. Canals now irrigated a larger area than wells. In
certain areas like Punjab the canal network became
particularly extensive.

- EFFECT
The British-built canals led to a significant addition to the area
under irrigation. In the Punjab, canals often ran in areas where
cultivation was previously sparse owing to lack of water, and
thus the area brought under canal irrigation was in large part a
net addition to the cultivated area.

Adverse consequences:
-In the riverine tracts, water table fell.
-In western UP, canals cut across natural drainage lines
which created malarious swamps, made non-masonry
wells fall by raising the water table, and spread ‘reh’ or
saline efflorescence which made soils unproductive.

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-Easy access to canal distributaries encouraged overuse of
water which harmed tillage.

- EXPANSION OF CULTIVATION
Now expansion of cultivation can happen due to two reasons:
1. Bringing uncultivated land under plough
2. Increasing Gross Cropped Area i.e cultivation of same land
over and over again.

Now what was the scenario regarding cultivated land

around this time?
There are divergent views regarding the same.

1. According to A. Heston, expansion of cultivation was

so limited that with the population increasing at a
higher rate, the cropped area per head declined.
2. However as per Atkinson’s estimates, the total
cropped area increased (18.38%) more than the
increase in population (18.04%).
3. According to George Blyn also, total cropped area
(11.77%) increased more than the rate of increase of
population (7.41%).

THE SITUATION IN INDIVIDUAL REGIONS NATURALLY VARIED YET THE

BROAD PICTURE REMAINED THE SAME – EXPANSION IN CULTIVATION
OUTPACED THE INCREASE IN POPULATION IN MOST AREAS.

Total Cropped Change in

Area (change) population
Bombay 10% 3%
Presidency
Madras 32% 24%
Presidency
Bihar 16.42% 10.77%

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Thus Heston’s figures are clearly refuted as the population
and land use data do not thus bear out the thesis of a
decline in cropped area per head of population.

But, think about it a bit…there is another possibility that

we need to consider.

If the occupational structure were to change within the

rural population, owing to de-industrialization, more rural
labour were to be released from non-agricultural work
then it could well happen that more hands became
available for work on each hectare of cropped area. That is
the intensification argument would be supported.

Statistical Evidence
As per the census data, the number of persons dependent
on industry decreased by 2.15 million while that in
agriculture increased 4.35 million. The cultivated land per
person dependent on agriculture should thus have
declined from 0.502 hectare in 1911 to 0.49 hectare in
1921. Although it is alleged that there is a bit of
overstatement in these figures, nevertheless some
intensification of the labour applied to land might have
occurred. Now this could have had further ramifications on
crop distribution.

- CROP DISTRIBUTION
Railways definitely leveled off prices prevailing in different
regions. Each region could now concentrate on crops grown
best and least expensively within it, in order to take full
advantage of the country wide market. Plus railways facilitated
transport of goods to ports, which boosted exports. The extent
of area producing such export crops as cotton, rice, wheat,

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jute and oilseeds was therefore bound to expand in regions
where they were produced best.

There was a shift from food to non food crops. Non food crops
increased from 13.42% to 15%. Within the main non-food
crops, cotton and jute were held to be expanding most, total
area under cotton increased from 3.72 to 4.52% whereas
under jute increased from 0.48% to 1.05%.

The more readily marketable export crops among food crops

like
 Wheat, held their area (8.73% to 8.8%)
 Rice, gained in area (29.29% to 32.3%)

Over the years 1891-1916, the area under food grains grew by
0.31% annually, while the area under non-food crops grew at a
higher rate i.e. 0.42%.

Crop Specialization:

Berar and Punjab displayed greater effects of specialization

from the laying out of railways than did the Central Provinces
and the Madras Presidency.
-In Berar, for example, the area under cotton increased
from 28.1% of the TCA in 1870-71 to 38.1% in 1899-1900,
while in the neighbouring Central Provinces, it only
increased from 3.8 to 4.7%.
- In Punjab, the area covered by foodgrains declined from
87.3% to 73.9% while in the Madras Presidency, the
decline was barely perceptible.

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TRENDS IN PRODUCTION AND INCOME (T. Roy)
IN THE NINETEENTH CENTURY

1. In major regions during this period, there was a significant

expansion in the net sown area.
2. For specific commercial crops, the yield per acre also
increased.

IN THE TWENTIETH CENTURY (1890 – 1947)

1. The average growth rate of crop output was 0.37%.

2. This was because the growth in land area was small and
because the yield per acre grew slowly.
3. Foodgrain output was stagnant, while non foodgrain output
was growing rapidly.
4. Until 1914, the yield per acre was growing for both food and
non food crops. In the inter war period, food crops saw a
decline.
5. Rice suffered the most. Wheat yield was actually growing,
across coarse grains, the picture is varied.
6. Bengal suffered a greater decline than any other region.
Greater Bengal had below average growth rates in output of
both food and non food crops, in yield per acre, as well as yield
per capita.
7. Until WW1, the food output grew more rapidly than the
population resulting in increasing availability of food per head.
In the inter war period, population growth accelerated and the
growth rate of food output decelerated.

Table 1: Growth rate for crop output, acreage and yield, 1891-
1946
Output Acreage Yield per
acre
All crops 0.37 0.40 0.01
Foodgrains 0.11 0.31 0.29
Non-foodgrains 1.31 0.42 0.81

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Table 2: Relationship between agricultural output and population growth

rates, 1891-1946

1891-1916 1921-46
Population 0.44 1.12
All Crops 0.84 0.34
Food grains 0.61 0.13
Non-food grains 1.66 1.08

REGIONAL DIVERSITY IN THE PATTERN OF AGRICULTURAL GROWTH

1. PUNJAB
Punjab was a showpiece for British administrators engaged in
economic development. Following is a brief account:

Geographical History: The region was a dry wasteland prior to mid

nineteenth century. The monsoon rains died away and intensive
cultivation could not be practiced. However since the region was a
treasure house of lots of perennial river, the Britishers invested
heavily on building canal colonies to facilitate irrigation on a large
scale, tapping the potential of even narrow strips along rivers.

Canal Colonies: The system of inundation and perennial canals

irrigated approximately 5 million acres. The earliest colony was
Sidhnai and the last was Nili Bar. 9 such canal colonies were made.
The largest were Lower Chenab, Lower Bari Doab and Nili Bar.

Allocation: In these colonies, greater part of land was distributed

to claimants in lots of 14 to 50 acres each, where preference was
given to claimants of peasant background. The Colonization Act of
1912 turned the peasants into proprietors. Due to these favors,
Punjab peasantry remained very loyal to the rule during the inter
war period.

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Infrastructure Revolution: Between 1867 and 1921, Punjab saw an

infrastructure revolution where the following advances were made
- Length of canals expanded
- Road length nearly doubled
- Cropped area expanded
- Mileage of railways grew
- Uncultivated wastes were made arable

As a result of this infrastructure revolution, the canals significantly

raised output, cultivated area, trade and revenue. Also a shift
towards higher valued crops was seen. A new regional
specialization pattern emerged. The percentage of area sown with
wheat alone increased from 62 to 79.

Ecological Costs: However ecological costs were also involved –

problems of waterlogging, silting, obstruction of earlier drainage
channels and salination occurred on a significant scale.

2. UPPER DOAB
‘Doab’ (pronounced as Do – aaaab, rhymes with Punjab, literally
means the confluence of two rivers). Doab refers to the fertile
northern plains comprising present day western UP and Haryana
which lie at the intersection of two rivers.

Canals: In the nineteenth century, a dense network of canals was

constructed in this region. In UP, the canal mileage increased from
4,751 in 1871 to 16,136 in 1921. The availability of extra water
more cheaply encouraged cultivation of water intensive crops like
sugarcane.

Railways: The advent of railways encouraged cultivation of grains

and oilseeds which now became much cheaper to transport than
before.

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Regional Specialization: This led to a broad regional specialization
in UP where wheat and sugarcane were cultivated in the Western
Doab while grains and oilseeds were cultivated in the periphery.

Export aspect: After the 1870s, foodgrains were exported from the
Doab on a large scale. Mirzapur, Lucknow, Kanpur and Agra among
others became major trading-cum-financial towns which were also
the connecting points for the railways or river routes. Agents of
European grain-exporting companies were settled here. The
railways also connected the smaller towns in the interior which
had weekly or bi-weekly mandis with large towns where markets
were permanent and had long term contracts. Sugarcane became
a major commercial crop and sugar a major product in the local
trade in the Doab-Rohilkhand region during the Company’s rule.
Sugar mills and small refineries rapidly grew in number.

3. DECCAN PLATEAU

The Deccan Plateau was inherently a dry region consisting of the

plateaus of India and bounded by the Ghats in the east and west.
This region had abundance of black soil, ideal for growing of
cotton. Two developments changed the scene in the last quarter
of the nineteenth century:
i) Railways connected Bombay to the potentially
cotton growing regions in the interior, and
stimulated cotton cultivation and trade.
ii) A network of canals was created in the Nira Valley,
south of Poona as a famine protection measure.
The canals attracted migrant farmers who had the
necessary resources to invest. They induced a
switch from millets to sugarcane. The river area
later saw a major concentration of sugar
manufacturing.

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Developments within 1843-1873: In this period, cultivated area in
the Bombay-Deccan increased by 67%, the increase was largely led
by cotton. However there was no decline in the area under
foodgrains.

Bombay-Deccan: With scholarship, there is a debate about

whether there existed an acreage expansion in the Deccan plateau
area thereafter. Different sources give different conclusions.
According to Charlesworth, there was a 13% increase in acreage
however Mishra vehemently opposed the conclusion. The
conservative conclusion was that the acreage did not change at all.
This is not surprising and can be explained in the light of the fact
that given that it was expensive to expand cultivation in the
Deccan plateau with private means. The only technological option
available was wells which cost a lot relative to peasant incomes.

What is clear is that some crop composition shifts occurred,

though on a small scale. The acreage of cotton and oilseeds grew
relative to millets, implying a positive impact of the new export-
market prospects on peasant incomes.

Madras-Deccan: The overall acreage trends here too were

uncertain. However

- There was significant growth in cotton and groundnuts

in the early twentieth century
- There were shifts in cropping pattern and the direction
of trade.
- There was a shift from millets to cotton, oilseeds and
fodder crops.
- Between 1871 and 1921, prices, acreage and road
mileage expanded in Bellary district and there were
signs of greater price integration between region.
-
4. WESTERN INDIA OUTSIDE DECCAN PLATEAU

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This area consisted of Konkan and southern Gujarat region. Three
major agricultural interests in the region and their stories are as
follows:

Paddy: The Konkan grew paddy. However poor communications

and absence of railways left the region out of the commercial
network. The region turned out to be a mere labour exporter to
Bombay city.
Later the railways and the cotton famine internationally,
stimulated the agricultural prospects in the Charotar region of
South Gujarat.

Tobacco: Nadiad town was a market for tobacco, easily accessible

from both Bombay and Ahmedabad in 1863. Land devoted to
tobacco possible more than doubled between 1870 and 1900. This
crop being a capital intensive crop increased inequality in the
region, profiting the rich farmers merely

Dairy: In the early twentieth century, large cultivators took interest

in dairy which encouraged processing industries on a small scale.
The number of milch cattle doubled between 1900 and 1915 while
the number of plough cattle increased only 10 to 20% in the same
period.

5. EASTERN INDIA
No major changes in cropping pattern – it remained paddy based.
Railways were one factor which quickly drew trade aw y from the
rivers and apparently increased the volume of trade.

Period from 1850-1880s: This period saw an increase in the

population of the eastern India as well as increase in the size of
population clusters based on non agricultural activity. This
included Calcutta, Raniganj mining-industrial area, Serampur
industrial area, north Bengal and Assam plantations.

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These industrial areas now became concentrated sources of

demand for rice.
At the same time, there was external demand for rice by British
colonies.

Trade in rice definitely grew.

At the same time, apart from rice, jute cultivation picked up
because of demand from jute mills around the world. Jute was
exported and the trade was controlled at the top by European
firms. However jute cultivation was entirely voluntary and had no
element of coercion.

Assam: Assam experienced a distinct path of agrarian

development.
- There was an infrastructural revolution.
- 400 miles of railway track were laid down.
- Dense river traffic already connected lower Bengal
with Assam.

However the multiplier effect was limited.

- Much of this development server the tea plantations

sector.
- Few localities were benefited.
- The profits of the industry were shared with Calcutta
or repatriated.
- Assam became a region experiencing net immigration
from peasants of Bengal searching for farmland.
- Although, cropped area increased, food grain
production remained subsistence oriented.

The growth of towns and small scale industry were connected by

two processes

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1. Limited extent of agricultural commercialization
2. Commodity trade

A particular case of Guwahati illustrates the case. The place

experienced urban expansion due to TEA and OIL and emerged as
AN IMPORTANT PORT OF TRANSIT. The town eventually became
an important commodity trade station exporting cotton, silk, lac,
mustard seeds, and forest produce. It imported salt, textiles and
food grains. The control of almost the whole of this business was
in the hands of Marwari merchants.

6. COASTAL ANDHRA
The following process chain summarizes the regional scenario in
Coastal Andhra.

Encouraged
Canal Cultivated
diversification
Irrigation in Eased area
into oliseeds,
the delta constraints in increased.
sugarcane,
districts of long distance Stimulated
tobacco,
Krishna and trade in grain trade
turmeric,
Godavari paddy and credit
chillies and
(1847-1852) markets.
plantains

This led to specialization as markets and transportation systems

also improved. Guntur district is an example of extreme
specialization where the bulk of India’s tobacco crop is grown.

7. TAMIL NADU
Tamil Nadu consists of several agro-ecological regions.
o Coastal Wet Districts(Tanjore and Chingleput):
Paddy was of overwhelming importance.
o Drier Interior Districts(Salem, Coimbatore,
Trichinopoly): Coase millets were initially the main
crop.

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In the first half of the nineteenth century, large canal irrigation projects
were constructed on some of the major rivers and extensive road building
also occurred. This led to expansion in inter-regional trade in rice and
garden crops.

The dry regions were regions of black soil which cultivated cotton. The
trade in raw cotton introduced new marketing and financial systems. The
demand for raw cotton increased from 1830s. In the inter-war period,
cotton improved its position as a cash crop because of the growth of a mill
textile industry in Madras and Coimbatore.

The second most important crop was groundnut grown in North and South
Arcot. The export market grew with the expansion of modern food
processing industry.

Also, commercial expansion and rising prices led to reduced real burden of
taxation. This increased profitability and encouraged private investment in
the form of irrigation wells. These irrigation wells constructed during the
colonial period played a key role in the post independence Green
Revolution in the country.

8. CENTRAL INDIA: NARMADA VALLEY, CHHATISGARH AND BERAR

Key driver of the agricultural growth in this region – RAILWAYS.

When the railway link between Jubbulpore and Bombay was
opened up in 1870, within the next five years wheat export from
the Narmada valley almost doubled. The acreage cropped
increased from 3.5 million to 4.2 million.
Later a series of BAD HARVESTS and COMPETITION FROM
ARGENTINA reduced the scale of wheat cultivation in central India.
However the growth impetus didn’t die down because of
industrialization in the region.

Railways also had a similar effect on a smaller scale on rice and

oilseeds export from Chattisgarh and cotton export from Berar.

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- Chattisgarh found an outlet for its products
from 1883 when a metre-gauge link opened
up between Nagpur and Ranjnandgaon.
- Cotton cultivation in Wardha and Nagpur was
stimulated by the cotton famine.
- At the turn of the century, the governmental
interest in experimental farms encouraged
cotton cultivation in the region. The farmers
rejected attempts to promote the long staple
cotton preferred by Lancashire but did expand
the hardier short-staple varieties which found
a market in Japan and Europe.

This region had favorable agricultural and geographical factors and

emerged as the most important wheat-exporting zone outside
Punjab and the western United Provinces.

They had a special system of irrigation here. Rain water was

trapped on land by constructing banks to increase the moisture of
soil in the drier months. In some cases, a rice crop was grown on
this water just before the wheat sowing season. Such special
systems of irrigation depended on cooperation and community
participation.

9. SIND

Sind was a vast alluvial plain with the gift of perennial river water
sources which ensured that the proportion of irrigated area to
total cultivated area here was always well above average.
Irrigation works in the region – brief timeline:
1842: Canal and Forest Department established.
- Engaged in de-silting operations
- Decided a dam at the Sukkur gorge would be
made

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- The dam construction and completion was
delayed by a century.

1875-1900: Canal construction works received priority. 15 major canals

were made, largest being Jamrao.

1921-22: Another set of canals were constructed, largest Western Nara.

Net sown area expanded from 1.4 to 3.9 million acres. Canal
irrigated area increased from 1.2 to 2.8 million acres between
1885 and 1925.

Till 1930: Other factors like – extension of the Karachi port, customs
reforms on the western border, extension of the Indus
steamboat business, creation of a railway line that connected in
stages Karachi, Hyderabad, with Multan and Lahore.

Main Crops: The main crops grown in Sind were rice, wheat, millets and
cotton. There was no marked change in this pattern after canal
construction. However wheat and cotton grew in relative
importance, an effect of the export market and the Jamrao
Canal.

COMMERCIALIZATION OF AGRICULTURE (1860-1925)

1. Definition
Commercialization refers to the process where peasants start
producing primarily for sale in distant markets, rather than to
meet their own need for food or to sell in the local market.

An alternative definition by Irfan Habib says that it is the

‘extension of trade and money relations in the countryside’. This is
corroborated by the increase in the operation of profit motive for
peasant to sell his produce in the market.

2. What facilitated commercialization?

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Commercialization was facilitated by both demand and supply
factors.
Demand Side Factors:
- The world demand for food and raw materials was
immensely stimulated by the Industrial Revolution in
Europe. (International demand)
- Steam shipping and the opening of Suez Canal
reduced distance and reduced shipping costs
- Because of incessant crop failures, pockets of excess
supply and excess demand occurred. (Internal
demand)
- Demand for food and raw materials was high in
industrial cities.
- Peasants who specialized in non-food crops became
dependent on food grain trade.

Supply Side Factors:

- Land taxes were progressively a lighter burden for the

peasantry, being fixed in money terms. This increased
the role of profits and profit motive. (Fact: Real burden
of land tax per head population decreased by 27%
between 1860 and 1900).
- With a doubling of prices, real revenue burden fell by
almost 100%.
- Railways brought down costs.
- More and more irrigation systems were now available
because of British investment in canals.
- New changes in agricultural practices and technology,
chiefly canal and well water along with seeds also
aided commercialization.

3. Impacts of commercialization
Qualitative Impacts:

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1. Enabled closer integration of global, regional and local
markets.
2. A new international specialization began to emerge as a result
of trade. India specialized in agricultural exports
3. Changes in the product market led to changes in the land,
labor and credit markets.

Quantitative Impacts:
1. Exports increased in value by 500%
2. Agricultural prices doubled and even tripled.
3. Cropped area increased led by marketable crops such as
wheat, cotton, oilseeds, sugarcane and tobacco.
4. Rents increased in nominal and real terms.
5. Credit transactions increased as more and more peasants
shifted away from subsistence agriculture.
6. The scale of land transfers also increased.

Apart from this, commercialization also led to the growth of towns

that had large spot markets and settlements of merchants-cum-
financiers. From the inter-war period, these towns saw growth of
small scale industries such as rice and oil mills, cotton gins, jute
presses and sugar mills.

4. Crops

1. Indigo and Opium in earlier wave

Indigo - Between 1850 and 1890, indigo cultivation first shifted

from Bengal to Bihar and the districts of eastern UP and thereafter
declined generally. The reason for the shift was the Indigo Revolt
in Bengal(1860). However in UP, the cultivation of indigo had a
more voluntary character, stimulated by the spread of canal
irrigation. Later after the 1870s, the coming in of synthetic dyes
reduced the usage of indigo dye.

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Opium - Opium was always regulated by the government – hence

it was never very remunerative.

Cane Sugar – Cane sugar was an export item of Bihar in the first
half of the nineteenth century. After 1850, cane sugar was priced
out by beet sugar. However the local market for sugarcane
cultivation did not disappear.

Silk – Silk was produced on a small scale by part time farmers in

Bengal. It suffered competition from European and East Asian skills
which were better in quality. The Indian Silk eventually died down
because of weaknesses in industrial organization.

2. Cotton, Wheat and Sugarcane in a later wave

Cotton – Cotton was already an old crop in India and enjoyed both
internal and external market. In the nineteenth century the
direction of export changed from China to Britain. Still, the
importance of Indian cotton for the British textile industry was
small. Three factors helped in its expansion during the peak of
commercialization period.
 American Civil War broke out in 1861, supply of
cotton from the American South to Lancashire
stopped – so India replaced America now in being
the major supplier of cotton to the world. There
was a huge rise in cotton and agricultural prices
worldwide.
 Cotton prices crashed when American supplies
resumed. However the speculative bursts gave
way to a steadier expansion of demand and supply
in India.

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 Meanwhile, Japan had become on e of the world’s
largest textile exporters. Japan depended heavily
on Indian cotton.

Wheat – In the 1870s, Indian exports of wheat to Europe grew. The

immediate factors were:

 The opening of Suez Canal in 1869 reduced

transportation costs.
 The export duty on Indian wheat in Britain was
repealed.
 In the Bombay-Deccan where the staple food
crops were millets, wheat was grown for the
export market exclusively.

Sugarcane – Sugarcane was traditionally used for making ‘gur’ and

‘khand’ – which had high molasses content, but were cheap and
ideal for off season rural industry. Two factors provided impetus to
the sugarcane cultivation during the commercialization period.
 The introduction of efficient crushers led to a rapid
growth in the manufacture of gur and khand and
hence an expansion of the area under sugarcane.
 Secondly, tariff protection was also given to the
modern part of the industry.

5. Accompanying Changes
According to Irfan Habib, there were three accompanying changes:
1. The process of commercialization was accompanied by
a rise in prices through a continuous fall in the value of
the rupee. Between 1861 and 1901, prices in general
doubled, they tripled by 1914. Agricultural Prices
increased proportionately more than non-agricultural
prices, according to McAlphin. The general price index
rose by 24.6%. Individually for crops, prices for rice,
wheat and cotton increased by 55%, 28% and 29%
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respectively. This was a worldwide phenomenon
which came due to fall in costs, mechanical
developments and increasing competition.

2. Secondly, this shift in the terms of trade against

industry created difficulties for those in the industrial
sector i.e. it led to deindustrialization.

3. Thirdly, the rise in prices helped to bring about

another circumstance. Since taxes were fixed in
nominal terms and prices were rising, the real burden
of land tax per head of population fell by 27% during
the period from 1860 to 1900. However it would be
wrong to conclude from here that hence the real
burden fell for the entire population engaged in
agriculture.
The direct beneficiaries of this decline were the
landowners, not their tenants (who formed about 90%
of the population). For these tenants, the total tax
burden did not fall, because the burden of indirect
taxation increased. In fact, the real fiscal burden per
head did not decline but increased.

6. End of Commercialization (1925)

Certain worldwide events in 1925 acted upon the

commercialization happening in India and caused an end to it.

1. By the early 1920s, world agricultural markets had begun to

face persistent oversupply and price depression.
2. Major cash crops now faced stagnant of falling prices.
3. This thoroughly upset the rural credit market.
4. Peasants faced a rising real value of debt. There was a fall in
real wages and living standards for agricultural laborers for a
brief period.
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5. Also, these external factors were exacerbated in India due to
the operation of an adverse macroeconomic policy.

This brought about a watershed in external market conditions.

Also by this time, arable land became scarce while population
growth began to accelerate.

LAND, LABOR AND CREDIT MARKETS

LAND MARKET

Between 1793 and 1840, a series of British property rights reforms were
fitfully introduced which destroyed tax-collection rights.

Two things done were: One, ownership was clearly defined and two,
ownership was made saleable.

Commercialization & New Investment increased market value of land and

rents. Thus, land could be made more
productive or people could alternatively buy land for speculative purposes
with the intention of profiting from the capital gains.

Ultimately, return on land was made comparable with other assets.

Buyers & sellers

The buyers were basically peasants and substantial landowners. Over time,
non-cultivating classes i.e. moneylenders and urban professionals also
started buying land as credit and commercial trade meshed. However
these instances were limited.

The sellers of land on the other hand were defaulting zamindars and
precolonial rural elite.

Tenancy Rights

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In all Zamindari areas, all peasants were technically tenants without
ownership rights. Series of tenancy acts(1859-1928) were passed which
strengthened occupancy rights of tenants or ‘raiyati rights’.

Effect of tenancy rights: Ambiguous, at large

(i) Encouraged mortgages & more transactions in such

rights
(ii) Encouraged rental market in which demand shifted
outward continuously, proliferation of sub-leases
happened. This led to SUB-INFEUDATION i.e. it pushed
the market into lease rather than ownership rights.
(iii) There was at the same time a universal confusion over
sub-proprietary rights. Tenancy started to be
associated with poverty and insecurity.

LABOR MARKET

Various factors lay behind the origin and evolution of the labor market.
Here is a brief overview.
 Breakdown of customary arrangements
 Voluntary migration
 Gender differences
 Ruralization of work
 Partial decay of artisanal industry
PROLETARIANISATION
Proletarianisation refers to increase in the number of proletariat or
working classes, in the context of agriculture here. Statistics show an
increase in the number of wage laborers. There are two schools of thought
providing reasons for the same.

View 1: Land having acquired a mortgage value was used as collateral in

the nineteenth century. However the peasants were now exposed to
commodity market risks. Because of worldwide fluctuations in prices, they

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became debtors and over time lost their land and became landless
laborers. This led to the rise of a labor market and wage labor.

S.J. Patel’s work on the theme pins down two factors as responsible –
deindustrialization and dispossession.

View 2: According to Dharma Kumar, what occurred was merely a

rediscovery of hereditary landless workers in the census.

The Census found that the evidence of proletarianisation was weak among
males and strong among females. Tirthankar Roy explains the fact in the
light of the following dimension.

Institutional Changes Migration Pattern

In precolonial India, landless laborers It became much easier to migrate
came from the lower castes whose and shift occupations in the
primary duty was to perform nineteenth and early twentieth
agricultural labor. They were basically centuries. Thus there were
serfs. voluntary movements between
old hierarchial contracts and new
In colonial India however, customary wage based ones.
bondage and serfdom decreased It is important to note here that
because of improvement in social now
status of depressed castes. - These attached labor
relationships were male
This led to based. Women were scarcer
- Elimination of the element of in these serf relationships.
compulsion in employment - As attached laborers were
- Migration within and outside replaced, the entry of women
agriculture increased. into rural labor markets
- They entered plantations, increased.
mines, urban services, public - Also, the destruction of
works and governmental artisanal industry went to
utilities. urban industry to look for
better wages. Their women
who remained behind joined
agricultural work.

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CREDIT MARKET
Based on descriptive reports, credit transactions in the village INCREASED.
The trend was not a smooth one; it was subject to disruptions caused by
harvest fluctuations and long commercial cycles. There were both demand
and supply side factors working in the background for the evolution of
credit markets.

Demand side factors

1. Commercialization increased the scale of production, the market

outside now tended to be bigger than the local market. The
commercial production needed more investment.
2. Peasants who were now producing non food crops had to buy food
from the market rather than meet their subsistence needs from
their own farms. To buy food before harvests, they had to borrow.
3. Payment of rent and revenue in cash than kind needed loans to be
taken to meet these payments.
4. Cash crops needed finance as they were traded over long
distances.
5. There was increased demand for relatively high cost inputs. Some
crops needed greater investment in land preparation, irrigation
and fertilizers.

Supply side factors

At the same time, the supply of credit increased due to:

1. Moneylender class flourished because of growth of market towns,

new profit opportunities which increased their mobility, migration,
settlement and enterprise.
2. The creation of property rights increased the collateral value of
land.
3. Legislations concerning credit conotracts gave the creditors much
greater power to recover loans. Repayment was made a legal
obligation.

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EFFECTS OF MARKET EXPANSION

1. Average Income
- Between 1870 and 1914, India’s national income increased
at a rate of 1-2% while the per capita income increased at
0.5-1% per year.
- In the inter war period, both declined.
- Agricultural income was growing in the pre war period, it
stagnated in the inter war period.
- This was largely because of exhaustion of land area
together with stagnation of land yield.

2. Standard Of Living of Agricultural Laborers

Wages differed by gender, task, area, seasons. Money wages

tended to be higher
- In areas with irrigated land, in lands near cities, in the
hills and in areas with high net emigration.
- In Bengal and Bombay compared to Bihar, UP and
Madras
When converted to real wages, these differences become smaller
but do not disappear.

The broad trends were:

1. 1840-1870 Rising tendency in real wages
2. 1900-1925 Real wages increased as per regional
evidence. This is true for the regions of Upper Doab,
Coastal Andhra and Bengal .
3. Post 1920 Money wages as well as real wages fell
because of Great Depression.
4. From the Great Depression onwards, till the Green
Revolution, real wages were stagnant because (a)
productivity was stagnant and (b) population was
increasing.

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5. The number of labor families grew from 3.5 million to 6.9
million between 1875 and 1931. Thus, poverty increased
both in intensity & incidence on account of:
(1) Labor surplus, stagnant land yield
(2) Social oppressions reinforced by
commercialization
6. 19th century: Real income increased faster than real wage.
This led to a rise in non-wage income, largely among large
peasants consisting of rents, interest or profit. Since the
non-wage income was higher among rich peasants, it
resulted in unequal distribution.
7. 1871-1921: Real wages were either stagnant or falling.
Reflects the dismal state of majority of people engaged in
agriculture.
3. Land ownership and class structure

Some historians have suggested that there was ‘forced

commercialization’ which led to polarization of the classes, that is
the title to land tended to pass from the peasants to the capitalists
during the course of commercialization.

However, at least 3 authors reported a fall in inequality in Madras

Deccan. This was on account of
a) Landless people acquiring cultivable waste
b) Decline of old nobility and hereditary elites
c) Weakening of correlation between social and
economic status

Now we will analyze the qualitative evidence in detail to

understand what was happening to people at each rung of the
society.

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1. The Top Rung

Older groups of rich people underwent a change in the
composition and a downward mobility. The earlier correlation
between social and economic status weakened. The decline of the
Brahmin as landowner was seen in South India.

2. The Middle Rung

A different phenomenon was occurring with the middle peasantry.
Middle peasantry who grew cotton, sugarcane or wheat on plots
of land made a profit and grew richer. They also became less
dependent on the moneylenders and began to lend themselves.
Unlike peasants with small landholdings, they had better capital
resources to invest. Precisely this group included:
- The Jats of Punjab
- The Jotedars of Bengal
- Kanbi patidars of South Gujarat
Thus there was upward mobility of this class i.e. a process of
consolidation of middle peasantry as dominant cultivators. This
class came to be known as ‘Bullock Capitalists’.
However such people were few. There are two reasons for that:
(i) Land and capital became scarce with population
growth
(ii) Sub- proprietary rights were not defined, so secure
tenancy was rare.

3. The Lower Rung

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At the lower rung, the mass of peasantry did not own enough
capital. Due to their social status
a) They suffered during famines & slumps.
b) They did have a share in profits from cash crops.
c) The trickle down of commercial profits led to
emergence of small plots and further fragmentation of
holdings.

Later in the 20th century, upward mobility from a small holding base
became more difficult. This was due to continuous subdivision because of
population growth, insecurity of tenancy, high risks of cultivation, limited
capital resources and rising prices. The distance between the proprietor,
the tenant and the laborer became thin at the lower end.

4. Market Organization

Compared to local markets dealing in subsistence crops, spot markets

were often bigger in size, more competitive, had standardized weights
and measures and enables the sale of larger lots.

However not all peasants had the ability to reach these markets and
sell their crops here. They got better prices and the benefits of a more
efficient market.

THE AGRARIAN CLASSES under various settlements

The section of society dependent on agriculture is divided into 1) landlords

2) peasants and 3) laborers. According to the diversity of land tenurial
arrangements, diverse classes can be analysed within agriculture. Below is
brief account of these institutional arrangements:

1. ZAMINDARI SYSTEM
This was the Permanent Settlement system wherein a kind of
landlordism was imposed on Bengal, Bihar, Orissa and coastal
Andhra by setting a fixed amount of revenue on each estate – the
zamindar was both the owner and the revenue payer.

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Now, the company set this land revenue at a high unchangeable

rate, the zamindars had to guard themselves against shortfalls in
collection. So they leased out large portions of their estates to a
few substantial sub-landlords who pledged to be punctual in their
rent payments. They in turn leased out their lands to other
middlemen.

Eventually a number of non-cultivating rent-collecting class

emerged between the zamindar and the cultivator.

2. MAHALWARI SYSTEM
- Prevailed in bulk of Uttar Pradesh
- Revenue was collected on smaller circles (mahals)
which were collections of some villages.
- Revenue = f(proportion of prevailing rent rates)
- Theoretically, revenue payers could be recognized as
zamindars too.

3. RYOTWARI SYSTEM
- Prevailed in Madras Presidency, except coastal Andhra
- This involved fixing the land revenue permanently on
each field based on gross produce.
- All uncultivated lands were deemed to be under the
control of the state which might let these out to be
cultivated at freshly assessed rates.
- Favored peasant proprietorship.
- In Bombay Presidency, a 30 years assessment period
was instituted under a different form of Ryotwari
settlement which made peasant proprietors. Revenue
rate = f(net produce)

4. TALUQDARI SYSTEM

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By 1858, different systems of settlements had been well
established. Britishers were looking for new settlements in areas
of Punjab, Oudh and Central Provinces. They didn’t really want to
offend the taluqdars already operating in these states. Settlements
were now made with these incumbent taluqdars only.

These taluqdars were made revenue payers, while smallholders

their tenants.
As tenants, these small holders became fully subject to eviction
under the provision of an act of 1868. They were reduced to the
status of occupancy tenants of newly recognized landlords.

5. MALGUZARS
In Central Provinces, the local tax farmers (malguzars) were
converted into landlords by the very first British settlement. In
berar, a class of revenue payers called khatedars were recognized
as tenants of the government with the revenue rates fixed for
periods up to thirty years.

Thus broadly, on one extreme was the Zamindari system in Bengal and on
the other was Ryotwari in Madras favoring peasant proprietorships – all
other arrangements ranged between these two extremes.

KEY TRENDS AROUND THIS TIME AND THE LEGISLATIONS INSTITUTED

Now the thrust of the British policy had been to consolidate middlemen’s
claims into landlordships. This was reinforced by the commercialization
impulse.

1. As prices rose, landlords and moneylenders bought up peasant

held lands.
2. There was a simultaneous enhancement of rents by zamindars to
make them in step with rising prices and also in anticipation of
crops of greater market value. Now zamindars sought to enhance
this rent through evictions of older tenants with whom they had a

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deal regarding fixed rents. Zamindars sought to obtain a larger
share of rental than was allowed by the earlier leases that they
had given to sub-landlords.

The non-cultivating lessees pressurized the government against

this move. This eviction was then checked by two acts:

BENGAL RENT ACT 1859

This decreed the permanence of all rents hitherto paid to the
zamindars by lessees whose leases went back to 1793 or any time
20 years previous the act. Those who had held their leases for
fewer years but for not greater than 12 years, were declared to
‘occupancy’ but not fixed rent.

TENANCY ACT 1885

Since there were some slippery clauses in the previous act, the
Tenancy Act remedied the same. It provided that rents on
occupancy tenants could be increased only by fixed percentages
after a certain number of years.

The result of both these acts was

- Bulk of the peasants became tenants-at-will
- Zamindar at the top was now not able to extract the
benefit of increased rental capacity. This explains the
long term stagnation of money values of zamindari
estates in both Bengal and Bihar.
- The sub-landlord in place of zamindar got this privilege
and was protected by the acts.
3. CHHOTA NAGPUR
Landlordism was imposed on tribal communities in Jharkhand
where community villages were converted into landlord controlled
villages.
On top of that,

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 Chhota Nagpur Landlord and Tenant Protection
Act, 1879
 Commutation Act, 1887

Both these acts extended legal recognition to landlords’ claims.

This led to tribal unrest and resulted in Birsa Munda’s rebellion in
1899. In 1908, Chhota Nagpur Tenancy Act froze protection to
tribal tenants.

4. MAHALWARI AREAS
In the Mahalwari areas of the North-Western Provinces, two
pieces of legislation were enacted in 1873.
 The REVENUE ACT set land revenue equal to half
of the rental which in turn was determined by the
settlement officers on the basis of rent rates
prevailing.
 The TENANCY ACT contained detailed regulation
for determining the occupancy rights of tenants on
the principle of twelve year tenancy set by the
Bengal Act of 1859.

The rents thus paid to the landlords were heavy. According to one
calculation, after paying the rents, a peasant would face an annual deficit
of Rs 5 which was equivalent to more than 2 months’ salary for him.

5. OUDH
The bulk of the Oudh peasantry were tenants at will and the
extent of land under tenants-at-will was on an average 76%.
 By the OUDH RENT ACT, 1886, a taluqdar could evict any
protected tenant by paying half the annual rent to the
court as fine – so that the tenant at the end got nothing in
lieu of the injury caused to him.

6. PUNJAB
In Punjab,

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 The TENANT ACT of 1868 granted occupancy rights to
peasants previously recognized as proprietors but now
reduced to the status of tenants.
 The TENANCY ACT of 1887 provided that only those who
could prove that they had been primary revenue payers
for 30 years prior to 1887 and had paid rent to none,
could have rights of occupancy.

In between the period of land assessment was reduced from

30 years to 25 years in 1895 because of rising prices. This led
to a 107% increase in the value of the landed property.

Another significant feature of Punjab was that it benefited

from canal irrigation and raising of export crops (wheat and
cotton). The canal colonies brought uncultivated wasteland
into cultivation. These lands were allotted to persons of
agricultural castes – peasants and landlords and 1.2 million
hectares were allotted thus.

7. CENTRAL PROVINCES
In the Central Provinces, land was available in forests for
cultivation, landlords were more interested in attracting than
evicting tenants.
 First, the Bengal Rent Act 1859 was extended to the
province in 1864.
 Later an attempt was made to increase the tenures. This
caused alarm among landlords and the Tenancy Act of
1883 froze the tenancies as they then existed.
 This act then made occupancy rights saleable so that they
could be purchased by landlords and moneylenders but it
forbade transfers of all other kinds of tenancies.
 Loopholes - Landlords could now freely enhance rent on
non-occupancy tenants and force a voluntary
abandonment of tenancy. This made the Act’s provision
for high compensation to be paid to evicted tenants

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practically meaningless and all non-occupancy tenants
became tenants-at-will.
 The Tenancy Act of 1898 later curtailed the landlords’
rights to the extent that they were now fixed by officers in
revenue courts.

Similarly other changes and legislations took place in

Bombay and Madras too.

EXPLAINING GROWTH & STAGNATION IN PRODUCTION & PRODUCTIVITY

(T.Roy)

From the 1880s to the 1940s, total output in agriculture rose so slowly that
it can easily be called ‘stagnation’. One phrase that describes the condition
of the sector as a whole is that agriculture was stuck in ‘a low-level
equilibrium situation’.

 The income of the farmers as well as the agricultural laborers

remained at or below the subsistence level.
 The growth rate in agriculture remained unimpressive – at most 1
% in the prewar period and disastrously low in the inter-war
period.
 Regional inequality increased. Some regions took part in the
export-driven growth much more successfully than the others.

There are two broad reasons which explain this stagnation in the sector.
One view holds class structure in rural India to be responsible; the other
holds resource scarcity to be responsible.

A. Class Structure
Agrarian structure at the outset refers to the sum total of ways in
which different groups and classes operate in relation to each
other. It dwells on the factors which influence these relations
which may be defined and enforced by law, by custom or may be

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just flexible. There were 3 main classes in Indian agriculture – the
cultivator, the laborer and the landlord (Kisan, Mazdur and Malik).

Now, analyzing the arguments within class structure, we find the

following:
(i) Revenue Burden?
Nationalist critics of British rule believed that revenue burden
was excessive and that peasants were burdened under its
pressure.
However, a cursory glance at statistics tells us that this
explanation cannot be valid since revenue burden fell after
the 1870s.
(ii) Moneylenders
This segment holds the moneylenders responsible for the
stagnation in agriculture. As per the argument,
commercialization exposed peasants to new risks and
fluctuations of prices in the international market which led to
increased demand for loans which came at exorbitant rates
from moneylenders. The complex web of factors thus led to
indebtedness.

The forced commercialization hypothesis goes one step

further and explains how the presence of moneylenders led
to stagnation. The story goes thus:
Moneylenders as a class, had no incentive to productivity.
This can be proved thus. All moneylenders had two sources
of income – one, income from interest and two, income from
soil. Now if he spends any resources to increase productivity
from the soil, this would lead to less demand for
consumption loans.

Was Commercialization Forced?

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Another issue arises as there is a need to verify whether this
commercialization was voluntary on the part of the peasants
or was it forced?
There goes a view that revenue burden may have induced the
peasants to produce cash crops. But the counter view holds
that debt should not always be looked to connote a negative
meaning for debt also means creditworthiness & prosperity.
According to B.B. Choudhary
(a). The notion of ‘force’ is naïve & unrealistic
(b). Debt was not universally a burden of similar scale
everywhere.
(c). The practice of treating debts uniformly as evil confuses
ordinary, working capital loans with occasional
consumption loans.
As a matter of fact, after 1860s revenue burden became
weaker and profit motive stronger. So cash crops were
produced because they were more profitable and also
because there was more choice available with the farmer in
deciding which crop to produce.

Another question is whether loans were taken for payment or

revenue or rent?
answer is that loans were taken for a variety of reasons –
including rent, revenue,working capital, or for consumption.
Moneylenders preferred unsecured loans than land as
collateral because land value was subject to fluctuations plus
there were lots of legal hassles involved making the transfer
of ownership difficult.

Thus, moneylenders were non-cultivating creditors however

the distinctness of the class & the extent of their power
declined over time in all regions.

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(iii) Zamindars
Another segment believes that it was not the moneylenders
but the zamindars as calss who were responsible for
agricultural stagnation. In the zamindari areas, benefits
weighed more heavily in favor of rentiers who did not
actually cultivate land directly. This led to an adverse
combination of superior rights and non agricultural
background.

B. Resource Scarcity
Resource scarcity in different ways contributed to persistence of
poverty in the regions. This resource scarcity took the form of :
1. Land Constraint : With increasing population pressure since
the 1920s, land man ratio declined. Apart from that, cultivated
land also stopped increasing. Till this time, all improvement in
agricultural output had come through increasing the area on
the margin, rather than the yield. Now that cultivable land was
exhausted, degraded lands started coming under the plough
and the output at the margin declined.
2. Lack of irrigation: The greater part of Indian subcontinent is
dependent on monsoons for agriculture. This is combined with
extreme aridity in the rest of the year which dries up much of
the surface water. The dependence on a natural supply of
water increased the risk of crop failure. Combined with the
new tradition of mono-cropping, there was now decreased
hedging against crop failure.
3. Manurial Problem: Peasants in India used too little organic
manure to restore the nitrogen content of the soil normally
depleted due to repeated cultivation. Natural supplements in
the form of oilseeds, grains and animal hides and bones were
exported, cowdung was used mainly as fuel, whereas fish
manure, green manure were even unheard of. Thus lack of
biological inputs led to a deplorable yield situation.

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4. Equipment, seeds and livestock: The use of iron plough for
deep ploughing in dry areas was very less. The diffusion of new
technology was highly restricted because of missing markets.
Although agricultural research stations developed new
varieties of seeds, neither an equipment market nor a seed
market on a large scale existed. Thus, while research was on,
extension was a problem. At the same time there was
inefficient use of animal power especially buffaloes because of
poor quality of buffaloes on an average. The problem arose
because of prejudices against cow slaughter and depletion of
grazing fields which caused oversupply of weak cattle.

Summary
State of technological advancement since 1890s
- Primitive techniques + Manurial problem
- Open minded peasants however
Canal Irrigation - Guarantee System – financial disaster
- Effect (Increase in area, overuse after, water table fell,
malarious swamps)
Crop Distribution -Railways – price integration
-From food to non-food crops
-Area under some food crops (wheat and rice) rose
-Specialization aspect
Trends in production and income
19th century - Increase in net sown area, Increase in yield per acre
20th century - Yield per acre grew slowly, growth in land areas small
Non food output rose more than food output
Decline during the inter war period
Rice and Bengal suffered
Regional Diversity
Punjab Canal colonies +Infrastructure revolution +
ecological costs
Upper Doab Canals + Railways + Regional specialization +
Export aspect

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Deccan Plateau Railways + canals + manufacturing
concentration + uncertain trends in Bombay and
Madras Deccan
Western India outside Paddy, tobacco, dairy
Deccan Plateau
Eastern India Population clusters in agriculture, infrastructure
revolution in Assam, Multiplier effect limited
Coastal Andhra Canal irrigation, diversification, increased
cropped area
Tamil Nadu Canal irrigation, commercial expansion,
groundnut cultivation
Central India Railways
Sind Irrigation timeline

Commercialization Land, labour and credit markets

- Meaning Land : Property Rights, Tenancy
- Demand and supply side Rights
factors Labour : Proletarianisation –
- Impact – qualitative and Institutional change + Migration
quantitative pattern
- Crops Credit: Demand and supply side
- Accompanying changes factors
- End of commercialization

Different Settlements Legislations Enacted

1. Zamindari - Fixed Revenue 1. Bengal Rent Act, 1859
2. Mahalwari - Small circles 2. Tenancy Act, 1885
3. Ryotwari - 30 year 3. Chhota Nagpur Landlord and
assessment period Tenant Protection Act, 1879
4. Taluqdari - Taluqdars Commutation Act, 1887
could forcefully evict 4. Revenue Act, 1873, Tenancy
tenants Act
5. Malguzari - Local tax 5. Oudh Rent Act, 1868
farmers, Central Provinces 6. Tenant Act, 1868
7. Tenancy Act, 1887

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Effects of Market Expansion
1. Average income
2. Standard of Living of agricultural laborers
3. Ownership and class structure (top, middle and lower rung)
4. Market Organization
Explaining Growth and Stagnation in Production and Productivity
‘Low level equilibrium situation’
- Class Structure
- Resource scarcity (land, water, manure, equipment)

Questions
1. It is said that diversity of agricultural land tenure arrangements
existed in British rule. Do you agree? What were the effects of this
on regional pattern of agricultural growth?
2. Analyze the agrarian relations that evolved during the British rule
in India.
3. Briefly state the reasons why in your opinion did Indian agriculture
fail to shift from a low level of equilibrium situation in spite of
impressive gains in output of non food crops before
independence?
4. Mc Alpin’s calculations indubitably reveal that the terms of trade
of agricultural goods vis-à-vis that of non-agricultural goods rose
by 47% between 1873 and 1925. Did this benefit all in the Indian
agrarian countryside alike?
5. “The persistence of both under-investment and under
consumption in the rural economy was part and parcel of the
institutional structures that emerged under colonial rule.” How far
is this true? Examine in the context of expanding market
opportunities in rural India before 1930.

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UNIT 4
Railways and Industries
References:
1. John Hurd, Railways, CEHI, Chapter 8, pp.737-761.
2. Rajat Ray (ed.), Entrepreneurship and Industry in India, 1994.
3. AK Bagchi, 1976, “Deindustrialization in India in the
Nineteenth century: Some Theoretical Implications”, Journal
of Development Studies.
4. MD Morris, Emergence of an Industrial Labour Force in India,
Oxford University Press, 1965, Chapter 11, Summary and
Conclusions.
5. Tirthankar Roy, The Economic History of India 1857-1947,
Oxford University Press, 3rd edition, 2011.

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Chapter 7
Railways
In 1852, Lord Dalhousie conceptualized the railway system in India while
he was on a Board of Trade dealing with Railways in England. The first train
ran in India from Bombay to Thane in 1852, covering a distance of 32 kms.
The motives behind railway construction were both political and
commercial.
 Railways helped to provide a market for British goods.
 It also helped in an easy transfer of raw materials.
 It helped in the defense of the frontiers.
 It helped to transport troops of soldiers across India.
 Economic development of India for Britisher’s vested interests.
There were three phases in the history of railway construction in India. The
first phase was The Old Guarantee System (1854-1869). The second phase
was The State Construction (1869-1882) and the third phase was The New
Guarantee System (1882-1924).

The Guarantee System of financing the railway system in India was

inherently unjust and inefficient.
 The Old Guarantee System (1854-1869)
Under this system if the railways construction did not achieve a
minimum rate of return of 5% then compensation will be done by
the Government of India. This was to increase investment in
railways, because if investors were secured or guaranteed a return
then they would put in the investible capital in railways.
 The State Construction (1869-1882)
In this phase, it was the government units who built and managed
railway lines. Railway lines were also constructed by Princely
states, provinces, district boards and central government.
Government built lines directly and also by leasing out some

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private companies. In 1878, government bought East India
Company railway but management remained at the hands of the
company.
 The New Guarantee System (1882-1924)
In this phase there was a new guarantee system with rate of
return around 3.5%. Government entered into partnership and
railways were once again built by private capital.

This guarantee system was unjust and inefficient in a number of ways and
for this the government was to blame.
 Drain
The guarantee system contributed substantially to the ‘drain’ of
funds from the sub-continent. When the investors were assured of
the rate of return and there were no risks of making loses, more
and more investment began to take place in railway construction.
There was ‘wasteful construction’ i.e. more tracks than what was
needed. This resulted in lowering of company’s actual rates of
return and unnecessarily increasing the subsidy and leading to
drain of funds.
 More tracks and wrong placement of tracks
In order to reap benefits from the guarantee system, more and
more tracks were laid. However tracks were laid in low profit areas
too. Though there was monopoly in the construction of tracks, but
it had to be approved first by the Government of India. The
government felt that the lines were required to lower the risks of
famine, so called ‘famine lines’. Also they were required for the
movement of troops of soldiers and defending the frontier. Hence
lines were constructed (70% of the total tracks) in low profit areas,
which meant the government, had to give subsidy if rates of return
were less which in turn led to the drain of funds. The subsidy
accounted for 43% of the railway earnings.

Unjust and Inefficient

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The subsidy and the drain could have been reduced drastically if the
density of the railway tracks were high in regions where profits were likely
to be high. Hence the guarantee system was inefficient.
Since, the number of unprofitable lines was high; tax revenue was used to
subsidize the railways. The unjust that the guarantee system did was that
it did not bring in ‘social benefits’. From 1860-1896, amount for guarantee
was 0.2% of the National income. Had the tax revenues being expended on
roads, navigation canals and irrigation, the social benefits would have been
higher. Railways were definitely essential for various purposes but
investment was totally neglected in roads and canals and one wonders the
cost of it.

Railway Rates
As there were no significant developments in other modes of transport
and railways were fast and reliable, therefore railways faced no
competition from other modes of transport. This affected the railway rates
which in turn had an impact on the various sectors of the economy. In the
initial years, 1853 -1880, there were high rates. However, there was some
competition after 1880. As more and more lines were built even in North
India (a high profit zone) the competition increased which led to the
decline in railway rates. This again posed a problem as the government
would have to pay subsidy if railway rates declined further. Hence,
government fixed a minimum rate, made a clearing house for co-operation
and discouraging competition and also encouraged expansion of branch
lines. This led to the rise of railway rates. There was price discrimination.
The railway rates were high for short distances as compared to long
distances. Also railway rates were different for transportation to and from
ports.

The rise in the railway rates hindered Indian industries. Industries needed
coal as their raw material, and cost of transportation of coal by rail was
very high. Coal was extracted for cheap but transportation increased the
final costs and hence it discouraged industries as they wouldn’t have been

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able to face international competition. It had a dampening effect on the
expansion of industries.

True, agriculture was favored by railway rates but agriculture’s limited

linkages and its institutional framework may therefore have been
responsible for the lack of economic growth in India.
Also, it is true that had there been no guarantee system, there would have
been no investment in Deccan and South and hence no railway network
there. But roads there could have done the job. It is basically to compare
the cost and the benefit in the cost-benefit analysis, the ‘cost of subsidy-
drain’ or the ‘cost of railways’.

Impact of Railways on AGRICULTURE

Indian railways unquestionably played a very important role and its impact
on agriculture was significant. Before coming of the railways, farmers used
to grow a variety of crops in their land which was basically meant for
subsistence. This was due to limited connectivity with other areas because
of lack of a fast and effective mode of transport. Although bullock carts
were available, it took time and money, for the goods to be transported
from one place to another.

 Exports and Imports

With the coming of the railways Indian agricultural commodities
were brought into the international market and allowed to face
competition. A good network of railways meant fast, efficient,
effective and reliable movements of both raw materials and final
products across borders. This made possible an enormous
expansion of exports of products such as wheat, rice, jute, corn,
etc. Between 1862 and 1929, exports rose by 230%. Before the
advent of railways, wheat was not exported at all but now 23% of
Britain’s import of wheat was from India. The growth of exports
was paralleled by the rise in imports which rose by 350% from

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1862 to 1929. Britain was now the largest customer and three-
fourth of imports came to India from Britain.

 Prices
Earlier, there were local communities/areas which were not well
connected infrastructurally. As a result, there were price
differentials, i.e. prices were different in different local areas.
Ofcourse, limited infrastructure reduced the possibility of
arbitrage. But, with railways, these local areas were connected
which meant prices cannot be different as it would lead to
arbitrage. Therefore, we see that there was ‘convergence’ in the
prices of rice and wheat, i.e. the coefficient of variation declined
nearly to 15-20% for both rice and wheat between 1870 and 1910-
20. The convergence was due to railways is confirmed by the fact
that the prices were nearly same in areas connected by railways as
compared to the areas without railways.

 Commercialization
The agricultural sector was deeply affected by the widening of the
markets. For the first time, prices of the agricultural products in
India became susceptible to fluctuations in world prices and Indian
agriculture became linked to world trade cycles. Now the farmers
had an option either to grow diversified crops or to grow one type
of crop depending on the soil and other favorable climatic
conditions and then sell that crop in the international market.

Thus, now agriculture began to become commercialized. Instead of

producing solely for the local market, agriculturalists fount it
profitable to sell in the foreign market. Thus, it led to greater
specialization and also led to increase in the value of farm’s
output.

 Demand for land

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Commercialization, in turn resulted in an increase in the demand
for land. There were three groups of people who benefitted. First
were the moneylenders who provided credit to the farmers to
finance cultivation of crops for export and to pay their ever-rising
taxes. These money lenders were exploitative in nature. Second
were the large land owners who gained from sales of export as
well as by lending as they had the capacity to make loans. Also, the
third group was that of landless laborers who benefitted as there
was an increase in real wages in low population density areas as
farmers expanded acreage in labor-intensive crops.

 Rural income
Commercialization led to an inflow of income in rural areas part of
which was spent on consumer goods and the rest were saved. This
is evident from the fact that large amounts of gold began to be
imported in rural areas. Some portion of income was also used to
finance the expansion of acreage.

 Employment
Though it is difficult to find a significant correlation between
railways and employment in agricultural sector, it is clear that
railways did affect employment to some extent. It is likely that
expansion of acreage generated led to a net increase in jobs.
However, firm conclusions can be drawn only if we know the labor
requirements of commercial cropping patterns.

We also see that as railways were developing, there were phases when the
railways rates were high and a small phase in between when the railway
rates were declining because of increasing competition. As agriculture
needed inputs that were produced locally, unlike industries for which coal
was a major input and its cost was made high by increasing the rates of
railways, the increase in railway rates did not affect agriculture much.
There was abundance of good land and cheap labor because of which

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production costs were low. Agriculture was relatively favored by railway
rates.

Despite this favored position agriculture did not prove to be a growth

sector. Nor did it stimulate growth in other sectors. This was due to
 Lack of sufficient linkages
Since industries were lagging, they did not demand much for
agricultural products. When crops required processing, most of the
machines were imported. Agricultural production remained
labour-intensive.
 Institutional framework
There were little attempts by the government to generate credit.
Government refused to tamper with the existing rural institutions
and expand rural credit facilities. There were few land reforms.
This led to lack of economic growth.
 Regional specialization slackened
Though specialization took place, it took time to become
widespread as high railway rates resulted in farmers allocating
some portion of their field to consumer goods for consumption
because they feared increase in railway rates might increase prices
of consumer goods. Hence regional specialization also slackened.

Therefore agriculture did lead to increase in agricultural output but

agriculture did not become a growth sector.

Impact of Railways on INDUSTRIES

In the manufacturing sector, effect of railways on output and employment

were equally mixed.
 Before the advent of railways in India, there were no modern
industries. Railways played a major role in the growth of India’s
modern industry. However, the growth was extremely limited.
 There was lack of heavy industries in the sub-continent. That is
why materials and man power for railways were imported. The

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Government of India did little to stimulate the development of
heavy industries.
 Coal Industries – The prices of coal was increasing because of
monopoly. As a result, the delivered prices increased. (expensive
transportation costs) Hence, the spread effects from the
production of coal were limited. Instead, it stimulated the Britain’s
economy.
 The industry was in ‘comparative disadvantage’. The high rates hit
the infant industries which were unable to compete, particularly
those not located at the ports. Block rates did impede the
establishment of industries that would have served internal
markets.

Impact of Railways on OCCUPATIONAL STRUCTURE

At all India level approximately the same percentage of total workers were
employed in trade, industry and services at the beginning of the period
under consideration as at the end.

We know that before railways there were virtually no modern industries in

India. By transporting raw materials at lower costs and carrying finished
goods to internal markets, railways played an important role in the growth
of modern industries in India. There was a sizeable increase (absolute) in
labor but percentage of total workforce did not increase. Coming of the
modern industry led to the decline of handloom (traditional) industry.
Hence decrease in the employment in handloom industry was offset by an
increase in employment in modern industry.

There might be absolute gain or loss in non-agricultural employment, but

in net terms railways did not alter the composition of the labor force in
major sectors of non-agriculture. Also the proportion of the workers in
agriculture and non-agriculture did not alter significantly and India
remained a pre-dominantly agricultural country.

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In some place like West Bengal, railways led to the development of
industries (Iron and steel and engineering industries), while in some places
like Rajasthan, with the coming of railways there were “disappearing”
industries and agriculture expanded. The transport revolution was
redundant on a range of local industries and services.

PROS and CONS of Railways

PROS
 Railways altered the transport system drastically. It improved
connectivity and was a fast and a reliable medium of transport. It
came to be called “Nation on wheels”
 Railways reduced the transportation costs. There was fall in prices
by 94% and by 9% of the National Income in 1900.
 There was commercialization of agriculture which led to increase
in the inflow of income to rural areas. This increased their savings,
led to specialization and profits increased.
 Markets expanded and there was more competition. Exports and
Imports increased and agriculture became cost-competitive.
 Because of Railways employment increased both in transport
sector and in agriculture. Though there was loss of employment in
the traditional sector, but it was more than offset.
 Railways reshaped the pattern of India’s foreign trade and helped
tie India to the British economy.
 Railways encouraged internal trade because of which price
differentials were removed and prices lowered.
 Railways also led to the development of modern industry in India
and there were modern industrial units.
 Railways also encouraged tourism.
 Railways led to the dissolution of caste system as different castes
would travel side by side.

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CONS
 Railways, because of the guarantee system led to economic drain.
There were more tracks than what was required leading to
wasteful construction. Also there were wrong placements of
tracks.
 Tax revenues were used to subsidize the railways which did not
lead to social benefits.
 Structural changes in the economy were basically due to lack of
linkages. The financial capital to build the railways came from
Britain. For management, skilled labor was required which was
imported from Britain. Government of India did very little to
stimulate and develop heavy industries or import management
skills within India.

 There was lack of backward and forward linkages. Industrial sector

suffered. Also the financial sector and the labor markets suffered.
India had poorly developed modern capital markets. So, raising of
99% of capital was in Britain and only 1 % in India. These
benefitted and led to economic development in Britain.
 Also, high railway rates affected specialization. Rate structure was
against the infant industry, especially those near the ports. It also
hindered coal industries, hence had a dampening effect on the
growth of the industries.
 Railways also led to pollution and deaths.
 With railways, spread of infections was fast. There were severe
epidemics in the late nineteenth century and also in the twentieth
century and railways only aggravated the problem by spreading
infections and diseases and affecting masses.
Data to show the growth of railway system in India
 Density of rail lines
1880 – 35 km/ 10000 sq. km
1947 – 159 km/ 10000 sq. km
 Length of tracks
1860 – 1349 kms
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1870 – Over 7000 kms
1890 – Over 25000 kms
1947 – Over 65000 kms
By 1947, 78% of India’s total area fell within the range of the
railway system.
 Passenger kms per capita
1882 – 18
1929 – 108
1946 – 164
 North India lines
Rates of Return Earnings
5-7% 21%
7-8% 38%
+8% 41%
 In 1881 to 1916-17, absolute rates decreased by 50% while real
rates decreased by 84%
In 1916-17 to 1922-23, absolute rates increased by 51%, then
became constant. Real rates increased by 221% between 1919-20
and 1933-4.

Summary

Objectives: Commercial, Military, Famine Lines, Political

Complex system of Ownership and Management:

Guarantee - British capital – private Criticism

system companies contracts - Wasteful use (70% of
- Government Lines, 1869 length of track)
-Takeover Policy, 1879 - 43% of earnings of rail
-Management takeover, system
1975 - Not the highest level
-Mergers of social return

Immediate Response to Railways:

Passenger Traffic (19 million to 1 billion)
Freight (4 billion to 44 billion)

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Cost Reduction (94% compared to other sources)

Impact on different sectors:

Agriculture Manufact- Transport Financial Labour Foreign

uring Trade
-International Link - More jobs Capital -Racial -Rise in
competitiveness Competition in railways – -1% from discrimina freight
-Specialization Employment about 1 lakh India tion - Exports of
-Price integration Lack of - Rise in -99% from -Britons wheat rose
-Commercialization linkages/ demand for Britain engineers by 230%
Land markets spread feeder -Indians in - Imports
Income in rural effect services Capital menial up by 350%
areas Coal, an -Decrease in Market low paid - Britain –
Large and small exception jobs in not jobs of India’s
farmers competing affected drivers largest
Landless laborers transport etc. customer,
Jobs created sectors Source of
Expenditure of new India’s
income 3/4th of
imports

Structure of Rates and Fares:

 Determined by private companies, however location determined

by government
 Monopoly power – low level of competition, demand inelastic
 Fares higher compared to US (40 – 60%)
- Phase 1: 1853-1880 Monopoly power high
- Phase 2: 1881-1915 Monopoly power low
(collision of interests – Rates fell by 50%
absolutely, 84% relatively)
- Phase 3: 1916-1947 Monopoly power high coz of
clearing houses, mergers, branch expansion –
Rates rose by 51% absolutely, 221% relatively)
 Price Discrimination
- Long distances<Small distances
- Ports<Inland
- Block charges
 Effects
- Boosted export s -Ports developed
- industrial expansion - Jobs

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- Growth of port cities - Karachi vs. Mirzapur
- Specialization in agriculture
- Agriculture favored
- High transport charges increased costs

Long term Effects:

- Increased Agricultural Output
- Growth of modern industry, mining
- New Jobs
- Redistribution of urban population
- Higher incomes for some segments
BUT NO LONG RUN STRUCTURAL IMPACT.

Questions
1. The guarantee system of financing the Indian railways was
inherently unjust and inefficient. Comment.
2. Analyze the impact of railways on agriculture and occupational
structure of the workforce between 1818 and 1914.
3. Railways development and industrialization go together. Is this
true? In this context trace the pattern of development of railways
in British Raj.
4. Write a short note on the impact of railway development on the
growth of modern sector.
5. Analyze the growth of railway system in India during the British
period. What implication did this growth have on economic
development of the country?
6. “While Indian railways did possess significant monopoly power,
this power was not absolute nor was it static.” Comment.

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Chapter 8
Deindustrialization
Any decline in the proportion of the working population engaged in
secondary sector, or a decline in the proportion of the total population
dependent on the secondary sector is known as de-industrialization. This
definition was given by Daniel Thorner, who also concluded that the
census data does not provide evidence of de-industrialization in India from
1881-1931.

In India, the traditional handicraft industry was declining but that was
taking place everywhere. It was necessary for Industrial Revolution to take
place. However, there were differing impacts.

Metropolitan Countries Colonial countries

If there was decline in one branch of Being poor, there were lack of
secondary sector, soon more opportunities and hence difficult to
employment was created in the find re-employment once
other branch. displaced.
In order to prevent the destructive No help was given to modern
effects of de-industrialization and industries (in India) until the First
enhance the technological growth in World War. The protective devices
the other sectors, protective were used to cripple the indigenous
measures like tariffs were used. industries.
Cotton mill industry, a NEW industry Depressive effect on the economy
led to Industrial Revolution so the was felt the most on handloom
destructive effects were less. weaving and spinning – the largest
traditional industries.

Capital industrialization is characterized by three factors:

1. Increase in the proportion of national income generated by the
secondary sector.
2. Increase in the proportion of the population engaged in the
secondary sector.
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3. Increasing degree of mechanization in industry.
A diversion from any of these is ‘non-industrialization’.

Francis Buchanan Hamilton carried out a survey to determine the total

population dependent on industry from 1809-1813. The assumption of the
study was that those who spun cotton or silk yarn supported only
themselves and those who were full time artisans supported a family. 1901
was taken as a benchmark for comparison. The districts of Patna, Gaya,
Shahbad, Monghyr, Bhagalpur, and Purnea were taken, making up the
Gangetic Bihar.

The result of the survey was that there was a drastic fall in the proportion
of population dependent on industry between around 1809-13 and 1901.
It fell to half the former levels. The population increased but still there was
a fall in absolute terms, major part of it was because of the decline of the
textile industry. The percentage of population dependent on cotton
spinning and weaving to total industrial population in Gangetic Bihar was
62.3 in 1809-12 which came down to 15.1 by 1901. Most of the displaced
workers shifted to agriculture because of lack of opportunities and others
migrated to Calcutta (Hooghly) in search of employment. This survey
indicates de-industrialization.

De-industrialization in All-India Context

 The degree of concentration of traditional industry was unusually high
in Gangetic Bihar because:
- Muslim nobles with urban culture settled there during the
disturbed years of 18th century.
- The area was located inland and hence not a major place of
manufacture for export.
Thus de-industrialization was also because of the displacement of the
traditional manufacturers to the internal Indian market.
 Gangetic Bihar: Only in Monghyr district there was some large scale
manufacturing establishment but still the loss of employment in the
traditional industry was quite high.

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 Calcutta and Bombay: Some modern industries were coming up but
addition to the labour force was inadequate to even absorb the growth
in the labour force of India. De-industrialization led to immiserization.
The fall in employment in the traditional industry for Bengal was 16
times that for Gangetic Bihar.
 East India (except Assam): De-industrialization was general for the first
50 years under study because the jute mill did not come up till 1855 and
its growth was quite slow.
 Deccan: Protected against the erosion of the indigenous hand weaving
industry. This was because
- Relative lack of exportable products which in turn did not create
trade channels.
- Lack of westernization.
- Relative inaccessibility when coarse cloth pre-dominated in
Manchester exports.

Technological Changes in the 19th century viewed from the under

developed countries

 Regarding technological changes, there are diverging views about the

interaction between advanced and underdeveloped countries. The
general notion is that the industrialization in advanced countries retards
the industrialization process in the underdeveloped countries.
 There are disagreements regarding the nature of development process
as well. According to Clark-Fisher scheme, economic development
proceeds from a situation where a very large part of population is
dependent on agriculture to a situation where agricultural production
has fallen to 20% or less of the total.
 Egypt made attempts of industrialization but under the pressures of
western powers like Britain there was deliberate de-industrialization.
Even in Burma, Philippines and Thailand rural industry gave away on a
large scale to production of exports under the impact of colonialism.
 De-industrialization was not compensated by concurrent rise of modern
manufacturing industries offering an equal amount of employment.
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Evidently, as Ricardo also said, there was a fall in the employment as a
result of the introduction of more capital intensive technology.
 There was investment of capital in virgin lands and the Europeans took
full advantage of the mixture of new technology and new capital. It
destroyed the traditional industries in the underdeveloped countries.
 The creation of overseas markets for the European manufactures led to
decline in income and employment of the artisans in the
underdeveloped countries. This was not compensated by the gains in
the advanced countries.
 Panglossian syllogism: It is possible to think of a situation in which
technological change in the advanced countries leads to a smooth
transition in the under developed countries characterized by full
employment throughout, but with the gradual adoption of superior
techniques both in agriculture and industry, and an attendant shift of
the working population towards agriculture.
 Marx has talked about the international repercussions of the
introduction of modern machinery. If we look at the Ricardo-Hicks
framework, in the Ricardian case the root of the problem is an increase
in the degree of mechanization (rise in the fixed to working capital
ratio). Also the ex-ante investment/savings had not increased
sufficiently to compensate for the fall in the employment in the
consumer goods industry.

However the model has certain implicit assumptions like (1) Planned
savings are invested and the problem lies in inadequacy of savings. (2)
Fall in wage-earners’ incomes in consumer goods industry does not lead
to any contraction in the market for consumer goods. The validity of the
assumptions in Britain’s context remains untested.
 In the Third World countries, the merchants or the trading class who
could have invested in new types of machinery were dwindling.

Thus, we know how employment was affected as a result of the

technological change. There was no effort by the state towards the re-
employment of the displaced workers. According to Bagchi, even with the

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existing techniques, the transfer of artisans from textiles to agriculture in
India in 1820s and 1830s would require a massive investment effort but
there was no government planning for it, so it might be that the landlords
were able to get the displaced artisans or new entrants into the labor-
force to clear land largely at the expense of their own labour.

Conclusions and Summary

1. Adjustments to technological change in the advanced countries
took place overseas. Labour saving technological changes and
creation of markets was because of the Third World countries.
2. There was transfer of investible surpluses from Third World
Countries to Western Europe. This made transition easier in the
Western Europe but not in under developed countries.
3. The technological change led to contraction of potential incomes
and savings of under developed countries.
4. Absorption of displaced workers would have required massive
investment but neither the government nor the business class
took the initiative.
5. There was asymmetry between the growth process in advanced
capitalist countries and the process of change in the under
developed countries from about 1820 to 1914.

To sum up,
The causes for deindustrialization in India were:
1. Lack of technological skills to compete with the British machinery
and the obsolete existing Indian tools and equipments.
2. Disappearance of demand for several artisan goods and urban
handicrafts as handicraftsmen lost patronage and became
unemployed.
3. Shift to using European goods by even native rulers resulting in the
emergence of a new trend.
4. Bias in the development of railways, because of which areas not
connected by railways did not flourish as proper industrial centers.

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Railways also brought good quality European goods which
replaced the traditional existing ones.
5. British policies which encouraged capital intensive industrialization
at the cost of existing handicrafts and small-scale industries.

The major component of industrial production was declining and the

growing component remained small. As a result, may be the total
industrial production could have grown, if at all, only very slowly and
registered a declining trend for most of the 19th century causing
deindustrialization.

If we assume that the income generated by primary and tertiary sectors

together grew faster, or declined more slowly than income generated by
the secondary sector, the reversal of second condition associated with de-
industrialization follows, resulting in de-industrialization. But if this was
not so, then it will be economic retardation or stagnation.

Questions
1. “Least controversial is the de-industrialization in the 19th century,
but to drag further into the inter war years would be blinding
ourselves to the changed context which facilitated
industrialization.” Discuss.
2. Explain the de-industrialization debate in India. What were the
causes of de-industrialization in India?

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Chapter 9
BOMBAY COTTON MILLS 1854-1947
Classical Notion: Indian industrialization was inhibited by firm resolution of
commitments to the traditional social order in the countryside. These
traditional social orders subdued the creation of an industrial labour force
and any movement to the city was temporary. As a result, Bombay cotton
textile industry faced shortage of labour before 1920 which also affected
stability and discipline.

But, it has been said of cotton textile industry in Bombay that at least till
the 1920s, the industry precisely got the kind of labour force and the kind
of labour discipline it wanted and needed.

Analysis of Bombay industry

 No labour shortage – The size of the labour force has steadily
expanded before 1920.
Evidence – (1) Mills were able to hire new recruits without any upward
pressure on wage rates. (2) There is no evidence of shift towards
capital intensive methods. If there was shortage of labour, these mills
would have used capital intensive technologies to compensate for the
shortage of labour.
Argument - Is it not possible that wage rates were independent of
labour shortages because of cultural reasons? Justification- The
changing wage structure during 1897 when there was shortage of
labour due to plague indicates that for the period under consideration,
the argument is false.
 From where did the workers come? – Most of them came from
districts of Bombay Presidency, initially only from a few known
districts. Moreover, initially more people came from far off places at
least 101-200 miles away as compared to those from hinterland. The

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only justification given for this is the changing economic situations in
rural areas and changing employment opportunities in Bombay city.
 Duration of service (Stability?) Increasing proportion of people was
recruited from permanent residents in Bombay. Over the years, there
was an increase in proportion of workers who provided ‘long service’
to the industry. This was because of changing income and
employment possibilities in the industry. This contradicts the
instability theme of classical notion.
 Absenteeism- Willful absenteeism was approximately less than 10%
and this was quite evidently due to illness. Also, there is no evidence
for seasonal swing in absenteeism associated with agricultural
requirements of rural sector, which also shows stability!
 Caste- There was caste clustering in the mills but still, different jatis
worked together. Industrial functioning was not hampered by these
traditional distinctions of castes. This does not mean that caste
attitudes did not exist. They did, but did not affect the Bombay mills
and its recruitment process in any way.
Exception- Hindu untouchables were excluded from weaving
department. Though common logic would say that this was because
the clean Hindus and Muslims refused to work with them, but there is
no evidence to support. Alternate explanation- Weaving was a high
paid job, reserved for the clean castes and the untouchables came in
late and occupied low paid jobs. Though no strong evidence is
present, but the fact that untouchables were also excluded from high
paid jobs in industry supports this explanation.
 Group divisions- These were not based on jatis or castes but on
differences in language, region and religion. The psychology of the
workforce, the rigid traditions and the rural social order did not
create labour problems within the industry.

The competitive nature of markets and the economic and technical

characteristics of the enterprises were taken into consideration before
recruitment and after 1920 the circumstances changed.

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Before 1920 there was ramshackle system of labour use and discipline.
There was a casual organization of mill labour force.

 Factors determining forms of labour utilization – The industry

focused on two things (1) Relative cost of capital and labour. (2)
Markets in which they had comparative advantage.
 Informal shift system - Capital costs were high and labour was cheap,
so the industries tried to use capital continuously, at highest
achievable speeds. Thus, only minimally trained labour would do. Also
more labour was employed because of the work schedule and hence
workers got breaks when machines were running.
 No well defined tasks – There was no elaborate system of supervision
of the production process and hence no regulations to decide the
relation of each worker to his task.
 Recruitment process – This was left to the jobbers as the quality of
output and the stability of mill workers did not affect the profits of
the enterprises. There was low probability of a more elaborate
system of recruitment leading to increase in profits.
 Effects of Dasturi (corrupt practices) – Dasturi was the money that
the jobbers exacted from the workers as a price of getting and
holding jobs. It was immoral in the way it led to exploitation of
workers. People sought employment through dasturi and there was a
higher labour turnover. However, dasturi would have existed even if
jobbers were not given the task of recruitment.
 Labour market competitiveness – The workers were lured from one
factory to another by giving a promise of higher wages. There were
unsuccessful attempts by established mills to set wage-
standardization schemes.
 Labour movements and fluctuating wage rates– This took place with
the change in market demand and the workers moved in search of
the highest wage rates available. Also there was no clear concept of
promotion/hierarchy which acted as a disincentive and workers
moved in search of improvement of position.

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Overall, a casual labour force in the industry. Reasons – skills were easily
learned, encouragements to instability and no rewards for constancy, no
incentive at all to stick to one job, and frequent cutbacks of work because
of demand fluctuations. This system of casual labour existed till 1920. This
system of administering the work force could not easily be modified after
1920, when the situation demanded. The attempts by mill owners to
transform the methods of labour utilization came in late.

Reasons why change in labour workforce was required

1. Major crisis caused by increasing competitions from up-country.
2. Japanese mills were now becoming a threat for the Indian mills.
Dealing with the problem
 An attempt to attack on all-industry wage level.
Consequence – General strikes of 1924, 1925.
 The Indian Tariff Board in its report 1927 suggested rationalization of
production involving expensive raw materials and high value product.
Consequence – Transformation of traditional methods of labour
utilization and discipline was required. Great strikes of 1928, 1929.
 The mill owners were making unilateral efforts to solve the problem
which created a suspicious environment in the mills. This combined
with the low strength of the labour unions led to the collapse of the
1929 strike and these infant trade unions disappeared.
 Even after the collapse of unions, there were pressures of
modifications in work organization. The Great Depression resulted in
shutting down of mills and Bombay mills reducing labour
requirements. However, the employers made only the most
necessary modifications while retaining the old format.
 The Bombay cotton mills survived through the Depression but the
general strike of 1934, showed what employers could do in desperate
financial situation which created workforce fears and hostilities. The
unrest was due to ruthless wage reductions and ambiguity in work
rules. The workforce was demoralized and couldn’t cooperate to
demand for a successful change/reform.

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 State Intervention – This was essential because employers were
unable to solve the problems and power of the unions was moderate.
- Trade Disputes Conciliation Act 1934 – Objective was to induce
employers to apply their own work rules. This proved very
difficult.
- After 1934, State defined its own terms of employment; discipline
and wage payment and the authority to determine own labour
discipline was eliminated.
This led to a high degree of industry wide conformity to the solutions.

What do the strikes that took place show? These strikes show the
attachment of the workers to the industry. Had the workers been casually
attached, there would have been no strikes and the workers would have
quietly returned to their villages. Also, strikes were not because of change
in attitudes or changes in rural social structure (which didn’t occur) Rather
the strikes took place because of –
1. Workers coming under the control of Communists who provided
leaderships for the discontent.
2. There was end of labour force growth and hence no fear of raw
recruits.
3. The changes in the mills were profound and rationalization of
1920s required revision of tasks and reduction of unemployment.

Comparison of Bombay mills with TISCO

Bombay Mills TISCO

The workers required very casual The workers required a broader
training and the most limited range of skills and training.
supervision.
Stability of workforce was of no Needed a stable workforce for
concern and recruitment task was profitable operation.
given to jobbers.
Ramshackle discipline was seen. Ramshackle discipline was never
feasible.

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There were large number of mills There was only one important
around and alternative employment employer
opportunities were available.
There are doubts about stability There was stability of workforce
because it is unclear whether and this situation was clear.
workers moved from one mill to Established in 1908, labour force in
another or from mills to 1957 amounted to 40,000 workers.
countryside.

Conclusion

It is relatively difficult to create a disciplined industrial labour force in a

newly developing society. The difference in worker stability was not
because of psychology or traditional environment but because of employer
policy. It was markets and industrial technology which affected employer’s
policy leading to the way labour organization was.

Questions
1. Describe the organization of labour force in Bombay’s cotton
textile industry. To what extent was this industry constrained by
supply of skilled labour?
2. It has been said of cotton textile industry in Bombay that at last till
1920s the industry got precisely the kind of labour force and the
kind of labour discipline it wanted and needed. Explain. What
implication did this system of labour utilization have for the period
after 1920s?

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CHAPTER 10
INDUSTRIES (Rajat Ray)
At the time of independence, the Indian Union possessed a large and fairly
sophisticated modern industrial complex which was the biggest in the
‘underdeveloped’ part of the world. How this came to being is a subject of
discussion.
Roots: The origins of industrial capital in the new states of India and
Pakistan have been traced to:

1. The world of bazaar in which indigenous bankers and traders

operated.
2. Older merchant communities – they were engaged in a different
set of activities which involved marketing of agricultural produce,
financing of inland trade in commodities, facilitation of movement
of artisan products and peasant crops etc. This was done by means
the inland bill of exchange called hundi using the indigenous form
of commission agency, known as the arhat.

These activities in the bazaar allowed the merchant communities to

accumulate capital and forge long distance connections in the inland
market. This was done on a large scale from the First World War till the
independence.

There are divergent views on the growth of private enterprise in India. It is

a well acknowledged fact that no industrial revolution took place in India.
All of them subscribe to either of the two underlying concepts:

1. That a colonial factor was responsible for the distorted pattern

of India’s industrial evolution.
2. That the explanation for the same rather lies in the low level of
Indian economy.

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Francis Buchanan: He outlined social factors – the doctrine of karma and
the rigid social and economic system characterized by caste, purdah and
joint family and labeled them responsible for inhibiting the spirit of
enterprise among the Indian population.

D. R. Gadgil: He emphasized economic factors inhibiting entrepreneurship.

He recognized the difficulties of capital mobilization on account of
smallness of capital resources with respect to the size of population, late
development of organized banking and stringent monetary conditions in
harvest time which compelled banks to keep as much of their resources
free as possible and not locked up in long term industrial loans.

A.K. Bagchi: He underscored the systematic advantages gained by

foreigners vis a vis their Indian competitors by means of cartels as well as
by virtue of the racially discriminating policies of the government of India.

Morris: He emphasized the strict business considerations that guided the

investment behavior of European businessmen in India.

TRENDS IN INDUSTRIAL PRODUCTION AND EMPLOYMENT

1. The proportion of population dependent on industry declined

significantly in the course of the nineteenth century. The
emergence of modern industry did not offset the decline in artisan
industries.
2. As per Buchanan’s figures, the proportion of people deriving their
sustenance from industry declined from 18.6 percent in 1809 to
8.5 percent in 1901. Much of this decline was due to a drastic fall
in the number of weavers and spinners in the Gangetic districts of
Bihar in the course of the century – their proportion to the total
industrial population going down from 62.3 percent to 15.1
percent.
3. Then in the twentieth century – there is evidence to suggest that
the above deindustrialization was arrested. Modern manufactures
expanded fast in the 1880s and 1890s going up from Rs 282 million
to Rs 870 million.

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4. The real product of Indian industry as a whole (taking both modern
and artisan manufactures into account) went up.
5. Until the outbreak of the Second World War, artisan output was
greater than the factory output, a fact which set India apart from
industrial countries.
6. However looking at figures for modern industrial growth in
isolation can give an impression of high growth rates, it is
necessary to remember that India was still a predominantly
agricultural and artisanal economy. Large scale mining and
manufacturing accounted for a small portion of the net domestic
product right till the outbreak of the Second World War.
7. The factory product was so small a portion of the NDP that the
increase did not produce any visible impact on the occupational
structure of the economy. The occupational structure remained
unchanged with agriculture’s share at 70 percent, manufacturing
at about 10 percent and services at about 15-20 percent. A slight
downward trend in industrial workers was observed.
8. Thus, deindustrialization in the nineteenth century was followed in
the twentieth by a mixed type industrial development- a
significant rise in the output of factory industry, a not-so-sharp
increase of employment in factories, and a slow expansion of the
total output of artisans but per head output went up. This was
thus a limited kind of industrialization.

BAZAAR

Indian market was a novel hybrid which cannot be compartmentalized

simply on the basis of primary, secondary and tertiary sector of service.
This classification is hardly suitable for an agrarian country with its large
number of handicrafts closely allied to agriculture.

Similarly a simple classification of organized and unorganized sector is not

apt.

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At the outset, there was no unified money market in India governed by a
single bank rate. The money market was divided in to three sections
governed by different rates:

a) The rates charged by Western Banks

b) Fluctuating bazaar rates of hundis traded in the market
c) Higher rates charged by moneylenders

An example from the nineteenth century records of the Punjab

government contains an interesting statement of these rates. Simla in
1875 –

Rate at Alliance Bank of Simla- 12 percent

Money lent by native bankers to native traders – 6 to 12 percent
Money lent to agriculturists – 12 to 18 percent

The rates prevailing in the bazaar were not necessarily higher than those
quoted by banks. There was a larger amount of loanable money in the
bazaar, so the indigenous bankers could often afford to under quote the
bank rate. Thus the nineteenth century Indian economy consisted of three
distinct social agglomerations: ‘Westernized Enclave’, ‘The indigenous
Bazaar’ and the ‘Subsistence economy’ of peasants, artisans and petty
dealers who relied on usurious loans from moneylenders.

Two reasons for the coming up of these agglomerations (separated from

each other by the fact that credit did not move from one complex to the
next in a sufficiently large volume) were:

1. Capture of the commanding heights of the Indian economy by British

capital, especially imports, exports and shipping along with
agricultural and manufacturing activities
2. The mutually beneficial adjustment reached by the European
corporations with inland merchants, commission agents and bazaar
bankers who would obtain produce from inland and also distribute
imported goods in the interior for the Europeans.

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The bazaar was not a primitive peddlar’s world, as compared to the world
of banks and corporations. The bazaar bankers also dealt in ‘Mobile Credit’
– negotiable paper which circulated in the market. Also, this indigenous
money market financed the inland commission agents known as arhatiyas
through whose network of commission agencies all movements of
marketed produce took place within the country. In fact by the mid-1860s,
the hundi network was well integrated with twin headquarters in Bombay
and Calcutta.

Hierarchical Impact:

The formation of these social agglomerations transformed the sociology of

the time by creating classes with hierarchies.

- At the upper tier, the European banks, shipping lines and managing
agency houses maintained a monopoly
- The above monopoly relegated the bazaar bankers and merchants to
the intermediate tier of the economy
- The merchant communities now operated within the redefined nexus of
the bazaar. The growing traffic in produce and hundis between the
market towns strund alonthe railways came to be dominated by new
merchant communities. They were like auxiliaries of the imperial
business concerns.
e.g. Parsis, Bhatias, Khojas and Memons from Gujarat, Cutch and
Kathiawad, the Multanis from Shikarpur et al. Their strong community
ties assisted inland and overseas migrations, laying the basis of
mercantile and banking networks that had not existed before.

These merchant communities had a certain space defined for them, but
they were definitely excluded from the highest tier. Within the sphere
defined for them, there sprang up large Gujarati and Marwari family firms
with extensive networks linked to the railways and telegraph. Some of them
founded several cotton mills in Bombay and Ahmedabad in the late
nineteenth century.

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TALE OF SETH HUKAMCHAND

Seth Hukamchand set up his own business by separating a share of

parental banking business in Indore at 1900. He adopted an
innovative way of capital accumulation.

First, he made profit out of the price differential of opium between

India and China. China had millions of opium addicts around this time,
so the demand for opium was high and the prices were exorbitant.
Seth Hukamchand would purchase opium from various places in
Malwa (Madhya Pradesh and Rajasthan) at Rs 2000 a unit and would
sell it in Shangai , China at Rs 10,000 per unit.
Second, when after some time, this trade was quashed by a legal
decree, he started trading actively in Indian spot and futures market
in cotton. He gambled on violent fluctuations in trade. Eventually he
became known as the ‘Cotton prince of India’.

Having accumulated capital in this manner, he set up the first Indian

jute mill in Calcutta in 1917. He enjoyed investor confidence and trust
of people from his experience, so he had no problem in raising capital
for the mill. He also carried on the family banking business alongside.
However he was well aware of the transient character of the cotton
futures market and he abandoned it in 1924. Then he confined
himself to spot transactions and to the administration of the mills.

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This is one insight into the budding entrepreneurs of the time. Broadly
speaking, most indigenous firms tended to operate in areas which foreign
firms found either too risky or not sufficiently attractive in terms of the
profit margin.

Some scholars argue that before 1914, Indian entrepreneurs stayed away
from industrial ventures not because of any racial bar but because they
had more profitable alternatives in the bazaar. M.D. Morris argues that
there may have been in India not one effective profit rate but two. This is
because Europeans were typically satisfied with rates of return
comparable with rates earned in Britain while Indians sought higher rates
akin to those available in other parts of India.

In effect, there were two distinct markets in India:

A mass market in which A small market for high-class goods
the main consideration catering to about one million people
was not the quality but whose incomes and living styles were
the price of the good. royal. They consisted of the European
Cheap goods sold like population of merchants, missionaries,
hot cakes. civil administrators, and officers and
soldiers of the British army, Indian
princes, landlords and other people with
westernized tastes.

While huge profit margins could be obtained by doing business with the
upper class, the lower class mass market offered little profitable avenues
for foreign sellers.

THE NEW AGE OF PARTNERSHIP

The Charter Act of 1813 threw the trade between Europe and Indian open
to private traders, the agency houses of Calcutta, Bombay and Madras
expanded their operations with the help of the East India Company. They
developed new colonial trade in which the export of cotton and silk
textiles to Europe was no longer the only items. Indigo, Cotton and opium

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became new items of export. These paid for shipments of Chinese tea to
Britain.

New role of Agency Houses:

The agency houses now built ships, employed them in the trade of the
Indian Ocean and by a natural extension went into the promotion of
insurance companies and banks. As the Company’s monopoly of the trade
between Europe and India came to an end and as exports of Bengal and
Malwa opium to Canton through the agency houses in Calcutta and
Bombay rose, the agency houses took an increasing share in the new
triangular trade between India, China and Europe. They also operated in
bills of exchange between India, China and Europe. They promoted
industrial ventures inland and financed indigo planters.

Some examples:

Fairlie Fergusson and Company was the biggest of the agency houses in
Calcutta till 1812. It owned the largest number of ships and managed the
Calcutta Insurance Office and the Calcutta Life Insurance Company dealing
largely with opium and indigo.

Palmer and company, the successor to mercantile supremacy in Calcutta

owned six ships, financed indigo concerns and managed Canton Insurance
Company.

Thus these agency houses (export houses) undertook the first private
corporate business and industrial activities in India.

Brokers:
Brokers were closely associated with the agency houses. They would bring
in guarantee contracts for supply of exportable produce from the inland
merchants. Sometimes they might be important merchants conducting
business of their own.

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For example, Motilal Seal a rare Bengali shipowner and merchant magnate
of Calcutta, lent money while acting as broker to Oswald Seal and
company.

Bengali Merchants:
Overall, two weaknesses in the position of Bengali merchants were
realized, as acknowledged by N.K. Sinha:

a) Their abstention from inland trade and bazaar banking and the
weakeness of the upcountry market links.
b) They did not venture to sail to Canton in order to open up direct
cotton and opium dealings with China, which left them vulnerable
to the tricks of their European correspondents.

Equality of Partnership
Kling has identified Carr, Tagore and Company (1834) as the first equal
partnership between European and Indian businessmen and as the
initiator of the managing agency system in India. It extended the technique
of running insurance companies to wider fields of business and industry.
Between 1836 and 1846, the firm promoted six joint stock companies:

Calcutta Steam Tug Association,

Bangal Salt Company
Calcutta Steam Ferry Bridge Company
Bengal Tea Association
Bengal Coal Company
India General Steam Navigation Company

Next, Jamsetjee Jeejeebhoy (JJ) and Sons had a strong presence in shipping
and external trade. The Parsis of Bombay had already established
themselves in shipping, shipbuilding and exports of opium and cotton to
Canton. Before the Opium War of 1840, the firm was equal partner in the
informal Malwa Opioum Syndicate which controlled market in Canton. This
firm was engaged in sailing ships to China and England and in transacting
bills of exchange between India, China and England.

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Rise of European Style Banks – Evidence of British control of business
concerns:

The new age of partnership was characterized by the rise of European-

style banks in which Indian capitalists had a significant part as promoters
and stock owners.

Indians obtained anywhere between two-thirds and four-fifths of the

credits granted by the bank. This explains the importance of the
‘khazanchee’ (treasurer) – a native officerlooking ater the Indian
component of the bank’s business in the day to day running of the bank.

So, when the aggressive smaller European agency houses of Bombay

induced the government, despite the reluctance of three oligarchical
houses to set up the Bank of Bombay, Parsis contributed 23.6 % of its
share capital and Framji Cowasjee was appointed as its single Indian
director, a post later occupied by Jamsetjee Jeejeebhoy.

The semi-official banks of Bengal, Bombay and Madras were discouraged

by the government from operating in the foreign exchanges. So this
business went entirely to the private European agency houses after the
East India Company withdrew from the field in 1833. To take advantage of
this expanding business, Mackintosh and Company and other European
agency houses of Calcutta promoted the Union Bank in 1829. This new
bank was financed by Dwarkanath Tagore and his European friends to
finance the innovative schemes in which they were involved – steamboats
on the Ganges, a steamferry bridge connecting Calcutta and Howrah, a tea
plantation in Assam etc.

Things turn sour later. Dwarkanath Tagore became wary of unscrupulous

practices of his European colleagues which he found at variance with
sound banking ethics. He sold off his Union Bank shares. Dwarkanath
Tagore died in 1846. And the dead man was right. The Union Bank crashed
in 1848. This crash was brought by unsound exchange transactions with
London and insecure advances in the falling indigo market. The Bengalis
experienced a general collapse of faith in European business reliability.

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The first exchange bank in the history of India was the Bank of Western
India promoted in 1842 by a mixed group of European and Indian
capitalists of Bombay. Within four years, branches sprung up in Calcutta,
Madras, Colombo, Hong Kong and Singapore. This bank was followed by
two other banks – the Commercial Bank of India and Mercantile Bank of
India, London and China.

The trend towards growing British control of business concerns was not
confined to Bengal alone:

JJ found himself fouced out of his earlier lucrative bills of exchange

business. Severe difficulties were experienced in the 1840s on account of
the devastating competition of Free Traders and Yankees who ran their
sailing ships much cheaply than the country ships of Jamsetjee and other
Bombay ship-owning magnates. On e by one he had to sell his ships off,
until he had only one left in 1855.

Post Mid Century Doom (Shut-out-the-Indians tendency)

After mid century the international environment was no longer favorable
to the growth of big Indian business in the country’s ports and abroad. The
business balance of power shifted away from smaller Indian firms to bigger
European firms in India and from India itself to the world centre of trade
and finance i.e. London. This was on account of developments between
1850 and 1880 like

- Completion of railways reaching far into the interior

- Development of the steamship services through the Suez Canal
- Linking up of the inland telegraph and the overseas cables into one
gigantic worldwide system of information at electrical speed
Effects:
1. The early exchange banks which were located in India with strong
Indian partnerships, they now shifted their headquarters to
London, beyond the reach of Indian businessmen, and
consolidated their hold over Indian exchange and finance by
remote control.

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a. The process began with Oriental Bank shifting its
headquarters to London
b. The Mercantile Bank of India, London and China merged
the Chartered Bank of India, London and China and control
passed into the hands of a London-based board of
European directors in 1857.
2. The Oriental Bank, the Chartered Bank of England, Australia and
China and the other newly opened exchange banks of London cam
to monopolize the financing of India’s export-import trade, in
which they instinctively favored European as against Indian
merchants.
3. The European banking system was now complete and the
tendency was to shut out Indians.
4. Natives, in particular Bengalis who were hitherto prominent
borrowers of the Bank of Bengal were virtually eliminated from its
business and the position of the bank’s khazanchee was now
reduced to a cipher!
5. Simultaneously, the great steamship liners were forming
conferences i.e. monopoly rings to exclude all competitors by
means like rate wars and deferred rebates. India’s overseas and
coastal shipping started to be dominated by European behemoths.
Native shipping was swept clean from the runs on which the liners
came to operate. Nor could Indian firms shift to steam shipping.
The shipping ‘conferences’ and managing agency oligopolies soon
became interlocked. Shipping conferences of British steamship
companies monopolized the carrying of merchandise between
ports in India and other ports of the British Empire.

More about shipping:

The leading European exporters helped the shipping rings as their agents.
Occasionally there were conflicts between the European shippers and the
liners. The conference liners pushed up the freight rates for shipments of
rice, wheat, linseed, jute and tea beyond market rates in the late 80s and

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in protest the European tea exporting firms of Calcutta opened a Planter’s
Line in 1889 and an Indian Mutual Line in 1893.

Indian businessmen and industrialists in retort, sought to break through

the monopoly shipping rings in alliance with the rising Japanese shipping
business groups. In 1893 Nippon Yusen Kaisha lined up with the Tata Line,
newly opened by Jamsetjee Nusserwanjee Tata in the interest of the
Indian cotton mill owners, who were being discriminated against. The
British government took a hostile view of the NYK- Tata agreement and the
proved too strong for the Asian alliance of steamers. One by one, the
Indian cotton mill owners on whom J.N. Tat had relied for support of his
national enterprise deserted it. The Tata Line collapsed. NYK returned to it
previous alliance but by demonstration of it s muscle brought freight rates
to Japan down below freight rates to China.

The Inward Turn of Indian Trade:

Thus the second half of the nineteenth century was characterized by a

clear cut racial division of economic space. Indian businesses were
prevented from competing in sea trade on equal terms, eventually these
businesses turned inwards.

They had formed wider connections in the inland trade and banking in the
course of feeding the long import-export lines. While firms like those of
Tagore and Jeejeebhoy declined, the Gujarati and Marwari bankers and
merchants operating inland survived by virtue of their wide ranging credit
and marketing operations along the routes running from the inland
produce marts to the ports and between the inland market towns.

The huge sprawling world of bazaar was segregated from the consolidated
enclaves of European banks and corporations. This segregation was
actually in some sense, a blessing in disguise. Segregation brought
autonomy and autonomy engendered the possibility of growth within the
confines defined by the imperial economy. Firms like Tarachand
Ghanshyamdas were all-India firms with branches all over the country.
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Eventually, European traders at the ports discovered that speculation had

become systematic in opium and all other leading objects of trade. By the
end of the century even wheat and seeds had entered the market of
forward sales conducted by thrusting merchant communities.

The system of integrated forward trading that developed in the inland

exchanges was largely in the hands of those mobile merchant communities
from among whom many of the Indian industrialists were destined to
emerge.

INDUSTRIALIZATION

Very little industrialization took place during the colonial rule. The progress
can be described in three phases:
PHASE 1: 1857-1914 (Till the beginning of First World War)
PHASE 2: 1914-1939 (Till the beginning of Second World War)
PHASE 3: 1939-1947 (Till the end of colonial rule)

PHASE 1 - 1857-1914 (High noon of the empire)

- This period was dominated by European managing agency houses,
the carriers of private European trade in Asia.
- The agency houses in Calcutta and Bombay began to rise after the
loss of company’s monopoly over India-Europe trade. They were
making their hold over the famous triangular trade between India,
China and Europe.
- The private European enterprise enjoyed a position of
unchallenged supremacy in the Indian economy.
- The railways came to India and linked Calcutta, Bombay, Madras
and Delhi. But, India missed an opportunity of inter-linked growth
of railways, iron and steel manufacture, coal production and
engineering industries.
- Business and industry were concentrated in the ports of colonial
India in 1870s, especially Calcutta and Bombay.

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- The aim of the reckless speculators of managing agencies was to
get rid quickly by selling off mis-managed mills and half cleared
gardens.
- These agency houses promoted industrial ventures inland. They
undertook the first private corporate business in India.
- There was a bias towards light manufacturing and planting and
mining industries which developed extensively and relied heavily
on markets abroad.
- A major part of cotton textile industry of Bombay catered to the
markets in the Far-East. The tea and the jute industries of eastern
India were export-led and there was no competition with the
British industries.
- One reason why Indian entrepreneurs did not enter the jute
industry was that the markets lay abroad. The export trade passed
out of Indian hands in the later 19th century.
- The coal industry was dependent on the railways. It had a huge
domestic market because railways were expanding and resulting in
a nation-on-wheels.
- The Steel industry did not flourish much. Small quantities were
produced. It did not have a significant impact on industrial
production.
- The industries in areas of natural advantage were based on under-
developed technology easily imported from Britain.
- As the economics of empire attained maturity, the Banias of
Calcutta were eliminated. The cotton mill industry expanded
steadily despite the laissez fairer economics of empire and the
political hostility of the Manchester lobby.
- The mills fell into the control of families which emerged as the
captains of the growing industry – Parsis, Bhatias, Khojas, Baghdadi
Jews and Europeans in Bombay, and Banias and Nagar Brahamans
and Kanbis in Ahmedabad.
- There were Petits, Tatas, Sassoons, and Currimbhoys who were the
biggest groups, and big names in the industries.

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- There was an increasing tendency to produce cotton fabrics for the
home market after the Swadeshi movement of 1905-8.
- The steel industry developed in 20th century, and was yet another
momentous development. It was possible because of the Bombay-
based capital. TISCO and BISCO came up. TISCO’s initial rated
capacity was 100,000 tonnes which was a small part of the total
demand for imported steel in India.

PHASE 2 - 1914-1939
- This period saw intense competition with the advance industries of
the West for the market for their goods. It saw a decline of
European managing agencies. The Indian firms were rising and
there was a shift from export-oriented industries to that which
catered to the domestic market.
- Along with cotton textiles industry, light manufactures also
developed. These industries were protected by tariffs. There were
cotton tariffs, which were also meant to generate revenue for the
government during war when expenditure rose considerably.
- 1916-1924 – Greater Extension Programme of TISCO – Steel
industry developed considerably.
- There was inter war industrial growth which created a market for
heavy engineering and chemical industries, however it did not lead
to industrialization on a large scale because of lack of capital
appropriation.
- For the jute industry, G.D. Birla led the Marwari traders of Calcutta
and direct contacts were established with jute market in Europe.
He established the first Indian Office in London in 1917 and soon
because one of the three leading jute exporters.
- The Federation of Indian Chambers of Commerce and Industry was
newly formed in 1927 to represent Indian business interests, put
pressure against the bar to the entry of Indians and as a result the
ban was lifted in 1928.
- The First World War initiated long term political and economic
developments whereby power was transferred gradually to

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Indians. In the long run, it resulted in profitable operations to
India’s domestic economy.
- The ascent of the Depression 1929 – Export markets of tea, jute,
and minerals collapsed. The foundation of the European business
contracted irreversibly. The Tatas, Birlas, Dalmia and Walchand
were coming up and there was lack of investment by foreigners.
The managing agencies suffered political, financial and
entrepreneurial loss.
- The share of domestic market possessed by Indian industry
expanded. This was due to high revenue tariff on imports and
grant of protective tariff to cotton textiles and other industries.
Those facing losses found it ‘profitable’ to leave from the interiors.
- The inland business was now left to the Indian people. There was
‘limited industrialization’. Due to poverty, the limited purchasing
power and under-developed condition of the economy restricted
the demand for the technologically sophisticated goods.
- Thus, heavy industries developed during this period but the level
of development hindered the pace of industrialization.

PHASE 3 – 1939-1947
- It was the technological leap of the Second World War that
enabled Indian industry to launch out on new and complex lines.
- The War hastened the structural shift of Indian industries towards
the production of heavy chemicals, sophisticated machinery,
machine tools, aircraft, automobiles, locomotives, ships and a
variety of other capital goods.
- The production of ships, aero planes, etc was prohibited as it
would reduce the productive capacity. Hence, focus was on
productive capacity (though it was small)
- The move into a new era of investment began during this period
and it was the big Indian houses that led the way.
- New industries were initiated. Factors like amount of risk, rates of
profit, length of gestation period were carefully calculated.

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- In India, components industry developed after the WWII in
response to the growth of the principal industries.
- The immediate goal was not to make profits, but to be committed
towards the process of industrialization in the country.
- The narrow technological base proved to be a serious hindrance in
the progress of industrialization in all directions.

Role of Nationalists
The Nationalists, by the end of the 19th century, had acquired a deep
understanding of the basic growth of India’s colonial economy. They did
not accept the fact that under development of India’s economy was due to
pre-colonial past. Rather, they believed it was because of colonial rule and
subordination.

 They led an attack on the laissez faire policy. It did not apply to an
economically backward country like India. They demanded tariff
protection for Indian industries. According to them free trade
resulted in unequal relationship.
 Nationalists maintained that the core of economic development
lay in rapid industrialization. India was economically backward
because it was characterized by a society where industry played a
minor role.
 They believed industrialization was necessary to reduce pressure
on land and increase employment.
 Within industrialization, focus was on heavy, capital goods sector.
Absence of capital goods industry led to economic dependence
and underdevelopment.
 NPC (National Planning Committee) and Bombay Plan emphasized
on rapid industrialization for self-reliant economic development.
 Small scale and cottage industries were to be protected because
they provide huge employment and require less capital, therefore
bringing capital-output ratio to manageable size.

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 Entry of foreign capital was allowed only if it does not interfere
into political influence and does not accompany foreign vested
interests.
 They wanted Nationalization of RBI and licensing of banking
business. Banks not registered in India were not allowed to raise
loans.
 Indian industries, infant industries were protected indirectly by the
State by lowering rupee-sterling ratio and falling rupee.

Questions
1. Give reasons for slow and lopsided development of industrial
sector in India during the British rule.
2. India was not an appreciably more industrialized nation in 1951
than in the first decade of the century. What were the constraints?
3. Discuss the growth of the industrial sector in India during the
British period, highlighting the role of Indian capital and enterprise
in it.
4. British investment was an outpost of the Western economies, not
an organic part of the internal economic structure of India. Would
you agree with this statement and in what ways were the
enterprise and investment different?

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CHAPTER 11
INDUSTRIES (T.Roy)
1900 – Most of India’s manufacturing workers were employed in small-
scale industries. There was no machinery or large factories.
With industrialization – Focus was on relatively more mechanized, factory-
based, more visible, large-scale industry.

Labour intensive Industrialization

The view that during the colonial period, employment was shrinking in
small scale has been questioned. Some sections of small scale industry
were in decline. The reasons for this are
1. Competition with machinery
2. Competition within the small-scale industry sector between
different types of firms, between factories and households.
By means of these, small-scale industry contributed to labour-intensive
industrialization. It involved the use of manual labour, rather than the
substitution of labour by capital.

Types of Industry Defined

Criteria Large Scale Small Scale Small
Industry (Modern) Scale(Traditional)
Organization Large factories Factories with Households and
with several usually less than other small
hundred workers hundred factories with very
and supervisors. workers. few workers.
Technology Modern Very limited use Use of hand tools
machinery, of machinery. at home.
electricity and
steam power.
Regulation Factories Act and Some industries Usually not
other acts regulated. regulated.
governing
management and

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organization.
Vintage Colonial Colonial Pre-colonial
Examples Jute, cotton mills, Cotton gins, Handloom weaving,
steel, sugar, foundries, Rice leather
paper, etc. and flour mills, manufacture,
weaving metals, woods,
factories with minerals, etc.
power driven
looms.

Long term pattern of industrialization

There are two main sources for data on industrial employment:

1. Census – It gives total employment in industry
2. The statistics on officially registered factories – It gives
employment for these registered factories.

Large-scale industry - dominated employment in registered factories.

Traditional small-scale industry – dominated employment outside the
registered factories.
Modern small-scale industry – It straddled both factory and non-factory.
Most firms in modem small scale industry did not register themselves.

Industrial employment declined in 1911-31. This decline derived mainly

from a decline in employment in small-scale industry.
Share of industry in  Large-scale industry remained
total employment a relatively small segment in
1911 11.8 employment. But the share of large-
1921 10.7 scale industry in the real income
1931 10.2 increased from 15% in 1900 to about
40% in 1947.
 The share of large-scale industry in employment grew slowly in the
colonial period, rather rapidly between 1951 and 1971 and has
been declining after 1971. This is mainly because of the scale of
growth in public-sector enterprises.

 Small-scale industry employment fell before independence but grew at

a small rate thereafter. There are two types of small-scale firms:
households and unofficial or informal factories.
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1961-91 - Shift in employment from households to informal factories.
 Thus the low rate of growth in employment was because of a shift from
firms that use less productive and less specialized labour to firms that
use more productive and more specialized labour.
 Women’s participation in industrial employment dropped from 34.3%
in 1911 to 29.7% in 1931 – Women mostly worked at home and with
the decline of household industry (because of loss of competitiveness),
their participation in industry fell.
 Labour productivity in small scale industry increased – Suggests
organizational and technological change within the small scale industry.

The output indicators show growth, whereas the employment indicators

show stagnation or fall.
The large-scale industry was concentrated in two provinces, Bombay and
Bengal, which were relatively less important in small-scale industry. In the
colonial period, nearly half the employment in small-scale industry was
located in the united provinces, Punjab, and Madras.

After 1947, Western India increased its share of employment in small-scale

industry significantly.
Eastern India remained less important in small-scale industry employment
and declined in respect of large-scale industry employment.

Textile Industry: The Most Important Industry! One in every four workers
was employed in textiles. Next in importance were food processing, metals,
wood products, and hides and skins. High resource and labour intensity
characterized large-scale industry. However large-scale industry arose
where mechanical options were available.

Industrialization in the twentieth century needs to explain two facts

concerning small-scale industry:
1. The low or negative growth rate in employment.
2. Increase in productivity and wages.

INTERPRETATIONS OF INDUSTRIALIZATION
DE-INDUSTRIALIZATION CONTROVERSY

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Any decline in the proportion of the working population engaged in
secondary industry, or a decline in the proportion of the total population
dependent on secondary industry is known as de-industrialization. The
causes for deindustrialization in India were:
- Lack of technological skills to compete with the British machinery
and the obsolete existing Indian tools and equipments.
- Disappearance of demand for several artistic goods and urban
handicrafts as handicraftsmen lost patronage and became
unemployed.
- Shift to using European goods by even native rulers resulting in the
emergence of a new trend.
- Bias in the development of railways, because of which areas not
connected by railways did not flourish as proper industrial centres.
Railways also brought good quality European goods which
replaced the traditional existing ones.
- British policies which encouraged capital intensive industrialization
at the cost of existing handicrafts and small-scale industries.

LABOUR INTENSIVE INDUSTRIALIZATION

More than de-industrialization, it was labour-intensive industrialization,

which means an industrialization that does not replace artisans with
machines but allows the artisans to work harder, improve quality raise
productivity and contribute to industrial growth.
So, there are two types of industrialization:
1. Mechanization.
2. Labour intensive industrialization.
Britain experienced the dual process. India experienced mainly the second.

HANDLOOM WEAVING

- By 1919, 2.5 million handloom weavers were in business. This figure

represented 20 per cent of industrial employment. The cotton-mill
workforce, at a little less than half a million, formed three per cent of
the industrial workforce.

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- Handloom weaving was the largest industry in India. They accounted for
about 25 per cent of the cotton cloth produced annually in the first half
of the twentieth century.
- Rising production and a constant loom count suggest that the
productivity and capacity of the looms increased. This can be
independently confirmed from the information we have on technology.
- The power-driven loom was on average 4- times faster than the hand-
driven loom. Still, handloom survived.

DEMAND
The demand side reasons why handloom survived in the phase of
industrialization are:
1. A part of what the hand-weavers made was highly skilled and/or met
specific wants. Traditional preferences for consumer goods of a certain
kind or quality enabled handlooms to survive.
2. Fabrics that used coarse or very fine cotton yarn, or had complex
designs woven on the loom, or used non-cotton yarn tended to use the
handloom. Example – Saris which had particular types of border design
that only the handloom could effect.
3. The markets for artisanal and mill-made textiles were segmented to a
large extent, which accounts for the survival.
4. The growing nationalist sentiments in the inter-war period, particularly
the ideology of swadeshi, helped the handloom weaver. Its impact was
variable over space: In Bengal, where swadeshi sentiment was the most
intense, handloom weaving actually declined in this period.

The changes in industrial organization and technology strengthened the

production side of the industry.

THE SUPPLY SIDE: Industrial Organization and Technology

- Around the third quarter of the 19th century, the usual form of
industrial organization in handloom weaving was the household.
- Inside weavers family, adult men typically worked as weavers' adult
women on winding and sizing operations and children as assistants in
both weaving and winding.
- Significant number of handloom factories had appeared in the textile
towns which employed migrant labour and were started by rich
weavers and merchants.

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- Capital and labour involved in the handloom industry became
increasingly mobile.
- In early 20th century, there were (1) Efforts of provincial governments in
popularizing technological dynamism (2) Endogenous capitalist
tendencies.
- There was a shift from throw shuttle to fly shuttle.
- Advent of synthetic dyestuffs in place of vegetable and animal
substance. (less knowledge intensive)
- Emergence of power loom factory.

WAGES AND EARNINGS

- According to Sivasubramonian weavers' money-wages 'declined from a

high level [at 1900] to very low levels by the end of the thirties.
- According to T.Roy, there was some increase early in the inter-war
period, but a reversal in the post-Depression years, which is how
agricultural wages moved too.
- The stagnant wages refer to ordinary semi-skilled cotton weaving and
hired workers.
- The returns to low-skilled textiles remained small because of
competition with mill textiles.
- Unemployment ensured that wages remained depressed.
- The average real wages in ordinary cotton weaving did not change
much in the long run and that inequality within the industry increased.
- The transition in the industry created a space for the capitalists to
operate and generally capitalists gained because there were new
avenues of making money.

INEQUALITY AND DIFFERENTIATION

- The general basis for the growing inequality in weaving was

differentiation amongst weavers based on product, status, skills, and
honour. Handloom weavers were differentiated.
- At the top were groups that earned quite a good income by
contemporary standards, manufactured silk or cotton textiles involving
complicated designs, often used elaborate looms, were urban, took part
in long-distance trade, and were in some way or other involved in a
business network.

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- At the other end were the rural artisans who supplied simple routine
articles to their peasant neighbours. A large group of people was
engaged in both labour and industry according to season.

EMPLOYMENT RELATIONS: From Family to Wage Labour

In 1900 - Household was the universal unit. Women and girls of weaving
families performed warping of the yarn, etc. Weavers as a rule were men,
sometimes assisted by young adults, almost invariably boys. About one in
ten women in weaver families knew how to weave.
20th Century - The household unit was generally in decline in handloom
weaving, in some cases being replaced by factories staffed with migrant
workers. The family firm and the apprenticeship system were the usual pre-
factory systems of production. There was a steady decline in the percentage
of women workers in the overall workforce.

STAGES OF DEVELOPMENT

- 1800-60 saw a net decline in employment in textiles. The export market

for cloth began to wane from about 1800.
- In 1860-1900, the railways intensified competition for handloom cloth
and the two famines of the Deccan plateau caused disruptions for
industry. Commercialization of agriculture improved purchasing power
and extended trade in cash crop regions.
- World War I created an acute shortage of yarn and proved a major
disruption for the weaving industry. However, the inter-war period was
again one of growth when most types of changes in organization and
technology occurred.

THE POWER LOOM INDUSTRY

- In the inter-war period, many power-driven looms were discarded at

scrap rates by the mills. Buying such a loom and reconditioning it to fit
the weaver's factory shed was not expensive.
- Relatively well-off weavers started to replace handlooms by power-
driven looms. The first such looms in India appeared in handloom towns
about 1900.
- From the 1930s' the power looms spread much faster when many
interior towns with handloom industries received electricity.

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OTHER INDUSTRIES

Leather Woollen Carpets, Engraved

Brassware, Shawls
Tanning of hides and skins became a There was growth of highly skilled
major export industry in the late 19th crafts such as Delhi, Agra, Amritsar,
century. From the 1870s to the Lahore, Srinagar, etc.
Great Depression, these remained a
major export. Thereafter, the export Products - Woollen carpets, engraved
of tanned hides and skins fell. brassware, wood and ivory carving,
jewellery and shawls.
Much of the industry is built on a
foundation of skills, expertise, and Consumed by rich people in towns.
capital accumulated during the In colonial era, rich people became
colonial period. impoverished but these were
exported to long distances now.
In most places hides were bartered
for grain. Commercialization resulted in
increasing competition between
Market concentrated in Kanpur, towns.
Madras, Bombay, and Calcutta.
It weakened rural barter system and There was concentration of industry
servitude. in few places. Crafts were practised
either in households or, more
Division of labour and specialization commonly in workshops.
increased with diversification.
New types of merchants appeared
and kharkhandari system was
followed.

Weaving of wool Utilitarian Crafts

Largely a rural and nomadic The major occupation of blacksmiths
occupation. and carpenters in the colonial period
was to supply and repair agricultural
The quality of home-grown wool implements.
was poor.
During the colonial period, new

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From the end of the nineteenth demand expanded in cutlery metal
century, formal or informal closures tools, machine parts, and durable
of the commons and wastes consumer goods.
reduced the supply of home-grown
wool as well as the locally woven Many blacksmiths entered these
blankets and garments. flourishing factory enterprises.

Long-distance trade expanded. Kumhars performed rural labour.

Railways played an important role in They were affected because of
deciding which places specialized in growing demand of metal utensils,
wool weaving – Rajputana, United poor quality of pottery and difficulty
Provinces and Punjab. of long distance trade.

Competition from urban weaving The furniture started to develop and

and the depletion of pastures the style of interior decoration was a
brought about a separation of product of cultural contact with the
spinning, weaving and the rearing of British.
sheep.
Specialization increased.

LABOUR IN TRADITIONAL SMALL-SCALE INDUSTRY

 In SSIs, there has been increasing employment of hired labour or the

growth of a labour market.
 FACTORY LABOUR
- Factories grew in four circumstances – in towns, in industries (less
skill intensive), in industries that were partially mechanized and in some
skilled crafts of North India.
- The migration of artisans is connected with the growth of factory
labour from the last quarter of the 19th century
 WOMEN WORKERS
- 1881-1971 - The percentage of women in industrial work forces
steadily declined and rose slowly after 1971.
- Impact of industrialization – exit of women workers and decline of
family as a work unit.
- According to T.Roy, very low age at marriage is one of the reasons
why women stayed away.
- Women’s participation was also dependent on their 'husbands' job
pattern.

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- The return of women to paid work(in 1970s) involves either
cultural change enabling greater work participation outside the home,
or the creation of new industrial organizations and new industries in
which women find it comfortable to work, or both of these.
 CHILD LABOUR
- Change from social contract to an unregulated labour market in
respect of employing children. Example – Carpet weaving industry.
- Child labour was justified by citing the carpet tradition. But in
reality children were no more employed in carpet weaving as part of a
master-apprentice system .They were not students or prospective
masters but mere cheap labour.
 Traditional Systems of Work: Family Labour and Apprenticeship
- Two common pre-factory systems of production – Family firm and
master-apprentice system. Firms using family labour employed workers
from within the family and masters hired apprentices. They participated
in industrialization and long-distance trade.
- The family firm and domestic labour were usually among Hindu
artisans and the master apprenticeship system was among the Muslim
artisans.
- In master-apprentice systems, master could control the graduation
of apprentices into masters and, thus, into potential competition.
- Ustad was a term used in North India – An ideology of
competence.
 Other Systems
- Two mixtures of traditional systems:
(1) Domestic collective work (2) Inter-family apprenticeship
- Domestic collective work – Women working in collectives inside
someone's home or in common spaces inside a village populated by
artisans. Example – North Indian embroidery.
- Inter-family apprenticeship - In industries and regions where the
main system was family labour, children were available for hire in
neighbourhood firms (mainly boys). It often led to near-formal
apprenticeship such as that in carpets.
 Dissolution of Traditional Systems
The reasons for this are:
1. As supply of labour increased relative to capital, investment funds
became less easily available.(Loss of access to capital)
2. Agglomeration (production concentrated in towns that had a
comparative advantage). It encouraged migration.

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3. Division of labour and specialization was less effective inside a
family.
4. With the increasing division of labour, craftsmanship has become
less important than before.
5. Surplus labour available for industrial employment increasingly
originated among groups, such as small peasants, who did not
have prior experience in industry and thus had no prior ties with
traditional employment institutions.
6. Unequal job opportunities for men vis-à-vis women.

CAPITAL IN TRADITIONAL SMALL-SCALE INDUSTRY

 SOURCES OF CAPITAL
- Little contact with formal banking sector and informal money and
capital markets.
- Main form of capital – CREDIT. (Informal finance) example North
India baqi.
 ORIGINS OF CAPITALISTS
Which background the capitalists came from was determined by:
1. Differences in levels of skills – Those who possessed this capital
could easily control trade and ensure quality.
2. Whether a craft was export-oriented or oriented to the home
market – Need for capital was smaller in home market because
producers knew the marketing system better.
3. Social hierarchy - There was resistance from upper-caste
neighbours whenever loan was to be taken.
 ASSOCIATIONS AND ORGANIZATIONS - Collective organizations
played an important role in the traditional small-scale industry.
Masters needed some system of control over the graduation of their
apprentices into masters and thus into potential competitors. Insiders
needed to control the entry of outside into the craft. Where both
employers and workers belonged to the same community, conflicts
over industrial relations could be kept in check by strengthening the
sense of belonging to a community.

MODERN SMALL SCALE INDUSTRY

There are puzzles related to modern small scale industries in India.

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1. Period of growth: Invisible before 1900. Factories with little machinery
and less than a 100 workers were conspicuous in the 1930s. Their
growth, in fact, accelerated in the inter-war period.
2. Industry groups: The modem small-scale industry concentrated on
textiles, food, drink, tobacco, wood, and ceramics. Many products
were seasonal.
3. Scale: The broad groups of food drink-tobacco and wood-stone glass
accounted for about 20 per cent of factory employment in 1931.
4. Origin: A segment among them, such as the power loom factories,
dealt in old products. They represented advanced forms of traditional
small-scale industry roles. Others were of new origin in terms of capital
and labour, though not necessarily in markets.
5. Location: The growth of modern small-scale industry dispersed
registered factories beyond the main mill towns, such as Calcutta or
Bombay. Modern small-scale industry clusters were located all over
lndia.

Summary and Conclusion

- There is a controversy whether de-industrialization took place or not.
- It was a Labour-Intensive industrialization.
- Commercialization transformed traditional small-scale industry and
created modern small-scale industry in colonial India. A key feature of
the change was increasing use of wage labour in place of family labour.
- The labour rnarket emerged slowly out of two traditional institutions,
the family and the master-apprentice system. The trend of decay in
these institutions in the long run is owed to many factors, such as
migration, new entry in capital and labour, and the reduced role of
craftsmanship.
- Changes in the context in which children and possibly women are
employed in small-scale industry can be understood better in terms of
this framework of a shift from traditional institutions to markets for
casual labour.
- There was a persistence of traditional organizations in the short run.
But underneath that stability, a movement towards the labour market
slowly began. In one respect, colonial India was different from the other
cases.

Questions (from entire Industries)

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1. What were the major features of industrial growth in India
between 1857 and 1947? Were there any significant changes after
World War I?
2. Examine the role played by domestic capital and enterprise in
India’s industrialization during 1914-47. What were the major
constraints faced by these enterprises?
3. Outline the growth of private indigenous investment in India
between 1914 and 1947. Examine the role government policy in
this regard.
4. (Imp.) Railway development and industrialization go together. Is
this statement true?
5. Elaborate on the process of industrialization which picked up
momentum in the inter-war years. Do you think that the strikes
which occurred in the course of the inter-war years were indicative
of instability of the labour force?
6. Though the prejudices about labour not forthcoming to industrial
activities were unfounded, the worker stability in the industry
depended on the employer policy. Elaborate in the context of the
emergence of industrial labour force in India.
7. To what extent was India’s colonial position responsible for the
limited growth of industry in India?

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UNIT 5
Economy and State in the Imperial
Context
References:
1. K.N. Chaudhuri, Foreign Trade and Balance of Payments,
CEHI, Chapter 10.
2. B.R. Tomlison, 1975, India and the British Empire 1880-1935,
IESHR, Vol.XII.
3. Dharma Kumar, The Fiscal System, CEHI, Chapter 12., The
Fiscal System, CEHI, Chapter 12.
4. Basudev Chatterjee, Trade, Tariffs and Empire, Oxford
University Press, 1992, Epilogue.

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Chapter 12
FOREIGN TRADE AND BALANCE OF
PAYMENTS
“Trade between countries is a reflection of their resources and economic
structure and as these changes the complexion of trade between them
also changes.”

India was nearly the size of a continent. It possessed a wide variety of

resources which enabled her to generate a surplus over current
consumption. It was one of the great trading nations of Asia. In terms of
both the absolute volume of trade and its proportion to total national
income as well as commodity composition, India was quite different from
other underdeveloped nations.
- Unlike many other countries which rely on one or two items for
their exports receipts, India traded in a wide range of
commodities.
- Unlike many other countries, India traded in both manufactured
and primary products.
- The relative share of foreign and international trade was of less
importance quantitatively, even though the volume of trade was
large.
In the first quarter of the 19th century, much of the economic thinking
went into the problems relating to foreign trade. This was also because
India occupied a sub-ordinate position, which was crucial as well. The
emphasis on trade as an engine of growth was just for Britishers’ vested
interests. They wanted to make India more useful for them.

India saw major structural as well as quantitative changes in foreign trade

from 1757 to 1947. Even after the revolution of 1757, Indian trade

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continued to flow along the traditional lines and its composition was based
on an exchange of fine textiles, foodstuffs and other raw materials.

TRENDS AND FLUCTUATIONS: Total Exports and Imports 1814-1947

GROWTH RATES Exports ImportsThe table shows the growth

1834-1866 5.61% 6.01% rates of exports and imports in
1866-1891 3.27% 3.6% various periods from 1834 to
1891-1914 3.84% 4.15% 1941. The Charter Act came in
1914-1941 -2.72% -2.33% 1813 which abolished the
monopoly rights of East India Company and in 1833, the trading rights
were terminated completely.

Till 1866 1866-91 1891-1914

Years of highest growth There was a halving of There was stagnation
of both exports and growth rates in spite of in the Indian trade
imports. This was opening up of Suez along with Sino
because of the Canal which reduced Japanese War and
following: the distance between recessions in the
 Industrial Revolution India and London West. But, the growth
in Britain, economy drastically. The travel rate was higher than
was expanding time reduced from 3 the previous period
rapidly. months to 15 days. because:
 1853-56 Crimean War This was because of  Good monsoons,
in Russia promoted disturbing factors: favorable climatic
jute industry by  A period of famines, conditions.
destroying oilseeds harvest failures,  Though there was a
and hemp growing scarcities and temporary decline
areas in Russia. depression in 1908-09 because
 1861-64 American  Exchange rate of unfavorable
Civil War gave boost fluctuations: Gold harvests but overall,
to exports of Indian price of silver there were good
raw cotton by depreciated. monsoon
destroying cotton conditions,
growing areas in the especially in 1901.
southern states.

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 Coming of Railways  American Civil war  This was a period of
facilitated easy ended and hence rapidly increasing
transportation, the initial boost to prices, but the
thereby helping in Indian raw cotton volume of the trade
trade. subsided. kept pace with the
 Political instability has value figures.
lessened in India
because of Crown
Rule.

Period of negative trade 1914-1947

 1st World War and thereafter
- It affected India’s imports more than exports with trade ceasing
with enemy countries and dislocation of markets in Britain,
France and Belgium.
- Exports began to recover from 1916 and reached the pre-war
peak by the time war ended. They were given a boost because
of the increasing government orders for jute bags, hides and
skin for the manufacture of army boots.
- Imports lagged, declining in volume.
- End of WWI – Currency appreciated resulting in imports boom,
mainly in manufactured goods and replacement machinery.
Revival in exports was less dramatic because of currency
exchange rate, influenza epidemics, adverse agricultural
conditions, slow recovery in European markets and congestion
in railways.
- In 1920 currency depreciated, import boom stopped, those who
had imported had huge import bill and hence chances of getting
default. Imports trade revived in 1924 and remains better till
1929.
 Great Depression and thereafter
- There was serious decline in the overseas trade and the value of
exports fell. The adverse terms of trade, and decrease in
absolute size of foreign trade created deflationary effects. This

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was exaggerated by the operation of monetary factors which
was because of deterioration in India’s balance of payments.
- There was recovery in 1935 but it was checked by a 2 year
recession in US starting in 1937. The foreign trade was below
the pre-depression level.
 Second World War
- The war brought political uncertainties to India’s economic
future and closed a substantial part of India’s overseas market.
But, it increased the value of both exports and imports.
- Almost every country with which India traded imposed a
complicated network of commercial restrictions including India
which did so to conserve foreign exchange and ease the
pressure on limited shipping space.
 Other autonomous factors
- Population explosion and slowing down in Indian agricultural
output reversed the large trade in food grains.
- Production of import substitutes because of commercial
restrictions altered the commodity composition of Indian
foreign trade.
- Laissez faire ended because of the breaking down of
international monetary mechanisms. The automatic gold
standard mechanism and multilateral payments system of 19th
century could not maintain internal and external equilibrium.
The GOI envisaged policy changes like bilateral trading
agreements.

COMMODITY COMPOSITION: Structure of Exports and Imports 1814-1947

In the first three decades of 19th century there has been an elimination of
Indian handloom textiles from the international market. The other items of
exports following it earlier were opium, indigo, raw silk, raw cotton, food
grains, sugar, etc. The quality of textiles was very fine and was of
international standards. However, disappearance of textiles as a major
group of exports meant India was now left with primary commodities. The

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problem with the export of primary commodities is that there is instability
in their demand and there are adverse effects of rapid price changes.

Moreover, the
1814-1850 After 1850
extent of
Opium, indigo, raw Diversified. Emergence of
cotton and raw silk new items like food contribution to
dominated exports. grains, jute, tea. Oilseeds, country’s welfare
Accounted for 56-64% cotton manufactured depends on the
of the total value. products, hides and skin. relative position of
primary exports in the rest of the economy. Peasants produced primary
goods leading to ‘dual economy, and marketing arrangements for exports
largely in the hands of foreign entrepreneurs.

The table alongside shows the percentage shares in exports of various

commodities. Let us look into the reasons for these changes.
OPIUM
 The most
significant 1811-12 1850-51 1910-11
Opium 23.8 30.1 6.1
single item
Indigo 18.5 10.9 0.2
of export
Raw Silk 8.3 3.8 -
(20-30% of Cotton 4.9 19.1 17.2
the total Food grains - 4.1 18.4
value of Jute - 1.1 7.4
exports), Tea - 0.2 5.9
the Manufactured goods - 0.9 8.1
expansion Oilseeds - 1.9 1.2
of opium Hides and Skin - 1.8 6.2
was mainly to finance the China trade. The import of Chinese tea, silk,
porcelain to Britain was financed by the opium trade.
 This happened mainly after the acquisition of Bengal and Bihar which
were the major opium producing areas. Opium was sold to the British
private traders in Calcutta through a public auction, who then shipped
in private ‘country’ ships.

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 In 1839, Chinese government threatened to take serious action. The
East India Company declared a war on China. The export continued till
the beginning of the 20th century but there were threats of war.
 In 1907 and 1911, there were voluntary restriction of opium exports
and the export share was insignificant before WWI.
INDIGO
 16th and 17th century – Indigo was exported on a large scale to Middle
East and Europe. With the growth of cultivation dye plant in West
Indies, India lost competitiveness thereafter.
 Later, indigo industry was re-established in Bengal and parts of
northern India because
1. There was development of machine textile industry in Britain
which led to increased demand for printing and finishing of cloth.
2. The French Revolutionary Wars curtailed the production in West
Indies.
Hence, the expanding demand along with ample supply of capital
gave a boost to indigo production.
 The share of indigo in exports began to fall because:
1. The short term elasticity of supply of Indigo was low because of
which it was vulnerable to fluctuations in foreign demand.
2. The depression of 1830-3 and the huge fall in prices caused
fluctuations in the actual value.
3. Discovery of synthetic aniline dyes.
4. In the 1850s, because of rise in the prices of food grains, farmers
began to substitute rice for indigo. It led to ‘indigo riots’ in 1860s
leading to great reduction in the number of indigo factories.

RAW SILK
The exports of raw silk were substantially free from monopsonistic control.
The main rival of the Bengal raw silk was the Italian silk in the European
market. By 1849-50, the share of raw silk fell to as low as 4%. The decline
was because of (i) Low quality which was unacceptable to the European
silk industry. (ii) Relative growth of other exports.

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COTTON
 Cotton, like opium provided basis for the triangular trade between
India, China and Britain. Earlier, cotton trade was inter-provincial with
small exports to China, but with increasing demand from Lancashire
mills, cotton trade developed.
 Initially, Indian cotton was of low quality and short staple and hence
Britain mainly imported cotton from southern states of America,
though a certain quantity was exported from India to Britain. Hence,
the government opened research stations to teach Indians to grow
cotton but it was a failure.
 The price of the best quality cotton was higher in Bombay than in
Liverpool, thus exports were less. Also demand from China was
dependent on the state of her own cotton crop.
 The American Civil War in 1860 gave a boost to Indian raw cotton but
once the war ended, it subsided. However, due to the growth of the
textile industry on the European continent, need for cheap supplies of
raw cotton and the fact that machineries were more suitable for
working with Indian cotton helped India to maintain her exports.
 By 1913-14 Japan was the single most important customer for India
cotton (taking 45.3% of the total exports) and this continued till 2nd
World War.

FOOD GRAINS
 Before 1914, India possessed a very large export trade in food grains.
Burma was one of the major exporters of rice. Indian wheat and other
grain also played an important role in the international trade at this
time. The reasons were:
1. Opening of Suez Canal which reduced the cost of shipping and also
improved the quality by shortening the duration of voyages.
2. Government encouraged exports, evident from the export duty on
wheat in 1873 and construction of railways between ports and
towns.

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3. The increase in demand – Britain was the most important market,
taking 18% of total imports from India. It was however conditional
upon harvests in Britain.
4. Moreover, the fall in the sterling exchange of rupee kept gold prices
of Indian wheat in line with the international trend.
 After war started in 1914, there were export restrictions till 1922. The
slow down started because of increasing competition from other
wheat producing countries.

RAW JUTE
 The demand for container bags increased with the increase in food
grains trade. This had a direct correlation with the jute trade. This is
evident from the fact that the export of jute bags were mainly to food
grain exporting areas like US, Australia and Straits Settlements.
 The Crimean War affected the supplies of Russian hemp and flax,
which gave a boost to the Indian jute mills. There was Indian
competition in the American and the Australian market. Between
1900 and 1914, the industry in Bengal was making profits and was
prosperous.
 After the end of the boom conditions created by the First World War,
the difficult times started which saw greater fluctuations which were
observed mainly in jute bags than in raw jute, because:
1. Competition from US and Germany which imposed protective
tariffs.
2. Availability of substitutes in the form of economical packaging
materials.
3. The Great Depression which adversely affected jute exports.

Differences between Cotton and Jute trade:

1. There were alternative sources of cotton supplies within and
outside India but jute was a monopoly of Eastern Bengal.
2. There was a correlation between acreage of cotton and the
movements of its international prices, but this relationship was
stronger in case of jute.

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3. The jute industry largely remained European, but the cotton
industries were started by the Indians (merchants in Bombay)

TEA
 Tea was a relatively new export item from India and it became
important as tea plantations developed in India and the taste for the
tea in the West. The Assam tea company (formed in 1839) and the
displacement of China by India in the international trade shows
import substitution.
 Since the tea industry was owned by British capital and enterprise,
most of the tea gardens were in remote areas, wages were low,
workers were treated badly and employment remained depressed.
 The real expansion started in 1880s because of high income elasticity
of demand and improving standards of living in Europe and North
America.
 After WWI, the demand of tea became price-inelastic and number of
tea plantations grew, leading to oversupply. The Indian industry could
control output and prices by voluntary restrictions.

MANUFACTURED GOODS
Between
1885-6 and Exports Imports Exports Imports
1913-14, the 1885-6 1885-6 1913-14 1913-14
Manufactured 3.5% 80.4% 22.4% 79.2%
share for
goods
manufacture
d goods increased from below 5% to over 20%. Manufactured goods
accounted for 80% of the total value of imports. In the case of imports,
there was stability.

OILSEEDS
Before 1914, India was the largest supplier of rapeseeds and ground-nuts.
The demand for oilseeds was expanding in the 19th century with the
development of the margarine industry. The most important customers
were the continental countries, particularly France.

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HIDES AND SKINS

The trade in hides and skins was evenly distributed between Britain, US
and Germany. However, neither of the two was entirely new to India.

IMPORTS
The major imports in the early 19th century comprised of:
1. Coffee, Chinese tea, Sugar and Spices, products produced in Asia
but not in India.
2. Luxuries like Arabian incense and carpets and horses from Persia.
3. Wines and spirits for consumption of European residents in India.
4. Articles of mass consumption – cotton textiles, metal goods,
paper, glassware.
After 1850, composition of Indian imports remained relatively stable.
Articles of mass consumption were the major items of import, cotton
textiles being the most important.
 India was dependent on foreign sources for the second most
important item in domestic budget, i.e. clothing. Cotton
manufacturers emerged as the single most important class of foreign
goods consumed in India.
 The proportion of imported cloth was small before 1840, but
increased substantially by 1860 (60% of total British exports to India)
The share of cotton textiles in total imports rose from 26.6% in 1848-
9 to 40% in the next three decades.
 There was stagnation later because of the following:
1. In 1890s, there was expansion of Indian mill production.
2. The volume of imports fell after WWI and was below the pre war
level, because of emergence of Japanese cheap cotton cloth. The
monopoly of Britain was broken.
3. The cotton industry in India developed and became ‘mature’
which also got tariff protection.
Result: The imports fell to 447 million yards in 1940-1 which was
as high as 2156 million yards in 1886-7.

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Other major items of imports were cotton twist and yarn, wrought and
unwrought metals, railway material and machinery and mineral oil.
European countries had a comparative advantage in their production
because of their advanced technology and hence India ended up importing
these because it needed mineral oil for domestic fuel and lightning and
railways were developing, so the machineries for it had to be imported.
However, this in a way proved beneficial because railways resulted in
‘nation on wheels’ and yarn led to rehabilitation of the handloom textiles,
resulting in economic growth.

GEOGRAPHICAL DISTRIBUTION OF TRADE

Before 1860, much of India’s trade with Europe was with Britain. The
geographical distribution of the Indian trade was divided between Britain,
the Red Sea and the Persian Gulf area, China and the Straits Settlements.
As far as exports are concerned, China was as important to India as Britain.
However, there was asymmetry between export and import shares, with
China supplying
10% of the imports
and Britain 65-70%
of the total
imports. The
pattern of trade
was bilateral. The
difference
between exports
and imports was
removed through
imports of
‘treasure’.

Triangular pattern
of trade – India,
China, Britain

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The rise of China trade and the export of American silver to the east by a
new route- from Acapulco to Philippines resulted in a multilateral trading
structure. India was transformed from a creditor to a debtor country which
led to diversification of world trade.
After 1860, there was industrialization of continental countries like US and
Japan resulting in multilateral pattern of trade settlements.
There was a sharp decline in the share of Britain in her total exports, from
44.6% in 1850-1 to 30% in 1900-1. The proportion of imports supplied
from Britain continued to rise throughout the second half of the 19th

century (>80% in 1865-1888, 65% in 1900-1)

Because of the opening of the Suez Canal, the exports did not have to go
to Britain to be re-directed to the continent but could go directly. As a
result, the value of export trade with France, Italy, Germany, US and Japan
rose from 5-6% of total export values in 1850 to over 25% in 1900. Mineral
oil imports increased from US. Belgian iron and steel, German cotton
textiles and chemicals were also imported.
By the end of 19th century, the triangular trade disappeared with China’s
share in total exports and imports being 10.5% and 2% respectively.

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The 1st and the 2nd World Wars saw the decline in the importance of Britain
in the geographical distribution of India’s foreign trade. It took just a few
decades to break the dependence built over centuries!

BALANCE OF PAYMENTS

Balance of payments is a record of all monetary transactions between a

country and the rest of the world. The two principal parts of the BOP
accounts are the current account and the capital account. When all
components of the BOP accounts are included they must sum to zero with
no overall surplus or deficit. While the overall BOP accounts will always
balance, imbalances are possible on individual elements of the BOP, like
current account and capital account.
BOP=Current Account + Capital Account
Throughout the colonial period, India had a large export surplus, an
unusual characteristic of India’s foreign trade. Large export surplus means
favorable balance of trade, hence a current account surplus. Therefore,
there should have been a capital account deficit, i.e. capital outflows in
order to balance the BOP. But, colonial India saw large export surplus plus
capital inflows after 1850. So, how was BOP balanced?

According to K.N. Chaudhuri, the answer to this puzzle lies in the invisible
items included in the BOP and unilateral transfer of funds that India had to
make to Britain. These unilateral transfers were basically political charges
or so called ‘tribute’ by Dadabhai Naoroji.

Basically, Current Account = Trade Account + Invisibles. Trade account

was positive, but invisibles were huge, leading to a net negative current
account (Current account deficit) which with positive Capital account
(Capital account surplus) resulted in a zero BOP. The invisibles include:
 Services/Remittances
 Home charges
 Freight payments and commissions on banking and insurance
 Interest on the capital borrowed from London money market

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 Increased railway construction, so borrowing increased and hence
import of capital

Highlights of BOP in colonial period:

 There are no scientific estimates of India’s balance of payments in
the 19th century, though some attempts were made like that by
G.A. Prinsep in 1823. After the abolition of East India Company’s
trading activities in 1833, India’s external balance sheet became
simpler and the foreign exchange market became freer. India was
a net importer of treasure.
 After 1850, capital borrowed from London money market
increased. The annual home charges increased after 1858.
Between 1868 and 1887, India’s balance of trade surplus increased
from Rs. 13 billion to Rs. 30 billion. After accounting for the
imports of treasure, BOT surplus increased from Rs. 4.5 billion to
Rs. 20 billion.
 The first decade of 20th century saw stability in exchange rate in
spite of India depending on capital inflows to attain BOP
equilibrium.
 Proper estimates of India’s BOP are not available for the two
World Wars, but the position improved in both these periods. This
is evident from the fact that there was a rise in the exchange rate.
Some estimates of the inter war period are available, though
certain amount of subjectivity remains. From 1921 to 1930, India
was a net importer of treasure, thereafter it became a net
exporter of gold. The outflow of gold was because of British policy
to keep the rupee overvalued in terms of sterling.
 A small amount of overseas investment was also made by India
which is clear from the fact that in 7 out of 18 inter war years,
there were actual surpluses. The deficit in other years was covered
by external borrowings.
 The BOP turned strongly in India’s favour with the outbreak of the
2nd World War. India was able to pay back £320 million worth of
sterling securities by 1945-6.
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DRAIN
The favourable balance of trade position could have been converted to
India’s advantage but unfortunately, being a mere colony of Britain, the
opportunity was lost. This phase was known as ‘mercantilist’ because the
ruling country used India as a source of legitimate gains without paying
anything in return. Other than this ‘official’ drain, there was ‘private’ drain
because of bribery and extortions of various kinds by the servants of East
India Company.

The nationalists, Dadabhai Naoroji and R.C. Dutt treated the entire amount
of the export surplus as the net drain from the country. But, in order to
measure the correct value of the drain, a ‘value added’ concept should be
used. The cost of producing the exports should be subtracted from their
final sales value. The difference will show the real income leakage.
Example: If the inflow of railway capital from Britain increased the value of
imports into India, this would reduce the export surplus, without actually
diminishing the drain. The converse holds true as well. Thus, increasing
export surplus was a quantitative reflection of the drain; it might not
directly indicate the size of the drain.

Home Charges
The ‘official’ element of drain consisted of a substantial part of Home
charges. These were payments made directly by the British government in
India to the Secretary of State for India in London which was huge
amounting to Rs. 24.3 crores in 1897-98. It comprised of:
 Civil charges. (Rs. 3.3 crores)
 Military Charges (Rs. 5.57 crores)
 Amount paid out of Indian revenues to railway companies in
England in lieu of guaranteed profits. (Rs. 3.23 crores)
 Enormous amount of interest paid on debts. (Rs. 4.31 crores)
 Stores (Rs. 1.34 crores)
 Interest on railway debt (Rs. 5.53 crores)

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 Absentee allowances for public work officials (Rs. 0.07 crores –
negligible)

Dadabhai Naoroji on the Drain of Tribute, 1873

The drain consists of two elements – first, that arising from the remittances
by the European officials of their savings, and for their expenditure in
England for their various wants, both there and in India. And the second,
that arising from similar remittances by non-official Europeans. As the
drain prevents India from making any capital, the British by bringing back
the capital which they have drained from India itself, secure a monopoly of
almost all trade and important industries, and thereby further exploit and
drain India, the source of the evil being the official drain.

Summary
- India saw major structural as well as quantitative changes in foreign
trade from 1757 to 1947. Till 1866 were the periods of highest growth
of exports and imports – Industrial Revolution in Britain, Crimean War,
American Civil War, coming of railways and political stability.
- 1866-91 saw halving of growth rates in spite of opening of Suez Canal –
American Civil War ended, famines, crop failures, epidemics, exchange
rate fluctuations. However, 1891-1914 saw a greater growth rate
compared to the previous period because of good monsoons.
- After 1914, were the periods of negative growth – Two World Wars,
Great Depression, other autonomous factors like end of the laissez
faire, population
explosion and 1814-1850 After 1850
slowing of Opium, indigo, raw Diversified. Emergence
agricultural cotton and raw of new items like
silk dominated food grains, jute, tea.
output.
exports. Oilseeds, cotton
- Commodity Accounted for 56- manufactured
Composition 64% of the total products, hides and
Exports value. skin.
Opium: To finance the import of Chinese tea, silk, porcelain to Britain.

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Indigo: India lost competitiveness because of dye plant in West Indies,
French Revolutionary Wars and development of machine textile in
Britain.
Raw Silk: Poor quality, competition from Italian silk.
Cotton: Triangular pattern of trade, American civil war, Japanese
competition
Food grains: Burma exported rice. Coming of Suez Canal, increasing
demand, government efforts and fall in sterling exchange of rupee.
Raw Jute: Crimean War, direct correlation with food grains trade. Later
suffered because of Great Depression, Competition and substitutes.
Tea: High income elasticity of demand and improving standards of living
in Europe and North America.
Manufactured Goods: Share rose from 5% in the late 19th century to over
20% in 1913-14.
Oilseeds: Development of margarine industry, largest supplier of ground
nuts and rapeseeds.
Hides & Skins: Was evenly distributed between Britain, US and Germany.
Imports
Mainly articles of mass consumption were imported. Other imports were
cotton twist and yarn, coffee, tea, sugar, luxuries, wine, spirits, etc.
- The geographical distribution of the Indian trade was divided between
Britain, the Red Sea and the Persian Gulf area, China and the Straits
Settlements. The pattern of trade changed from bilateral to
multilateral.
- The value of export trade with France, Italy, Germany, US and Japan
rose from 5-6% of total export values in 1850 to over 25% in 1900 –
because of opening of Suez Canal.
- The two World Wars saw the decline in the importance of Britain in
the geographical distribution of India’s foreign trade.
- Colonial India saw large export surplus plus capital inflows after 1850.
The Balance of Payments was balanced by the invisible items. They
were the ‘drain’ as called by Dadabhai Naoroji.

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Questions
1. Analyze changes in composition and direction of India’s foreign
trade during the period 1870-1939. How far did these reflect the
colonial character of the Indian economy?
2. Importance of foreign trade to a country’s domestic economy
depends as much on the composition of its exports and imports as
it does on the direction in which it is sending and receiving them.
Illustrate with the example of India’s trading pattern in colonial
times.
3. Discuss the composition of India’s foreign trade between 1857 and
1947. What was the impact of tariff policy on it?
Note: Read Tomlinson before answering this question.
4. It has been argued that for the British, the great strength of the
Indian economy and the key to the financial stability of the
Government of India was its ability to generate an export surplus.
Why this should have been so and can this argument be reconciled
with the view that the most important benefit to the British
economy of the imperial connection lay in the Indian trade deficit
with Britain?
5. According to Nurkse, the rapid development of the British
economy was responsible for transmitting the process of growth
to those areas with which Britain had the closest trading links…
The mechanism of growth transmission seems to have come to an
end with the decline of multilateral trade following the World War
I (KN Chaudhari) How true is this of the Indian experience between
mid 19th century and World War II?
6. What do you understand by the term drain theory? In this context
how do you account for the fact that, but for short periods, India’s
Balance of Trade during the British Rule continued to be positive
but its Balance of Payments continued to be negative on the
current account?

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7. “Trade between countries is a reflection of their resources and
economic structure and as these changes the complexion of trade
between them also changes.” Elucidate.
8. The changes in the commodity composition of Indian exports were
the induced effects of factors operating through demand. (KNC) Do
you agree with this statement? Give reasons.

Brief Note
MONETARY SYSTEM
The main aim of the monetary system was to stabilize the exchange rate.
- If the exchange rate appreciated then it would discourage exports. It
would not be of commercial interests even though it would
encourage import of capital.
- If the exchange rate depreciated, then it would not be of British
interest as India would not be able to meet its sterling obligations to
Britain. The value of ‘home charges’ in Indian rupees would go down.
Therefore there was controversy between appreciation and depreciation
of exchange rate. However, the Government of India could not follow a
stabilization policy independent of London.

Great Depression
Price plummeted mainly because of decrease in demand. Because of
decrease in demand, the output fell. However the wages and the prices fell
less than the output. The fall in the output and employment was severe.
There was a fear of devaluation or depreciation which most countries did
and the exports fell. However, if there was no devaluation, it would lead to
deflation. In India, depreciation was not desirable because of vested
economic motives of Britishers who did not care about the welfare of
India. They just wanted remittances from India. Investment increased and
it crowded out the more productive public investment.

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Silver Standard 1858-1893
 Adopted in 1858, the ratio of rupee to pound sterling was 15:1. The
silver exchange rate was modified to settle the balance of trade.
 There were two ways of exchange between India and the rest of the
world:
- Council Bill system: The India Office gave council bills to London
which they brought to India and it was redeemed from the
treasury and used for transactions.
- Produce silver in Britain, ship to India and then convert to silver
coins and use for transactions.
 In late 19th century prices of silver were falling, silver supply was
increasing. The Council Bill system became a threat and hence the
second method was effective.
 The committee under Henry Herschell in 1893 abandoned the free
coinage of silver.

Gold Exchange Standard 1898-1916

 The committee under Henry Fowler in 1898 adopted the gold
exchange standard.
 The rupee to sterling pound ratio was 15:1, 16 pence for a rupee.
There were discussions on whether the gold exchange system is good
or not.
 The India office gave council bills to the Bank in England which was
limited to the home charges. Later on the limits were removed and the
council bills were used as a method/medium to stabilize the exchange
rate.
 In 1902, a gold exchange standard reserve was set up which consisted
of treasury notes, consols, gold securities, bonds, etc.
 Only time when the reserve was used was in 1907 when there was a
fear of depreciation of rupee and people were losing confidence in
rupee. “Reserve Council bills” was used as a method.
 At the end of World War I, there were pressures for the currency to
appreciate. It created problems for gold exchange standard and in

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December 1919 the currency appreciated. In 1920s there was
depreciation and in 1925, the exchange rate was 18 pence per rupee
and was to remain so for few decades.

Ratio Controversy and the Great Depression

With rupee-pound sterling at 18 pence per rupee, the demand for full gold
standard and autonomy with regards to exchange rate grew again. In
1920s
- The prices were falling.
- There were depression pressures (default on external obligations).
It was not easy. It was totally undesirable and unacceptable by
London.
- There was a rigid monetary policy. The confidence in rupee was
eroded which affected the BOP. There were adverse terms of
trade.
- It led to monetary contraction; interest rates increased and
created hardships for the people. It crowded out investment.

Gold reserve has been increasing and when the gold exchange was taken
off in London, pound devalued, gold prices in India was now less than the
prices in rest of the world. There were exports of gold. India was losing
out on a possibility to build reserves. It was British policy not to let India
build reserves as it was a threat to post war Britain’s adjustment process!

In 1935, RBI got control over the exchange rate. Money supply increased.
India was later on able to pay all its sterling obligations.

Critiques of Monetary System

1. Nationalist policies and business classes: They said that the
currency was systematically over-valued. The export prospects
went down though there was import of capital goods. There was
steady decrease in price levels in the second half of the 20th
century.

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2. Scholarly views: It was found in later research. Monetary system
was rigid and colonial in a fixed exchange regime. Policy was
never compromised on India’s external obligations, not even at the
height of depression. Britishers just had vested interests. They
wanted the stabilization of the economic transactions between the
two countries. They wanted to limit demand and import of gold
which was a threat to its post war adjustment process.

Price fluctuations
From 1875-1925, prices were increasing and from 1925 onwards prices
were decreasing. 1900 onwards there were several periods of short
inflation (20-30%) and by 1925, prices fell by a factor of four or more.
Prices fluctuations were mainly because
 Prices were weather sensitive
 Imports were sensitive to BOP
Maladjustment of transaction demand for money and transaction supply
of money happened in Great Depression also.
Increase Fall in
in Prices output
1903-08 33% 7% Money supply expanded, imports of
gold went down
1913-14 6-7% 14% Gold was not affected
1919-20 50% 30% “Private” gold transactions was
stopped

Public investment was less because of home charges and sterling

obligations. Government was poor. It spent little because it earned little.

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Chapter 13
FISCAL STRUCTURE
In 1858, there was a centralized empire. It was a magnificent structure but
a hollow one which could not raise enough revenue. In the latter half of
the 19th century there were financial difficulties, unstable rupee, the cost
of military was increasing and the revenue sources were inflexible. For
revenue new forms of taxes was required and there was DEVOLUTION.
However it was in two forms.
- Provincial and local administration were to have own sources of
revenue (Decentralization) The provinces were given some
autonomy of administration. Different provincial governments
were running their own departments like jails, police, education,
etc.
- Indians were nominated and elected for local and provincial
administration. Their power was increased.
However there was limited devolution and administrative changes could
not solve the financial problem of the Raj. By 1914, there were pressures
for further devolution.

Between 1880 and 1935, imperial imperatives and Indian circumstances

changed.

1880 1935
There were a few Indians who were Indians were elected in provincial
nominated in provincial and Central and central councils and had
councils and had no legislative unfettered legislative and executive
power. control.
Centralized structure of empire, Decentralized form of economy.
rigid and intact.
London directly controlled GOI London handed over the control of
which controlled the provinces. trade and tariff policy and
established independent Reserve

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Bank to look into currency and
national debt.
Local government had little Provinces were separate
autonomy. administrative units.

British Rule in India

1. It was not for the benefit of Indians or for the interest of the
Britishers, but to keep firm the foundation on which much of
formal and informal empire rested. India was to provide for
imperial cause and pay for the tariff. A balance between domestic
pressure and imperial demand was required which was disrupted
during WWI, WWII and the Great Depression when Indian
resources were pressed against imperial service. There were
political pressures because of determination of Indian leaders that
British should leave India.
2. India played an important role in Britain’s position in the World.
80% of the Indian exports were to Britain and India bought 10-15%
of British exports. Between 1890-1911 Indian exports to US and
Europe increased in semi-manufactured goods while that to Britain
decreased from 1/3rd to 1/4th. The triangular pattern of trade
(explained in Foreign Trade chapter) strengthened the British
economy. India was financing 2/5th of Britain’s BOP deficit with
Europe and North America.
3. India was a rewarding field of enterprises and British investment.
India was a market for exports of capital (mainly by 1913). It was
for 3 purposes: Railways, Government debt (borrowing) and
merchant and agency houses in Calcutta. 20% of British overseas
investments were in India in 1870 and 1885; however it fell to 10%
in 1913, though there was an increase in absolute terms.
4. Indian army was of great advantage to the British. 40% of the gross
expenditure of GOI was on military (single burden on revenues).
However, there were certain limitations. The army could not be
used efficiently outside India as their deployment within India was
governed by garrison schemes of 1860s. The cost of the army was

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so much as it was laid in 1858 and there was 1 British for 3 Indian
soldiers and no soldiers had commissions.

The financial affairs where the government of India was involved were:
 Payment of interest (annual) for debt raised in London for public
and railway purposes.
 Funds for training, maintaining and pensioning British army and
employment in imperial rule.
Other British interests were private. Lancashire dominated Indian tariff
policy (cottonocracy) in the mid and late 19th century and there were
pressures for imperialism of free trade, but it failed in the next century.

First Exchange Crisis (1893)

- There was financial stability because of export surplus but 1870
onwards the gold price of silver was falling and there was
abandonment of silver exchange by European countries.
Result: Rupee sterling exchange rate fell and the cost of Indian
remissions to Britain increased.
- Till 1892-3 revenue was sufficient for these remissions but in 1893
there was a crisis/deficit of revenue. It was overcome by going off the
silver exchange standard and appreciation of currency by reducing the
minting of rupees.
- Solution: The Currency Committee of 1893 suggested Import tariffs.
Import tariffs of 5% were introduced. The secretary of state (SoS)
suggested 5% of counter-vailing excise on piece goods to remove
suspicion of protection. There was 5% tariff + excise by GOI in 1894.
After two years, 5% import tariffs were brought down to 3.5% because
of pressure by Lancashire.
- Why import tariffs? Increase in direct taxes was not possible as it
would create political turmoil. Opium tax was near the point of
diminishing returns. Salt and excise tax had already increased in 1888.
Tobacco and sugar tax was not popular. Export duties were not
increased as it would reduce competitiveness of Indian exports and

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lead to BOP deficit. Hence, only option left to increase revenues was
import tariffs.

Second Exchange Crisis (1907-09)

- Problems: The climatic conditions were unfavourable. There were poor
monsoons and hence a decline in agrarian production and demand of
Indian raw materials leading to industrial depression.
- Result: Severe exchange crisis, decrease in BOP surplus, decrease in
land revenue and customs revenue, deficit in India’s balance of
commodity trade.
- Solution: Increasing the revenue tariff was the only possibility. 7.5%
tariffs on cotton and 2.5% on industrial inputs (which was exempted in
1894) was proposed.
- Lord Morley, the SoS objected and the action was postponed for a
year. In 1910, India came out of crisis, the rupee strengthened and
there was export boom. There was no revision of revenue tariff before
1914. But 1909 step showed what the Government of India can do!

Military condition before the war

- There was a question as to who will pay for the army? Which
government will bear the cost? In 1896 a formula was adopted
according to which how much the GOI bears will depend on how
greatly Indian interests were at stake, but the problem was how to
measure it?
- In 1900, the Royal Commission for administration of expenditure of
India surveyed and found that most of the cost of expeditions to
Afghanistan, Sian, Gulf, Egypt and Persia and some of the cost of
expeditions to East Africa will be paid by Indians.
- When Indian troops were used for imperial purposes, then how much
should India pay was a matter of dispute. After 1900, there were
threats to the empire from Russia, Germans, Japanese and Americans.
When there was Russian threat then the Committee of Imperial
Defence 1902 discussed it for 3 years but due to financial crisis,
expenditure could not be increased indefinitely.

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- In 1900, 30000 men were in army, and Lord Curzon said it would be
increased to 70000 if the war prolonged. In 1904, 160000 men were
employed in the army which was scaled to 100000 men by Committee
of Imperial Defence in 1907. In 1904 Kitchner proposed that there
should be a cost of 2 million £ / year from 1904-09. In 1907, it was
sealed down and in 1909 abolished.

After 1914 – The effects of World War and the GOI Act 1919

1. Effects of war on military expenditure: The military expenditure

chargeable to Indian revenue increased from 20 million £ in 1913-
14 to 30 million £ in 1917. The imperial government expenditure
increased from 110 million £ in 1917-18 to 140 million £ in 1918-19
(including home charges). The government of India started minting
new silver rupees. 75 million £ of war loans were contracted and
the revenue was increased by 16% in 1916-17, then further by 14%
in 1917-18 and 10% in 1918-19. The ends were met but 370 million
£ of debt created financial difficulties after the war.

2. Effects of war on trade: The war depressed the world trade. The
imports and exports were going down. There was shortage of
shipping embargo on trade with Germany and Austria. There were
bans on exports like hides, jute, etc. and partial bans on cotton,
food grains, metals, oils, wool raw, etc. Exports and internal trade
suffered also because of railways being affected by military
activity. There was no investment in railways.

The prices of imports were increasing because of problems of

transportation and remittances. In 1917, the prices of agricultural
produce were also low because of good harvests. In 1918, again
the military activity increased and the demand for food and cloth
for army increased leading to agrarian unrests and strikes.

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3. Effects of war on industries: Indian industrial activity developed
because of increasing demand for war supplies. The export
oriented jute and tanning industries declined, but other industries
like sugar, cotton, iron and steel, cement, chemical, engineering,
etc. expanded. But it did not create an industrial boom because of
shortage of capital and imported machinery. However, it created
pressure on government tariff policy as during war there was a
protected market for industries. So, if there was free trade policy
again, then there would be opposition.
4. Effects on Revenue: There was a financial and a political cost. This
could only be met by reducing India’s future role in British imperial
system. Raising revenue was desperately required. In March 1916,
import tariff of 7.5% was introduces. The excise on exports could
not be removed because of revenue considerations.

The home government suggested to increase tariffs on other

goods than on cotton and that there was no need of “counter-
vailing” taxes. The Viceroy and SoS wanted to abolish excise
completely, leading to protectionism. Finally, the cabinet retained
it at 3.5%

The Constitutional Reform: Government of India Act 1919

 In Nov 1916, the GOI passed a resolution proposing a definite goal

for British policy. There was to be an increase in representation in
local government and provincial councils and also increase in the
proportion of Indians in higher reaches of civil service and “self
government” The India office criticized it and in the cabinet there
were clashes between Montagu, Curzon and Chamberlain.
 In 1917, there was a declaration which said advancement to ‘self
government’ but it was to depend on ‘good conduct’. If Indians
refused to use their increased power to play a part in imperial
system, then there will be coercion.

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 In 1918, Montagu-Chelmsford Report was passed, which along
with Joint Select Committee recommended complete separation of
provincial and central government. It also said that the London
could not intervene in the GOI trade policy.
 By 1919, the GOI had won autonomy for trade policy under fiscal
autonomy convention. The GOI Act 1919 was passed according to
which
- Central legislative assembly where Indian politicians could
debate on government policy.
- Power to Indian politicians in provinces.
- Financial resources for reform work in provinces. This meant
limiting resources of GOI those at the centre.
- Financial decentralization
 In 1920, the revenue of provinces included land revenue,
irrigation, excise and general stamps and that of GOI included
taxes (salt, income) and tariffs. There was gain in revenue of
provinces and loss in revenue of the GOI. The provinces, thus, had
to pay to the central exchequer (caused annoyance to the
provincial governments). This is known as MESTON SETTLEMENTS.

Third Exchange Crisis (1920-1923)

- During the war, there was a positive balance of trade, hence rupee
appreciated and the demand for rupee increased to pay for the
exports. In 1920, there was sudden contraction of world trade, leading
to trade deficit. Rupee was less in demand.
- Result: In 1921, exchange rate fell, the value of rupee fell (earlier it was
over-valued) Also, there was trade depression due to bad monsoons
which increased the deficit from Rs. 798 million to Rs. 339 million.
- Deficits: The Afghan war created a deficit of 24 crores, deficit due to
trade and falling exchange rate was 21 crores, military expenditure
created a deficit of 33 crores and public debt because borrowing from
London increased from 411 to 781 crores rupees.
- Solution: The need of the hour was to cut down expenditure (cut army
budget) The revenue tariff was increased in 1921 and in addition there

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were new tariffs on luxuries. The increase in revenue was okay but a
decrease in expenditure was a must and to be done through cut in
army expenses.

Escher Committee
Escher committee was set up
 To investigate about the future imperial role of the Indian army.
 To examine the relationship between War office, CIGS, India office,
commander-in-chief and viceroy.
The Report
 Freedom of action of Viceroy and Governor-General-In-Council.
 Commander in chief will be the sole military advisor of Viceroy and
CIGS will be that of SoS.
 Military department of India office was to be abolished.
 GOI should prepare itself to intervene in east Europe and near and
Middle East as and when need arises.
Protests stating
 Political and financial limitations on using Indian resources for
imperial military needs.
 Full powers to be given to the Viceroy and the SoS.
The matter was taken to the Committee of Imperial Defence in June 1992.
It was approved by the cabinet in Jan 1923. The Escher committee plans
were cancelled completely and the Indian army was to be employed
outside after consultation from Governor-General-In-Chief.
In 1924, protectionist iron and steel tariff was introduced and cotton
excise was abolished in 1926.

Fundamental changes by 1920s

 India market was becoming irrelevant to growth sectors of British
economy.
 British exports were not assured of world market.
 Importance of type of goods exported to India was declining.
 India now took only 1/3rd of Lancashire’s output.

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 Import substituting industries were giving tough competition to
British exports to India
 British’s overseas investment went down, the role of British
investment muted.
 Gold standard exchange has collapsed.
 Britain no longer dominated world wide finance.

Before the Great Depression

- The government was interfering to strengthen or weaken the
currency. The supplies of rupees available for purchases of India’s
exports were determined.
- The aim was to stabilize the currency and keep it as high as
possible as it will reduce the cost of remissions to London. But,
some wanted low exchange rate as it increased competitiveness
abroad.

 In 1926, the Hilton young Commission saw lack of confidence as

rupee’s greatest weakness. It recommended setting up an
independent Reserve bank to handle India’s exchange and currency
policy.
 Basil Blackett, who suggested Gold based rupee independent of
sterling accepted this and a Reserve Bank bill was prepared and put
before the (C.L.A.) Central Legislative Assembly. (FINANCIAL
LIBERALISM)
 The bill was attacked in 1927-28 but it did not give enough control to
Indians. GOI wanted shareholders bank (where mostly Indians are
there) and MLAs wanted State Banks controlled by C.L.A. The bill was
defeated and was withdrawn.
 In 1929, there was Great Depression because of which the prices fell.
Exports went down and remission and foreign currency earnings also
fell which was a major concern for London.

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Fourth Exchange Crisis (1931-1933)
- Causes: In Feb 1930, import duty on cotton textiles increases from 11%
to 15%. In January 1931, the cotton tariff increased to 20%. There was
tension between India and Pakistan. In September 1931, because of
financial difficulties and to balance the budget the cotton tariff was
increased further. A new loan failed in 1931 and sterling reserves were
depleted because of which India almost defaulted.
- Proposals: The cabinet proposed preferential tariff to Britain goods
than other foreign goods. But viceroy was adamant. According to him,
India’s tariff policy must be decided on India’s interests only.
After the real crisis of Sep 1931, the Cabinet proposed counter-vailing
excise to nullify the effect of new tariff and increase in tariff on Non-
Britain imports to 40% ad valorem. The viceroy was not satisfied. He
did not want any dictation from London of Indian tariff policy.
- By mid 1932 crisis was almost over. Remissions began, rupee
strengthened, credit on London money market was sound and
repayment of short term sterling and rupee loans also started.

Government of India Act 1935

The fiscal autonomy convention was discontinued and was replaced by
complete exclusion of London from any interference whatsoever in Indian
tariff policy. Now Lancashire begged for favors though India was still an
important potential buyer. A trade agreement was signed according to
which India exported raw cotton to Britain in excess of what was
required. This was done because of Japanese threat.
Proposal prepared in Dec 1932 by Cabinet Committee
1. Non-political Reserve Bank to control the currency and exchange
matters.
2. Viceroy to safeguard the credit of the Federation and have the
support of the statutory financial advisor to help.
3. Budget to be presented by Finance Minister after Viceroy’s
sanction.
4. Supply of defense and forest departments and “sinking funds” on
public debt to be immune from any vote in the legislative.

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This proposal was then presented in cabinet, 3rd round table conference
and joint committee of Parliament. The Bill was passed in 1934 and the
plan embodied in GOI Act 1935. From 1935-39 the financial position
gradually strengthened. On the eve of Second World War India remained
an important asset in the balance sheets of British imperialism.

“The main difficulty in the way of India getting responsible Government

was that within the first three years of responsibility at the Centre [Indians]
would alter the ratio of the rupee to sterling, ruin interests of British
investors and play about with tariffs to such an extent that British trade
would suffer irretrievably” James Grigg.

It was not only the economic change but also the political change which
sapped the resources of the raj and was removing the foundation. It was
Indian political opposition combined with war enfeebled Britain that led to
independence! Even till 1940, British continued to threat India as her
colony, however they were advised:
1. Not to question India aspiration for an independent political
status.
2. To turn India’s long term dependence on industrial economies to
Britain’s advantage by participating in Indian development plans.

Impact of Second World War

A complete turnaround
Britain turned from a creditor to a debtor country. The causes for this
were:
- Disruption of exports to India.
- Disruption of demand of military supplies.
- Britain’s political inability to make India pay for modernizing her
armed forces.
This led to a permanent change in India’s balance sheet with London.
There was a debt of 360 million £ in 1939 which was converted to India
having sterling balances of 1300 million £ by the end of the War.

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Britain now had to preserve equilibrium in BOP with rest of the world,
their post war liabilities increased. However, there were restrictions on
conversion of sterling balances into gold or other hard currencies. Hence,
the huge sterling balances that India had post war were of no use but to go
back to Britain through a larger demand for British goods. This was a
positive sign for the future of British export trade to India.

The wheel comes to a full circle. How?

o In Lancashire, those unemployed moved to the army. By 1941,
there was acute shortage of labour and raw materials. The
government closed down 40% of the factories by giving
compensation to their owners.
o War affected the textile industries in Europe and Japan. Optimists
believed that once the war ends, Lancashire will have a bright
future if the government tightened the system of imperial
preference to prevent the revival of Japanese competition.
o After the war, there was some revival of production and export
but still it was far below the pre war levels. The shortage of labour
continued.
o After 1950, the competition revived. Cheap goods were produced
by India and China because of which the industry couldn’t survive.
Now, India began to export cotton goods to Britain. Mid-1950s
saw Lancashire lobbying for import controls. Yes, the same has
happened to India few years back. The circle was complete!

REVENUES AND EXPENDITURES

REVENUES
Most of the revenue came from non-tax sources. Land revenue was the
most important tax. The revenue structure was typical of traditional
agrarian economies; however the ability to change the tax structure was
marked by political considerations. The table shows the main heads of
revenue as a percentage of total revenue.

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The Land Revenue

- Zamindari System: It was a way of collecting taxes from the peasants.
Zamindars collected the taxes which they handed it over to the lords
(Britishers) after keeping a portion for themselves. All public lands were
brought under Zamindar control. For example it was in effect in the
Bengal Presidency.
- Ryotwari System: Undifferentiated land taxes were collected from
‘ryots’ who were individual cultivators. The revenue was fixed per acre
of land which was classified according to quality. The rates were fixed
once in 20-30 years. However, remissions were made in case of poor
harvests.
- It was argued that the land revenue would encourage private
improvement of the land but the Bengal’s experience was not in line
with this argument. When the expenditure rose in 1872, government
was unable to find any source of revenue and hence the idea of
permanent settlement was abandoned in the country in 1872.
- Between 1860-1 and 1900-1, the value of agricultural output increased
much faster compared to the increment of collections in the land
revenue which was only 25%. The prices increased by 80% and hence
the value of output rose even though the output did not increase.
- The land tax was 5% of gross agricultural output in 1900-1, which in
1860-1 was about 10%.
1858-9 1860-1 1870-1
Land Revenue 50 43 40
Opium 17 17 16
Salt 7 9 12
Customs 8 10 5
Excise 4 4 6
Income/license tax 0.3 3 4
Others 13 16 18

Commodity tax
- Opium and salt were also the main sources of revenue. We are aware of
the triangular pattern of trade with China. Government exercised its

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monopoly in Bengal and also charged a heavy export duty from the
princely states, thereby generating revenue of Rs. 50 million in 1858-9
and Rs. 70 to 80 million thereafter.
- Salt was manufactured in private areas under British control through a
complicated system of custom lines. Imports were also substantial but
duties were levied on them. Salt was an important item of consumption
and hence generated revenue. The tax was not increased indefinitely
because that would have depressed consumption and led to a fall in
revenues. Whenever revenues got a boost, salt tax was reduced
immediately.
- Talking about customs, they were also a significant source of revenue.
There were differential import tariffs and export duties rates for British
and other manufacturers. However, when there were financial
difficulties in 1857, these differences were removed and also an
additional duty of 20% on luxuries and all other goods (except cotton
twist) were imposed.
- In 1861, a uniform tariff of 10% ad valorem was imposed except for
beers. Wine, spirits and tobacco which paid specific duties. In 1862,
duties were reduced to 5% on piece goods and 3.5% on yarn and in
1864 the general rate of import tariffs was reduced to 7.5%
- Later through the years and in the 20th century, we have already seen
earlier in this chapter how, when and why did import tariffs change.
Basically, generating revenue through import tariffs was the best
method seen by the Government of India to raise revenue.

The Income tax

- Taxing the income of the people can be very dangerous from a political
point of view. However income tax as a temporary form of revenue
during emergencies has been quite helpful. Initially it followed the UK
system in 1860. However, it was difficult for the government to assess
the incomes of large amount of population.
- Initially agricultural incomes were not exempt from income tax and the
landowner and cultivators in Bengal paid a third to half of the total
income tax receipts. It was imposed for five years.

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- Next, the income tax came in 1869 for three years. The exemption limit
rose which reduced the unpopularity of the tax.
- Once again, the income tax came in 1886 but agricultural incomes were
exempted as the land was already taxed.
- Later, due to pressures of war and dire need of revenue, income tax
was raised substantially in 1916; the company profits were also taxed.
The tax on income increased largely during the Second World War as
well. An excess profit tax was also levied. All this was to generate the
revenue, to meet the excess expenditure during wars.

Overall structure of taxes

- The revenue generated from land tax was not complete. The Muslim
rules and the Hindu kings took one-third to half of the gross product of
agriculture in land revenue. There were local taxes, especially on
transport.
- In India, the proportion of national income devoted to public
expenditure was the same as many developed countries in 1870,
however it didn’t grew much after that. In 1893, there were difficulties
in raising tax revenues, which we have seen earlier under the topic First
Exchange Crisis.
- In 20th Century. The tax structure took a modern form.
 Import duties were imposed.
 The range of excise widened.
 The income tax was raised.
Even in 1900-1, nearly half of the total tax collection was from land
revenue.
- However, there was a decline in land revenue later. The reasons were:
 Direct taxes on agriculture declined with the growth of the
industry
 Modern methods of taxation were developed.
 Government was unwilling to tax agricultural incomes which led to
the decline of land revenue. Now, there was a privileged class who
paid the taxes.

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 Also the tax base widened with growth of customs, excise and
income tax.
- The tax structure was regressive.
 Businesses were lightly taxed.
 A large part of profits accrued to the foreigners.
 Many high salaries in Civil Services also accrued to the Britishers.
 Most of the commodity taxes were necessity – salt, kerosene,
matches.
- The tax structure was inelastic to increases in income, a characteristic
typical of underdeveloped nations.

Administration Defence Education Health

1871-72 16 32 NA NA
1913-14 12 25 4 2
1946-47 4 26 3 2

PUBLIC EXPENDITURES

Along with the public revenue, the public expenditure was also slow to
change. The table shows public expenditure of some heads as a
percentage of the total. Defence and civil administration accounted for
about half of the expenditure. Some expenditure was on debt services.
Instead for India’s development public investment should have been done,
which was almost negligible.

Defence
It accounted for one-third of the current expenditure of the total central
and provincial governments. We know that the army played a very
important role in defence and the expansion of the British Empire
elsewhere. The defence forces of the empire constituted half of Indians.
The defence expenditure was totally in the interest of the Britishers and
we have already seen how the military expenditures increased when
required and especially during the two wars. It was mainly because of
these expenditures that a shortage of revenue was felt during the wars!

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The army maintained law and order within the country as well and also
performed police functions. The defence expenditure rose to 4.7% of the
national income during the Second World War from 2-3% as earlier. After
independence, the defence expenditure was just 2% of the national
income.

Administration
Civil administration included justice, legislation, and cost of collecting taxes
and the payment of pensions to government servants. It accounted for
about 25% of the total expenditure or 3-4% of the national income in
1937-8. This was essentially because of
 The high cost of collecting taxes, a characteristic typical of
traditional agrarian societies.
 Most of the senior bureaucrats were Britishers.
Even in independent India, public expenditure was 3% of the GNP which is
higher than in many poor countries.

Public works
- It includes expenditure on roads, railways and irrigation. The period
was marked by some severe famines especially in 1877 and the last
few years of the 19th century. In spite of the government adopting
strict standards, the cost of famine relief kept on rising. Millions of
rupees were also kept aside in good years to meet the cost of famine
relief. Rs. 15 million was set aside most of the years after The Famine
Insurance Fund were set up in 1881. (See in detail the chapter on
Famines)
- The expenditure on railways also rose because of the initial
“guarantee” system. Though the railways were under private control,
but still these guarantees proved really expensive because of which
private investment was put to a halt (the second phase of railways
development in India) The canals were also privately funded. (See in
detail the chapter on Railways)

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- However there was a steady growth of public investment between
1898 and 1914. The railways accounted for about 45% of the
investment in economic overheads between 1898 and 1939.

Development
The government spent very little on health and education as can be seen
from the table above. This was essentially the cause of low levels of
literacy and high mortality rates. Expenditure on social services by the
provinces and local authorities went up in the 20th century and the
increase on education was by 50%. But still, the expenditure on education
was too low. It was Rs. 130 million which was far below the requirement
of Rs. 600 million. It was just 0.2% of the national income. This was typical
of the colony – very little was spent on social or economic developments,
or research, extension, or on industry, etc.

Home Charges
The ‘official’ element of drain consisted of a substantial part of Home
charges. These were payments made directly by the British government in
India to the Secretary of State for India in London which was huge
amounting to Rs. 24.3 crores in 1897-98. It comprised of:
 Civil charges. (Rs. 3.3 crores)
 Military Charges (Rs. 5.57 crores)
 Amount paid out of Indian revenues to railway companies in
England in lieu of guaranteed profits. (Rs. 3.23 crores)
 Enormous amount of interest paid on debts. (Rs. 4.31 crores)
 Stores (Rs. 1.34 crores)
 Interest on railway debt (Rs. 5.53 crores)
 Absentee allowances for public work officials (Rs. 0.07 crores –
negligible)

Summary
- Two forms of devolution – Decentralization and increase in the
power of Indians.

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- 1880- Centralized structure, local government had little autonomy,
London controlled GOI, and few Indians were nominated in
provincial and central councils.
- 1935 – Decentralized form of economy, Independent Reserve Bank
to look into currency, provinces were separate administrative
units, more power to Indians.
- 1893 – First exchange crisis – fall in gold price of silver,
abandonment of silver exchange by European countries. Currency
crisis, hence import tariffs of 5% introduced. Also 5% counter-
veiling excise on piece goods.
- 1907-09 – Second exchange crisis – Unfavorable climatic
conditions, fall in agrarian production, industrial depression. This
resulted in severe exchange crisis; fall in BOP surplus, etc. 7.5%
cotton tariff and 2.5% on industrial inputs. Action postponed for a
year by SoS.
- 1910 – Out of crisis, rupee strengthened and export boom.
- Adverse conditions by 1913 – bad harvests, fall in agrarian
production, exchange rate crisis, increasing demand of import
tariffs, encouragement to industries, loss of competitiveness of
Britain, rivals of Indian markets, depression in world trade, change
in balance of power in Asia.
- 1914 onwards - Effects of war – Military expenditure increased,
agriculture depressed, exports and internal trade suffered. Indian
industrial activity developed, but could not create an industrial
boom because of shortage of capital and imported machinery.
- 1916 – Revenue rose. 7.5% tariffs. Excise on exports could not be
removed because of desperate revenue conditions.
- 1919 – GoI Act 1919 – Fiscal autonomy convention, financial
decentralization, power to Indian politicians in provinces. CLA
where Indian politicians could debate on government policy.
- 1920-23 – Third Exchange Crisis – Sudden contraction of world
trade. Trade deficit, value of rupee fell, bad monsoons, trade
depression. Increasing expenditure because of Afghan War,
military expenditure, deficit due to trade, public debt because of

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borrowing from London, etc. Again revenue tariffs and new tariff
on luxuries.
- Escher Committee – investigate about future imperial role of
Indian army and examine the relationship between War Office,
CIGS, Indian Office, Commander in Chief and Viceroy. Later Escher
Committee plans cancelled completely.
- Changes by 1920s - India market was becoming irrelevant to
growth sectors of British economy; British exports were not
assured of world market; Importance of type of goods exported to
India was declining; India now took only 1/3rd of Lancashire’s
output; Import substituting industries were giving tough
competition to British exports to India; British’s overseas
investment went down, the role of British investment muted; Gold
standard exchange has collapsed; Britain no longer dominated
world wide finance.
- 1931-33 – Fourth Exchange Crisis - Causes: Import duties
increased, tariffs soaring high, financial difficulties. A new loan
failed in 1931 and sterling reserves were depleted because of
which India almost defaulted. Counter-vailing excise to nullify the
effect of new tariff and increase in tariff on Non-Britain imports to
40% ad valorem was proposed. The viceroy was not satisfied. He
did not want any dictation from London of Indian tariff policy.
- 1932 (mid) - Crisis was almost over. Remissions began, rupee
strengthened, credit on London money market was sound and
repayment of short term sterling and rupee loans also started.
- GoI Act 1935 - Fiscal autonomy convention discontinued and
replaced by complete exclusion of London from any interference
whatsoever in Indian tariff policy.
 Non-political Reserve Bank to control the currency and exchange
matters.
 Viceroy to safeguard the credit of the Federation and have the
support of the statutory financial advisor to help.
 Budget to be presented by Finance Minister after Viceroy’s
sanction.

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 Supply of defense and forest departments and “sinking funds” on
public debt to be immune from any vote in the legislative.
- Second World War - On the eve of Second World War India
remained an important asset in the balance sheets of British
imperialism.
Britain turned from a creditor to a debtor country. The causes for
this were:
Disruption of exports to India; Disruption of demand of military
supplies; Britain’s political inability to make India pay for
modernizing her armed forces.
- Wheel comes to a full circle - After 1950, the competition revived.
Cheap goods were produced by India and China because of which
the industry couldn’t survive. India began to export cotton goods
to Britain. Mid-1950s saw Lancashire lobbying for import controls.
Yes, the same has happened to India few years back. The circle
was complete!

Questions
1. Outline the changes in the fiscal structure in India during first half
of the 20th century. Do you agree that the fiscal structure of India
acquired a somewhat modern form during the last 50 years of
British rule?
2. Examine principal changes in fiscal relation between government
of India and the provinces 1870-1935? What were the main factors
underlying these changes?
3. When and why did the government of India adopt the policy of
discriminating protection? How far did this policy help in growth of
Industries in India during the British period?
4. What was the impact of World War I on fiscal policy of
government of India? How did it serve to modify imperial rule in
colonial economy?
5. Discuss the growth of fiscal federalism in India between 1857 and
1947. What were the principal constraints on fiscal policy?

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6. “Empires are not given up simply because of economic change,
least of all because of the charges of the kind that occurred during
the inter war period” B. Chatterjee. In this context examine the
changes in the colonial imperatives in India and their implications.
7. Assess the significance of the two World Wars in shifting the
political economy of British rule in India.
8. Right from the free trade period cotton tariff has been a
controversial issue in the political economy of India. Discuss the
controversies associated with cotton tariffs in colonial India.
9. Explain briefly the land revenue system imposed by British Raj in
India and the constraints that this system imposed on the
revenues of GOI in the 19th century. Why did the structure of
public revenue change in the 20th century?
10. The sterling balances bequeathed as a legacy of the 2nd World War
had much to do with the protracted shifts witnessed in the nature
of financing defence expenditure towards the inter war period, the
barracks in the oriental seas could no more be counted for free.
Elaborate.
11. Was it because of the growing pressure of masses inspired by
economic nationalism or was it because of India ceased to be an
asset worth possessing that the British left India? Discuss.

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ECONOMIC HISTORY OF INDIA -2012

Attempt any ONE from Section A and any TWO from Section B
SECTION – A

Q.1. After experiencing positive growth rates of total and per capita
income since 1865, India suffered stagnation in per capita income after the
World War-I. Was it because of stagnation in agriculture? What caused this
stagnation?

Q.2. The Indian occupational structure showed little sign of change over
the whole period of 1881- 1951. Why did the development of railways not
alter the broad occupational structure of India?

Q.3. The ability of India to fulfill its imperial commitment was dependent
on a number of important variables - The performance of the domestic
and world economies, the intricacies of government finance and, most
important of all, the ability of the Government of India to balance internal
and external demands upon its scarce resources." Critically examine the
above statement.
SECTION – B

Q.4. Agrarianization of tribal population living in forests was an overriding

priority of the British officials. How did tribal people respond to this policy
and what were the social consequences for them?

Q.5. The power loom was on average 4-6 times faster than the hand-driven
loom' Despite such a wide productivity gap, at the end of World War-I,
around three million workers in India were engaged in hand weaving as
compared to about half a million cotton-mill workforce' How will you
explain this survival story of hand loom weaving?

Q.6. Trace the emergence of industrial labour force in India during the
period 1857 -1947 ' How difficult was the transformation of agrarian
workforce into an industrial labour force?

Q.7. Discuss briefly the main trends in India’s foreign trade during the
period 1857-1947.Identify the circumstances that caused the changes in it.

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