Colonialism and Underdevelopment of the Indian Economy

Paper: International Economics

Lesson: Colonialism and Underdevelopment of the Indian Economy
Name: Sarabjeet Kaur
College/Department: Rajdhani College, University of Delhi

Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

Table of the Contents

Chapter: Colonialism and Underdevelopment of the Indian Economy

1. Learning Objectives
2. Colonialism
3. Exploitation of India Under British Rule
a. Merchant Capital and the Exploitation.
b. Industrial Capital and the Exploitation.
c. Finance Capital and the Exploitation.
4. Drain Theory
5. De-industrialization
6. References

Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

Learning Objectives
After study this chapter, you will learn:
1. Meaning of Colonialism
2. Exploitation by Britisher
3. Drain theory
4. Effect on various sectors

Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

Colonialism and Underdevelopment of the Indian Economy

World experienced large number of significant events during 17th and 18th
century. One of most important event that took place in England was
Industrial Revolution. Further, the event of industrial revolution was spread
to other counties of Europe. Vasco De Gama developed sea route to India,
as a result, Britain and most of the European Countries came to India for
trading.

India provided a platform to Britain for providing raw material for factories
and also a market for finished goods. British officials have perfect
opportunity to establish their hold through wars, forced treaties, annexations
of and alliances with the various regional powers. Britishers introduced new
administrative and economic policies, which helped them to establish their
control in the country. They collect huge revenue through their land revenue
policies from poor farmers. They also forced farmers to produce various cash
crops and raw material for British industries. Britian control the political
system of India such that its trade with India only.
They improved transport and communication system in India so that they
can do easy trade with India. They also developed English education system
so that Indians would assist the Britishers in ruling India and strengthen
their political power.

Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

Colonialism
Before discussing the role of colonialism in India, let us discuss the meaning
of colonialism. Colonialism relate to the relation of political and social
between two countries; ruler and colony. The ruling country controls political
system of the colony. Ruling country also controls the economic system such
that they can make and regulate all the policies in favour of ruling power.
This imbalance association between the colony and ruling country causes
underdevelopment of the colony.
Bipan Chandra gave three characteristics of colonialism.
1. There is a complete and complicated relation of the colony with the
rest of world capitalist system in a secondary position.
2. There is an imbalance trade between a colony and the industrialist
countries. they use better technology with high productivity and
mainly produce capital intensive goods, whereas the colony use low
level of technology with low productivity and mainly produce labour
intensive product.
3. There is a unilateral transfer of surplus from colony to ruling country,
which is called as drain of wealth, through exports.
Exploitation of India Under British Rule
After the Battle of Plasey ,the East India Company of British established its
rule through the major portion of India. With this, the period of exploitation
of Britishers in India have started. In this period, there was huge drain of
wealth from India to England. This results in pauperization of the India and
Industrial Revolution in England. After the transfer of power from East India
Company to British Crown, it did not change any circumstances.
form of colonial exploitation had changed.

Institute of Lifelong Learning, University of Delhi

But, the

Colonialism and Underdevelopment of the Indian Economy

India was exploited by Britishers for over period of two centuries for their
colonial rule but exploitation was never the same throughout the time
period. The whole period of exploitation have been divided in three phases:
1. Merchant Capital and the Exploitation.
2. Industrial Capital and the Exploitation.
3. Finance Capital and the Exploitation.

The first phase of exploitation (i.e, merchant capital) ended in 18 th century,

which started from Battle of Plasey . The second phase (i.e, Industrial
Capital) started in the 19th century and ended till the end of this century.
The last phase of exploitation started in late of 19th century and it continued
till independence.
I. Merchant capital and Colonial Exploitation
After the Battle of Plasey, the Britishers have stronghold (both politically and
socially) on the Indian Economy. They started exploitation in India in
following ways:

Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

1. The Company has stolen trade from India. During the initial years of
establishment of East India Company, there was huge amount of
exports but there was hardly any import from Britian. Hence, the
company has to pay in terms of gold and silver worth 30,000 pounds
per annum. The political power of India had captured by the company
after the battle of Plassey. Because of this reason, Britishers have got
maximum goods for minimum payments and hence, balance of trade

was in favour of British.

Lord Cornwalis

2. Land revenue was a tool of plundering agriculture labours under the

rule. Lord Cornwalis established the Permanent Settlement of land in
the year 1793. The land revenue was 34000. This collection of land
revenue was not spending on developmental activities or public
welfare. These were used as the surplus of the company.
3. The staff of the company was corrupt and unprincipled and they used
all the feasible ways to make huge amount of fortues.
Hence, they exploit the Indian Economy completely.
II. Industrial Capital and the Colonial Exploitation
There was a need to change in the mode of exploitation because of
increasing demand for raw material for Industrial Revolution in Britian. In

Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

this phase, India was developing as a market for the British industries. Here
important forms of exploitation were:
1. Export of machine made goods to India
In the initial phase, British products could not compete with Indian Products
because; british products were inferior and expensive. Hence, on the one
hand, for protection of home industry, British government imposed heavy
taxes, i.e, 78 percent custom duty, on imported Indian goods. On the other
hand, there were duty free british imported goods in India. This policy has
given protection to British industry to India. Hence, export of India
decreases where as its imports increases.
2.

Development

of

cotton

and

jute

industry

and

plantation

The Britishers did not want to establish any manufacturing industry in India.
But few industries, which wont be established anywhere, encouraged by
them. One of them was cotton and jute industry and the british government
was earning profit from this industry. Tea, coffee and indigo plantation were
few other industries set up by Britishers.
3. Revenue and expenditure policies of the Britshers
There was a need of maintaining a big army of Britisher for retaining political
pressure in India. Expenditure on army was highest, almost one-third of the
total expenditure of government. This expenditure was paid by Indian

Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

government. Some other expenditure were also paid by the Indian
government such as pensions of army officers, expenditure on Indian office,
salaries of the members of the Indian council etc.
III. Finance capital and the colonial exploitation
During 19th century, the massive investments of British capital in India were
not brought from England. Rather it was collected in India by using all kinds
of unethical way by the British. The main sectors where British government
entered were:
1. The State Sector:
The British government unethically imposed expenses on India that were not
related with the people of the country. All these expenses were treated as
the loans which were granted to India.
2. Investment in plantations
The main interest of British government was in tea, coffee and rubber
plantations. Investments on these industries were because of the reason
that these industries could not be developed in England due to geographical
factors. India had favorable climate for these industries and labour was also
cheap. Hence, the British government wanted to make investment in this
sector.
3. Investment in Railways
The British government imported capital particularly for the construction of
Railways in India. But the Indian tax payers have to pay interest on this
capital. Hence, the entire burden of interest was on Indian tax payers. There

Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

were number of objectives for the construction of railways in India:

a. To collect raw material different parts of the country for export to

England.
b. To supply British manufactured product in all the parts of the country.
c. To serve commercial and political interests of the British. It also
benefits to Indian economy.
d. Safe, speedy and relatively cheap mode of transport for goods and
passengers.
4. Other Sectors
The British government invested in few sectors like, oil, mining, rubber
industry, etc but total investment in these sectors was even less than 3
percent of the British total investment.
Hence, there is no dought that British government does not want to develop
India at all.
The nationalists of the country highlighted two important aspects British
Colinal rule India
A. The Drain Theory
B. The theory of de-industrialisation
Economic Drain or Drain Theory
As given by the nationalists, according to drain theory, a important part of
national wealth of India was being exported to England and for this India

Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

was not getting any return. According to Dadabhai Naoroji, drain as

Dadabhai Naoroji

marking the difference between the rulers of India in the past and the
British, for under the former there was no drain of wealth from the country.
The wealth of the people remained within the country and was spent inside
it. Individual citizens might suffer but the country as a whole did not lose;
the loss of one citizen became the gain of another. The British, on the other
hand, took wealth out of the country and spent it abroad.
Dadabhai calculate the economic drain of India during 1835 to 1872.
Economic Drain (1835-1872)
_____________________________________________________
Years

Yearly Average

_____________________________________________________
1835 to 1839

5,347,000

Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

1840 to 1844

5,930,000

1845 to 1849

7,760,000

1850 to 1854

7,458,000

1855 to 1859

7,730,000

1860 to 1864

17,300,000

1865 to 1869

24,600,000

1870 to 1872

27,400,000

Source: Naoroji, Dadabhai, Poverty and Un-British Rule in India, 2nd Edition, Ministry of Information
and Broadcasting in India, Government of India, New Delhi, !966, p.31

From the above table, it was clear that there was huge amount of economic
drain from India to England and it was increasing from time to time.
The drain consists of two elements---first, that arising from the remittances
by European officials of their savings, for their expenditure in England for
their various wants both there and in India; from pensions and salaries paid
in England; government expenditure in England and India, 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, thereby further exploit and
drain India, the source of the evil being the official drain. The opinions of
various people on the types of drain include the extortions of the
government,appropriations of revenues by the company.
High amounts of drain carried on for a long period would impoverish any
country. Annual drain as calculated by Montgomery Martin in 1838 at 12%
compound interest to the enormous sum of 2,000,000 for fifty years, to

Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

8,400,000,000sterling, so constant and accumulating a drain even on
England would soon impoverish her; how severe then must be its effects on
India, where the wages of labourer is from two pence to three pence a day,
going on for half a century would ultimately affect India., which has been
remitted

to

speculations,

Great
to

Britain

pay

the

to

meet

interests

the
of

deficiencies

debts,

to

of

support

commercial
the

home

establishments, and to invest on Englands soil the accumulated wealth of

those whose lives have been spent in Hindustan.
Implication of the drain
English Government has affected the impoverishment of the country and
people to an extent almost unparalleled.

The result was that the lives of

Indians had become miserable and they had started to make appeals to
government for their needs, as the very fabric of the society was destroyed.
The drain had affected the whole country and people were getting poorer.
Such a drain had reduced India to a land of famines and had resulted in the
impoverishment of the prosperous nation. So, great an Economic Drain out
of the resources of a land would impoverish the most prosperous countries
on Earth, it has reduced India to a land of famines more frequent, more
widespread, and more fatal, than any before in the history of India or of the
world. As a result, the economic drain had impoverished an industrious,
peaceful, and once prosperous nation.
2. De-industrialization
The British rule led to the de-industrialisation in India as argued by
nationalists. Before the British rule, India was exporting cotton but during
colonial rule, India became an importer of cotton. Hence, Indian artisans,
craftsmen and important trading centres collapsed. The main reason for this
was all the manufacturing actions existed was destroyed under the impact of
imports of cotton manufacture. Amiya Bagchi observed: for more than
Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

seventy five years up to 1913, India remained the major importer of cotton
goods from Britain, after taking more than forty percent of the British
exports. The decay of Dhaka, Surat, Murshidabad and many other flourishing
towns bears testimony to de-industrialisation
Case for Protection of Industrial Policy of India
Industrial policy of India during British rule can be divided in three periods :
Period I (1850-1914):
Industrial development depends on the development of interlinked sectors
such as development of transport and communication, growth of foreign
trade etc. With the development of railways, there was some potential for
industrial development. The main features of industrial development during
1850 to 1914 were:
a) There was a decline in the handicrafts industry during this period. In
this phase, Indian Economy was transforming from traditional towards
technical. Technical education was gaining importance and crucial
steps were made to start new industries.
b) Joint-stock enterprise was established during this phase but growth of
these enterprises was slow.
c) With the development of railways, there was development of various
towns in India. The generations of these towns had positive impact in
the development of various industries of India.
d) The political movements at home and aboard, such as American Civil
War, the Crimean War, the Swadeshi Movement, etc., facilitated the
development of industrial sector of India. British government also
adopted positive attitude towards industrial growth.

Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

e) With the development of Suez Canal in 1869, oceanic transport system
encouraged the industrial development in India because of easier
imports of machinery and technology from abroad.
f) There was development of some consumer goods industries during this
phase but there was no development in capital goods, heavy
engineering and other key and basic industries.
g) Because

of

improper

planning,

there

was

unbalanced

regional

development.
Period II (1915-39):
In this phase, number of crises happened in the world, which affects the
pattern of development of industries in India. For instance, First World War
of 1914 to18, the post-war boom of 1919 to 20, the fluctuating exchange
rates between 1921 to 27, the worldwide depression of 1929 to 33. There
was a setting up of various commissions for industrial development such as
Indian Industrial Commission of 1916, The royal (Whitley) Commission on
Labour of 1929 etc.
Immediately after the First World War, the economies of foreign countries
were in very bad condition. Hence, British ruler made some political and
economic concessions. These economic concessions took the shape of future
industrialization.
British imports were also affecting due to foreign competition. Hence, with
the development of some industries within India was much better than
displacing Imports of British. For this, Industrial Commission and the

Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

Munitions Board were set up. On the recommendation of Board, the

following progress was made:

a. For the fulfillment of the needs Army, railways and civil departments,
the India-made materials were purchased directly.
b. All the orders from UK and other parts of the world were diverted to
India.
c. Providing various kinds of assistance to Indian industries for importing
plants and technology.
Board was in favour of the establishment of various industries like cotton,
jute, iron and steel etc. But immediately after the war, British government
revert back all concessions. Again in the year 1920, there was competition
among

industries.

Commission(1922)

Hence,

with

the

recommendation

of

Fiscal

a policy of discriminating protection called the Tariff

Board was introduced. Thirteen industries received protection from this.

Despite of various hurdles in this period, India was among first eight
industrial counties of the world.
Period III (1940-1950):
During this phase, the Second World War (1939) was broke out. This gave a
considerable motivation for the development of industrial sector but its

Institute of Lifelong Learning, University of Delhi

Colonialism and Underdevelopment of the Indian Economy

contribution was not equally great. The already set up industries worked
with full capacity. Some new plants and few basic industries were also
established. But because higher prices, profit margin was decreased. Hence,
industrial development was not upto that mark which was expected by the
entrepreneur.
The damage caused by the war was major problem for industry. A worldwide
problems of machinery and shipping, political disturbances made it very
difficult to start any new major industrial project. Further, the partition of
India and Pakistan, left India with almost the entire industrial sector of
undivided India.
References:
1.
2.
3.
4.

Dutt, P.R, India Today (Calcutta, 1970)p. 101

Anstey, V, The Economic Development of India, London, 1952.
Naroroji, D. Poverty and Un-British Rule in India, London 1901
http://www.historydiscussion.net/british-india/useful-noteson-the-industrial-policy-of-british-in-india/646

Institute of Lifelong Learning, University of Delhi