India's colonial rule

Research Questions and Hypothesis

The following objectives / research questions will constitute the foundation for the direction and structure of the methodology chapter.

1. What was India’s economy like under colonial rule?
2. What was the post independence economy in India like?
3. What did colonialism did for the Indian economy?
4. What is India’s economy like today and can it sustain growth?

These questions will act as a logical guideline with which my dissertation research can begin.

Hypothesis: At the end of colonial rule, the newly independent India took on an economy that was ruined, poor and stagnant. However after the 1991 reforms the economy has grown at a rapid rate and has a promising future ahead. I feel that it is due to the instruments that the British put in place that is able to retain economic growth today.

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Abstract

The Indian economy has had a chequered past, from 1858 to 1947 the British ruled India; there are many examples of the colonial rule exploiting India as the British thought, India was the ‘jewel in their crown’. When the British left India they left behind an underdeveloped, poor country, as in the 1700 India’s share of the world income was 22.6% and fell to a low of 3.8% in 1952. However the colonial rule did also introduce India to industrialization, it introduced fixed exchange rates, property rights, and a uniform currency. The British built the enormous railway system and improved communication links. Which in turn helped bring India on the path to westernisation.

In the 1970’s India had an output of just 3% and in the 1980’s it started to have problems in with its balance of payments. At this time India was a semi-socialist closed economy, which followed the USSR in its economic policies instead of the free world. India however had to revise their economic policies and come up with a plan that would save the countries economy, as India found that imports were increasing rapidly and exports decreased. In the late 1980 India had a huge fiscal deficit which resulted in a balance of payments crisis of 1991.

In 1991 Prime Minister Manmohan Singh was the finance minister in the Narasimha Rao government, he was the chief architect of the new economic policies. He shifted the Indian economy from a semi socialist command to a more open liberal economy. This liberalization in 1991 was a catalyst for future growth in the country. From the initial readings of the literature along with the primary and secondary research, it has showed that there were a number of different factors and views that pushed the Indian economy to grow after colonial rule. The key factors that have drive India’s economic growth from 1947 were, transition to a knowledge based economy, middle class population, the demographic dividend, English speaking people and Investment potential. However constraints to growth are affected by the bad infrastructure, lack of higher education and widespread poverty.

Background

This dissertation aim’s to look at how British colonization of India as affected her economy today. Through research it has been found, that India, due to its history was at a handy cap when it came to economic growth. The British rule from 1858 to 1947 drained the wealth of India, the British reasons for colonialism according to Maddison (1971) were purely economic. They saw India as a main component in the in the hierarchy of power, of the world. For many years after India gained its independence in 1947 it was a closed economy, with bad infrastructure and low growth rates. However since the crisis in 1991 India has made social reforms, which has helped it become one of the fasted growing third world countries in the world. It is argued that India has further to go, as does Rajadhyaksha (2006) that India has great potential because of its huge population, its increase in the middle class population, economic liberalization and its relationship with outside world for further economic growth. There is a vast amount of literature that supports that supports my view, because India is such a relevant country today. I chose this as a topic because I feel that India is on the verge of exploding economically. Although India is yet to over take China in terms of in terms of PPP (purchasing power parity), it is still a relatively young country, and in the next 50 years it could take over China.

The research for this topic will start of with a general examination of the Indian economy during the colonial rule through the use of secondary sources. Focus will only be emphasized on some aspects of the economy Indian economy because, the state of the economy is such a huge topic to cover in one dissertation. Once an overall knowledge of the topic was gained, it was necessary to analyze the literature, so that a deeper understanding of the Indian economy and look at how the Indian Economy has changed after the instruments of modernization placed upon India by the British.

Methodology

Research is defined by Saunders et al (2003) as “something that people undertake in order to find out things in a systematic way, thereby increasing their knowledge”. I will use two different research philosophies, the Interpretivism paradigm, which focuses on ‘the subjective aspects of human activity by focusing on the meaning, rather than the measurement, of social phenomena,’ (Collis & Hussey, 2003), this paradigm will be useful to me due to the qualitative nature of my dissertation. Another research philosophy that I will follow is the Realism paradigm which looks to understand, the existence of an external and objective reality that influences people’s social interpretations and behaviours (Saunders et al 2003). The most important methodologies that I will use for this dissertation are interviews, case studies on India and its economy and questionnaires. I incorporate both quantitative and qualitative data in my research but focusing more on the latter. In addition, I will also use primary sources, such as informal interviews, questionnaires and book, and secondary sources, such as government statistics, journals, and newspaper articles. I will also look at the ethical aspect of conducting research for my dissertation, as I will be conducting informal interviews, I will have to be aware of basis.

This Literature Review

This Literature Review will look at a variety of opinions concerning India economic background during British colonization, post colonization and it’s future potential in the world stage. This will include a detailed analysis of what pervious well-known authors have written on India’s economic growth, Indian economy’s, current performance and the potential for further growth; this in turn will lead to a better understanding of the subject and establish a academic foundation for further research based on academic journals, books and magazines.

Economy under colonial rule

Did the British colonial rule help or hinder India’s economy today? This area of study has spawn countless debates. Many academics highlight the positive role British colonization had on India, from supporting capital movements and trade (Furguson: 2002) to amalgamating administration and securing peace (Lal: 2004). However other academics take an opposite stance on the subject and suggest that the British exploited India and drained her of her wealth (Bagchi: 2002). The British had many reasons for colonial rule of India according to Paul Halsall (Internet modern history source book), the reasons included security, trade and the cause of humanity. However Maddison argues in his book Class structure and Economic Growth that Britons motive for colonisation was simply economic, they ‘wanted to achieve a monopolistic trading position’ (Maddison: 1971: 35). The British mission was to explore all territories, in hope of opportunities that ensured them economic power. Maddison justifies this claim through researching the economic and social impact of colonial rule; he found that the colonial rule brought slight change to the life of the general population, there were no major changes in village society and education efforts only assisted the upper class. Stein on the other hand argues in his book The History of India that the British did do their share to improve the economy and sustain development. They helped improve the infrastructure of the country and introduced which boosted India’s export industry. Although the view of imperialist is that colonialism produce a modern state. Tirthankar Roy in Economic History and Modern India: Redefining the Link, suggest ‘that it came at a cost’ (Roy: 2007: 109). The Indian economy suffered under the British rule because of the ‘exploitation by foreign capital and noninterventionist stance of the Indian government’ (Roy: 2007: 109).

Indian Economy

The Indian economy is slowly taking hold of, the world’s attention with its extraordinary economic performance Bureau (2009) sees India as a ‘Caiged Tiger, which is growing at a slower rate than China’s economy, but nonetheless is growing at a rapid speed. The growth in India’s economy is due to India having a very successful IT service industry and the large amount of speaking young demographic. India is walking away from the reputation it had in the 1950’s, as the ‘leader of the third world’ to a potential ‘future leader of the world’ (Charlie Rose Interview: 2006). Rajadhyaksha (2006) wrote ‘The Rise of India’, in which he thinks India’s economy have further potential for growth. He analysis the new changes in Indian policy, consumer behaviour, demography, and financial markets. According to Rajadhyaksha (2006) these significant changes will aid India’s economic growth as it embarks on a journey to contend with other countries.

Economic Development: History

‘On the eve of the industrial revolution India was the second largest economy in the world, contributing more than 20% of total world output. By the 1970s after two centuries of relative economic stagnation, that share had fallen to 3%, the lowest in its recorded history’ (Poddar and Yi: 2007: 4). Poddar and Yi (2007), argues that this was a ‘post-industrial economic decline and an effect of historical aberration, driven by a lack of openness and forward thinking’ (Poddar and Yi: 2007: 4) due to Jawaharlal Nehru favoring a Fabian socialist society rather than the present neo liberal. India was described to follow the “Hindu rate of growth” after the Independence in 1947, this was because of the decades of low rate of growth, due to the reforms ‘undertaken by the Congress government in 1980s resulted in growth which was “fragile and sporadic” and finally ended with a balance of payments crisis’ (Financialexpress.com: 2005). Poddar & Yi (2007) person responsible for writing the Goldman Sachs report 2007, explain how the subsequent reforms in 1991, integrating India into the global economy and remove obstacles that prevented economic growth. India is now noticed as one of the fastest growing economies in the world.

Crises of 1991 and the consequent Reforms

The reforms instigated by the finance minister in the Narasimha Rao government of 1991 Manmohan Singh, were seen as ‘waking a sleeping giant’ (Singh: 1985: 407), according to Cohen (2001). The reforms were instigated because of the balance of payment crisis India faced in 1991, that threatened to crumble the Indian economy because the foreign reserves were so low that they could not even maintain two weeks of imports. Due to the 1991 reforms, India’s semi- socialist, closed economy made a transition towards a open economy and private Indian and international investment. Cohen (2001) agrees with Nayar (1998) on the issue that the balance of payments crisis led to a demand in investment, labour legislation and opening of the economy. I agree with Cohen (2001) and Nayar (1998) that reforms of 1991 that happened because of the crisis, influenced the rise if the Indian economy from a sluggish, stagnant economy to a rapidly growing one, India found a new sense of enthusiasm and confidence.

Pre 1991 Growth

Although the crisis of 1991 is often said to be the trigger for Indian economic reform’s and economic growth, Rodrick & Subamanian (2004) believe that the productivity surge and economic growth started steadily in the 1980’s a decade before the 1991 reforms. Rodrick & Subamanian (2004) put forward an argument of a changing mind-set on part of the government in the 1980’s, from a more socialist society to a more liberal one who favors the private sector. This significant shift, according to Rodrick & Subamanian (2004) was led by Indira Gandhi’s Congress Party. However they do state that ‘attitudinal change was grounded primarily in political calculation, and not in a desire to enhance the efficiency of the economic regime’ (Rodrick and Subamanian: 2004: 24). Kohli (1989) also supports Rodrick & Subamanian’s view and states ‘ideology of the leaders rather than the nature of regime organization, it is a key determinant of economic policy choice… leaders will push an economic program of their choice’ (Kohli: 1989: 305). Rodrick & Subamanian (2004) continue to argue that policy changes in the early 80’s and then internal liberalization in the mid 80’s was the catalyst to the huge economic growth that we see in India today.

Future Growth

Purushothaman and Willson (2003) think that Brazil, Russia, India and Chian becoming a ‘much larger force in the world economy’ (Purushothaman and Willson: 2003: 1) over the next 50 years. Purushothaman and Willson (2003) analyzed the GDP growth, income per capita and currency movements in the Indian economy until 2050. Kakodkar (1998) express’s that with improvements to the infrastructure, clearer policies, India will become increasingly attractive to investors. This potential, according to Luce (2007), has been largely wasted because of the caste system that has shaped Indian society for several thousands of years. He suggests that the factors, which would allow the realisation of India’s potential, are by the encouragement of democracy, education and empowerment.

Chapter Plan

Chapter One – Introduction

This chapter will be a short introduction to the dissertation and question. How was India’s economy effected by colonization and whether effects of colonization are still being felt today?

Chapter Two – Economy Under the British Colonial rule

In the second chapter will introduce a brief history of the Indian Economy under colonial rule and what the British did in the sub- continent. The focus will not be placed on the economy as a whole instead it will concentrate on specific parts of the economy which are considered most important, such as trade, investment and the infrastructure.

Chapter Three – Developing Economy

The third chapter will discuss the Indian economy after Independence from British colonialism. It will look at the economy from 1957 to 1991 when it was a semi socialist economy to its shift towards a market economy in 1991. Again emphasis will be placed on trade, growth rates and infrastructure.

Chapter Four- What colonialism did for India?

Chapter four will discuss the effects of colonialism on the Indian economy and society. It will look at the benefits and detriments India suffered during colonial rule. Again only certain aspects of society and economy will be analysed.

Chapter Five – ‘Waking the sleeping giant’ Economy of India Today

Chapter five will focus on India’s economy after 1991 till the present day and beyond. What’s more, it will continue to examine what are the key factors of economic growth, sustainability and the constraints.

Chapter Six – Discussion

The discussions chapter will focus on the three aspects of research methods used in this dissertation, the analysis of the questionnaire, discourse analysis on a speech by the British to justify colonial rule in India and the reading from literature.

Chapter Seven – Conclusion

In the final chapter will conclude the research question and evaluate the outcome of the research.

Chapter Two, Indian economy under colonial rule

Research question: What was India’s economy like under colonial rule?

In 1757 the British East India Company established its dominance in Bengal and nearly 100 years later, in 1858 the British Crown took over India’s princely states. To understand India’s economy under British rule, which lasted nearly two decades one has to take into account why the British conquered India in the first place. For western empires colonization was a way of expanding their territory, their purpose was undoubtedly economic and then resulting to political expansion. India was seen as the ‘agriculture mother of Asia and the industrial workshop of civilisation’ (Singh: 1970: 16). The British quickly realized that India had great resources of wealth and raw materials that would benefit them financially thus slowly increased their hold of the sub continent, which led to the war of 1857 that paved the way for full British colonization of Indian Princely states.

India’s economic structure pre colonization was one of ‘oriental despotism’, which restricted its industrialization and development. India’s custom of the caste system prevented modernisation of the economy because of the ‘peculiar position of the artisan in the Indian village’ (Stokes: 1973: 139). When the British colonized India they became the ‘agent of economic modernization’ and wanted to ‘achieve a monopolistic trading position’ (Maddison: 1971: 35). India’s predisposed socio economic order was greatly influenced by the market forces, industrial competition and modernization encouraged by the modern imperial state. Indian economy was integrated into the world economy as a result of British colonization.

India began trading with the world long before colonization took place in the sub continent, however trade began to grow exceedingly fast in the late 18th century as the result of the Charter Act of 1813, which gave India’s trade a major boost compared to modern standards. A rapid growth in trading started from 1800 till the beginning of the First World War. Tirthankar Roy measures Indian trade ‘by the contribution of foreign trade (or exports) to national income’ (Roy: 2000: 32). In India during the late 18th century and early 19th century the national income (at present value against 1968 as base rate (index)) was 1.5 % per annum and the growth rate during 1868 and 1913 of imports and exports was 4-5 %. The percentage of imports and exports was escalating rapidly throughout the 19th century. Despite the escalation of foreign trade, nationalists argue that the British colonization of India in fact hindered India’s economic growth. Angus Maddison (1971) proposed that the British were willing to assist with the Indian economic development as long as it did not diverge away from their own economic interests. For example the British colonial rule exercised a free trade policy in India, which meant that all British imports came into India without any duty paid on goods and when a small tariff was necessary for India’s revenue purposes, the British in turn imposed equivalent ‘excise duty on Indian products to prevent them gaining a competitive advantage’ (Maddison: 1971: 39). Maddison (1971) continues to argue that if India had been ‘politically independent, her tax structure would probably have been different’ (Maddison: 1971: 39) and the trade turnover much higher, for instance Brazil’s Import revenue was 21% of trade turnover, whereas India’s revenue was only 2.2% in the 1880’s. Some academics estimate that the net transfer of capital from colonized India to Britain was 1.5% of the total GNP of the sub-continent. The trade policies that the British imposed on India were ‘tools of exploitation… and a ploy to force its manufactures on India and crush domestic industry’ (Basu: 2006).

Initially, India was a feudal society however British colonization of India institutionalized its society and transformed its agricultural industry. It introduced property rights ‘resembling the unencumbered private property characteristics of Western capitalism’ (Maddison: 1971: 45) and collected land revenue in the form of taxes imposed on the farmers and peasants. During the first half of British colonization of the sub- continent the agriculture industry grew, firstly in order to feed the growing population and secondly to export other countries that demanded the cotton, teas, and opium that India produced. From the period of 1860 to 1880 the demand for cotton grew substantially and ‘for a few years the value of cotton exports was more than half of the value of all exports’ (Desai: 1969: 21). It suggests that in 1859 the price of cotton per lb was 2.7, however as the export grew to 14 lakhs of bales, so did the price pre lb to 11.5. Consequently the demand for such goods meant that India was leading to commercialization and entering the world economy. Nevertheless this prosperity did not last. From the period of 1895 to 1914 India suffered from two ruthless famines, which were an amalgamation of natural causes and administrative failures. Yet the British did in this period, also try and introduce new reforms, they established a famine relief policy that included the expansion of irrigation and better infrastructure. The Indian agriculture industry went into decline from the period of 1930 to 1940; Desai (1986) suggests that this decline was due to the great depression and provincial autonomy. The depression, which was felt in all through the world, lowered agriculture prices in India hence led to a decline in farmer’s income however their responsibilities to the government remained the same, they still had to pay taxes on the land, etc. The second World War increased the burden on the farmer’s as the demand for agricultural goods on the world market declined and ‘the exports of jute, cotton and groundnut fell to half or less in three or four years’ (Desai: 1986: 26). In spite of this the demand for food crops increased India supplied food crops to Western Asia and the increase in the proportion of the military meant that consumption increased.

Due to the increase in trade and some slight advances in agriculture the British colonization of India helped established a system of centralized of governing and amalgamated the administration of India, they ‘improved the governing of the states, security of life and property’ (modern source book), and in addition to this the British also improved the infrastructure of the sub- continent. They invested in ‘repair, enlargement and unification of ancient irrigation systems’ (Roy: 2000: 46) as it was the most straightforward way of increasing yields of agriculture, helping the farmer that would in turn result in more revenue for the government, and help prevent further famines. However they procured returns for their investment to the irrigation from increasing revenue charged on irrigated land and on water rates.

The British also invested heavily in the Railway industry in India, they considered it an important investment as it increased the volume of trade in the sub-continent and improved Indian social conditions. The railways helped promote the agriculture exports, it made the export of large sums of raw materials easier and provided cheap transport. The British thought of themselves as saviors of the Indian people ‘spreading western civilization’ (MacPherson: 1955: 177). The first railway tracks were laid in 1853 under the guidance Dalhousie and by 1869 5,000 miles of tracks had been laid down. From the 1880’s onwards the railway construction took on a new life and by 1910 India had the 4th largest Railway system in the world which cost the Indian people £50 million, however MacPherson (1955) argues that £95 million was invested into Indian railway by British companies. According to Desi (1969) the railway industry was built not to benefit the Indian economy but instead their own. During the First World War the British used the Indian railway to meet the demands of their own country, the Second World War incapacitated the Indian railway system as moved the rains to the Middle East and the railway workshops were renovate to weapons workshops.

Up until 1835 the Indian sub-continent did not have a universal currency, which is needed in a modern state. The Act of 1835 introduced India to the silver rupee, which was to be the legal tender of the sub- continent. In 1861 the paper currency act was launched, this Act enabled the government to issue paper notes, this followed the English currency principle, that there ‘must be a full metallic reserve above a certain amount’ (Desai: 1969: 226). The circulation of this tender began to grow slowly when ‘confidence developed and there was more education’ (Desai: 1969: 227). Banking in the sub- continent can be seen in two dimensions, the formal and informal sector. Roy (2000) puts forward the idea that the formal sector of the banking industry four constituents, the exchange banks, joint stock banks, presidency banks and the cooperate credit societies. The informal sector were not legally accepted as banks, however they dealt with credit ‘transactions in agriculture and small-scale industry… in the forms of loans given to by employers or merchants to actual producers against work in progress’ (Roy: 2000: 202). The modern bank system stabilized the sub- continent however there were still failures in the system, from 1913 to 1925 almost 180 banks collapsed, this according to Desai (1969) was due to inexperience, incompetence and even fraud’ (Desai: 1969: 241).

The British did not introduce the education to India; nonetheless they did promote education heavily amounts the population. By the beginning of the 19th century the British made English he official business language of the sub- continent. According to Sanne (2003) the British wanted people in India to be ‘English in mind, but with Indian bodies’ (Sanne: 2003: 12) and ‘gave assistance to a more extended and systematic promotion of general education’ (Lyer: 2004: 14). According to Roy (2002) British investment played a major role in shaping the education system in India. By the end of 1901 there were approximately 14,000 colleges in India, there were a few universities in Mumbi, Kolkata and Madras. Sanne (2003) continues to suggest that British education in the sub- continent create a vast amount of highly ‘educated elite as well as a huge amount of semi educated, low paid, English speaking subordinate’ (Sanne: 2003: 12).

The telegraph was also something that that British introduced to the sub- continent that indirectly shaped its economy at the time and in the post- colonial period. Roy (2000) states that the telegraph was a vital military tool in the ‘rebellions and wars of annexation’ (Roy: 2000: 268), and by the mid 1900’s there was rapid growth in the telegraph industry, from 0.38 million Rs in 1858 to 26.34 million Rs in 1921. Roy (2000) also claims that the British united the Postal service in the sub-continent in the wake of ‘migration and money orders. One could hardly live without the other’ (Roy: 2000: 267). Roy (2000) continues and states that there was a basic postal service in India in the pre-colonial periods however it really took off when post offices were opened in semi rural areas. The postal service and the telegraph created jobs for many semi educated indigenous people in India and also bridged the gap of communication in the huge country.

British colonization of India also changed the legal structure of the sub- continent. According to Cohn (1961) pre- colonial India did not have one legal system but ‘multiple systems…which differed from place to place’ (Cohn: 1961: 614). They had the Mogul law and the Hindu law to follow, however British colonization of India unified the legal system of the sub- continent and established civil courts in 1818.

Over all during the British colonization of the Indian sub-continent they contributed to the economy in many ways. They set up a currency system, which was still in place in India up until recently. Introduced the sub- continent to the telegraph system, which connected the country to the rest of the world. It reformed the Indian agrarian society, increased trade through the improvements in the infrastructure. The railways, that British started build nearly 1750 years ago, have now grown into the largest railway system in the world under a single management in the world. Colonialism also commercialized the Indian economy and was an agent for modernization, for a feudal society. These contributions cannot be ignored. When India gained its independence from the British in 1947, it had the basic interments for economic growth in place.

Chapter Three, Developing economy after Independence

Research question: What was the Indian economy like after independence?

After India gained its independence from British colonialism in 1947, its economy was stagnant compared their fellow Commonwealth counterparts such as Malaysia who experienced an increase in their GDP growth post British Colonialism. Amartya Sen claims that ‘many estimates suggest that a sizable economic decline took place during the last decades of British rule’ (Basu, Sisson: 1986: 28). Following India’s Independence the first Indian Prime Minister, Jawaharlal Nehru followed an economic policy of Fabian socialism and self-reliance. Under Nehru’s leadership The Planning Commission was set up to guide the newly independent Indian economy to follow the semi socialist economic model. The commission was set up to increase living standards of Indian’s through using Indian resources, boost production and enhance employment. However these policies had an adverse affect on the economy because they hindered international trade, constructed inefficient industries and it saturated the private sector and economy with regulations and red tape.

British colonization left India with some resources to modernization, according to Williamson (2006) it had the oldest capitalist institutions in Asia, such as the stock exchange. Post- colonial India had a contradictory economy; it had the institutions in place that should have on paper made it a strong economic system in Asia. It had manufacturing industry although it was very weak. It had a railway industry that was one of the largest in Asia, however in was in disrepair. The India’s economy was had many burdens that stagnated the economy and hindered it’s growth. Along with the independence of India came the partition of the sub- continent, which according to Rothermund (1986) was a reason for the troubled economy of the time. The national planning commission of India wanted to kick start the economic growth of the country and came up with the Five Year Plans.

These plans were guidelines ‘to stimulate economic activity within the existing economic and social frameworks’ (Epstein: 1973: 243). The first Five Year plan was launched in 1951 by Professor Mahalanobis who embraced the Soviet two sector model, and desired to invest ’35 billion rupees: 20 billion rupees into the public sector and 15 into the public’ (Rothermund: 1986: 133) with an intention of increasing national income by 11%. By 1956 India had invested 31 billion rupees into the two industries and exceed national income more than 11% set by the Plan. Throughout this period India’s industry grew at an average rate of 4.1% however the economy went into decline through th