Beginning of British Economic Control
From the early 19th century, the gradual expansion of the British East India Company brought major changes to India’s economic structure. The British introduced new taxation systems and agricultural policies, which encouraged the commercialisation of agriculture. Farmers were pushed to grow crops meant for trade, such as cotton and indigo, instead of food crops.
This shift reduced the production of food grains and made farmers poorer. Many farmers fell into debt and poverty. In the short term, these policies also contributed to several famines across the country.
Decline of Handicrafts and Traditional Industries
During British rule, India’s traditional industries suffered a major setback. The handicraft and handloom sectors, which had once been among the most important industries in the world, declined sharply.
This happened mainly because British policies reduced the demand for locally produced goods. As a result, many artisans lost their jobs and traditional industries collapsed.
Expansion of Trade After 1813
In 1813, the British government passed the Charter Act, which removed many restrictions on international trade. After this, trade between India and other countries expanded significantly, and commercial activities increased steadily.
However, the benefits of this trade expansion did not remain within India.
Drain of Wealth from India to Britain
Economic historians argue that British colonial policies caused a large transfer of wealth from India to Britain. Instead of investing in India’s development, much of the revenue generated in India was sent to Britain.
This phenomenon is often referred to as the “Drain of Wealth.” It meant that the resources produced in India were used to strengthen the British economy rather than to modernize India’s own economy.
Before colonial rule began in the early 19th century, the Indian subcontinent had been one of the largest economies in the world for most of recorded history.
Decline in India’s Share of the Global Economy
During the colonial period, India’s position in the global economy declined sharply.
- India’s share of the world economy fell from about 24.4% in 1700 to only 4.2% in 1950.
- India’s share of global industrial output dropped from about 25% in 1750 to only 2% by 1900.
At the same time, Britain’s share of the global economy increased, rising from about 2.9% in 1700 to 9% in 1870.
Trade Policies Favouring Britain
After the British conquest of Bengal in 1757, the British East India Company gained strong control over India’s markets. British policies forced India to open its markets to British goods.
British manufactured goods could be sold in India without tariffs or duties, while Indian producers faced heavy taxes. At the same time, Britain imposed high tariffs and restrictions on Indian textiles, preventing them from being sold easily in British markets.
Meanwhile, raw cotton was imported from India to Britain without tariffs. British factories used this cotton to manufacture textiles and then sold those finished goods back in the Indian market.
This policy gave Britain a monopoly over India’s markets and raw materials, turning India into both a supplier of raw materials and a consumer of British manufactured goods.
Institutional Changes Under British Rule
During the 19th century, British expansion also created several new institutions and systems in India. These included:
- A system that formally protected property rights among the colonisers
- Policies encouraging free trade
- A single currency system with fixed exchange rates
- Standardised weights and measures
- The development of capital markets in company-controlled areas
- The establishment of railways and telegraph networks
- A civil service system designed to operate without political interference
- A common-law legal system and modern courts
These changes took place during a period when the global economy was undergoing major transformations due to industrialisation and rapid growth in global trade.
Economic Condition at the End of Colonial Rule
Despite these institutional developments, India inherited a very weak economy at the time of independence.
By the end of British rule, India faced several economic problems:
- Industrial development had stagnated
- Agriculture struggled to feed a rapidly growing population
- The workforce was largely illiterate and unskilled
- Infrastructure remained inadequate and underdeveloped
As a result, India was considered one of the poorest economies in the developing world at the time of independence.
Population and Urbanisation
According to the 1872 census, about 91.3% of the population lived in villages in the region that now forms modern India.
This was actually an increase in rural concentration compared to the Mughal era. During the reign of Emperor Akbar around 1600, about 85% of the population lived in villages and 15% in cities.
Urbanisation remained slow during most of the British period because industrial development was limited and transportation systems were inadequate.
Growth of Cities in the 20th Century
Urban growth started increasing only in the 1920s. Later, government policies that gave financial protection to certain industries and the economic changes brought by World War II encouraged industrial development.
This led to migration from rural areas to cities, and large port cities such as Bombay (Mumbai), Calcutta (Kolkata), and Madras (Chennai) expanded rapidly.
Even then, by 1951, only about one-sixth of India’s population lived in urban areas.
Debate Among Economic Historians
The impact of British rule on India’s economy remains a subject of debate among historians.
Many leaders of the Indian independence movement and several economic historians argued that colonial rule weakened India’s economy. They believed that the capital needed for Britain’s Industrial Revolution came largely from India.
However, some other historians argue that India’s economic problems were also linked to global economic changes and the transition toward industrialisation and economic integration.
Real Wages and Economic Changes
Some economic historians have suggested that real wages in India declined during the early 19th century, possibly starting in the late 18th century, largely due to colonial rule.
Research by historians such as Prasannan Parthasarathi and Sashi Sivramkrishna suggests that earlier, the grain wages of Indian weavers were comparable to those of British workers, and their incomes were about five times higher than the basic subsistence level, similar to conditions in advanced parts of Europe.
However, due to limited historical data, scholars say it is difficult to draw definite conclusions and more research is needed.
Deindustrialisation of India
Some historians also argue that India experienced deindustrialisation during the late 18th century, partly due to the collapse of the Mughal Empire and the economic changes brought by British rule.
This decline in traditional industries further weakened India’s economic structure during the colonial period.