The Political Economy: Decolonisation In India

1. Introduction

In the story of the fall of the British Empire the decolonisation of India in August 1947 plays a mayor role. It not only stimulated further movements of decolonisation in Asia, India’s gain of independence is also commonly considered to be the beginning of the end of British dominance in world politics. Such an analysis is attributable to India’s position as the most lucrative colony in the British Empire. India’s labelling as “jewel in the crown” of Britain underlines its major contribution to the economic wealth of the Empire mainly acquired through flourishing trade with its mother country at the zenith of British colonialism.

However, considering the significant function British India served in the Empire, it demands explanation why India pioneered the wave of decolonisation within the British Empire. In this essay, this question is approached through the prism of an analysis of the political economy of British India and its relation to the motherland in the last decades of the Raj. This politico-economic approach means examining the interrelatedness of economic conditions and political choices in official policy making in British India. This approach is promising because Britain’s interests in India were not merely strategic but first and foremost economic. The Indian subcontinent’s duties, its ‘imperial commitment’, were to serve as a market for British industrial products and to reduce London’s budget deficit by paying sterling that it attained through tariffs. In order to secure these objectives, the colonial government had established an institutionally complex colonial administration that sought to maintain a foreign exchange surplus generated by private investment and trade.

In this essay it shall be argued that India was decolonised largely because it gradually failed to achieve its ‘imperial commitment’. The colonial trade and industrial relations were unable to secure sustainable growth as well as political consent in India, and, eventually, the subcontinent was less profitable to the British motherland than it used to be.

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2.Trade and Industry at the Zenith

At the end of the 19th century and at the beginning of the twentieth British expatriate enterprises enjoyed great success. India fulfilled its role in the imperial economy primarily as a main customer of British products. British trading companies, located primarily in the Calcutta area, dominated the external trading sector. As B.R. Tomlinson points out, a large proportion of India’s foreign trade prior to 1914 “took the form of exchanging primary produce for customer and capital [-intensive, C.F.] goods with the advanced economies of the West”. India’s export trade, thus, were composed of mainly agrarian produces like raw cotton, raw jute, rice, tea, oilseeds, and wheat, which were sold to Britain, Europe and North America. However, increasingly simple manufactured goods had been exported, e.g. jute cloth, gunny bags, cotton twist and yarn. Great Britain was the most important trading partner, yet British exports to India were much higher than vice versa. India also exported a high quantity of products to neighbouring Asian countries and continental Europe. Britain, in contrast, accounted for 60% of all imports in 1913. The Indian market was not equally lucrative to all British exporters; to the staple industry, cotton textile manufacturers, and producers of engineering products, however, the Indian market was of immense importance. British heavy industry also exported products in high quantity, even if not as high as by the cotton industry, to the Indian subcontinent. The British-led industrialisation of India created a demand for rails, galvanised sheets, tinplates and other steel products. However, approximately 30% of all steel imports were of Belgian provenience. Further, the Indian economy was dependent on the British machinery industry for its enterprises and, therefore, India imported regularly agricultural machinery, motorcars, sewing machines and the like. What emerges from this short overview is the importance of the Indian market for British industry at the beginning of the 20th century. India’s relations to the western world, especially Britain, was characterised by unequal terms of trade, in which India exported raw products at large, while it imported predominantly highly fabricated goods.

India, thus, effectively fulfilled its ‘imperial commitment’ to the British Empire. In terms of India’s role, Tomlinson identifies the creation of a market for British goods and a surplus in sterling as important criteria for meeting the commitment. At the end of the 19th and the beginning of the 20th century there was undoubtedly a high potential for foreign investment by British company holders. The incipient industrialisation of India, particularly in the transportation sector and the cotton industry offered incentives to investors. India’s growth coincided with an emerging protectionism in the national economies of Europe and North America, which had been the main receivers of private foreign investment. Of course, India did not only attract British investors but due to the dense network of British trading companies it was mainly British companies that invested in India. Above that, British capital was invested on a portfolio basis, mainly in government loans, and therefore favoured products of the British heavy industry. These investments led to rising incomes in the primary producing areas and thus created further demand for imported commodities as well.

However, the dominance of British enterprise and trade in India reached its peak by the beginning of the 20th century. Although the British investment can be credited with the introduction of a modern industrial economy and modern corporate organisation, the decline of economy beginning in 1914, must be attributed to obsolete institutions of finance and trade. B.R. Tomlinson points out that:

The way in which the various sectors (…) worked (…) reveals the way in which the impact of a growing international market for Indian produce had helped to strengthen traditional agencies, rather than cause a breakdown of an old system under the impact of the world economy. The stability and self-sufficiency of the unmodernised banking sector prevented the transformation of the Indian money market and domestic economy on Western lines.

Maria Misra presents a similar view by expressing it in economic parlance, saying that British enterprise had lost its ‘dynamism’. Cooperation between Indian and British enterprises was rather low which was also reflected in the banking sector. Bank houses retained a structure of duality. That is, hardly any indigenous bank was able or willing to provide capital for the industry segment, while scarcely any indigenous entrepreneur afforded to borrow capital from an expatriate bank because of the high interest rates they charged. As a consequence, the indigenous and the expatriate sector were characterised by low interdependence. Productivity in the indigenous sector remained lower than in the expatriate sector, and thus, the wealth of the general population did not rise at a sufficient rate, eventually hampering persistent growth.

In the following years, however, Britain would force the Government of India to increase its ‘imperial commitment’ by demanding greater shares of sterling in order to balance the budget of the motherland, as Tomlinson argues. This growth in India’s commitment while its economy was staggering marks the beginning of the ‘crisis years’ of Britain’ colonial engagement in India.

3. The Crisis Years 1919-1947

3.1 The Interwar Years and the Great Depression

The decades after the First World War were marked by rapid political as well as economic change. In 1919, the Government of India Act provided for elected provincial assemblies and granted limited authority to Indian ministers. Above that, these provincial administrations were granted the right over the staple Land Revenue. Jürgen Lütt argues in a review of Indian history that the British government was forced to grant power to the Indian people to a limited degree in order to appease the Indians after the stresses and strains of the First World War and the uprisings that had sparked off. For Tomlinson, the aim of the allocation of revenues to local authorities was primarily economic. He points out that this was “an attempt to buy the political peace needed to expand the tax base”. While in the late 19th century the British government were convinced that the secret of Indian success lay in low taxes, now felt coerced to increase public revenue by means of raising tariffs and income duties. These increases in taxation had, eventually, damaged India as a market for British goods.

Maria Misra, however, rejects this view. She argues that it was not true that “the British state consistently put its own financial interest above all others”. British business interests were not sacrificed to the British household or the City of London. Rather, policies were adopted that were meant to both develop the expatriate and indigenous industries. Yet, most of those policies failed. The Government of India provided incentives for the British iron and steel industry by guaranteeing purchasing contracts. Further, indigenous industry was to be supported by providing “technical advice and education, investment in infrastructure, and the establishment of pioneer factories in new industries” sponsored by the government. Expatriate enterprises felt to be discriminated against their interests, an argument that is put forward by some commentators for the collapse of British industry in India at that time. However, fostering the productivity of the indigenous industry would have been a precondition of sustained growth in India as British investors relied on economically strong trading partners. However, this policy mainly failed due to retrenchments by the British government (thus underpinning Tomlinson’s argumentation) and the decentralisation of government hampering central co-ordination. Above that, many British enterprises were hostile to state intervention.

While the 1920s generally saw modest growth, the Indian economy contracted when it was strongly affected by the ‘Great Depression’ of 1929. As a consequence much of British trade business collapsed and foreign investment declined, particularly in the heavy industry sector like railway building. This put the British colonial presence at risk, as Tomlinson writes:

The smooth functioning of the apparatus of British rule in India, if not the Indian economy as a whole, depended on the existence and expansion of an open economy.

For the colonial government the expansion of the trade sector was the only ideal mode of economy as it guaranteed easy access to indirect tax revenue (from custom duties) and foreign currency that it required to fulfil its ‘imperial commitment’. India therefore needed to raise revenue tariffs in 1930 and 1931 significantly in order to balance its budgets and to gain foreign currency earnings. Further, the Indian trade economy profited from Britain’s need for gold in the crisis years, and thus was able to partly save its export sector. Even if a certain amount of trade with India was retained, the ‘Great Depression’ marked the end of a period in which trade was free. As Misra remarks, bilateral trade treaties between member states of the British Empire and India were signed at an economic summit in Ottawa in 1932 in which the participants agreed to give preference to imperial over non-imperial goods. These changes in the mode of trade relations in India had a significant impact on the future economic policies of the Raj.

The ‘Great Depression’ produced even more severe outcomes in the indigenous sector of Indian industry and agriculture. The value of farm produce, for example, alarmingly decreased while the land rent the farmer had to pay remained high. Farmers and Indian manufacturers therefore had to sell their gold and silver reserves in exchange for sterling (see above). The depression in prices prompted some Indian politicians to demand protection of the internal economy from the recession in trade and expatriate business by depreciating currency, obtaining and drawing credit in London and the support for price support schemes. This claim led to strained relations between the London and New Delhi government. The eventual refusal by the British government fuelled tensions between the colonial government and its subjects, and intensified the political agitation against British rule.

The decline in trade also essentially altered the domestic economic system. The imposed tariffs of 1930 and 1931 had considerable protective effects and led the Indian economy to be closed. What was of a severe long-term consequence to the economy of the British Raj is the collapse of the established system of marketing and finance. It came to be modelled according to the requirements of a closed and domestic demand-based economy. Tomlinson writes that:

[It] broke down the established systems of marketing and credit-supply, and the mechanisms by which food and raw materials were extracted from the rural areas and exchanged for consumer goods and bullion from the towns and from the international economy. These upheavals succeeded in eroding institutional barriers to the diversification of credit in the external economy and helped to create, for the first time, a fairly well integrated national money market in India.

This new system alone did not really succeed in alleviating the problems of the Indian economy, however, it had decisive political implications. Because agriculture and industry were localised and focused on the domestic market, the decentralised governments with a high proportion of Indian politicians revealed themselves to be better organisers of the local economy than the central colonial government that found it increasingly difficult to intervene in the Indian economy. The Indian governments secured ties with the economy and thus a decisive power base in potential negotiations with the British government. This development was also shown by the introduction of another Government of India Act in 1935. This act again was meant to appease the Indian population and was a reaction to the strengthened and better-organised national movements – the Congress Party demanded entire independence from Britain in 1929. It provided for greater power of the local governments and the introduction of direct elections. In the first general election in India, the National Congress Party won approximately half of all seats.

3.2 The Second World War

Towards the end of the 1930s the third arm of India’s ‘imperial commitment’ had to be revived: the Indian army. During the Second World War Japan threatened to occupy colonial possessions of Western Powers and to induce their will for self-determination. The role assigned to the Indian army was to defend not only India but to fight in the entire Southeast Asian region. As a result of the war effort, “India and the British Raj suffered a mortal blow” (Tomlinson). India only had a standing army of 180.000 soldiers at the beginning of the 1930s, however, 2.5 million Indian soldiers should fight during the Second World War. At a time of economic crisis, the Indian colonial government changed the India industry over to a wartime economy mainly producing weapons and agricultural products to nourish the soldiers abroad. Due to restricted supply of rice from the Burma region, 3 million people died of starvation in Bengal in 1942. Although Britain promised to vouch for the majority of costs of Indian expenditure for the war, India suffered from a huge deficit because the lines of capital transfer were cut. At the end of the war, Britain’s debt to India was four times as large as India’s debt used to be before the war.

As a result of the outcomes of the war economy, anti-British tensions among the population grew again. Political consent was put on third place after strategy and economics in the preference list of the Indian government. Discontent of the Indian population was now channelled through two influential political groups, the National Congress and the Muslim League, both were committed to free India from colonial repression. However, no settlement was achieved between the groups and the colonial government and thus the question of India was left to another day.

4. Conclusion: The Decolonisation of India

In order to answer the question why India was decolonised in 1947, the actual reason for colonisation has to be asked for. It has been argued in this essay that this reason was primarily economic. India’s ‘imperial commitment’ was to provide a market for British goods and to generate a sterling surplus. India fulfilled this commitment very well until the beginning of the 20th century, which legitimised, from a British point of view, the highly institutionalised colonial presence. From the inter-war years on, at the latest, India was bound to fail to achieve its ‘imperial commitment’. Britain’s engagement in the industrialisation of India did not succeed in developing the Indian economy, which would have been necessary in order to secure persistent growth. Instead, the Indian colonial government forced the economy to be open during the interwar years at the expense of local enterprise and thus enforced opposition to British rule. The Indian government attempted to appease opposition by giving limited power on local level through two government acts, imposed in 1919 and 1935. Their power in the provinces helped them secure links to the economy during protectionism. After the Second World War, the British government was unable to open India’s economy again and, thus, the advantages that Britain could look to from continuing the Raj were severely limited. Informal influence promised to be more successful to the British economy that is able to invest in India without government protection. Thus, as Tomlinson puts it, “the British were pushed out of India as much as by the logic of their own interests as by the opposition of their nationalist opponents”.