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Economy
Sunday, March 4 2012, 10:02 AM
£ Economic Policy in India
Phase 1 Mercantilism (16001757)
1. Its role was that of a trading corporation which exported Indian goods in exchange for foreign goods or
bullion. So it tried to develop new markets for Indian products abroad and increased Indian exports. By
18th century, Indian clothes had become so popular in € that the € governments imposed stiff trade
barriers on Indian products.
2. However, unlike the free trade prevailing in India, £ tried to mix politicomilitary power with trade, used
bribes, negotiations and show of force to gain trade concessions and monopolies.
Phase 2 Mercantilism with Political Power (17571813)
1. This was the phase where company had control of Bengal resources as well as had nizamat powers in
Bengal (1765 onwards). So the company began to misuse its powers to rapidly expand trade. Thus the
expanding trade brought only poverty to India.
2. It used revenues of BBO to finance its Indian expenses and to pay for Indian exports.
3. It began to coerce Indian artisans to produce on their terms forced labor, high input prices, lower output
prices. Since it had nizamat powers as well, no one could check this. On top of it, trade barriers continued
on Indian goods in €.
Phase 3 Industrial Capitalism (1813 1880)
1. This was the time Industrial Revolution had taken firm ground in £ and £ was manufacturing items in
factories.
2. The Charter Act of 1813 ended company's monopoly on Indian trade (except tea) and so the £
manufactured goods began to pour in. Indian handicrafts were now ruined. India became a source of raw
materials. Colonialization of Indian economy was firmly practiced.
3. These manufactured goods were imported without any duties while Indian goods had to face trade barriers
in €.
4. Other manifestations of this policy were in increased annexation, anglicization of Indian education and
missionary activities, development of means of communication.
Phase 4 Finance Capitalism (1880 onwards)
1. £ capital was invested in Indian Railways, banks, insurance, ports.
Agriculture
The agrarian society thus proved to be more resilient than once thought to be.
1. Contrary to received wisdom, modern research has established that the effects of these changes were less
spectacular than once imagined, and had significant regional variations, as the land transfers could not
fundamentally alter the structure of land holding everywhere. Thus in PS , jotedars retained their
traditional influence and not as many outsiders were introduced as was once thought. In RS, it were the
local elites or the mirasidars who gained and even in Deccan, only central Deccan saw large influx of
Gujarati money lenders. In the MS , local officials, primary zamindars etc. gained although in some cases
alien elements came to hold land as well.
Tenancy Reforms
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1. In 1859 and 1885 the £ brought out tenancy legislations which to some extent protected the tenants by
recognizing their occupancy rights.
Early Efforts (176593)
1. When the company got the diwani rights, it had no idea about LR mechanism in India and no data + not
enough officers. So the company appointed naib diwans for BBO. These naib diwans used the existing
machinery to collect LR, deduct 10% LR and deposit rest. But this couldn't function properly as (a)
although the native officers were in charge of collection, they were supervised by europeans and their
resulting corruption led to under collection for the company. (b) the company had informational
disadvantage and there was conflict of interests.
2. So in 1772, Warren Hastings put the naib diwan behind bars (since he wanted to take full control of the
revenue collection process) and introduced the 5 year farming system where the company auctioned the
zamindari rights for 5 years. The amount due from zamindars was fixed for 5 years and thereafter annual
settlements were done. But all of them failed since the burden of revenue demand on the farmers became
so onerous that it could not be collected at all.
3. In 1776, Warren Hastings appointed a commission to know the true value of LR. The commission
submitted its report in 1778 and this became the basis of the yearly contracts.
Permanent Settlement
Why did £ make Zamindar the landlord?
(a) Colonial Interpretation
1. Misunderstanding. In £ the landlords were the central figure in agriculture and he cultivated via hired
labor. £ thought zamindars were his Indian counterpart.
(b) Critique of Colonial Interpretation Creation of private property in land was a misnomer, as the absolute
ownership was retained by the imperial authority.
1. In £, landlord was land owner with respect to tenant as well as state. But the zamindar of India was a land
owner with respect to tenant only and with respect to the state he was a mere tenant. Instead of paying
small amount of income as tax as in £, he had to pay 10/11 of his income to government.
2. They created a class of zamindars who was completely dependent upon them as they needed such a buffer.
3. Making zamindar the owner of land also was administratively easier as £ now had to concern themselves
only with zamindars. Financially it was safer for the £ as well as in case a zamindar failed to pay LR, he
could be removed and land auctioned to a new zamindar and auction proceeds would pay for the shortfall
in LR.
4. A zamindar would only invest in the land for improvement if he has the ownership.
What do we mean by 'zamindar was made landlord'?
1. Under Akbar, the peasant held all land and the zamindar could be removed by Akbar on a complaint by
peasants. The state recognized the rights of the peasant through patta. So zamindar couldn't also act
arbitrarily and remove a peasant or try to collect more.
2. Under £, they said,"give us LR, so long as you give us that, we will not terminate your zamindari rights".
So zamindar was free to act arbitrarily and he could even evict a peasant who would have no recourse.
Circumstances Leading to PS
1. The company realized that the existing system (revenue farming for fixed tenures) was impoverishing the
country, ruining agriculture and was not producing the large and regular surplus that the company had
hoped for. As a result its trade had suffered as well because of the difficulty in procuring Indian goods for
export.
2. The next problem was to decide as from who to collect the revenue and how much to collect. The nawabs
used to collect from zamindars and there were some large land magnates who controlled large areas with
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their own armed retainers (in 1790 12 zamindars paid ~53% revenue). Others were small zamindars who
would pay directly to the state or through the big zamindars. Peasants would pay the zamindars at
customary rates. But via the previous experiments, the company administration had thoroughly confused
the situation as it retained some zamindars while replacing others with ijardars, customary rates were
violated as revenue demand was increased.
Economic Philosophy Behind PS
1. This reduced discretionary powers and thus will reduce the corruption that existed when the officers could
alter the assessment at will. It was also hoped to save on manpower.
2. The LR since it was going to be fixed in perpetuity was going to be fixed at a high level. This would
ensure higher and stable revenue for the company in initial years while later on the taxes on trade etc.
could be increased. Thus estimates are that the LR demand nearly doubled between 1765 and 1793.
Impact of PS: Change vs Continuity
1. The patta feature of PS was never implemented (either by zamindars or the peasants for they feared losing
their rights in any formal agreement). The peasant had lost his land right in 1793 itself and subsequent
Acts of 1799 and 1812 gave right to the zamindars to seize property of the tenants as well without any
court order in case of non payment of rent. Due to overall increased exploitation naturally the overall
cultivation went down.
2. It increased the pressure on zamindars as well and there were large scale transfers of zamindaris. Thus
within the first 20 years, more than 50% zamindari changed hands. But contrary to 'old myths' the new
guys who bought it were not exactly 'new'. The old zamindaris were parceled out by their own (zamindari)
officials, kinsmen, neighboring zamindars, subfeudatories etc which merely elongated the chain of
intermediaries living off the land surplus.
3. Jotedar thesis: Then there were some which were taken up by rich peasants. Also 1859 and 1885 tenancy
regulations (which provided benefits to the tenants) could not provide any relief to the poor cultivators.
Rather these reforms strengthened the position of a group of powerful rich peasants jotedars who
controlled vast areas particularly in N Bengal (while zamindars controlled merely revenue collection
rights). Ray and Ray (1973, 1975) argue that the power of this class and their control over the rural society
remained unaffected and herein lay the basic continuity of the rural social structure in colonial Bengal.
Bose (1986) however countered this saying that the jotedars were at best influential in N Bengal only and
in rest of the areas the power of the zamindars continued unchecked as late as 1930s. Further research
showed that in other areas the zamindars probably retained influence and authority but there also existed
all along a section of substantial peasants who too yielded power. However, the interests of the 2 classes
were complementary to each other and they often worked in unison.
Ryotwari Settlement
Economic Ideas Behind RS
1. Ricardian theory of rent showed that rent was the surplus from land which in Indian case the
(unproductive) intermediaries kept with themselves without performing any useful activity and thus didn't
deserve to keep it. So the state had a legitimate claim on this surplus (since it was the excess of output
after compensating the cultivator for inputs). Another reason was the perennial financial crisis of the
Madras presidency.
RS created individual property right in land and it was vested in the peasants rather than in zamindars. But it
defined the state itself as the supreme landlord and individual peasants as the landowners who obtained title by
paying annual cash rents or revenue assessments to the government.
1. It was based on a field assessment system where the rent payable on each field was to be permanently
assessed through a general survey of all lands. Then the government and the peasant would enter into
annual arrangements for cultivation who had the choice of accepting it or rejecting it. If he agreed he
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would get a patta if he didn't the state could lease out his land to someone else (violating the private
property concept) and if no one was willing to cultivate the land, it would lie fallow.
2. Thus in order to be successful a detailed survey was needed and assessments to be realistic. But in
practice, assessments were made by guesswork and revenue demanded was excessively high. The revenue
was fixed on the entire farm and not on each field while some of the land may be irrigated and some dry,
no considerations were made. And peasants were coerced into acceptance. The cultivating peasants
therefore were gradually impoverished and increasingly indebted and couldn't invest for the extension of
cultivation.
Factors Responsible
1. £ utilitarian philosophy. They were against monopoly of zamindars.
2. £ thought this was the original system of India. The poligars had subsequently usurped the land rights and
sovereignty when the power of the state had declined. This needed to be reversed now.
3. Need to eliminate zamindars and corner more revenue. Madras was anyways revenue deficient.
4. Failure of PS. Came up in Madras in 1820 and in Bombay in 1825.
5. Fixing PS revenue in perpetuity.
Features
1. Assessment & collection @ individual level. Based on survey & measurement. Fertility of soil and type of
crops being sown kept into mind.
2. LR in cash or kind. 1/3 to 2/5 level. A peasant free not to cultivate if he didn't agree. In such a case, land
would be auctioned to another peasant. If no one willing to pickup, then left fallow.
3. LR adjusted in 35 years. Patta and kubuliyat present.
Impact RS was the 'golden age' of Mirasidars
1. Coercion. Peasants forced to cultivate. Actual land revenue was ~80% due to inflated assessment. Farmers
began to abandon land and fly into nearby jungles. According to a survey conducted in 1855 by the
Madras government, ~ 60% of cultivable land was lying fallow.
2. The RS was favorable to the village elites or mirasidars. As their privileged rents and special rights were
recognized and caste privileges of brahmans were respected in the RS, the existing village power structure
hardly altered, and indeed was even more strengthened by the new system. These elements who also often
worked in the positions of local revenue officials appropriated most of the vacant land at lucrative prices
(since there were no other buyers). Moreover after 1816, these local revenue officials were also vested
with the police duties (apart from the already held revenue duties) which spelled doom for the poor
peasants. Absentee landlordism also grew as a result.
Reforms in RS
1. In 1855 (on the recommendations of Madras Torture Commission) a scientific survey of the land and a
fresh assessment of revenue was undertaken which resulted in some decline of the actual tax burden. It
was decided that the revenue rate will be half of the net value of produce and the settlement would be
done for 30 years. The system was implemented from 1864 but by then most of the damage had been done
and it strengthened the position of the new landlords (who had already displaced most of the old ones).
RS in Deccan
1. Initially in these areas, £ were collecting revenue via the traditional deshmukhs. But this didn't yield as
much revenue as they hoped for and from 1813 they began to collect LR on their own directly from the
peasants. Soon the abuses of the Madras system appeared here as well and peasants lost their land to
money lenders or migrated to the neighboring native states.
2. In 1835 'Bombay Survey System' was devised which was a practical settlement aiming at lowering the LR
demand to a reasonable limit which will ensure its regular payment. The actual assessment of the field
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was to be based on what it paid in the immediate past, the expected price rise, the nature of soil etc. It was
implemented from 1836.
3. It is believed it gave rise to the Deccan uprising of 1875 since it reduced the village patils and deshmukhs
to an ordinary level. £ however argue that this process had started from the time of Sivaji itself and they
were merely continuing it. Moreover this displacement was not uniform in all areas and it was only in
central Deccan that a power vacuum was created at the local level (where the Gujarati money lenders
stepped in) and the 1875 revolt was not centered here. As for the peasants the new settlement had made
LR less burdensome. If they became indebted this indebtedness was 'long standing'.
Mahalwari Settlement
Evolution The refractory and oppressive nature of the taluqdars and the need to maximize revenue as well as
protect the rights of the peasant proprietors to ensure the improvement of agriculture, rather than the influence
of Ricardian theory of rent, prompted the making of Mahalwari Settlement.
1. These areas had a small group of intermediary zamindars taluqdars who contracted with the state to
collect LR. Then there were a large group of primary zamindars who held the ownership rights over land
and included small owner cultivators as well as large proprietors of several villages.
2. The £ initially tried to make short term settlements with the taluqdars but they were again based on faulty
assessments and had fixed the revenue demand too high. Many of the big taluqdars resisted this increased
demand and were disposed of ruthlessly. Many were driven off and their fortresses flattened. The land
which was then sold in auction was most of the times bought by revenue officials, civil servants,
merchants, bankers etc. thus creating a whole new class of landlords alienated from the village
community.
3. Mackenzie in 1819 asserted that only the village bodies were the real owners of land in Oudh and thus
from taluqdars the £ preference now shifted to the primary zamindars and the village communities. The
1822 Regulation (based on Mackenzie's recommendations) provided for a detailed field to field survey for
revenue assessment and settlement to be made with the village community, primary zamindars and
taluqdars depending upon the local structure of land relations. Apart from the overall settlement, the rent
to be paid by individual cultivator was to be recorded as well.
But the new settlement from the very beginning was enmeshed in confusion, and corruption, as in practice it was
virtually impossible to implement.
1. The survey which was at the core of the new arrangement failed because it was too complex to be carried
out with the existing administrative machinery. The obvious result was over assessment, corruption,
arrears started mounting, land remained uncultivated and buyers were difficult to find.
2. In 1833 the system was reformed to make it more manageable. Now the detailed survey would be carried
out at the mahal level and the total revenue so fixed would be shared by the members of the mahal. The
state was to get 2/3 of the net income from the land and the settlement would be made for 30 years.
Impact
1. Even the surveys after the 1833 reforms remained imperfect and rid with over assessment, and remained
hostile towards the taluqdars. The increasing pressure and £ hostility led to many of them losing their jobs.
Land passed in the hands of money lenders and alien land lords in many cases. One can hardly say
nothing happened, the grievances of the rural society of N India were soon to be expressed rather loudly
and violently in the revolt of 1857.
Commercialization of Agriculture
Factors Responsible
1. £ utilitarians, their free trade policy, economic colonialization of India as it became a raw material
supplier.
2. Cash based economy encouraged by £ coupled with huge LR demand. But the LR argument is a weak
since a cash economy would mean even the food grains can be sold in the market and higher prices of
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cash crops would indicate a profit motive.
3. Breakdown of selfsufficiency of villages. Indian economy became closely interlinked and also linked
with international markets. Need to balance trade of China led to cultivation of opium.
4. Development of means of transport like railways, Suez canal.
5. Coercive practices followed by £ backed by legislations. £ capital.
Pattern of CoA
1. It was a coercive process and exploitative. The benefits never accrued to the peasants because of this. A
classic case is indigo plantation. The farmers could hardly reap any benefits of higher prices due to
monopoly coercion by the manufacturers (often £ earlier on and later Indians) while the lower prices were
passed on to them. The coercion element prevented CoA from becoming a tool for the modernization of
agriculture.
2. It involved plantations where land was owned by € planter and labor was hired. It also involved indigo
type cultivation where a contract was signed with the peasant.
3. It involved regional development only. Only some pockets were suitable for some crops.
4. The crops were cultivated keeping £ needs in mind. Thus cotton production in deccan was encouraged due
to $ civil war. Jute came up in Bengal to serve £ factories. The cultivation of indigo declined after the
synthetic dye came up, opium grew till 1900 then decline as China stopped importing opium. Wheat
export began to increase to £ and it was produced in areas in Maharastra despite not being a staple crop
in the region. Bengal rice was exported to China, SE Asia.
Impact
1. Volatility killed. Widespread poverty. Coercion. £ grip on India increased.
2. Famines (food grain production lagged behind the population growth and the element of coercion meant
that land was forcibly diverted from food grains to cash crops disregarding market signals), agricultural
indebtedness.
3. Revolts, growth of nationalism.
Famines
Major Famines
1. Bengal Famine of 1770. Wiped out 1/3 of population.
2. In 1784, Madras was struck by a massive famine.
3. In 1792, N India struck by a famine.
4. In 1803, another famine in Oudh.
5. In 1833, Guntoor famine which wiped out 40% of population.
6. In 1837, another famine in N India.
Famine Policy
1. The £ company was totally unconcerned about it. Some sort of policy started evolving only after the
transfer of power to £ crown.
2. In 1861, DelhiAgra region was struck by a famine. A committee was appointed but no significant study
was undertaken and situation remained largely unchanged.
3. In 1866 the Odisha famine struck and 3 mm died. A committee was setup to look into the causes. The
committee suggested that steps should be taken to generate employment and famine relief measures
should be carried out.
4. In 187678 another famine struck in many parts of India and 5 mm died. Richard Stretchy commission
was appointed in 1880 which suggested (a) A famine code be formulated, (b) LR should be remitted for
famine struck areas, (c) Data about peasantry should be collected to understand the true causes of the
famine, (d) A famine relief fund should be established. As a result of its recommendations, (a) A famine
relief fund with a corpus of Rs. 1 cr was setup. (b) A famine code was implemented in 1886 which
divided the famine prone areas into various categories, listed the precautions to be taken in normal times,
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listed the relief measures to be taken in a famine and the responsibilities of the officials in relief
campaigns.
5. In 189697 a major famine struck in whole India. Another commission was appointed but nothing came
out.
6. In 189900, another famine broke out in India. McDonnell commission was appointed which
recommended (a) Famine commission be established to coordinate relief measures. (b) Famine code be
revised. (c) Transportation facilities be developed. (d) Agricultural banks should be setup. (e) Irrigation
facilities should be developed. In pursuance with recommendations a famine commission was setup,
famine code revised and irrigation facilities developed.
7. In 194243 Bengal famine happened. Another commission was appointed which suggested merger of
departments of food and agriculture and steps be taken to increase agriculture production.
Means of Communication
Railways
Factors Responsible
1. Free traders and their influence.
2. Good for capital.
3. Good for £ iron and steel industries.
4. Good for administration.
Features of Railway Development
1. Till 1869, railway development was with private capital assuring 5% guaranteed rate of return with full
capital back at the end of 99 years. But this proved inadequate and slow although in this period railways
attracted some £70 mm of foreign capital. So from 18691880, railways were built as a state enterprise.
From 1880 onwards, both private and public capital was used.
2. All capital was £. Indian capital as well as other € and $ capital was not allowed. Till 1901, IR was a
losing concern and all losses to private capital were made good by £ government.
3. Guaranteed return on cost led to inefficiencies. Against and estimated cost of £9,000 per mile, actual cost
was £30,000 per mile. When the government began to construct on its own, the cost turned out to be
£12,000 per mile.
4. Railways were just another colonial enterprise keeping in mind only colonial interest in design (connected
internal markets with ports only and not with internal cities, connected frontier areas to facilitate army
movement), implementation and use. Even the coal used to run the railways was imported from £. The
transfer of technology remained confined to low technology areas like plate laying, bridge building or
tunneling while the higher technologies were never Indianized. Many nationalists believe that such capital
could have been much more beneficial had it been invested in irrigation.
5. But when £ left, they left behind 65K km of railway lines obviously an unintended product of £
imperialism.
Telegraph
Postal Services
European Business Enterprises
Managing Agency System
Nature & Character
1. These were partnership firms or private limited firms. Within these firms, control was limited to 34
people and was hereditary.
2. They used to provide management expertise to the companies.
3. They also used to act as financiers and promoters. When a company applied for a loan, apart from the
company's signatures, a managing agency signature was also required. Sometimes, the themselves used to
lend. Thus they acted as financiers. Then due to absence of capital markets, while promoting new
companies, these agencies used to buy shares temporarily and offload later. This way they acted as
promoters.
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Limitations
1. They had too much of power vested in them. This led to lack of interest on Indian capitalists' part to float
their own ventures.
2. Poor corporate governance as they were opaque in functioning, hereditary in control and shareholder had
little power.
3. Sometimes their remuneration was linked to goals contrary to goals of the shareholders. Example sales
maximization instead of profits. So through successive companies acts and amendments, their power was
curtailed and eventually abolished.
Advantages
1. They provided capital when no one did.
2. They modernized Indian market. Introduced the practice of public capital whereas in those days it used to
be family capital only.
Economic Transformation of India
Decline of Indian Handicrafts
Factors Responsible
1. The character of £ rule.
2. The misuse of politicaladministrative power by £. They used to force artisans to work for them @ low
wages, pay less for output, pay more for input, reveal trade secrets. So Indian manufacturing became an
unprofitable venture.
3. Policy of one way free trade due to impact of utilitarians who emphasized laissez faire.
4. Policy of annexation resulted in loss of patronage and loss of market as well.
5. Westernization of India missionaries and middle class.
Consequences
1. Deindustrialisation, pressure on land increased, deurbanization.
2. Poverty, famines.
3. Class of landless labor increased in number.
Did India under £ experience any economic development at all?
It was after the pacification of the revolt of 1857 that the 'classical colonial economic relationship' between £
and India gradually emerged.
1. At the time of WW1, Indians consumed 85% of Lancashire cotton piecegoods and 17% of £ steel was
absorbed into Indian railways. Until WW1, there was no import duty which could possibly offer any
protection to Indian industries. Even after the 1919 Fiscal Autonomy Convention where the import duty
policies were supposed to be changed, any rise in cotton duties was offset by a rise in excise duties as well
in the wake of Lancashire lobby which fought for "our rights" in India which was considered to be an
"important imperial asset".
2. Similarly Indian exports with other countries helped £ to overcome their BoP deficit with them and her
exports to £ satisfied the raw material needs of the £ companies. Home charges and drain of wealth was
another factor of exploitation.
Debate: How big was the drain?
1. Colonial historians argued that the drainage represented < 2% of the value of Indian exports in that period.
Another argument is that some of the expenditure was to encourage economic development in India
(guarantee on loans, encourage FDI etc.). Much of the foreign loans were used for the development of
infrastructure in India and £ enabled her to borrow cheaply from the world markets.
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£ and Irrigation
1. There was very limited colonial initiative to develop agriculture in India except for the construction of
some irrigation canals in NW, NE and SW India i.e. the non PS areas where there was a scope of
increasing revenues (in PS the revenues were fixed). Still the area under irrigation remained a small % of
the total cropped area. Even in areas where canals were constructed the canal charges remained high and
only the rich peasants and landlords could avail of them. Thus the entire exercise remained ineffective as
it was guided solely by profit motive. Famine conditions tell the true story.
£ and Industries (Revisionist Literature)
1. Some historians argued that the rate of deindustrialization of cotton industry was not significant since as
late as 1930s the handlooms continued to produce coarse cloth for the poorer consumers in India. If they
declined afterwards it was because they were taken over by Indian mills. But this is a weak argument.
Research indicates that in the 19th century, the proportion of industrial population declined to less than
half in many parts of the country.
2. Some historians also argue that while employment declined, real income per worker in the industry
increased between 1900 and 1947. And this rise in per capita income was not merely due to rise in modern
industries but also due to rise in productivity per worker in the small scale sector. As such it was brought
about by technological and managerial changes (substitution of wage labor for family labor). Production
now came to be done for non local markets as well, a shift occurred from local to long distance trade and
development of infrastructure aided in this.
3. But it has been pointed out that if such a development took place why didn't the share of industry grow in
the GDP. Between 1881 and 1947, the structure of economy remained virtually unchanged with
agriculture contributing 70% and manufacturing 10%. The growth of industrial sector before WW2 was
only 3.5% p.a. which was not fast enough to set India on course of IR.
4. Another major reason for the failure of Indian industry was the £ monopoly over capital and the european
managing system. Then the state itself was far from just being a 'night watchman' and followed a policy of
discrimination against the Indian industries. A clear example is the tea plantations in Assam which were
developed in 1833 by the government. Later on when they were transferred to the private sector, Indian
capital was completely ignored. The 1859 Inland Emigration Act also secured the supply of labor to these
european plantations.
Gradually India's role in the greater imperial structure was subordinated to its own domestic requirements. The
imperial goals and ideology were muted to accommodate pressures built up in India, both financial and
political.
1. Between 1880 and WW1, successive financial crisis and famines showed that India was incapable of
bearing the financial burden of serving the empire.
2. Development of political opinion made any increase in internal taxes a risky affair. This resulted in the
weakening of imperial goal and sharing of power. The WWs saw end of £ imports into India, gradually
import tariffs were imposed, £ investments in India declined, £ trade with India declined and the use of £
Indian army to serve the £ empire too declined for the cost now had to be borne by London or by the
colony which needed it.
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