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The Economic Legacies of Colonial Rule in India


Another Look
Tirthankar Roy

The essay reinterprets the British colonial empire in India


(the Raj, for short) as a state. Based on that
reinterpretation it offers fresh assessments on three
issues: how its policies shaped the economy of India,
what lessons the postcolonial state drew from history,
and the gains and costs of the postcolonial
development strategy.

he long-term legacy of the European empires that ruled


over large parts of the non-European world is an enduring theme in world history. Although imperial history
does not mean the same thing in different academic traditions,
the economic consequences of the empires form a more or less
coherent discourse. Within that discourse, the British Empire
occupies a place of special importance, because in some regions of the world, British rule started at the same time that
Britain started on a course of rapid modernisation leading to
unprecedented rise in productivity in agriculture and manufacturing industry. Some of the ingredients of the modernisation, including new institutions and new technologies, were
transferred to the territories ruled by Britain. And yet, the rule
expected to serve the interests of the imperialists. Those who
take part in the discourse ask, did the Empire, on balance,
modernise and develop the regions that it ruled, or left them
poorer than before?
The present paper revisits this issue with reference to the
history of India. I ask two questions in this essay. What were
the most important economic consequences and enduring
legacies of European rule in India? And how far did postcolonial India modify or retain these effects? In order to answer
these questions, we need to consider first those traditions of
analytical history that draw lessons about the prospect of economic development from the history of the European empires.

Linking Empire with Development: The Old Theory

This paper is based on the text of the Tenth Godrej Lecture delivered in
Mumbai, 16 December 2014. The author wishes to thank the organisers
of the lecture and the audience for a lively conversation. A longer
treatment of the subject with fuller citations and more statistical data is
expected to appear in the journal Revista de Historia Economica.
Tirthankar Roy (t.roy@lse.ac.uk) teaches Economic History at the
London School of Economics and Political Science, the UK.
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The debate around these questions is almost as old as the empires themselves. In the last 15 years, however, the debate has
taken a new turn. There is an old theory, and a set of new theories about how empires shaped the prospect of economic development in the regions once ruled by them. In part, the motivation to write this paper arises from these intellectual developments and the need to rethink Indias place in them.
The simplest way to describe the difference between the old
and the new theories is that, whereas the old theory focused
mainly on trade between the colonist and the colonised economies, the new interpretations are centred on people. People, it
is recognised with increasing force in all strands of world history, embody ideas, and ideas change the world. Following up
that intuition, some writers see European settlement in the
non-European regions to represent channels through which
institutions and technologies travelled around the world, and
others see the growing scale of international migration of capital and labour in the 19th century, which were enabled and
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sponsored by the empires, to have encouraged the transmission of useful skills, ideas about business organisation, and entrepreneurship across the world. But both the trade-mediated
effect of empires and the people-mediated effect of empires
varied in their quality and strength. The new theories are
about these interregional variations. I will briefly describe the
two perspectives, and then explain how this essay uses some
of the new ideas.
One of the antecedents of the old theory emerged in India
around 1900 through the writings of the publicists who
wanted to see British colonial rule reform itself. Two individuals, Dadabhai Naoroji (18251917) and Romesh Dutt (1848
1909) were particularly important. Neither was a professional
scholar; Naoroji was a teachermerchantparliamentarian and
Dutt a civilian-cum-novelist. But both were well-read and prolific writers in English. Both of them had witnessed famines
that swept through western and southern India between 1876
and 1899 and felt compelled to develop a theoretical understanding of Indian poverty.
Two ideas emerged with special force from their writings,
that the colonial policy of free trade harmed the peasants and
the artisans, and that factor income flows reduced potential
investment. Dutt believed that the famines were a result of
taxation in the countryside. In his lifetime, agricultural commodity exports had grown in volume about three times, and a
string of irrigation canals together with the railways had
transformed areas like Punjab from grasslands into wheat baskets. The imperialists held up Punjab as a showpiece. Dutt
spoiled the celebration by saying that by and large Indian
peasants had not gained from foreign trade. In fact, by selling
too much food abroad they reduced chances of survival during
famines. Trade also destroyed the handicrafts, and the unemployed artisan crowded agriculture, putting more pressure on
land. That idea later became known as deindustrialisation.
Naoroji was known for a different contribution. From the
time that the East India Company consolidated its rule in India
in the last quarter of the 18th century, a balance of payments
system had taken shape wherein India imported a large quantity of skilled services, and paid for these services by a positive
trade balance, that is, by selling commodities. The main thrust
of his analysis was that India paid too high a price for the services it imported from Britain, which became known as drain;
meaning that the payments transferred Indian savings abroad
without a corresponding benefit. This was an indirect criticism
of trade because the services were paid for with trade.
These authors did not advocate an end of British rule. But
those who did fight for an end of colonialism late in the interwar period, found their writings useful as weapons. In the
process, there emerged a key tenet of Indian nationalism,
which is economic nationalism or the belief that India needed
to be free because foreigners had ruined its economy. Economic
nationalism, in this way, joined the study of history with a political battle, an equation that served politics well, but history
rather badly, I will argue in the concluding part of the essay.
Because the two things were tied together, when freedom
came in 1947, this economic history had run out of time.
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However, it received a new lease of life in the 1960s from a rising intellectual movement, global Marxism. Marxists believe
that capitalists appropriate surplus value from the workers.
Between 1957 and 1975, a group of Marxists who may be
loosely called the Monthly Review Press collective and included, among others, Paul Baran, Samir Amin and Andr
Gunder Frank, generalised this idea of exploitation to the
whole world. The rich world, which had more capital, grew
rich by transferring surplus value from the poorer world where
most people worked as labourers and produced raw material.1
There were differences between major contributors to the
Marxist scholarship. Some stressed the process of production,
others exchange, and yet others the political aspects relatively
more. The contemporary movement called the World Systems
School initiated by Immanuel Wallerstein, for example, was
more interested in the interactions between international
trade and regional politics. It was also more historical and
more global in scope than some of the Marxist works, but
shared with the latter the beliefs that surplus appropriation
explained world inequality and that colonial rule used power
to help the transfer of surplus value.
Thus, the Marxist offshoots shared a common set of beliefs
about economic history, that in the past (and the present)
openness of their economies made the Third World poorer,
and that colonialism was a political tool to maintain openness.
The charge acquired a particular force in the case of the British
Empire, which made no secret of its desire to maintain free
trade within the parts of the Empire, and in the case of British
India, made sure that London had firm control over the Indian
monetary and currency system in order to achieve that aim.
There thus developed a close bond between economic nationalism and global Marxismboth schools consisted of essentially one agenda, an emphatic rejection of the open economy.
Those who espoused the idea that openness caused underdevelopment discovered in drain, deindustrialisation, and
peasant distress discussed by the Indian nationalists, examples of how surplus was transferred from India to Britain by
the colonial rulers. These phenomena represented a forced
opening of Indian markets to British goods, transfer of Indian
savings to Britain via drain, they distorted agricultural institutions and worsened inequality by making the poor peasants
poorer even as traders-moneylenders-landlords engaged in
agricultural exports became richer.
By 1990, global Marxism was in retreat. Its basic insight that
capitalist prosperity was based on exploitation went out of the
toolbox of the historian. No one denies that exploitation is a
fact of life. But exploitation cannot be the definition of capitalism. The idea obscures the innovative propensity of capitalism, and obscures the presence of brutal exploitation in socialist societies. That colonialism was a political means to sustain
openness seemed blunt as a tool for doing comparative history;
it flattened the differences that existed between times, countries, territories, geographical zones, and between Spanish, Dutch,
British and French empires in their policies and institutions.
Not surprisingly, few original works were published in the
field of empire and development for 20 years after the last
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major works by the Monthly Review Press collective appeared


in print. From the early 2000s, the historical scholarship
started moving again in at least three new directions.
Linking Empires with Development: The New Trends

One of these applies to comparative economic development


the intuition of new institutional economic history or NIE. The
intuition is that the origin of international economic inequality in the modern world had owed to the quality of institutions
such as security of property right or the law of contract. One
set of authors uses this idea to show why settler economies,
usually colonies in the New World where Europeans settled in
large numbers, often had a different experience from colonies
such as India where they did not. The economists Daron Acemoglu, James Robinson, and Simon Johnson suggest that the
size of settlements, which in their view, was a geographically
influenced variable, predicted the quality of institutions like
security of property in the colonies. In settler societies, Europeans recreated institutions following the European precedent. In regions where their number stayed small, they preferred to rule by indirect means, with the help of local agents,
and created extractive or predatory institutions.
Staying within the paradigm that institutions matter,
another set of writings shows that in fact settler economies
varied among themselves; in some cases like Latin America or
South Africa settlers appropriated property rights and public
goods, whereas in others a more democratic outcome followed. A yet third strand in institutionist history considers the
nature of the legal tradition transplanted by Europeans, and
the varied effects thereof.2
The second trend is less interested in seeing empires as institution-building governments, and more interested in the link
between the British Empire in particular, and what one contributor calls the early modern globalisation. A series of
works in imperial history in recent years has traced the prehistory of globalisation to British imperialism and the spread of
settler societies.3 These works talk about a British world or
an Anglobalisation, which was distinct from the British Empire as a state system, but dependent on it. This world was a
combination of accelerated movements of goods, capital and
labour, thanks to the Industrial Revolution and new communication technologies, and a political and institutional set-up
supplied by the Empire. The Empire fostered a lingua franca of
business, uniform laws, and easy exchange of knowledge over
a large part of the globe. Together, the two factors, rising trade
and a pro-trade state system, spawned a new network of multinational enterprise. The Empire was neither benign nor just a
marketplace. It produced racism, conflict, nationalist backlash, warfare, and consolidation of local hierarchies. But its
effect on the making of a world economy was also large and a
completely modern phenomenon.
A third set of writings, led by Jeffrey Williamson, offers an
interpretation of the 19th century economic globalisation, but
can be seen to contain lessons for imperial history insofar as
some empires did play a large role in maintaining market integration. The theory of trade predicts that the fall in the costs of
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doing trade would lead to more trade along with more specialisation. Consistent with that prediction, the 19th century
saw the emergence of economies dependent on manufactured
goods exports and those dependent on agricultural or mineral
exports. India was an example of specialisation in agricultural
export and a retreat from industry, though an awkward example as we shall see. The decline of handicraft production in
India, or deindustrialisation, was part of this process of specialisation. The theory does not predict that the world would
become more unequal as a result of specialisation; but it can
have that outcome if industrialisation entails increasing
returns and agriculture diminishing returns to scale.4
There are problems involved with a straightforward application of any of these ideas. The settler economy literature has
faced three types of criticism. First, it rests too much on an
almost religious faith in the importance of institutions, and
the superiority of European institutions. To conduct narrative
history of any one society from that faith would amount to
overlooking, at least not knowing how to deal with, a host of
indigenous factors, such as the capacity and power of local
elite, quality of norms and customary law, entrepreneurship,
and artisanal skills. This is an especially vexing issue with Indian history, since much of the narrative history of colonial
India deals more with indigenous agency, and less with European agency.5 There is a more fundamental problem at stake
here. NIE as an intellectual movement has enthralled the
North American economics departments. But outside that
small collective, it has had limited influence. Narrative historians by and large have not shown much enthusiasm for NIE. In
that sense, it has had a rather divisive effect upon economic
history. Whether this is a reflection of incompatible methods
or the way American academic departments communicate is
an open question. I will have more to say on this issue below.
Second, the economists favoured way of showing that institutions matter involves long-range regression analysis where
remote causes or instruments thereof are shown to produce
modern effects. The statistical tool obscures the process of
change, creates the impression that we already know the process, obscures path dependence, and the mechanism by which
supposed causes translated into supposed effects. The method
involves the syndrome that an early criticism called compression of history into two dates, one representing the cause, and
the other the effect, leaving hundreds of years in between unaccounted for.6 The criticism again reflects how economists
and historians often differ in their approaches to historical
processes. Economists believe a model will tell them enough
about the process, and that a few anecdotes can serve to motivate constructing a model. Historians need to be sure of the
historical process by reading the testimony of real people. The
two methods cannot happily collaborate, though they must do
so if economic history is to have a good future.
Third, while there cannot be any question that European
settlement mattered to developmental outcomes, narrative research has revealed great diversity and unpredictability in the
ways it mattered. The scholarship on Africa has shown this
especially well. With India, a counterpart problem arises.
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European settlers as a proportion of Indian population, given


its immense size, were invisible in a statistical sense. And yet,
British foreign, military, trade, and imperial policies were
shaped both by the fact of settlement and the settlers themselves. It would be nave to characterise British India, which
built one of the largest armies in the world, created a bureaucratic state, collected an immense body of information, and
passed numerous laws, as a case of light-touch indirect rule.
The size of European settlement tells us nothing useful about
the nature of the rule. The skill composition of the settlement
might. But that variable cannot be precisely measured.
The second of the three trendslinking empire with globalisationremains in spirit a Britain-centric scholarship,
though nearest to the story that I will offer here. The third
globalisation and inequalityfails to explain basic stylised
facts about Indian economic history. India had free trade
thrust upon it, and yet it specialised in agricultural exports to
a more limited extent than most tropical countries. The evidence on deindustrialisation is even more debatable. A new
scholarship has questioned the significance of deindustrialisation as a concept. Many skilled artisans survived imports from
Britain, and the surviving artisans contributed to the growing
share of manufacturing in the national income.7 That many
artisans survived the Industrial Revolution and Indian merchants set up factories on a large-scale poses a problem for
trade and specialisation models, though they do not necessarily make them invalid. These anomalies suggest that it is necessary to factor in the flow of skills and knowledge along with
the flow goods, for trade models to be credible.
The reason why we need to reopen the debate about empire
and economic development in India should now be clear. The
old theory has failed to supply a persuasive account of the economic legacies of the empire. And it cannot yet be said that the
three recent trends in the reinterpretation of 19th century economic history, and of imperial agency in turn, necessarily lead
us towards a coherent or better understanding of how the British
Empire shaped Indian development. The orientation of the
new writings lies elsewhere than in specific regions. Their
main points of interest are settler societies, the British world,
or trade theory. But they do offer some lessons useful for a
reinterpretation of Indian history.
In this essay I use two lessons. The settler society scholarship stresses that people matter as embodiments of ideas,
skills, and capacities. European settlers came with a set of
ideas about institutions and technologies, their Indian associates and rivals had another set of ideas. History formed of an
interaction between the two. Of course, skills and capacities
could be deployed for exploitation purposes, but not necessarily. The most important thing about the settlers was not that
they were exploiters, but that they carried useful knowledge.
The second lesson comes from the empire and globalisation
scholarship, which stresses the role of the British Empire as a
foundation of the 19th century global order, for two reasons.
The Empire used its political power to force open and connect
markets. And the empire became a vast field for interaction
between ideas, skills and capacities.
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These notions can inform a new economic history of the Raj,


but cannot really be the foundation for one. The task to build a
new foundation should begin with a reconsideration of the
kind of state that the Raj was, and why such a state evolved
from the activities of a trading firm, the East India Company.
What Kind of a State Was the Raj?

What did the British think they were doing in India for 200
years? There is no easy way to answer the question. We know
that the British were trading in 1750. But why did they create
an empire? Why did they hold it for so long? The Empire served
political functions, of course. But surely there was an economic logic as well. It is not easy to pinpoint that logic. There
have been a few attempts to measure the gains from having an
empire. At least one of these shows that the costs incurred to
maintain the Empire were quite large and underestimated.8
If we look within India, one clue to an answer is suggested
by the fact that it was a small government keen to maintain
open markets. Tax revenue formed about 3% of gross domestic
product (GDP) and public administration 5% in 1931. This state
was one of the smaller governments in the contemporary
world, tiny in comparison with not only contemporary Britain
or postcolonial India (government expenditure formed 22% of
GDP in 1981), but also with other emerging economies of the
time such as Imperial Russia and Meiji Japan. The Indian market was also one of the least regulated. Now, classical liberalism makes a case for small governments and free markets. And
this message was applied to India by the early 19th century
ideologues and rulers. Perhaps the colonial state and its policies can be understood as an experiment in classical political
economy?
This is an attractive idea. But historians find it difficult to
prove a direct link between economic theory, trends in the
British economy that influenced theoretical thinking, and
colonial policy in the early 19th century. Liberalism, with its
belief in liberty, came to terms with colonies not without tortuous reasoning.9 Scholars who have studied how colonial policies were implemented find that the link between doctrine and
practice varied over time and between contexts of practice.10
The force of ideas changed because free trade and small government generated backlash. Free trade for the colonies, in a
popular view, was not much more than a means to meet British balance of payments. Perhaps it was not liberalism, but another 19th century intellectual movement, utilitarianism, with
a belief in the rule of law that shaped statecraft in India.11
That, at least, explains better the bureaucratisation of the state
in India.
There is a further problem. Many pre-British Empires in
India also shared these outward features, small government
and unregulated markets. According to one interpretation, the
Mughal treasury in Delhi or Agra probably did not earn a large
share of the tax receipts from land, much of it being retained
by magnates like the jagirdars and zamindars. And beyond
collecting taxes, the state did not have a policy on regulating
markets either. Merely having the outward features of a liberal
idealsmall state and free tradedid not make the Raj special.
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What did make it special were two other features. First, it


was a military-fiscal state. Unlike any other South Asian state
of the past, the Raj centralised the military and fiscal operations, in the process suppressing and demilitarising the armed
groups like jagirdars and zamindars who earlier collected
taxes and enjoyed local political power. Such people, if they
rebelled together, could and did bring an Empire down. In order to suppress them and secure its own future, the British
raised a huge standing army, combined it with a navy, funded
the whole enterprise by a bureaucratic fiscal machine, and
through that army, imposed political unity on a region where
power had always been fragmented and decentralised.
The origin of such a state in India cannot be fully explained
without reference to the conflicts and contests of the 18th century, through which the East India Company established
power in India. The Companys strategy to concentrate military and fiscal power at the centre made it different and a distinctive kind of rule, and an essentially European one, in comparison with most of its Indian contenders. A new scholarship
shows why the Company succeeded as a military-fiscal state
whereas its Indian rivals often failed, and emphasises the
European dimension in the Companys strategy and statecraft
in late 18th century India.12
Second, whereas most empires of the past had limited access
to the seaboard, the British controlled the seaboard firmly, and
used that control to foster maritime trade. The Raj emerged,
not from outright conquest, but from the activities of the East
India Company between 1765 and 1818. The Company was a
merchant firm. Although it had left its commercial legacy
behind from much before 1858, when it was removed from the
formal rule of India, it understood the commercial importance
of India, especially its port cities not least because private
European traders were often former employees of the firm or
their friends. The Crown carried on the commitment to protect
overseas trade, increasingly driven by a belief that the Indian
Ocean region was crucial to securing Britains own future.
Many pre-British regimes in India may have entertained
ambitions of fostering market integration on a large scale. But
they did not have the means to do so. Mughal ports like Surat
or Hooghly were almost certainly much smaller in scale than
Bombay, Calcutta or Madras in the 19th century, and more
loosely tied both to the imperial capital and intercontinental
maritime trade than the port cities established by the Company.13 The Raj had the means, and used these means to foster
globalisation. It cannot be understood either as limited government or as a free trader. It was a government strong enough
to sustain and extend market integration on a world scale,
with the result that not only commodities but also capital,
labour, and knowhow, circulated on a vastly larger scale
than before.
In other words, the Raj functioned as if it saw itself as the
guardian of a system of interconnected markets. Statecraft in
India played a very important role in that project. In order to
maintain market integration between Britain, India, and the
colonies, the rulers used three principal means, control on the
monetary system which was done by the Secretary of State in
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London, commercial laws which were overseen by the Viceroys Council in India, and of course, the huge army, which has
been discussed already in relation to the military-fiscal aspect
of the state.
With these ideas about what the Raj was, it is possible now
to offer a coherent set of conclusions on what it did. We have
the elements to talk about the major success and the major
failure of this state.
Benefits and Costs of Colonialism

Any assessment of economic change under the Raj must pay


special attention to one extraordinary fact. Between 1850 and
1940, employment in Indian factories increased from near
zero to two million. Real GDP at factor cost originating in factories rose at the rate of 4%5% per year between 1900 and
1947. These rates were comparable with those of the two other
emerging economies of the time, Japan and Russia, and without a close parallel in the tropical world of the 19th century.
Cotton textiles were the leading industry of the 19th century.
Outside Europe and the United States, 30% of the cotton spindles in the world were located in India in 1910. Within the tropical zone, 55% of the spindles were in India.
What is really offbeat about industrialisation in India is not
that it happened, but that it happened in a region where every
textbook prerequisite for industrial capitalism to emerge had
been missing in 1850. We tell students in a world history class
that Britain industrialised under free market conditions thanks
to favourable factor prices, that is, relatively low cost of capital
and energy but high wages, and to productive and energyintensive agriculture which generated savings for investment
and created path dependence in technological choices.14 We
tell them also that virtually every latecomer to industrialisation needed to do something special to compete with Britain.
The most popular idea is that of the activist state, which Alexander Gerschenkron and his followers treated as an axiom for
late industrialisation or catching up. In the discourse on
international development the idea lives on as big push, embedded autonomy, developmental state, and governed marketsome of these labels were coined to account for the recent industrialisation of East Asia. The developmental state
manipulates tariffs or regulates banks or manages the import
of technology.15
None of these conditions were present in India in 1850.
Interest rates were two-to-three times higher than in the
financial centres of Europe. The Empire was as far away from
Gerschenkrons activist state as we can imagine. It did not actually obstruct the industrialisation, it did not have the legal or
the political means to do so, but nor did it aid the process. The
saving rate was around 5% of GDP in 1920. Indian agriculture
was characterised by some of the lowest yields even in the
tropics. Indias artisans may have been skilled but they had little access to the expensive capital market to start factories.
Why did industrialisation happen then? The answer is easy
access to the world market for finance, machinery and skills.
Industry emerged in the three port cities, Bombay, Calcutta,
and Madras. These cities had seen rapid population expansion
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since the late 18th century when these were still centres of the
commercial activity of the Company. The growth continued
into the 19th century. The volume of foreign trade to and from
India more than doubled in 18651914. The volume of trade
through the three ports increased from 2 to 9 million tonnes
between 1863 and 1913. The estimated ratio of foreign trade in
national income increased from 8%10% to 20% in 18651914.
People who led commercialisation-led industrialisation.
Further, because exports were dominated by agricultural
goods, overseas trade, overland trade, and indigenous banking became ever more interdependent in the 19th century.
Land trade and caravan trade in textiles, grain or cotton had
been well developed from before British rule, and bankers
who financed long-distance trade could be found in the major
towns located on rivers and caravan routes. As the Mughal
Empire collapsed from the 1720s, a number of these merchants
and bankers migrated to the capitals of the rising states such
as Hyderabad, Lucknow, and Pune. But these were not the
leading commercial hubs in the late 19th century set-up. Therefore, in the 19th century, much more of the migration was directed to the British Indian ports.16 Here, a string of British and
European trading firms purchased agricultural commodities
for export from merchants specialised in overland trade. The
merchants themselves were financed not by the small number
of corporate banks, but by indigenous bankers and moneylenders. By 1920, the biggest market for rediscounting of indigenous trade bills, the hundi, was located not in the interior, but
in Bombay and Calcutta.
Among those Indians who invested money in manufacturing industry, one segment had always been based in the coasts,
like the Parsis, and the other segment, like the Marwaris, had
migrated from northern and western India towards the coast
from the late-1700s. They were joined by foreign trading firms
and foreign investors in the port cities. The first factories were
established by these groups making use of their knowledge
and control of inland trade, overseas markets, banking and
finance. As time passed, profits accumulated in industry and
trade went into public goods. At the time of Indian independence, the port cities were homes to some of the best
schools, colleges, hospitals, universities, banks, insurance companies, and learned societies available outside the Western
world. A big part of that infrastructure had been created by the
Indian capitalists.
It was created in collaboration with skilled immigrants from
Europe. And here we return to the significance of European
settlement discussed earlier. This world of enterprise could not
possibly emerge without heavy reliance on the import of services from Europe. India had goods to sell. It did not have an
adequate supply of skills and technology. In order to set up
factories, Indian businesses imported not only machines, but
also the engineers and the foremen to operate these. Likewise,
doctors, scientists, university teachers, lawyers and military
personnel came from Europe, often to work under Indian
bosses in the private sector. Corporate executives, managers
and partners in foreign firms were European. Therefore, joining the world economy required India to maintain a deficit on
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the services account. The deficit included private outflows,


such as repatriated profits or remittances by managers and
employees, and the so-called Home Charges, a payment made
by the government on account of debt service, pensions and
railway subsidy.
This was Naorojis drain. Like any payment made by governments anywhere in the world, there was a lack of accountability and an element of waste. But the so-called drain was also a
payment for skills, and it is impossible to imagine an economy
short of skills dealing with the world without having to buy
skills from abroad. The services thus purchased contributed to
national income, public goods, and political stability. There
has never been a serious discussion on the scale and the nature
of the contribution. Economic nationalism took it for granted
that factor payments were necessarily forced and unrequited, and thus, purged the issue of its contribution from
scholarly research.
The great paradox of the economic record of colonial India
was that national income grew at an exceedingly slow pace
throughout. Between 1900 and 1947, GDP increased by 60%
and per capita income by 10%. Rulers of postcolonial India assumed that the problem was lack of industrialisation and that
the problem needed to be fixed by means of a closed economy
and state intervention. They drew the wrong lesson from history. National income statistics show that the non-agricultural
economy was always a source of dynamism and growth. The
size of the non-agricultural economy doubled during 1900
1947. Trade and industry together more than doubled. Openness had delivered a modernisation process that had few parallels in the tropical world. Industry and commerce did not
need fixing by the visible hand of the government. The real
problem was agriculture, which grew by about 15% in the
same time span, and only slightly faster in the previous decades. Given the size of agricultural production, its stagnation
imparted a depressing effect on real wages across the board,
and on national income.17
Neither drain nor deindustrialisation can explain what ailed
agriculture. Agricultural productivity was notoriously small in
the South Asia region. The majority of the population lived in
villages and cultivated land. If the village was located in an
arid or upland district, the land produced too little even for a
comfortable subsistence. Like the states of the past, the Raj depended on land taxes, which was a limited resource because
land did not produce a lot. In the past, low land yield was not
only the root of poverty, stagnation, and small tax receipts, but
also of repeated famines.
Why was land yield so small? Was the answer rooted in
man-made factors such as institutions or free trade, or in the
regions geography? Marxist scholars writing in the 1970s suggested that the agricultural problem was manmade in nature.
This would be credible if we can show that yields were once
high, but fell during the colonial era. There is no worthwhile
data showing this. From all the evidence we can have, Indian
dry-lands had poor yield from precolonial times, because of
poor soil, and even more, precarious water supply, and whereas
land yield in some parts of the fertile deltas did fall in the early
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20th century, the fall was more likely caused by over-exploitation of land by a growing population.
Whatever the roots of the agricultural stagnation, the singular failure of the Raj was an inability to make a dent in rural
poverty. It created canals, but on much too small a scale. It created railways, but railways were not much good if there was
not enough surplus product to sell. After the military expenditure was taken out, there was little left in the budget for spending on public goods. The biggest casualty of the public goods
paralysis was agriculture. The Raj never seriously considered a
policy to develop rain-fed agriculture. Between 1900 and 1947,
agriculture was in a crisis because the open land frontier had
disappeared, government investment in canals stopped, and
population growth accelerated.
If the Raj did transform the non-agricultural economy, at
least in the port cities, why did it become unpopular? We can
point out three reasons. First, agriculture became a rallying
point in the nationalist movement in the 1930s. Mahatma Gandhi turned what had been until his return to India an urban
and elitist political movement into a mass protest movement,
partly by going to the countryside. The mounting agricultural
crisis made this move timely. Second, after the Great Depression of 1929 ended the globalisation process, Indian business
lost interest in the world economy and some of them started to
finance the independence movement. Among those business
interests who joined the independence movement, there were
several who hoped that their future would be better secured
by a protected economy than an open economy.
The third factor was a more long-standing one. The Raj had
made monetary policy and military policy more or less completely non-negotiable entitlements of London. By doing so,
during much of its career the Raj appeared to the educated
Indian as a military despotism. In political culture, it fully
reflected that despotism. For several months in a year the government sat in Simla insulated from the heat and dust of the
plains. Its proceedings were ritualistic. The Viceroy was technically advised by a council. Individually, the members of the
council were capable and interesting people. But the deliberations within the council did not allow for open discussion. The
government left no room for internal debate. There were no
Indians in the secretarial staff around the Viceroy. A reform
measure in 1909 had introduced a few elected members in the
council, but that did nothing to change the ritualistic mode of
its functioning. Subsequent reforms came in too little, too late,
and with a good deal of resistance from reformers. These
reforms laid the foundation of a parliamentary democracy in
India. At the same time, the tortuous process removed the
legitimacy, if any, that the Empire still had left.
In 1947, the Empire ended. In India, the new state framed a
development strategy that almost point by point attacked the
features of the imperial economic system. The most consequential change was the retreat from openness.
Policy and Ideology after 1947

In India, the new state set out to replace the Rajs brand of
openness and limited government with vengeance. Protection
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was raised to very high levels and reinforced with non-tariff


barriers. Commodity export was discouraged. There was public control of markets and assets, and skills and machinery import faced stiffer barriers. All this was done with such commitment that 30 years after independence, trade and foreign
investment had been reduced to insignificance, whereas the
size of the government relative to GDP grown seven times in
193181.
It is not the purpose here to delve into a detailed assessment
of postcolonial policy. I do, however, wish to suggest that the
post-1947 record can be understood better if we have a sense of
history. At the outset it is necessary to say that although the
new regime delivered GDP growth at a much higher level than
did the colonial one, I do not consider this a measure of success. The elevated growth was largely financed out of the taxpayers money, as opposed to commercial profits earlier. It was
not a sustainable strategy, and therefore, not a great idea. That
it came to an end in the 1990s was not due to the foresight of
politicians, but to its inherent contradictions. GDP figures also
obscure some of the costs that were paid to achieve this pattern of growth and some of the gains made that do not show
up immediately in national income data. Let me, therefore,
leave GDP aside, make a more direct approach to the issue of
gains and costs, and illustrate these with three examples:
trade, foreign firms, and agriculture.
A massive transformation was unleashed in private trade
and private finance after 1947, especially in the sphere of agricultural goods. In the colonial era, an interdependence had
developed between foreign trade, domestic trade, and private
banking. There is plenty of evidence that this interlinkage had
created synergy between these three activities and helped reduce risks for merchants investing in banks or manufacturing
industry. In the interwar period, sources such as the Banking
Enquiry Commission (192930) revealed dynamism and institution-building in banking, trade, storage, and futures. All of
that entrepreneurship and innovation seemed to evaporate in
the next 30 years. Step by step, the government erected a regulatory system that paralysed trade, and drove private capital
away from commercial infrastructure and institutions, reversing almost a century-long trend to the contrary. Starting with
the Essential Commodities Act, 1955, restrictions were added
on movement of goods across India, and on private storage.
There was a ban on export of agricultural goods, ban on future
markets, ban on private trade, and ban in many states on sale
of agricultural goods except in approved sites. With the link
between foreign trade, domestic trade and private finance
now snapped, all three dwindled. The devitalisation of private
trading and finance was done in the name of food security and
from the belief that the moneylender was the root of all evil.
Whatever the merits of that sentiment, the new order greatly
weakened both internal trade and finance.
The retreat from an open economy was bad news also for
foreign firms. Between 1950 and 1970, except a few multinationals selling goods to Indians, the British firms that were engaged in export-oriented trading and manufacturing were
squeezed out of India. The firms in Calcutta lived on the export
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of jute and tea, procured capital and technology from abroad,


and recruited top management internationally. The nationalist state sharply raised tariffs and capital controls, which made
taking any of these steps more difficult than before. The
investment policy raised investment cost in businesses that
had long relied on imported capital, knowhow and expertise.
Exports suffered in jute and tea. The global firms operating in
India, thus, faced pressure from two ends. They lost their foothold in export trade, and although they could in theory diversify, this option was not easy since they never had a foothold in
inland trade. A series of hostile takeovers by opportunistic
Indian families with help from cynical politicians sealed the
fate of the global firms. Most of them were then run down by
their new Indian owners.
The retreat from international business also sealed the fate
of Calcutta. Once a global city, with a larger entrepreneurial
base than that of Singapore and Hong Kong, Calcutta reached
the 1970s as a provincial backwater. These other port cities did
not turn their backs on the trading past, but built on that heritage, combining it with good governance. Calcutta set out to
destroy its global past and hunt down foreign capital. Outside
the communist bloc and some dictatorships, there is probably
no comparable example of a systematic and managed grinding
down of capitalism.
If the destruction of the open economy and the enlargement
of the state were damaging, there was one area where the
state scored a major success, which was the absorption of new
high-yielding agricultural technology in the 1970s. This one
step not only raised output and productivity above historical
levels, but also gave rural wages a sustained upward push that
was without precedent. We now know that this strategy has
been a drain on the budget, and led to an expenditure commitment that cannot conceivably come down in near future. Still,
it is the national state that must be credited with making a real
dent into rural poverty. It is not believable that the British
rulers of India would have the courage to undertake such an
ambitious development plan, or that they even knew what
needed to be done.
The economic liberalisation of the 1990s, which returned
India to openness, made it possible to sustain this expensive
agricultural system without leading the economy to a breakdown. It enabled the state to earn more money to afford spending more money on subsidies. And yet, even as the state secured
its commitment to agriculture, in many other ways it retreated
from the postcolonial policy regime and even returned to the
tenets of the colonial economic system, the key point of return
being openness.
Conclusions: Economic Legacies of Colonialism

What were the most important and enduring economic legacies of the British colonial rule in India? How did independent
India change these legacies? I wish to end by restating three
points that help answer these questions.
First, the British built and maintained in India a large army.
Independent India inherited this army. If it was a weight upon
the budget then, as the nationalist critics pointed out, it
58

robably still is a significant weight. But without that fiscal


p
burden, it is difficult to imagine political unification of a land
that had never before been unified to this degree. In turn, the
large army was the consequence of the warfare and conflict
through which the East India Company established its state in
India. It was a result of the military-fiscal strategy the Company successfully deployed to secure power. The price paid by
the Indians for political unity secured in this way was large.
Given the small size of the state, the military expenditure that
it had to undertake crowded out spending on public goods,
leading to the greatest failing of the Raj, an inability to
address the key challenge of development, transforming rural
livelihoods.
Second, the Empire created an open economy, open to trade,
capital flows, and settlement. For the imperialists, keeping
India open to trade, investment and migration served British
economic interest. But that does not amount to saying that
openness was damaging to Indian economic interests. The two
interests were broadly compatible until the 1920s, and diver
ged around the time of the Great Depression. But when world
trade again recovered from World War II, India had left the
stage. In the colonial era, openness contributed to the emergence of a robust industrial capitalism centred in the port
cities. It helped the growth of a sophisticated education system. The cosmopolitanism was sustained by the free movement of people, skills and knowledge. It is certainly possible to
criticise individual items of factor payment. But economic
nationalists fundamentally misread these flows by calling
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these drain. They were the price India paid to tap into a mobile
market for skills and capital.
In both these respects, independent India changed the rules.
It enlarged the state many times, and dismantled the cosmopolitan capitalist order. If these were on balance regressive
steps, the most notable achievement of the postcolonial state
was agricultural transformation, which would be inconceivable without enlargement of the state and subsidisation of
agriculture on an enormous scale.
Could the rulers of postcolonial India have made a better
choice? A handy characterisation of the Raj is that it was a
strong economic system with a limited government. The postcolonial economy, by contrast, had a large government with a
flawed economic system. A counterfactual scenario would be
one in which the best legacy of the past was combined with the
best modern idea. That is, the cosmopolitan capitalism was retained with the addition of a large state. This option, however,
was unthinkable in 1947. Neither the socialists nor the procapitalist politicians in the Congress liked foreign capital or
wanted a cosmopolitan capitalist order to continue.
This brings us to the third and perhaps the least visible of
the legacies, the persistence of economic nationalism. I have
defined economic nationalism as a belief that India needed to
be free of foreign rule because foreign rule had made Indians
poorer. In principle, liberty can be fought for without having a
historiography to support that fight. These two thingsdesire
for political freedom and an economic history suggesting that
free enterprise had damaged Indiahave no theoretical
relationship between them. In India, however, the two became
interdependent. That equation served the nationalist struggle
well. But it made conducting debates on economic history a
difficult enterprise. The suggestion that the Empire was good
for India because it had created an open economy sounds in
some ears like a politically incorrect stance. The point of such a
statement is not to support the Empire in a dead and irrelevant
political debate, but to reiterate the virtues of openness.

Notes
1 Karl Marx himself had a more upbeat view on
the spread of capitalism to the non-European
lands via the agency of empires, based on
assumptions about the economic system prevailing in these lands.
2 Other than the three names mentioned in text,
contributors to the literature include Stanley
Engerman, Kenneth Sokoloff, Rafael La Porta,
Florencio Lopez-de-Silanes, and Andrei Shleifer.
For a recent survey, see William Easterly and
Ross Levine, The European Origins of Economic Development, Cambridge MA: NBER
Working Paper 18162, 2012.
3 Works by Chris Bayly, John Darwin, Gary
Magee and Andrew Thompson, and Niall
Ferguson, are examples. For a review essay, see
P J Cain, The Economics and Ethics of British
Imperialism, The Historical Journal, 55(1),
2012, pp 24961.
4 J G Williamson, Trade and Poverty: When the
Third World Fell Behind, Cambridge Mass: MIT
Press, 2011.
5 C A Bayly, Indigenous and Colonial Origins of
Comparative Economic Development: The
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By tying politics with history, economic nationalism devitalises economic history in India. It creates a narrative trap. One
either speaks the language of economic nationalism or entertains the wrong political leanings. The outcome of the trap is a
weaker discipline. How do we know this?
In the western world economic history is experiencing a
comeback, among other reasons because the media takes
note of what the professors lecture on, and the professors
do carry on vigorous and noisy debates. In India the economic
history professors do not take part in a lively debate, and
therefore, the media ignores them. On 4 December, the American journal Chronicle of Higher Education published a story
with the title The Fall and the Rise of Economic History in
the US. In June 2014 a Routledge journal published an article
with the title The Rise and Decline of Indian Economic
History.18 The rise and the fall in the titles of these articles stand for a measurable increase or decrease in the
quantity of original research published in international journals. In terms of top quality publications originating in India,
the record is pathetic and worsening. The world over, the interest that mass media exhibits for professional scholarship
works as motivation for school students to study history, and
creates the capacity to reject the outlandish verdicts on the
past that nationalistic politicians often pass. In India, the
capacity to respond to slogans about history has grown
singularly weak.
It is not only the professional historian who is paying the
price for economic nationalism and the narrative trap it created. Economic nationalism is also a weapon in the hands of
businesses that fear foreign competition. Look what the
British did to us is a potential tool in the aid of xenophobic
backlash against globalisation. I have suggested in this essay
that the message of economic nationalism is not only wrong
but also dangerous in a country that is trying to re-embrace
openness and cosmopolitanism with a view to building a
secure future for itself in the world economy.

Case of Colonial India and Africa, Policy Research Working Paper 4474, World Bank Development Research Group, Washington D, 2008.
Gareth Austin, The Reversal of Fortune Thesis and the Compression of History: Perspectives from African and Comparative Economic
History, Journal of International Development,
20(8), 2008, pp 9961027.
Tirthankar Roy, Traditional Industry in the
Economy of Colonial India, Cambridge: Cambridge University Press, 1999.
For example, Patrick OBrien, The Costs and
Benefits of British Imperialism 18461914,
Past and Present, 120(1), 1988, pp 163200.
For one example, Donald Winch, Classical Political Economy and Colonies, Cambridge Mass:
Harvard University Press, 1965.
S Ambirajan, Classical Political Economy and
British Policy in India, Cambridge: Cambridge
University Press, 1978.
Eric Stokes, The English Utilitarians and India,
Cambridge: Cambridge University Press, 1959.
Two quite different examples are, Tirthankar
Roy, Rethinking the Origins of British India: State
Formation and Military-fiscal Undertakings in

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14

15

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17

18

an Eighteenth Century World Region, Modern


Asian Studies, 47(4), 2013, pp 112556; and
Mandar Oak, and Anand V Swamy, Myopia or
Strategic Behavior? Indian Regimes and the
East India Company in Late Eighteenth Century
India, Explorations in Economic History, 49(3),
2012, 35266.
Mumbai, Kolkata, and Chennai, respectively.
In this essay the original names are retained.
Robert Allen, The British Industrial Revolution
in Global Perspective, Cambridge: Cambridge
University Press, 2009; E A Wrigley, The Transition to an Advanced Organic Economy, Economic History Review, 59(3), 2006, pp 43580.
H-J Chang, The Economic Theory of the Developmental State in M Woo-Cummings, ed,
The Developmental State, Ithaca: Cornell University Press, 1999, pp 182-99.
I explore the shift in An Economic History of
Early Modern India, London: Routledge, 2013.
On national income data, see S Sivasubramonian, National Income of India 19001947,
New Delhi: Oxford University Press, 2000.
T Roy in The Economic History of Developing
Regions, 29(1), 2014, pp 1541.

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