Indian Economy on the Eve of Independence

Written and reviewed by Devendra Dubey, Mathematics & Commerce faculty at UniDrill (M.Sc. Mathematics, Osmania University · 10 years teaching). Based on NCERT Economics Class XI (Indian Economic Development), Chapter 1.

How does the land of muslin end up with a life expectancy of 32?

Bengal's muslin was so fine that it was sold across Europe, Asia and Africa. Yet when India became independent in 1947, an average newborn could expect to live only 32 years, fewer than one in six people could read, and the country imported the cloth it once exported. This chapter explains how that happened. The answer is not one event. It is a policy: for nearly two centuries the economy was run to serve Britain's industries, not India's people.

The big idea: an economy built to serve someone else

Colonial economic policy was concerned with protecting and promoting the economic interests of Britain, not with developing the Indian economy. India was reduced to a supplier of raw materials for Britain's fast-growing modern industry and a market for its finished goods. Every feature in this chapter follows from that one purpose.

Before British rule India had an independent, self-sustaining economy. Agriculture was the main livelihood, and the country was equally famous for handicrafts in cotton and silk textiles, metal work and precious-stone work, which found buyers all over the world. Daccai muslin and the finest grades, malmal shahi and malmal khas (worn by royalty), were the best-known examples.

Why it matters. When an exam asks for the "purpose" or "motive" behind any colonial policy, the safe answer is the same: raw material out, finished goods in, and Britain's interest first.

Measuring the damage: national income and growth

The colonial government never made a sincere attempt to estimate India's national and per capita income. Private estimates were made by Dadabhai Naoroji, William Digby, Findlay Shirras, V.K.R.V. Rao and R.C. Desai. Of these, V.K.R.V. Rao's estimates are regarded as the most significant.

The headline numbers for the first half of the twentieth century are two paired figures.

Per capita growth is always lower than total growth when the population is rising, because the same output is shared among more people.

$$g_{\text{per capita}} \approx g_{\text{total output}} - g_{\text{population}}$$

Pause and predict: if total output grows at 2% a year and the population grows at 1.5% a year, roughly how fast does output per person grow?

Check your answer: about $2 - 1.5 = 0.5\%$ a year. This is why a tiny per capita figure alongside a "less than 2%" aggregate figure points to a growing population and almost no rise in living standards.

Beyond the textbook. For the exam: V.K.R.V. Rao is the "most significant" estimator of colonial national income. In reality: Dadabhai Naoroji is better known for something else, the drain thesis set out in his book Poverty and Un-British Rule in India. Examiners sometimes use his name as a distractor in the "who estimated national income" question.

Agriculture: 85% of the people, almost no growth

About 85% of the population lived in villages and drew their livelihood directly or indirectly from agriculture. Yet the sector was stagnant and often deteriorating. The reasons are best read as cause and effect.

The central paradox is the exam favourite: the largest share of the population depended on the sector that received the least investment.

Two views. For the exam: commercialisation of agriculture served British industries and did not improve the cultivator's economic condition. Another reading: economic historians have long debated the effect of cash cropping. Some stress the burden of debt and falling food-crop area on small cultivators, while others point out that selling to markets also brought cash incomes to some regions. The textbook position is the first.

Industry: from muslin to mills

India could not build a sound industrial base under colonial rule. The policy of systematic de-industrialisation had a two-fold motive, which is the most-tested statement in the chapter.

The two-fold motive in one line: reduce India to an exporter of raw materials for Britain's modern industries → and turn India into a sprawling market for the finished products of those industries.

Modern industry began only in the second half of the nineteenth century. Compare the early industries side by side.

Sugar, cement and paper industries came up only after the Second World War. There was hardly any capital goods industry, meaning industries that make machine tools, which in turn make articles for current consumption. The new industrial sector contributed very little to GDP, and the public sector was confined to railways, power generation, communications, ports and a few departmental undertakings.

Pause and predict: why is the near absence of a capital goods industry a deeper problem than the absence of a consumer goods industry?

Check your answer: machine tools make every other factory possible. A country without them must import the machines for each new industry, so its industrial growth stays tied to foreign suppliers.

Foreign trade and the drain of wealth

Colonial policies on commodity production, trade and tariffs turned India into an exporter of primary products such as raw silk, cotton, wool, sugar, indigo and jute, and an importer of finished consumer goods (cotton, silk and woollen cloth) and light capital goods from Britain. More than half of India's foreign trade was restricted to Britain. Trade with other countries was permitted only with China, Ceylon (Sri Lanka) and Persia (Iran).

The opening of the Suez Canal in 1869 cut transport costs by avoiding the long Cape route and gave Britain even tighter control over India's trade.

India ran a large export surplus, but it brought no gold or silver into the country. The surplus went to pay for three things.

This outflow is the famous drain of Indian wealth. Its cost at home was real: essentials such as food grains, clothes and kerosene became scarce in India.

Pause and predict: an export surplus normally earns a country foreign money. Why did colonial India's surplus not enlarge its gold and silver holdings?

Check your answer: because the surplus was used up abroad, paying the London office, war expenses and invisible imports. The money was spent where it was earned, not brought home.

Two views. For the exam: the export surplus drained wealth from India to Britain and brought no benefit to the Indian economy. Another reading: scholars have long argued over how large the drain was and how it should be measured, though the pattern of spending described above is not in dispute. In an A-R question, stay with the textbook position.

People: numbers and well-being

The first census was held in 1881 and has been repeated every ten years since. The census shows two stages of demographic transition. Before 1921 India was in the first stage, with high birth and death rates and slow population growth. After 1921 it entered the second stage, as death rates began to fall while birth rates stayed high, so population growth rose. For this reason 1921 is called the great divide.

Social indicators on the eve of independence were dismal.

Today infant mortality is about 28 per thousand and life expectancy is about 70 years, which shows how far the gap has closed.

Extensive poverty marked both the rural masses and the urban poor.

The occupational structure hardly changed over time.

There were regional differences. In the Madras Presidency (today's Tamil Nadu, Andhra Pradesh, Kerala and parts of Karnataka), Bombay and Bengal, dependence on agriculture fell. In Orissa, Rajasthan and Punjab it rose.

Infrastructure: built for extraction

Roads were built mainly to move the army and to carry raw material from the countryside to railway stations and ports for shipment to Britain. All-weather roads in rural areas were very scarce. Railways were introduced in 1850. They made long-distance travel possible and broke geographical and cultural barriers, but they also encouraged commercialisation of agriculture and raised export volumes without raising Indian incomes.

Two views. For the exam: railways were introduced to serve colonial interests, with the benefit going to Britain. Another reading: the textbook itself notes the other side, that railways let people travel long distances and cross cultural barriers. Historians continue to discuss how much the railway network also linked Indian markets, even though it was designed for the colonial purpose.

Other infrastructure was limited. Inland waterways such as the Coast Canal on the Orissa coast proved uneconomical and were abandoned. The electric telegraph served mainly law-and-order purposes. Postal services were useful but inadequate. Aviation began with Tata Airlines in 1932.

Timeline: six dates to fix

What independent India inherited

Exam traps

60-second revision

Where this chapter connects

• Next: Indian Economy 1950–1990 shows how the new state tried to fix each problem listed above through planning, land reform and industrial policy.
• Later in Class XI: Human Capital Formation in India returns to literacy and life expectancy and compares them with the 1947 figures.
• Also see: Employment: Growth, Informalisation and Other Issues follows the workforce shift out of agriculture that barely began before 1947.