How the Raj shaped India’s economy

Did the British Empire make India richer or poorer? The question has been around since 1900 when writers and publicists like Dadabhai Naoroji and Romesh Dutt first asked it. Even now many people would want to read about the economic history of India to answer this question.

But the discussion on this question is not always well-informed or based on evidence. What is the evidence? What was the record of economic change in India in the late nineteenth century and the early twentieth century? What facts are we explaining?

What facts are we explaining?

Ventures like these usually start with a look at the national income data. The table below draws on the statistical work of Moni Mukherjee, Alan Heston, and S. Sivasubramonian to show that the growth rate of real national income between 1860 and 1947 was low, and that population growth made this low rate even lower over time. This is a depressing conclusion, though we should remember that average growth rates in the world outside Europe and North America in these years were not much higher than these figures. The whole world grew a lot more slowly then that it does now.

National income (% per year) Population (% per year) Per head income (% per year)
1860-1885

1885-1900

1900-1914

1914-1947

 1.76

1.01

1.45

1.14

 0.53

0.55

0.45

1.08

1.23

0.46

1.00

0.06

The table tells us that we should be explaining why the economy under the Raj was stagnating, when the western world forged ahead. We should ask: Was the Raj responsible for the falling behind? This type of debate the world economic historians, encouraged by Angus Maddison’s data, have turned into a craze.

But this is the wrong question to ask. To see why, look at the pair of graphs below. The graphs divide up real national income into two parts – what the peasants earned (green line), and what the merchants, industrialists, service workers, and bankers earned (red line). The graph at the left tracks total income in million rupees, and the graph at the right tracks income per worker in rupees, both at 1938-9 prices.

The graphs do not tell us that the economy under the Raj was stagnating. They show that one part of the economy was forging ahead and almost certainly catching up with the Western World, whereas another part was stagnating and falling behind. The business sector was doing very well, gaining in income and in productivity. The right question to ask is: Why was there more inequality in the colonial economy? Were the Raj’s policies responsible?

Figure 1 Indian data

How well have these facts been explained?

Most general discussion on the economic history of colonial India looks at average incomes, misses the inequality, and therefore asks the wrong question, which is, why the economy faced stagnation. The answer follows the classics or the moderns, and both blame the Raj for pursuing policies that made India poor.

The classics like Naoroji and Dutt attacked openness and globalization. The British Raj did not really have an economic policy. But it behaved as if it did, and the policy was to keep markets open. Dutt said that free trade destroyed the handicrafts and made Indians poorer. Naoroji’s target was factor market transactions. He said that India purchased many services from Britain, the payment for which were a ‘drain’ of resources. By draining saving and investment away, the empire made India poorer. Their criticism was very influential in shaping development policy after India gained independence, when the new state rejected openness with religious zeal.

The modern version of why India stagnated attacks capitalism (Marxists) or agrarian property rights (institutionists).

The classics got it wrong. The business sector, which included industry, thrived despite drain and industrial decline. Perhaps far from being a drain, the services purchased abroad helped businesses grow? Marxists might not find the evidence on inequality surprising, and suggest that it shows how capitalism caused a redistribution from the poor to the rich. In fact, the red line contains too many different professions to support that conclusion. For example, it includes the artisans and the factories together. Institutional economic history does not explain why under the same state and the same institutional regime, two segments in the economy could have dissimilar experiences.

How should we explain these facts?

There is a very simple explanation of inequality in colonial India. The open economy was good for business, but it could not alter production conditions in agriculture, which are generally poor in the tropical zones.

Although India exported a lot of agricultural goods, agricultural productivity was low throughout because the major part of the land is arid or semi-arid, where monsoon rains permitted growing one main seasonal crop but acute water scarcity in the rest of the year prohibited intensive and multiple cropping. Small peasants and labourers in the dryland and upland areas, and the overpopulated eastern Gangetic Basin did not become rich even as agricultural production increased. And they received little more than friendly gestures from the British Indian state. Transforming tropical agriculture required large-scale investment in water supply systems, often at serious environmental cost. Neither the geography nor the capacity of the state made taking that step easy.

What about merchants, industrialists, bankers, and shippers? The seaboard and market towns in the interior had been trading from a very long time. These enterprises gained from the nineteenth century globalization that the Raj was keen to maintain. The gains were dramatic. The volume of long-distance trade in India grew from roughly 1 million tons in 1840 to 160 million in 1940. As profits in trade were reinvested, India led the contemporary developing world in two leading industries of the industrial revolution, cotton textiles and iron and steel. Not only factory industries like steel and cotton, even the handicraft industries did well in the early twentieth century. Cotton cloth weaving on hand-powered looms, saw a more than doubling of the production of cloth between 1901 and 1939.

At independence in 1947, the port cities were homes to some of the best schools, colleges, hospitals, universities, banks, insurance companies, charities, and learned societies available outside the western world, much of it built with capitalist profits. This extraordinary development would be unthinkable without the open economy, the cosmopolitanism of the port cities, and the knowledge and the skills that entered India through the open borders. The nationalists called the cost of buying this knowledge ‘drain.’ They were being cynical.

Was the state blameless?

The state wanted openness, and openness delivered. Was it the best kind of state India could have? Certainly not. The state needed to spend a huge amount of money to lift agriculture from stagnation. An independent state did just that from the 1970s onward, without that commitment the Green Revolution would not happen.

The Raj was too weak, too conservative, and too uncommitted a state to design a radical development policy that would have to begin with the agricultural problem. Why was it so weak a force? The answer lies in the way it managed the fiscal and the monetary systems. I will answer the question in a later essay.

Tirthankar Roy

Professor of Economic History

London School of Economics

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