ENTREPRENEURSHIP AND INDUSTRY IN INDIA: INTRODUCTION

pp. 1-69
by Rajat Ray
INTRODUCTION
1. The roots of industrial capital in the new state of India and Pakistan have been
traced to the older merchant communities embedded in the time honoured caste
system.
a. The top 20 industrial houses in India, at least until the 1980s, derived mainly
from the merchant communities especially the Marwaris.In Pakistan too many
of the 22 families which reputedly own half the nation s wealth are the Cutchi
(Katchhi) Memons, i.e. Memons from Katchh region, the pre eminent trading
caste among the Muslims of undivided India.
b. Yet the widespread involvement of these merchant communities in modern
industry is a phenomenon that goes back no earlier than the 1 st World War.
2. Before that the world of bazaar, in which the indigenous bankers and traders
operated, was sharply distinct from the world of modern business and industry,
which was predominantly European and generally located on the coast.
a. Although, in the late 19th century an Indian-owned complex of modern industry
had sprung up in Bombay and Ahmedabad but this was an exception.
b. The tea plantations, the coal mines, the jute mills etc. had developed in eastern
India under European enterprise, roughly between 1850s and 1880s.
3. The merchant community of the interior were engaged at that time in quite a
different set of activities
a. the marketing of agricultural produce,
b. the financing of inland trade in commodities,
c. the facilitation of movement of artisan products, and peasant crops etc.
4. They did this by means of the inland bill of exchange, known as the hundi and by the
indigenous form of commission agency known as the arhat.
5. These operations in the bazaar enabled bankers and merchants to
a. Accumulate Capital
b. To forge long distance connections in the inland market.
c. Such connections were to prove crucial when they went into industry beginning
from the outbreak of the 1st WW to the advent of independence.
6. The first major research work on the growth of private enterprise in India was Daniel
Houston Buchanan s The Development of Capitalist Enterprise in India (New York,
1934).
a. In his view, the spirit of enterprise was inhibited amongst the indigenous
population of India by the religious philosophy of resignation embodied in the
 doctrine of karma and rigid social and economic system characterized by caste,
purdah and the joint family.
b. It appeared to him that a mixed non-indigenous group, either Europeans or
persons from outside the native Indian population, especially the Parsis, were
the leaders of industrial movement.
7. Contemporary Indian opinion differed significantly from Buchanan s view.
a. D. R. Gadgil in The Industrial Evolution of India in Recent Times (first published
in 1924), emphasized the economic factors inhibiting more rapid industrial
development especially the difficulties of capital mobilization on account of
absolute smallness of resources in respect to the size of the population etc.
b. At the same time Gadgil was not oblivious of the social factors that went into
making of the Indian capitalist class.
8. Thus there is no gainsaying, that the tight organizations, such as a commercial
community that characterized such groups as the Europeans, the Marwaris and the
Parsis, certainly helped the members of those communities to compete on more
than equal terms with the rest of the population.
9. But at the same time, one should be wary of the tendency to regard the Europeans
or the Parsis as inherently more dynamic by virtue of either race, or superior social
customs, or some sort of protestant religious-cultural ethos.
a. Rajat Ray points out that - had a Protestant-ethic been the only factor, the
progressive-minded English-educated Bengalis, after their initial ventures in
collaboration with the Europeans would not have faded out after 1848; nor
would the Marwaris, an intensely conservative community, have emerged
thereafter as the most successful group in Calcutta.
b. More importantly, as Ashok V. Desai s work of Parsis indicates - it was not so
much their Protestant ethic as the strategic position they had carved out for
themselves early on in Bombay, by virtue of acting as collaborators ( the
comprador role ) of the Europeans in the China trade.
10. As for the Europeans,
a. Amrtya Sen emphasizes ties at home held them back from pioneering the
cotton textile and the steel industry; and
b. Amiya Kumar Bagchi underscores the systematic advantage they gained vis--
vis their Indian competitors by means of cartels as well as by virtue of racially
discriminating policies of the Government of India.
c. However, others, including Morris de Morris and B. R. Tomlinson, do not agree
with this. Among other points they seek to emphasize the strictly business
considerations that guided the investment behaviour of European businessmen
in India.
11. On such hotly debated issues, a consensus is yet to emerge, especially as regards the
impact of British capital and British government on the development (or
underdevelopment) of Indian industry.
 a. One line of thinking associates the distorted pattern of India s industrial
evolution with the colonial factor.
b. The other [line of thinking]minimizes it and seeks explanation in the low level of
the Indian economy.
12. The first line of thinking, reflected in the writings of authors such as R. S. Rungta,
Amiya Kumar Bagchi and Rajat Ray (and perhaps more recently
PrassananParthasarthi), amongst other things,
a. Dwells on the laissez faire economics of the Raj and the missed opportunity of
industrialization in the 19th century (R.S. Rungta).
b. Bagchi points out in his Private Investment in India 1900-1939, that the
structure was shaken up after 1914, and opened the way to limited degree of
industrialization under Indian initiative in the 1920s and 1930s.
c. Rajat Ray, Industrialization in India, stresses on the new ventures undertaken by
industrialists freshly risen from the bazaar, as well as the opportunity they
missed in heavy industries during the 2nd WW on account of the government
obstructions.
13. As opposed to this line of thinking, Morris de Morris and more recently Tirthankar
Roy and others have emphasized upon
a. The poorer resource endowment and the technological backwardness of the
Indian economic structure as the major factors blocking the sustained growth of
large scale industry.
b. By implication Morris challenges Bagchi s contention about the inhibitive
impact of colonial economic interests on levels of investment in India.
14. By common consent, however, the explanation of the backwardness is no longer
sought in the otherworldly values of Indian civilization, the religious ethic or the
institution of caste. In other words, instead of resorting to uncritical generalizations
about values and customs, economic historians now pay closer attention to demand
and supply factors.
15. This research has thrown up a series of questions regarding the history of industry in
India, such as:
a. Why did the linking of Indian capital to industry came so late?
b. How was the sophisticated world of Bazaar shut out from the European
preserve of modern banks, export-import houses, factories and plantations?
c. What benefits did these European enterprise confer on the country in terms of
economic growth, etc.
16. According to Rajat Ray, such questions are closely related to the basic question
why was the Indian enterprise unable to effect an industrial revolution.
a. Was it, as Morris argues, too backward around 1800 for it to take off in the
19th century?
b. Or did underdevelopment develop in India as a result of deindustrialization in
the course of the 19th century?
 TRENDS IN INDUSTRIAL PRODUCTION AND EMPLOYMENT & THE
DEINDUSTRIALIZATION DEBATE

1. It may be noted here that the current chapter is concerned with the modern industry
alone. Artisan manufacture, which remained outside the sphere in which industrial
capital operated remains outside the purview of the chapter.
2. For the statistical evidence available on employment in the secondary sector of the
economy seems to indicate that despite the emergence of factories and mines, the
proportion of population dependent on industry declined significantly in the course
of the 19th century.
3. According to Rajat Ray, the emergence of modern industry did not offset the decline
in the traditional industry.
a. Furthermore, there is evidence to show that this deindustrialization was
arrested before or around the beginning of the 20th century.
b. Modern manufactures expanded fast in the 1880s and 1890s going up from Rs.
282 million in 1882 to 870 million in 1889 at constant prices.
c. Not merely did the factories begin to multiply from around 1900(and sometime
before this) the output of artisan industries also went through slow rate of
increase (More about this in the chapter by T. Roy on Small Scale industry).
4. Until the outbreak of the 2nd WW, however, artisan output was greater than factory
output a fact that set India apart from the industrial countries.
a. Since artisan output increased at no more than 1.2% between 1900 and 1946,
the overall income from the secondary sector increased at the rate of 3.5% per
annum.
b. This wasnot a fast enough rate to set India on the path of industrial revolution
despite the apparently rapid growth of the modern industry between the two
world wars.
5. Hence to some extent, the question here is not so much about when artisan
production declined and by how much,
a. The question is why did the modern industry begin so late and so slowly?
b. Why was there a large time gap between the European debut of the industry
and the Indian debut of the industry?
6. If we look at the growth of modern manufacturing in isolation, it gives a misleading
inflated impression of growth, for it wasa predominantly agricultural and artisanal
economy in which large-scale mining and manufacturing accounted for a small
proportion of the net domestic product (NDP) right down to the outbreak of the 2nd
WW.
a. While seen in isolation, the large scale industry did well from its inception in
mid 19th century to improve not only over the two WWs but also during the
depression year.
 b. But the factory production was so small a portion of the NDP that the increase
did not produce any visible impact on the occupation structure of the economy.
c. For the first half of the 20th century when the development of modern industry
was a seemingly impressive phenomenon it is a little curious to observe the
continuation of the downward trends in the percentage of workers , both male
and female employed in manufacturing
d. On the other hand, in the case of National Income (NDP), the share of Small
Scale Industry (SSI),as it is evident from the table 2.1 below,was more than the
large scale industry (LSI) before the 2nd WW but superseded it by the end of
the war.

Table 1: NDP of India between 1939 and 1946 (at 1946 prices) (Rs. Million)

1939-40 1945-46
Agriculture, animal husbandry, forestry and fishing 34780 34712
Mining and large scale manufacturing 4360 6599
Small and Cottage industries 6102 5665
Net Product 62325 69272

7. Industry s contribution to NDP increased from 1900 to 1946. This was due to the
better performance of the modern industry. Modern industry grew rapidly at the
time when artisan manufacturing was slow to expand.

Table 3: Product from Three Sectors (at 1938 prices) (in Rs. million)

1900-01 1938-39 1946-47-

1. Primary (crops, livestock, forestry, fishing) 9318 10721 11350
2. Secondary (LSI, SSI, mining) 1638 3960 4307
3. Tertiary (Services, professions, house property) 3319 8423 9571
4. Total Product 14046 22625 25210

8. Given the case that even though employment was declining, the output in the
industry was not, it would be difficult to say that deindustrialization continued in
the 20th century.
9. Thus, according to Rajat Ray, deindustrialization in the 19th century was followed in
the 20th century by a mixed type of industrial development:
a. A significant rise in output of factory industry (output per employee rose from
an index of 100 in 1900 to 149.7 in 1947 i.e. a 50% rise in less than 50 years),
and
 b. A not so sharp increase of employment in factories (from 0.6 million in 1901to
2.9 million in 1951). Its noteworthy that although in percentage terms the rise is
impressive, (almost 500% increase), however, given that the Indian population
was slightly more than 360 million in 1951, the percentage of factory workers is
less than 1% (0.8%).
10. A slow expansion in total output of artisans (their numbers decreased from 12.6
million to 11.4 million between 1901 and 1951, but per head output went up
according to S. Sivasubramonian, from an index of 100 to 168.5).
a. This was a limited kind of industrialization. Nevertheless, India in 1947 came to
possess a large industrial complex by third world standards.
b. Moreover, the greater part of that complex was already in the hands of a strong
indigenous capitalist class.

THE BAZAAR

1. According to Rajat Ray, the standard classification of primary, secondary and tertiary
sectors was hardly suitable for an agrarian country like India.
a. Unlike the industrial countries, India derived most of its National Income from
handicrafts than from factories until almost the end of the 2nd WW.
b. Since the artisan crafts were an integral part of the peasant economy it will not
do to lump the modern industrial sector and the older handicraft sector
together into a single secondary sector , as against the primary sector of
agriculture.
c. The household economy of the peasant and artisans constituted a world of its
own, standing apart, from the much smaller modern industrial complex that
had been enclaved into the Indian economy by British enterprise.
d. To single out the Western style concerns alone as the organized sector andto
put the rest of the economy into an undifferentiated, unorganized and static
mass oftraditional concerns would be to miss the complexity and sophistication
of the indigenous part of the economy.
e. The Bazaar had its own institutions and indigenous forms of organization and
though these did not correspond to western models, they were capable of
adapting to changing conditions.
2. In other wordsthe agricultural cum artisan economy the bazaar - was a complex
and sophisticated, with its own institutions and dynamism. It was from this bazaar
that the Indian industrial capitalist emerged in the late 19 th century.
3. Thus, it would be fruitful to identify the exact position of the bazaar in the economy-
a. Let us begin with the fact that there was no unified money market in India. It
was divided into 3 sections governed by different rates:
i. Rates charged by Western-style banks
ii. Fluctuating bazaar rates at which traders borrowed bankers
uponhundies
 iii. The much higher rates charged by moneylenders on peasants and
artists.
b. According to the data available with Punjab government, in one instance: in
Simla in 1875, the rates reported were as follows
i. Alliance Bank of Simla 12%
ii. Native bankers to native traders 6%-12%
iii. Money lent to agriculturists 12%-18%
c. It appears rates prevailing in the bazaar were not necessarily, higher than those
quoted by banks. There was a large amount of loanable money in the bazaar, so
the indigenous banker could often underquote the bank rate.
4. Thus, the bazaar was no primitive pedlar s world, as compared to the world of banks
and corporation.
a. The bazaar banks also dealt in mobile credit, i.e. negotiable paper which
circulated in the market.
b. This was not the case with ordinary moneylenders lending to peasant and
artisans: they dealt only in non-transferable book credits, not in negotiable
paper.
c. The indigenous money market financed inland commission agents, known as
arhatiyas through whose interlocking commission agencies all movements of
marketed produce took place within the country: in fact, the larger commission
agents were themselves bankers.
d. By the mid 1860s the hundi network was well integrated, with twin
headquarters in Bombay and Calcutta.
5. The 19th century Indian economy , may be said to have consisted of 3 distinct social
agglomerations:
a. A Westernized enclave of banks, factories, mines, plantations, corporations,
managing agencies and import-export firms with weak linkages to the rest of
the economy
b. The Bazaar, a well integrated complex of shroffs, arhatiyas and wholesale
merchants, operating in inland trade through negotiable instruments of credit
(hundis);
c. The subsistence economy of peasants, artisans and petty deals who had no
access to banks or hundi credit, and who were therefore compelled to rely on
usurious loans from moneylenders.
6. It is important to remember that credit did not move from one complex to the next
in a sufficiently large volume (the reason why the prevailing rates of money in each
area were so radically different).
7. The above stated, three-fold redrawing of the economic contours of Indian society
originated from two related processes
 a. The capture of the commanding heights of the Indian economy by British
capital, especially the control of imports, exports, shipping and of the large
scale manufacturing activities that fed the flow of processed and exported
agricultural produce.
b. The mutually beneficial adjustment reached by the European corporations with
the inland merchants, commission agents, and bazaar bankers, on whom the
former relied for obtaining produce from inland, and for distributing imported
goods in the interior.
8. According to Rajat Ray, under the above scheme of things, the bazaar operators, the
shroffs and the arhatiyas submitted to the regime of the worldwide economic and
political empire but they did so, in a certain measure, on their own terms.
a. However the bazaar operators understood that under the new scheme of
things, the upper tier was reserved for the European banks, shipping line and
managing agency houses and they were relegated to the intermediate tier of
the economy.
b. The new generation of shroffs and arahatiyas was a completely reshaped
fragment of the country s indigenous commercial traditions, the shape of the
fragment being determined by the contours of the colonial economy into which
they were pressed by the colonial regime.
i. The hundi nexus, despite its antiquity, was no longer the same as the
one Travernier had witnessed in the 17thcentury -extending one arm
from Surat to Bantem (Java) and a third stretching inland from Surat
to Agra and onwards to Dacca. The new Hundi network stretched
along the tracks of railways, moving inwards from Bombay at one end
and from Calcutta at the other.
ii. As the British unified the currency system on the basis of the uniform
silver rupee in 1835, and organized their own treasuries suppling bills,
bazaar bankers lost the privileged position they had earlier enjoyedas
money changers, remittance agents and treasurers to the English East
India Company, and to the rival princes of the 18th century.
c. Shorn of the earlier charges of insurance and coin exchange, the hundi was
transformed, into a pure bill of exchange in the inland trade.
9. The merchant communities operating within the redefined nexus of the bazaar were
no longer traditional in the true sense of the term. Most older firms collapsed and
newer unrelated firms took their place.
a. Among the new merchant communities the Parsis, Bhatias, Khojas and Memons
from various parts of Gujarat , Cutch and Kathiawar, Multanis from Shikarpur
(Sindh), Marwaris from Shekhawati, Bikaner, Marwar, Jaisalmer and the
NattukottaiChettiarsfromChettinad tract in Tamil country.
b. As auxiliaries of imperial concerns the most adventurous amongst these
merchants communities forged new business concerns abroad: the parsis to
China, the NattukottaiChettiars to Burma and the Straits Settlements, the
Bhatias, Khoja s and Memons to the Middle East and East Africa.
 10. The limitations and success of Indian merchant communities arose from their
position within the imperial economic system. After being excluded from the higher
tier (reserved for the Europeans), within the sphere defined for them, there sprang
up large Gujarati and Marwari family firms with extensive networks linked to
railways and telegraphs two technological innovations that fundamentally altered
the conditions of trade within the country.

BACKGROUND OF THE LARGE FAMILY FIRMS OF THE BAZAAR

1. An interesting question to ask at this stage would be

a. What were the large family firms of the bazaar doing before they entered
industry?
b. It seems that the leading bazaar firms, that led their way into the close
preserves of European industry after the 1st WW, had been actively engaged,
since the last years of the 19th century, in a wide range of trading and
speculative activities.
c. Such activities enabled them to accumulate the capital which they were later to
employ in corporate industrial ventures.
2. Thomas Timberg identifies 3 types of Marwari firms
a. The great Banking House
b. The brokerage firms attached to large European House
c. The venturesome speculator who might later become an industrialist
3. The house of Hukumchand and Swarupchand is a well know example.
a. Seth Hukumchand, who made his pile by daring opium speculations in 1901-10,
pur hased opiu fro arious pla es i Mal a at , a u it a d se t o to
Sha ghai a d other pla es i Chi a, selli g at , a u it.
b. Soon after the opium trade ceased due British agreement with China, he
adroitly switched to the Indian spot and forward market in cotton, trading very
largely in cotton sattas (futures) and speculated on the violent fluctuations in
trade.
c. Having accumulated his capital in this manner, he set up the first Indian jute
mill in Calcutta in 1917.
d. Because of the people s previous experience of large profits from investments
in his ventures he had no problems in raising capital for the mill. When he
offered the shares of the mill at Indore, there was a great excitement in town
and he had to stay in office from morning till evening to meet purchasers. In no
time he mobilised 80 lakhs for the mill.
e. Besides, he also carried on the family banking business. Nor did he abandon the
cotton trade in which he continue to invest lakhs of rupees.
4. The biggest and soundest banking and commission agency firms tended to stick to
safer lines of business,
5. where the profits were much lower. Usually the rate of commission , after deducting
expenses, amounted to no more than 1%.
a. The business was highly competitive, and there were too many arhatiyas
jostling in the bazaar for fat commission to be had for the picking.
b. One must also remember that the giant international produce marketing firms
such as Ralli Bros. of Calcutta and Volkart Bros. of Bombay, made deep inroads
into the inland produce markets from the late 19th century onwards in order to
feed import-export lines at better prices.
c. The most reputable arhartias were, in fact, the suppliers of Ralli and
Volkartagents posted in to inland markets.
d. The smaller arhatias were pushed into the less profitable marketing channels.
The European inroads into the inland markets, though restrained around the
time the 1st WW, continued well into the 1920s and it was not until the Great
Depression that the bigger indigenous banking and commission agency firms
established their dominance over the domestic market.
e. Until then the foreign terms had the pick of the business, indigenous firms
tended to operate in areas which foreign firms either found too risky, or not
sufficiently attractive in terms of profits margins.
6. Not all scholars are as convinced, as Rajat Ray is, about the imperial division of
economic space in the country. Some like Morris de Morris argue that
a. Before 1914, Indian entrepreneurs stayed away from industrial ventures not
because of an racial bar to their entry but because they had a more profitable
activities in the bazaar.
b. In this CEHI (Cambridge Economic History of India) article, Morris has argued
that Europeans were typically satisfied with rates of return comparable with
rate earned in Britain while Indians sought higher rates akin to those available
elsewhere within India.
c. But if we are to go by the reports of contemporary American consuls in India,
quite the contrary was the case. He advised American businessmen that there
were two distinct markets in India:
i. A mass market in which the main consideration in selling goods was
not how good but how cheap.
ii. And a small market, for high class goods, catering to about a million
people whose incomes and living styles were substantially higher
the European population of merchants, missionaries, civil
administrators, and officers and soldiers of the British army, the
Indian princes, large landlords and Westernized merchants; and
Parsee community of Bombay and Anglo Indian population with
Western tastes.
iii. Department stores and shops that these people patronized, and
where the goods obtainable were of the same quality as in Europe
and America, constituted a separate market from that of the bazaar.
 iv. The consul further added that
1. in doing business with the latter (the Europeans and the rich
Indians) it is possible to secure a wide profits margin but the
sales must be comparatively small.
2. In doing business with the great masses , the margin of profit
must be extremely small, however, the sales and collective
profits may be enormous.
d. So according to Rajat Ray,
i. while the bazaar businessmen, including the biggest shroffs and
arhatias were willing to operate with low profit-high volume trade,
ii. it was unacceptable to the sahibs, and they preferred to occupy the
high profit trade that the imperial division of economic space enabled
them to occupy.

THE END OF PARTNERSHIP

1. The segregation of Indian enterprise in the bazaar, which was so prominent a

characteristics of the developed colonial economy in the latter part of the 19th
century, was not so pronounced earlier (i.e. in the 1st half of the 19th century).
2. Modern business activities developed by the European agency houses in the early
part of the 19th century had a substantial element of Indian partnership before new
developments from the mid 19th century drew a clearer line defining a black space
and a white one.

AGENCY HOUSES

1. What were these agency houses?

a. The agency houses were originally the carriers of private European trade in
Asian waters. At that time the trade to Europe was an official monopoly of the
English EIC.
b. When the Charter Act of 1813 threw the trade between Europe and India open
to private traders, the agency houses of Calcutta, Bombay and Madras
expanded their operations with the help of the EIC.
c. As India herself turned into a net importer of Manchester textiles by the 1830s,
she developed alternative primary items for exports such as indigo, to provide a
means by which to transfer the growing remittances to England.
d. India also developed an export trade with China in raw cotton and opium,
which paid for shipment of Chinese tea to Britain.
e. The Agency housessuch as Palmer & Co., and many others from Calcutta,
Forbes & Co. and Bruce Fawcett & Co. of Bombay, and the Parrys and Binnys of
Madras were the funnels of this new trade.
 f. The modus operandiof the agency house is described this by R. M. Martin in
1832

A large mercantile house is established at Calcutta, with a

branch in London; the partnership formed of various
individuals one a retired civil servant of the Company
another a military man a third a doctor and a fourth a
London merchant. They possess no real capital, but establish
an agency and banking business, receive as deposits the
accumulating fortunes of the East India Company s servants
and trade on these deposits.

g. The agency houses built ships, employed them in the trade of the Indian Ocean,
and by a natural extension went into the promotion of insurance companies
and banks.
h. Once the EIC monopoly came to an end, the agency houses increased their
share in the triangular trade between India, China and Europe and also started
operating in bills of exchange between the three places, a business hitherto
transacted by the companies alone.
i. At the same time, the agency houses in Calcutta promoted industrial ventures
inland: they financed the indigo planters, they put money in silk filatures (places
where silk is obtained from silkworm cocoons), and even came to manage some
indigo concerns themselves.
j. To take an example, Fairlie Fergusson & Company, till 1812 the biggest of the
agency houses in Calcutta , owned the largest number of ships in Calcutta (nine
to be exact), manage the Calcutta Insurance Office and the Calcutta Life
Insurance company, and dealt in a large way in opium and indigo.
2. The agency houses thus undertook the first private corporate business and industrial
activities in India. However, it was not until the joint stock companies were granted
limited liability in 1857 that large corporate could begin under European and
subsequently Indian enterprise.
3. The agency houses also introduced the business device of the managing agency in
the corporate sector.
a. Under this system, a managing agent (either an individual, partnership firm or
company) would be appointed to manage one or more joint stock companies.
The managing agent would also hold shares in the managed companies and
control their boards of directors.
b. The agency houses were typically managing units in the shipping, coal mining
and sugar manufacturing companies.
4. Closely associated with the agency houses were their brokers. The basic function of
these Indian associates was to bring in and guarantee contracts for supply of
exportable produce from the inland merchants.
 a. The brokers were called Banias in Calcutta, Dubashes in Madras and guarantee
brokers in Bombay.
b. Sometimes they might be important merchants conducting business of their
own: Raghuram Gosain, the Bengali Banian of Palmer & Co., was a rich
merchant in his own right; so was HormasjeeBomanjeeWadia, the Parsi broker
to Forbes and Co. in Bombay. An independent merchant magnate like Ramdulal
Day, Bengali millionaire and owner of several ships, might act as a Banian to
several American and British traders at the same time.
5. The Bania was also, not infrequently the financial of his European principal and
sometimes a conduit for getting finances for them.
a. Motilal Seal, Bengali shipowner and merchant magnate of Calcutta lent money
while acting as a broker to Oswald Seal and Co (joint venture?).
b. On one occasion he acted as a link between Oswald Seal and Co. in Calcutta and
great banking firm of LachminchandRadhakissen of Mathura. The Mathura
banker relied on his introduction to Oswald and Seal Co, to make shipments of
opium through latter to the great opium importing house of Dent at Canton.
c. The head of Palmer and Co. clarified that behind the moneylenders in Calcutta
stood the great upcountry shroffs and other capitalists.
6. The shroffs were not dependent for their survival on the agency houses.
a. By 1820s the Marwari bankers appear to have formed a world of their own in
Barabazar.
b. However, some brokers increasingly became dependent and thus vulnerable to
the tremors of the European business world. For example, according to N. K.
Sinha many Bengali merchants had two weaknesses:
i. Their abstention from inland trade and bazar banking; and
consequently weakness of their market links upcountry.
ii. The fact that unlike the Parsis, they did not venture to sail to Canton,
which left them vulnerable to the tricks of their European
correspondents.
c. Furthermore, the insolvent agency houses had a habit of passing on their debts
to these Banias. Between 1830 and 1833, reckless dealings including over-
speculation in indigo brought the 6 great agency houses of Calcutta crashing
down. In the process many Bengali fortunes were destroyed.

THE PARTNERSHIP

1. Dwarkanath Tagore of Calcutta and JamsetjeeJeejeebhoy of Bombay in their own

unique way the pioneering modern entrepreneurs of mid 19th century India.
2. Kling has identified Carr, Tagore & Company (1834) as first equal partnership
between European and Indian businessmen, and as an initiator of the managing
agency system in India to a wider field of business and industry, as hitherto agency
houses had used the system for insurance only.
3. Between 1836 and 1846 the firm promoted 6 joint stock companies, namely
a. Calcutta Steam Tug association (1836)
b. Bengal Salt Company (1838)
c. Calcutta Steam Ferry Bridge Company (1839)
d. Bengal Tea Association (1839)
e. Bengal Coal Company (1844)
f. India General Steam Navigation Company (1844)
4. JamsetjeeJeejeebhoy and Sons did not promote industrial ventures as didCarr,
Tagore & Company, but it had a stronger presence in shipping, and external trade.
a. A junior partner of the English in the trade with China, before the Opium War of
the 1840, his firm was equal partner in the informal Malwa Opium Syndicate
that had been formed between Jardine Matherson& co., Remington Crawford
and Co. and JamsetjeeJeejeebhoy& Sons to control the market in Canton.
b. His firm was engaged in sailing ships to China and England, and in transacting
bills of exchange between India, China and England.
c. The new age of partnership was characterized by the rise of European style
banks, in which Indian capitalist had a significant part as promoters and stock
owners.
5. The semi official Banks of Bengal, Bombay and Madras (1843) were discouraged by
the government from operating in the foreign exchanges, a business that fell wholly
to the private European agency houses after EIC withdrew from the field in 1833.
a. To take advantage of this expanding business, Mackintosh & Co. and other
European agency houses of Calcutta promoted the Union Bank in 1829. The
new bank, which served as the prototype of the later exchange banks had its
capital augmented considerably (1835-39) by Dwarkanath Tagore and his
European friends to finance the innovative schemes in which were involved
steamboat on the river Ganga etc.
b. The first exchange bank in the financial history of India, the Bank of Western
India (later renamed Oriental Bank) was promoted in 1842 by a mixed group of
European and Indian capitalist of Bombay.
c. Dwarkanath Tagore died in 1846. Before his death he had become wary of the
unscrupulous practices of his European colleagues which he found at variance
with the proper practice of banking . He systematically sold off his Union Bank
shares.
d. Due to the unsound exchange transactions with London and insecure advances
in the falling indigo market the Union bank failed in 1848, bringing down with it
various other Indian enterprises in India that had sprung up in partnership with
Europeans. Consequently, the Bengalis experienced a general collapse of faith
in European business reliability.
e. European enterprises were afterwards reorganized without Indian partnership,
and all Dwarkanath Tagore s ventures passed to exclusive European control.
 6. The trend towards growing British control of business concerns in India was not
confined to Bengal alone. As the world finance became centred in London,
JamsetjeeJeejeeebhoy found himself forced out of his earlier lucrative bills of
exchange business. With Jardine, Matherson and Co. growing into an international
giant in his later life, his firm was ultimately overshadowed in China and London
trade.

Break in Partnership: The Move to London

1. The careers of Dwarkanath Tagore and JamsetjeeJeejeebhoy show unmistakably that

after mid 19th century the international environment was no longer favourable to
the growth of big Indian business in the country s ports and abroad. Between 1850
and 1880 a series of technological and organizational changes the completion of
railways, building of Suez canal etc. decisively shifted the power away from the
smaller Indian firms to bigger European firms in India, and from India itself to the
world centre of trade and finance based in the city of London.
2. We have seen that the early exchange banks were located in India, with strong
Indian partnership: they now shifted their headquarters to London, beyond the
reach of Indian businessmen, and consolidated their hold over Indian exchange and
finance by remote control.
a. The European directors were able to wrest control and shut out Indian directors
by holding out the advantage of royal charter conferring limited liability and the
right to operate in British colonies east of Suez.
b. The Oriental Bank, the Charted Bank of England, Australia and China, and other
newly opened exchange banks, came to monopolize the financing of India s
export-import trade, in which they instinctively favoured European as against
Indian merchants.
c. In other words, the European banking system was now complete in all respects,
it no longer needed the Indian finance or the Indian financial network, and its
tendency was to shut out the Indians.
3. It was not merely the European system of banking that was tightening;
a. Shipping: Simultaneous to changes in banking, the great steamship lines were
forming conferences which was in essence monopoly rings to exclude all
competitors by such means as rate wars and deferred rebates. At times they
were also favoured by government contracts, e.g. for carrying mail.
i. Native shipping, which had been at a point of collapse even before
the rise of the steamship liners was swept clean from the runs on
which the liners came to operate.
ii. Nor could the Indian firms switch to steam navigation. The P&O
Company formed in 1875 the first shipping ring, called the Calcutta
Conference, with a few other steamship lines of London, Glassglow
and Liverpool to prevent all newcomers from entering their preserve.
b. Managing Agencies: In the meanwhile big European Managing agencies had
arisen in Calcutta, Bombay and Madras. Closely financed and supported by the
Presidency Banks and the exchange banks.
c. They were engaged in extensive imports of manufactured goods from Britain
and in exporting raw cotton, raw jute, gunnies (jute bags), hessian (coarse fabric
made of jute), cotton yarn, grains and seeds, tea, etc.
d. The shipping conferences and managing agency oligopolies soon came to be
interlocked. Shipping conferences of British steamship companies, locally
administered in Calcutta by leading European managing agencies monopolised
the carrying of merchandise between ports in India and other ports of the
British empire.
e. The leading European exporters themselves, organized monopolistic managing
agencies came to the aid of shipping rings as the latter s agents.
f. Occasionally there were conflicts between European exporters from India and
the Liners. For example in 1880s when faced with the high monopolistic rates
charged by the Conference liners, the European tea exporting firm opened a
Planter s Line in 1889 and the India Mutual line in 1893, the Liners Conference
killed both lines by rate wars, but brought the shippers round in 1895, by giving
them more favourable terms which met tea shippers objections.
g. It was quite otherwise when Indian businessmen and industrialists sought to
break through the monopoly shipping rings.
i. A conference had earlier been formed between P. & O., Nippon Yusen
Kaisha, Austrian Lloyds and Rubbertino on the line operating out of
Bombay to the Straits settlements and the Far Eastern ports.
ii. The Conference led by P. & O. charged exorbitant rates on Indian
shippers of yarn, opium, and cotton to China and Japan, while at the
same time giving favourable rebates on freight to European shippers
based in Bombay.
iii. In the 1893, Nippon Yusen Kaisha breaking out of the alliance with the
rising Japanese shipping business groupsJamsetjeeNusserwanjee Tata
in the interest of Indian cotton mill owners, who were being
discriminated against.
iv. The British government too a hostile view of the NYK-Tata agreement,
the combination of P&O Austrian Lloyds and Rubbatino proved too
strong for the two allied Asian lines of steamers. P. & O. cut rates
fro 9 to -8 and even offered to carry cotton free to Japan.
v. One by one, the Indian cotton mill owners, on whom J. N. Tata had
relied for support, deserted him. Tata line collapsed, NHK returned to
the Conference in 1895, but by demonstration of its muscle (thanks to
the support of the sympathetic Japanese government) brought freight
rates to Japan below freight rates to China, despite the longer run.
vi. By contrast, Bombay exporters to the Straits Settlements, Hong Kong
and China were penalised by high rates of freight.
4. Thus, the 2nd half of the 19th century established a clear-cut racial division of
economic space.
a. The presidency and exchange banks and Liners Conference and the European
managing agencies favoured by a benign imperial government committed to
free trade (as against the Japanese government s mercantilist nationalism),
were too formidable a combination for the Indian businessmen to contend
with.
b. Prevented from competing in sea trade on equal terms, the Indian businesses
turned inwards. They had formed wider connections in the inland trade and
banking in the course of feeding the long distance import-export lines, such as
the line sending opium from Malwa down to Bombay.
5. While firms like that of Tagore and Jeejeebhoy declined, the Gujarati and Marwari
bankers and merchants operating inland survived by virtue of their wide-ranging
credit and marketing operations along the routes running from the inland produce
marts to the ports and between the inland market towns.
6. In the process the huge sprawling world of the bazaar was segregated from the
consolidate enclaves of European banks and corporations. Segregation on this
pattern meant a certain measure of autonomy and the possibility of growth within
the confines defined by the imperial economy.
7. Networked firms that arose from the migrations of enterprising merchant
communities in the 19th century were the best in the position to take advantage of
the spreading network of railways and telegraph. Immigrant Marwaris and Bombay
Bhatias, and not the local traders, were the masters of the new system of trade by
rail and wire.
8. Significantly the system of integrated forward trading and speculation that
developed in the inland exchanges was largely in the hands of those mobile
merchant communities from among whom many of the Indian industrialists were
destined to emerge.

INDUSTRIAL ENTERPRISE IN THE HIGH NOON OF THE EMPIRE

1. From about 1857 to 1914 the European enterprise, which had established itself in
the new form of the industry in previous half of the 19 th century, enjoyed a position
of unchallenged supremacy in the Indian economy.
a. The first European industrial complex, in India, consisted of cotton mill, an iron
foundry, a distillery, an oil mill and a paper mill was erected in 1873 at Fort
Gloster, 15 miles from Calcutta on the banks of the Ganges.
b. The first private tea plantation in Assam was set up by The Assam Tea company
incorporated in London, in 1839.
c. The first cotton mill in western India, a spinning mill at Broach, was floated by
James Landon in 1854. This was followed by the first Bombay cotton mill set by
CowasjeeNanabhoyDevar in the same year.
 2. These were small beginnings. A change in company law in 1857 permitting all
companies other than banks and insurance concerns to be formed on the basis of
limited liability, and two further acts in 1860 and 1866 extended the privilege to
banks and insurance companies, laid the foundations of the corporate sector firmly.

Railways and Industrialization

1. These changes in company law, coinciding with the expansion of railways (by the end
of 1870s, the railway system was completed in all essential respects), and business
corporations, for the first time, came to occupy an important position in the
country s economy.
2. And yet, during those vital years when Calcutta, Bombay, Madras and Delhi became
linked to one another by the railways, the country missed a critical opportunity: the
opportunity of inter-linked growth of the railway, iron and steel manufacture, coal
production and the related engineering industries on the pattern of took place in
Russia and Japan around the same time.
3. The railways, as we have already discussed, was the greatest single injunction of
British capital into India, was built almost entirely by means of imported
locomotives, rolling stock etc. The Buy British policy, as Daniel Thorner has pointed
out, withheld from India an impetus to industrial development that proved quite
effective among other leading railways powers particularly the US, Russia and
Germany.
4. India alone of the countries with the great railway networks remained
unindustrialized, with her capacity for production of capital goods and her potential
for the basic and heavy industries remaining almost entirely untapped.
5. The freight policy followed by Railway companies served to split the interior of India
and twist it towards Britain in the crucial early years, especially their tendency to
a. Charge lower rates for the carriage of long-haul bulk goods from the interior to
the ports and for finished goods being sent from the ports to the interior than
goods moving between two railway stations with comparable distances within
the interior, and,
b. Charging of specially high rates on traffic movement over the sections of their
lines linking up with the rival systems
6. The railways thus promoted lines of commercial and industrial activity in which
European firms with strong links to Britain could easily overshadow Indian firms
(which had no such links.).
7. In other words, they created an economic space reserved for European enterprise. In
that space arose great managing agencies, which began to concentrate in the 1870s
the mills, mines and plantations begun earlier by speculative European businessmen
in a small way.
8. In short, railways did little for industrialization in India, but it provided impetus to
the planting and processing of world commercial crops by planters and mill owner,
and the extracting of ores for exports or for the running of railways.
The Characteristics and Pattern of European Enterprise in India

1. As far as industry was concerned, the type of industrial evolution, with a bias
towards light manufactures which intended to harness the country s agricultural
resources to the requirement of foreign trade, was the natural consequence of the
pattern railway development in India. That pattern serving Britain s interest more
than those of India cannot be comprehended unless we keep in view the latter s
colonial dependence on the former.
2. The Indian firms that acquired a toe-hold in modern industry, especially in Bombay
and Ahemedabad, following the same system. The process of concentration was
more or less complete by early years of 20th century. An official of the India Office
wrote privately in 1912:

Nearly all the tea, coal, jute mills in Bengal and Assam are
under European Management, in most cases the bulk of the
capital is Europea Broadly speaki g, I should say that i the
Bombay presidency possibly the Parsis and other non-
Europeans own half or more of the mills and the other
industrial concerns; but that elsewhere in India the non-
Europeans share is less than 1/4th or may not exceed 1/6th or
even 1/8th.

3. Apart from the railways and steamships, British enterprise confined itself to export
industries, e.g. tea, coffee, indigo, jute goods and to extractive and trading
operations. The only manufacturing industry that European entrepreneurs
developed into a major industry was jute.
4. In other words, European manufacturing and trading operations in India
concentrated on producing goods for export to the advanced countries and were not
very useful for developing the industrial potential of India. In that sense their
industrial operations were an outpost of Western economies not an organic part of
the internal economic structure of India.
5. In terms of country s material advancement, the great European export industries
tea and jute- had particularly weak linkage effects and a miniscule share of the gains
was ever passed on to the Indian producers of the raw material these industries used
or to the labour that worked for them. For example,
a. The GOI passed labour and migration laws which enabled Assam planters to
turn the immigrant labourers into bond slaves, who worked in harrowing
conditions at shameful wages.
b. A strong association under the Bengal Chambers of Commerce similarly enabled
the European jute mills, in and around Calcutta to obtain raw jute from the
peasants at depressed monopsonistic prices compared to its real value in the
world market.
 6. On the other hand in industries such as cotton and iron and steel , that were meant
for India s internal consumption - the very industries, as Amartya Sen points out, that
laid the foundation of industrial revolution in Britain the European role was
marginal compared to the part played by the Indians.
7. It is, however, noteworthy that while most of European managing agencies were
engaged in import of manufactures, and export of country produce with a bit of light
manufactures, one exception to this colonial bias was the coal mining industry, the
growth of which was, however, held back by the low state of the iron and steel and
engineering industries.
8. What explains the particular pattern of European enterprise its typical bias?
a. One answer suggested by Amartya Sen is the social ethic of expatriate British
firms in India, one that inhibited them from competing in lines that might harm
the interests of the mother country and by implication British industry.
b. Another possible explanation, suggested by Morris D. Morris might be certain
purely material considerations expatriate firms with strong connections at
home , found it advantageous to concentrate on the organized markets of the
advanced countries to which they had ready access through London.

Evolution of Indian Industry

1. Business and industry was overwhelmingly concentrated in the ports of colonial

India, especially Calcutta and Bombay. Madras has much smaller component of
business.
a. The principal European industries jute, tea and coal had headquarters in the
premier firms of Calcutta.
b. European interests in Bombay consisted of great variety of marine, fire and life-
insurance companies, a considerable number of cotton presses, and a few
spinning mills that did not compete with Manchester.
c. In Madras, while the scale was small, a variety of activities, such as curing of
coffee, shipping, insurance companies and exchange banks and refining of
country-made molasses sustained the established expatriate firms.
2. The managing agency houses were seldom pioneering firms. It was not the great
managing agencies had developed the early European concerns in jute and tea. They
were floated by a set of reckless, unscrupulous, insubstantial speculators whose one
idea was to get rich quick by selling off half-cleared gardens and mismanaged mills at
a profit while the tea mania (1863-66) and jute rush (late 1860s to early 1870s)
lasted.
3. The early jute mills of Calcutta did not thrive they merely displaced the handloom
products in the court and the coastal markets and were quite incapable of
penetrating the great markets abroad which the Dundee mills dominated.
4. Many of the rickety early concerns collapsed the tea gardens in the crash of 1866-
68, and the jute mills in the trade crisis building up in 1875-80. Thereafter a
reorganization of the tea and jute industries under the reputable managing agency
 houses of Calcutta led to a period of stable expansion. Backed by the wider
connection so the new management the jute mills broke into the Australia, New
Zealand and San Francisco markets competing successfully with the Dundee mills.
5. However, according to Rajat Ray, the newly dominant managing agency houses were
not above swindling the public they were deeply involved in the flotation of non
existent gold mines in the 1890. But by the end of the 19th century, the new
economic space created for them by empire had enabled European houses of
Calcutta to build up a reputation for soundness and integrity in the management of
their industrial concerns.
6. They tended to be conservative, insisted on sound finance and they confined
themselves to sure bets, the ones that empire brought within their exclusive grasp.
They showed in particular, a penchant for taking over properties going cheap
because the original promoter had started the plantation, mine or mill by
unscrupulous methods and had subsequently vanished. But at the same time they
got together to fight any local rivalry with fierceness.
7. Before the 1st WW, the Bengal, Madras and Upper India Chambers of Commerce had
practically no Indian members and Bombay Chambers of commerce alone had a
notable Indian element. In eastern India, Indian enterprise was confined to second-
class tea gardens in Jalpaiguri district and the mines producing inferior coal for
household use.
8. Morris D. Morris, however does not agree with this analysis of racial barrier to Indian
entry. As we have seen before, he argues that profit rates were not too high enough
to attract Indian capital to the jute industry. Rajat Ray on the other hand feels that
jute mills were by far the most attractive investment on the Indian business scene,
the rate of dividend on the face value of ordinary shares in boom years (such as
1904-7 to 1911-13) being in the range of 20%. to 25%
9. According to Bagchi, one basic consideration that deterred Indian entrepreneurs
from entering the jute industry that the markets lay abroad and the export trade of
Calcutta, unlike that of Bombay, had entirely passed out of Indian hands in the later
19th century.
10. According to Ray, contrary to Morris s conviction that nothing but cost had kept
Indians from setting up international sales agencies abroad there was a race bar. As
G. D. Birla s experience subsequently revealed. The London Jute Association did not
admit Indians, any Tom, Jack or Ragstraw could negotiate sale or purchase in the
Sales Rooms in London, but not Birla himself.
11. The cotton mill industry of Western India, by contrast, catered to markets to which
Indian capitalists had ready access within the country, being intimately linked,
especially in Ahmadabad but also in Bombay, with handloom production (the mills
generally sold machine spun yarn to the weavers), bazaar banking and other
multifarious indigenous material activities. The Bombay mills were managed on
western lines; the Ahmadabad mills bore the stamp of native mercantile and
manufacturing traditions.
12. What was common to the capitalists of Bombay and Ahmadabad was that they were
both able to wrest a place for themselves in the new economic space created by
empire.
13. Interestingly, Bombay merchants retained some of the oceanic connections they had
formed earlier. In those early days they had sent goods abroad on consignment.
Despite the change taking place from consignment system to the order system (after
the telegraph revolution) in the European trade, Bombay merchants managed to
retain a toehold in the foreign trade.
14. Indian merchants from Bombay and other ports on the Cutch-Gujarat coastline
continued the trading connections they had forged to China, to the Straits
Settlements and to the Persian Gulf, the Red Sea and the Swahili-speaking coastline
of Africa.
a. Furthermore, European control could not be established over the rich cotton
and opium belts of Western and Central India which fed the port of Bombay,
due to variety of factors such as the strength of the Indore, Ahmadabad and
Berar merchants, and the division of the hinterland into autonomous princely
states like Baroda, Indore and Hyderabad. The most well known group trading
in Broach cotton and Malwa opium to China were the Parsis.
b. Among other merchants may be mentioned the socially orthodox Khojas and
Bhatias, who along wit the Westernized Jews and Parsis came to own the
greater number of mills in Bombay. Khojas and the Bhatias were the principal
carriers of the purely Asian trade of Cutch and Gujarat to Muscat, Aden and
Zanzibar after the early part of the 19th century.
c. Apart from those mentioned above one must keep in mind the highly orthodox
Gujarati bankers and merchants of Ahmadabad who had a share in cotton and
opium exports though Bombay. They made fortunes from opportune cotton
consignment during the raw cotton boom connected with the American Civil
War. One should also remember the Marwari traders and bankers of Malwa
whose shipments of opium were unabated and unaffected by the collapse of
the cotton boom in 1866.
15. After 1875, the Jewish (e.g. Sasoon group) and other European groups pushed
backed the westernized Indian capitalists from seafaring operations as the order
system operating from London, with wire, steamships and exchange banks excluded
them from the overseas markets like China, nevertheless, the Europeans were not
able to penetrate the heart of opium belt in Malwa. Here the Marwaris of Indore and
the Gujaratis of Ahmadabad continued to hold sway.
16. In the marketing of textile products and supply of raw cotton too, the enterprising
communities of Western India continued to enjoy a type of strength and confidence
not to be seen elsewhere in India in the high noon of imperialism. These factors
explain the impetus behind the burgeoning cotton mill industry of Bombay and
Ahmadabad, which expanded steadily despite the laissez faire economics of empire
and political hostility of the Manchester lobby.
17. According to Rajat Ray, conditions for the growth of a modern cotton textile industry
were very favourable in India, it would have been a little strange if this industry had
 not developed; the country was producing 20% of the world s supply of raw cotton,
a place occupying next only to US; India had an abundant supply of relatively cheap
labour which became cheaper as the mills moved inland and closer to the cotton
fields; and it had in its vast population and its countless weavers, the world s biggest
railway connected mass market for coarse cotton fabrics and yarn.
18. The initial beginnings were quite small, and Manchester was not threatened since
the markets were not quite the same. The early mills did not manufacture the finer
fabrics imported from Manchester and concentrated on producing low count yarns
for handloom weavers which would otherwise have been spun by women.
19. As already noted, the cotton mill industry was initiated by a Parsi in Bombay and a
Gujarati Nagar Brahmin in Ahmadabad in the 1850.
a. CowasjeeNanabhoyDevar was the archetypical Bombay broker and financier,
was an active exporter of cotton before he founded the Bombay Spinning and
Weaving Company.
b. And RunchhodlalChotalal, an English-educated ex-bureaucrat, was an employee
of the banking firms Karamchand-Premchand, when he founded the
Ahmedabad Spinning and Weaving Company.
c. The cotton boom during the American Civil War, and the intimately connected
share mania stroked up by the stock broker king Premchand-Roychand helped.
d. As the mills multiplied in Bombay and Ahmadabad, they fell into the control of
certain families which emerged as the captains of the growing industry Parsis,
Bhatias, Khojas, Baghdadi Jews and Europeans in Bombay, and Bania, Nagar
Brahmans, and Kanbis in Ahmadabad.
e. The Hindu and Jain presence was far stronger, indeed exclusive, in the cotton
textile industry of Ahmadabad.
f. The biggest group of textile mills belonged to the Sasoons divided into three
separate managing agencies. The Sasoon mills might be more properly grouped
with European mills
20. The speculative activity of the early 1860s an extraordinary chapter in Bombay s
financial history (1861-65) was all the more remarkable because Premchand-
Roychand and his Indian associates overshadowed for a time even their European
Partners.What it indicated was the extraordinary strength of its commercial
traditions.
21. While many magnets burned their fingers in collapse of the share boomin 1866,
including Premchand, JamsetjeeNusserwanjee Tata, the Nagar Seth family of
Ahmadabad, many more speculators in Bombay and Ahmadabad managed to add to
their fortunes. By an estimate the boom added to 70 to 77 crores to the wealth of
Bombay alone during the 5 years.
22. It will be evident by now that the Bombay and the Ahmadabad mills developed on
rather different lines. The remarkable feat of the Bombay mills was to break into the
market for yarns in China at an early stage.
 a. The Petits (a Parsi family from Bombay) who had a strong presence in China
trading led the way therearound 1882, outbidding Manchester yarns by virtue
of the fall in the value of silver (the currency of China and India) as against gold
(the currency of Britain).
b. This became the main line of production for the Bombay mills: no less than 60%
of the yarns annually, manufactured by them were exported to China every
year over 1904-08.
c. The export of Indian piece goods was not so extensive but still formed around
25% of the total Indian production in 1900, mostly on account of the Bombay
mills. These goods too were distributed in areas where the Bombay merchants
had a long established presence: the East African coast, the Persian Gulf, Ceylon
and the Straits Settlements.
d. The Ahmadabad mills on the other hand expanded in the early stage mainly by
supplying yarns to the handloom weavers in India. Behind the formal presence
of the companies and mills in Ahmadabad there was a far stronger informal
presence of pedhis and weavers.
23. By the turn of the century the substitution of mill yarn for hand-spun yarn was more
or less complete in the handloom weaving industry of India.
a. The lower yarn prices stimulated a perceptible concentration of handloom
weaving in the urban centres of Western India, a development accompanied by
the emergence of indigenous workshops (karkhanas) of weavers there.
b. The growing handloom industry in its turn, enabled the cotton mill industry to
expand by providing it with a large and growing market for its yarns. Thus a real
integration was achieved between machine made yarn and handloom textiles.
c. Another development brought about by the Swadeshi movement (1905-08) and
the displacement of Bombay yarns by Japanese yarns in the China market was
an increasing tendency to produce cotton fabrics for the home market, which
offered an even stiffer competition to Manchester piecegoods.
d. Overall, the cotton mill industry contributed to the wealth of the country and
the welfare of its population.
24. The beginning the 20th century witnessed another momentous development, again
thanks to Bombay-based capital: the emergence of the steel industry.
25. In this context it is pertinent to ask, why and how did Tata Iron and Steel company
(TISCO) succeed whereas earlier British attempts, including the latest Bengal Iron
and Steel Company (BISCO) had failed to produce steel commercially?
a. The answer is that there were formidable problems to overcome, BISCO and
the earlier British Iron works in India were on too small a scale, with insufficient
amounts to spend to solve these difficulties. Then problem was to find the right
location amidst vast uncharted spaces to set up a works bigger in scale than
anything Asia had witnessed before.
b. The Tatas solved this problem: they conducted an epic search through the wilds
of Central India for many years, and spent unheard of sums on the exploration
 before they located the site, which as near the sources of cheap and best
quality iron ore and passable coal with ready access to Calcutta, the largest
market in India for Steel, and low cost limestone and dolomite for flux available
nearby.The site was the most economic in the world.
c. Even so the Tatas would have never embarked on the venture had they not
been assured of government support. Government and railways, the largest
purchaser of steel in the country, had pursued an unalterable policy of buy
British until the end of 19th century.
i. What change the attitude of the government was Curzon s new
imperial vision at the turn of the century. His pursuit of strategic
interests from the Gulf of Persia to the heart of Tibet dictated the
building up of India as a broader base of power.
ii. This attitude was further strengthened by the WW-1 when the
Munitions Board had to gear itself up to the task of ensuring an
adequate supply of steel east of Suez in view of the German menace.
iii. Curzon s government gave TISCO the vital new railway connections to
the site and a guarantee to buy 20,000 tonnes of rail annually for 10
years at import price still keeping within the broad framework of the
laissez faire policy of the 19th century policy.
d. Tatas sought to raise the money for the plant initially in London, but according
to Rajat Ray, the British investor wanted the cream of business control over
the works without any share in risks. Eventually the Tatas raised the money in
the large and well organized Bombay money market, with a fair amount of
ease, as the Swadeshi movement had changed the political and economic
climate of the company.

INDUSTRIALIZATION 1914-1947

1. Under the high noon of the empire, as already mentioned, Rajat Ray postulates that
the economic space had been divided between
a. The stable, assured, steadily profitable investmentsspace reserved exclusively
for the European enterprises (although some Bombay-based Indian
entrepreneurs had barely managed to retain a toe-hold in it by virtue of the
strong maritime connection they had forged in the earlier phase of the empire),
and
b. The second space a limited and constrained space an Indian space the
bazaar.
c. Under the imperial scheme of things Risks and uncertainties, as far as possible,
were to be absorbed by the second space the bazaar.
2. As the imperial sun crossed the meridian with the outbreak of the WW-1. The
division of economic space maintained so carefully in the high noon of the empire
could no longer be sustained as bazaar based houses encroached relentlessly upon
the exclusive space the empire had created for the Europeans in its heyday.
 3. The imperial structure was profoundly shaken by the 1 st WW and the Great
depression.
a. The interconnected lines of the railways and the steamships were spasmodically
interrupted and the domestic market for industrial investment grew into the
major field for investment in the inter-war period.
b. Here (i.e. in the domestic market) the bazaar firms enjoyed a natural advantage
by virtue of the marketing and the credit connections they had formed across
the whole country.
c. As the depression hit at the foundation of the foreign buying and selling
organizations and a whole range of business turned inwards, the bazaar
emerged as an integrated system of inland transactions (through hundis and
arhats) between distant market towns (mandis).
d. Under the new circumstances, the expatriate British firms could no longer shut
their native associates and competitors out of the warm place in the sun.
4. The advance of the bazaar-based Indian houses into modern industry , accompanied
by the decline of the expatriate firms and the emergence of Multinational
Corporations (MNCs), were the most significant developments in the business scene
of the period.

THE 1920S

5. Entry of the Indian business enterprises in the hitherto exclusive European space was
dramatically demonstrated by the forceful entry of the Indian businessmen in
shipping and external trade in the 1920s.
a. G. D. Birla, led the Marwari traders of Calcutta in establishing direct contacts
with the jute market in Europe.
b. He established the first Indian office in London in 1917 for the export of jute
and soon became one of the three leading jute exporters.
c. Initially he was the only (Indian) member of London Jute Association, a position
he obtained by threatening to start directly with the (European) Continent
under Continental arbitration. But the Commercial Sale Rooms and the Baltic
Exchange, where the actual sales and purchase was conducted, would not
admit him despite his membership of the London Jute Association. He had to
employ an English clerk to do the business while members of other
nationalities, including the Japanese were let in without hindrance.
d. The Federation of Indian Chambers of Commerce and Industry (FICCI), newly
formed in 1927, to represent Indian business interests, put pressure against the
bar to entry of Indians, and in consequence the ban was lifted at the end of
1928 by the sales room of London.
e. The race bar came to an end of a gradual process of Marwari entry into the
baled jute export trade at the Calcutta end which had begun in a perceptible
matter during the 1st WW. At the end of the war more than 50% of the
 members of the Calcutta Baled Jute Association were Indian firms though their
share in exports was much smaller as yet.
6. Indian were at length were becoming more important in the foreign trade of their
country at a time when the trade itself was ceasing to be the essential lever in the
mechanics of economic domination.
7. Many institutions that seemed to have differentiated on racial grounds, began to
change their attitudes. For example, exchange banks that were almost exclusively
owned by the Europeans and had lent only the Europeans in the past, in the
1920sbegan to finance the import/export bills of the Indian traders to a greater
degree than before.
8. The 1st WW was a watershed in every respect. It initiated those long term political
and economic developments whereby power was transmitted gradually to Indians.
a. Its immediate impact was felt in the form of reduced imports, stimulated
industrialization by import substitution, disorganized the supply of expatriate
firms, and brought more liquid assets in the hands of the bazaar operators
(Kalkattake Bade Bazar meindhanbarasnelaga) which partly found its way into
the industrial field.
b. The Indian investors, especially Marwaris speculated in a big way on stock
exchange and in the futures of key export commodities. They threatened to
disrupt the established channels of trade and commerce. From the European
point of view, the most dangerous aspect of the [Indian] speculative activity
was the tightened Marwari grip over supply lines.
i. The speculative, industrial and trade activities of the Indians
entrepreneurs threatened the European businessmen in another way,
the wealth that these activities generated was used to breach the
industrial monopolies hitherto enjoyed by the European managing
agencies.
ii. Indians are determined to get into our industry exclaimed, Sir
Edward Benthall, the startled head of a Jute company Bird Heilgers, as
no less than 7 jute mills, led and encouraged by G. D. Birla, sprang up
in the 1920s. Equally startling was the take over of coal mills by the
Marwaris.
c. Although Omkar Goswami feels that some of these developments might have
taken place before the 1st WW, Rajat Ray rejects the idea and sides with A. K.
Bagchi, who believes that the absolute European control over jute trade and
industry came to an end when Marwari speculators pushed up the prices at
which European dealers had hitherto bought jute fibres from the interior for
the mills around Calcutta; in the bailed jute market, the development of
strongly organized futures in Calcutta enabled G. D. Birla and other Marwari
shippers to undersell the Europeans through cut price exports by hedging in the
futka bazaar (the futures market)
d. The IJMA complained, bitterly in 1928 about the inside market (bhitar bazaar)
or the futures, but by 1933 the gradual destruction of the hegemony of the
 expatriates by Indian firms (11 of them outside IJMA and two inside it on their
own terms), but 2 years later, IJMA ruefully found it better to make
substantialconcessions to the Marwari interlopers.
9. One must take care, however, not to exaggerate the extent of the decline of the
European and the ascendancy of the Marwari.
a. Despite a series of takeovers of collieries (coal pits/mines) and jute mills
between 1942 and 1945 by the Bajorias, Bangrurs, Goenkas and others, the
overall share of Europeans in share capital invested in Calcutta still formed 72%
of the total rupee capital in 1947.
b. As late as independence, Indians accounted for no more than 28 out of 85 jute
mills in the country. Many of them were quite small and at no point did Indian
capitalists control more than 20% of total loom capacity.
c. Majority of the tea companies too were sterling companies incorporated in
London, which the Marwari had no means of taking over. Till 1947, the tea
industry remained even more predominantly European than jute or coal.
10. In fact, it was not in the established export industries like tea in which the Indian
capitalists made the biggest advances after the war, but it was in a new range of
manufacturers for which the domestic market, protected by war-time cutting off of
exports, or by high revenue or protective tariffs afterwards, was the principal
market.
a. The European managing agency was not able to extend their hold to the new
range of industry and the houses rising from the bazaar were able to capture
them, and in some instances by new MNCs that had little in common with the
old European Managing Agency Houses.
b. The MNCs entered the market towards the end of the inter-war period,
concentrating on technology intensive capital goods and certain specialized
consumer goods for the middle class.
c. The business houses rising from the Bazaar on the other hand, thrust into the
news areas that had attracted the MNCs, as well as into the field of mass
consumption products requiring no complex technology. Such consumer goods
catered to a low priced mass market in which import substitution was more or
less complete during the Great Depression.
d. The market for Capital goods opened up later not before the 2nd WW, and on
a much smaller scale. The MNCs soon established their presence in this field, by
the side of the Indian houses.

PHASES OF INDUSTRIALIZATION

1. The pattern of entry into the industrial field by managing agencies, bazaar houses
and MNCs would become clearer if we bear in mind that there were 3 distinct
phases, in the development of large-scale industry in colonial India.
2. The phases overlap to some extent but are distinct enough to be roughly identified
as
 a. 1850-1914
b. 1914-1939
c. 1939-1947
3. The first phase, as we have already seen, was dominated by the European managing
agencies.
a. It saw the development of light manufacturing, plantations and mining which
relied heavily on the markets abroad.
b. The tea and jute industry of eastern India were almost pure export industries
c. And the greater part of the cotton textile industry of Bombay also catered to
the Far East.
d. There was no serious competition as yet in the Indian domestic markets with
industries of Britain.
e. The coal industry, which depended on the domestic market, was primarily
consumed by the railways.
f. Steel which did promise a revolutionary breakthrough based on the domestic
market, was produced in too small a quantity to make any perceptible
difference to the total value of the industrial production.
g. The industries of the period developed in areas of natural advantage, based on
rudimentary technology easily imported from Britain.
4. The second time span or second phaseof industrialization, distinguished from the
earlier one by its orientation to the domestic economy (market) and from the
succeeding one by its simpler technology.
a. The 2nd phase saw the development of competition between the indigenous
Indian enterprises and the advanced Western firms for the possession of the
mass market for consumer goods within the country.
b. Side by side the older textile industry there sprang up a new range of light
manufacturers, all protected by war, tariff and depression. The production of
cotton textile, sugar, paper etc. surged ahead within the sheltered domestic
market helped by relatively simple technology.
c. By the end of the 2nd period, import of Manchester cotton textiles, Java sugar,
and foreign paper of all sorts except newsprint were more or less eliminated by
the burgeoning manufacturing units owned by the Indian businessmen and
industrialists.
d. One critical development that went beyond the aforementioned was the Great
Extensions Programme of Tata Iron and Steel Company (1916-1924), the
completion of which for the first time made the steel industry a considerable
one. Industrial growth during the inter-war period that had slowly created a
market for the heavy engineering and chemical Industries and the expansion of
TISCO acted as an enabler for Indian industrialists to cater to this market.
5. Phase three, thus,wasmarked by the beginning of the capital goods industry. It was,
however, the technological leap of the 2nd World War that allowed the Indian
industry to launch out the new and complex lines of production.
6. The production of basic and heavy capital goods was hampered by formidable
technological problems arising from the absence of essential equipment, machinery
and technical know-how.The problem dictated a new pattern of corporation
between the big Indian houses and several multinational corporations by the time of
independence.The changing industrial scene contracted the sphere of the old
European managing agencies.
7. The declining of European managing agencies and the rise of Indian firms coincided
with the shift from export-oriented industriesto Industries catering to the domestic
market. The shift began imperceptibly after the 1st WW, and became perceptible
during the depression.
a. In fact, the wartime boom in the typical European industries continued till 1920
based on heavy exports of jute, tea and even coal with no hint of decline on the
surface.
b. The boom encouragethe big houses like Bird Heilgersand Andrew Yule to float a
number of new engineering, power, electricity, paper, tannery, leather,
graphite, saw mills and other companies.
c. However, many of these new concerns perished with the collapse of the short
lived post war boom which was followed by a severe and cyclic depression from
the middle of the 1920 through 1922.
8. The sound core of European business contracted irreversibly as the Depression
struck in 1930.
a. The export markets in tea, jute and minerals - the mainstay of the
expatriatefirms -collapsed.
b. The problem was that the European managing agencies being confined to a
stagnant core business in which there was not much profit to be made had
nosurplus funds to invest (and thus were making no new investments while
Indians were entering new industries).
c. In short, suffering from loss of drive on various front political, financial and
entrepreneurial
i. the Europeanswere becoming more and more preoccupied with
retaining control of what business they hadin view of the growing
Indian takeovers.
ii. After the 2nd WW they were psychologically on the defensive. We
will not be eliminated wrote Edward Benthall, head of a jute
company Bird Heilgers (who, incidentally, was also a delegate on the
1st Round Table Conference).
9. Unlike the export markets, the domestic market for industrial products was not
paralyzed by the fluctuations of the 1920s and the depression of the 1930s.
 a. Cloth, the greatest mass market in India underwent a long-term expansion in
terms of per capita consumption:
i. 9.8 yards in the last stage of the 1stWW,
ii. 13 yards on the eve of the Depression and
iii. 14.4 yards in the late 1930s.
b. The depression, while it did temporarily disrupt the normal channels of trade in
the country, coincided with the imposition of a high revenue tariff on the
imports and the grant of protected tariff to cottontextile, sugar and other
industries thereby rapidly expanding the share of the domestic market
possessed by Indian industry.
c. In terms of profitability the two major export industries, jute and tea, and to a
lesser extent: coal weresteadily going down in the 1930s while a variety
ofprotectedindustries, cotton, steel, sugar and paperwere experiencing
investment booms on account of rising profits at the end of the Depression.
10. But during the Depression, the expatriate firms which had a strong presence from
the interior to the colonial portswere compelled by falling profits to withdraw their
presence from the interior to the colonial ports, leaving the entire inland business to
the bazaar nexus of the shroffs and the arhatiyas.
a. The Indian businessmen, besides have more connections in the Bazaar, were
able to cope up with Depression by shifting investment from the depressed
tradesector to domestic industry.
b. Furthermore, according to Rajat Ray, they were altogether less deterred with
business difficulties of the period as they were impelled by their great
determination, grit and growing psychological commitment to the process of
Indian industrialization.
11. At the same time Civil Disobedient movement (which was accompanied by massive
boycott of foreign cloth) together with trade depression and protective tariff
decisively broke Manchester s hold over the piece-goods market in India.
12. Although the Bombay mills experienced great difficulties, bazaar type
industrialization in smaller centres of production pushed up the mill production of
cloth from 2259 million yards in 1926-27 to 4269 million yards in 1938-39.
13. But the most dramatic impact of the production was seen in the rapid development
of the sugar and paper industries in 1930s, a process in which the houses coming up
from the bazaar, took the leading part.
14. The Tatas and the Bombay mill owners had graduated out of the bazaar long ago.
Unlike them Ahmedabad mill owners and the upcoming houses of the 1920s and the
1930s, were closely tied to a variety of spot and forward transactions in the bazaar.
To take some examples
a. The Birlas were bankers, traders and speculators before they became
industrialists.
 b. Dalmia, who made his fortune in the Calcutta bullion market in 1917 by
speculating on the rise of the silver prices in London built up an empire in sugar,
cement, and paper during the 1930s at the same time continued large scale
speculative operations.
c. Karamchand Thapar was a big coal trader in Calcutta before he entered the
coal, paper and sugar industries in the 1930s.
d. Lala Shri Ram, the cotton textile and sugar magnate of Delhi, belonged to a
family which had made its fortune in the Commissariat by supplying the army
during the Mutiny .
e. WalchandHirachand was a building contractor in Sholapur who established a big
construction business during and after the 1st WW and then went into shipping,
sugar and engineering.
15. A common characteristic of these trader-industrialists was the continuation of
bazaar transactions and speculations while expanding into the modern industrial
sphere.
a. It is instructive to note in this context that some of the Westernized Bombay
textile houses which had moved away from the bazaar came to grief in the
1930s, while bazaar industrialists prospered in the smaller and the more
indigenous types of textile towns
16. To sum up then:
a. As the upcountry buying and selling organization of the European dominated
organized sector folded up with the onset of the Great Depression, Indian
bankers, merchants and speculators who sustained the spot and forward
transactions between the colonial ports cities and the market towns of the vast
interior achieved an integrated organization over the subcontinent.
b. The better concentration and organization enabled them to increase their
participation in mill industry and export trade perceptibly, so that the organized
modern sector itself came to include at the end of 1930s a substantial element
of men who had risen from the Bazaar.
c. It must be emphasized, however, that bazaar industrialization within the walls
of the sheltered domestic mass market had strict limitations.
i. Because of the poverty of the masses, their purchase capacity was
limited, and because of the underdeveloped state of the economy,
ii. the demand for the technologically sophisticated products of the
capital goods industry (practically non existent until the 2 nd WW) was
narrow.
d. However, it was possible to effect some advance by substituting imports in
those industries which did suffer severe competition from abroad, and this was
done in the 1930s.
i. There was, for instance, a burst of investment in the sugar industry
between 1931 (the year in which protection was given) and 1936.
 ii. But as imports fell off, so did profits and fresh investments. This is not
unexpected, without an increase in per capita consumption, the
industries advancing by import substitution were bound to hit a
ceiling once imports were eliminated.
e. It was the outbreak of the 2nd WW, which produced a shift of investments
towards the basic and heavy industries, opening up a new chapter in
industrialization.
17. As far as foreign enterprise is concerned,
a. The initiative passing to MNCs, who as already mentioned, unlike the expatriate
firms, aimed at capturing the domestic market for a variety of middle class
consumer products as well as certain capital goods for which new demand had
been generated by the expansion of Indian industry in 1920s and 1930s.
i. For example, the Swedish Match company (Wimco), the largest
importer of matches in India, climbed the high tariff wall in 1924 and
started producing matches in its own factories at Ambernath (near
Bombay) and in Calcutta.
b. According to Rajat Ray, much to the alarm of Indian business opinion, by end of
the 2nd WW, the multinationals, popularly known as the India Limiteds,
practically monopolised for themselves such industries as chemicals,
automobiles, rubber, matches, soap, cigarettes, boots, shoes etc.
c. It may be noted that the MNCs entered a variety of industries over a length of
time. Not all these industries were basic and heavy industries requiring
sophisticated technology.
i. From 1937, however, some of the multinationals began to explore
areas of complex technology, along with big Indian managing agencies
which were eager to invest their accumulated profits from steel,
cotton, sugar, paper and construction in the new chemical
metallurgical and engineering industries.
ii. The extraordinary military requirement of the 2nd WW coming on top
of the previous growth of consumer industries in inter-war years
created a domestic market for these capital goods industries.
18. The 2nd WW hastened the structural shift of Indian industry towards the production
of heavy chemicals goods.
a. At the beginning of the war there were 600 workshops capable of producing
engineering components at the end there were 15000 engineering workshops
supplying the government s war requirements.
b. The government, concerned with turning out munitions alone (India had been
assigned a subordinate place in the global planning for war production)
exhibited total indifference to enhancing the capacity of production of steel.
c. The authorities also obstructed the production of ships, aeroplanes,
automobiles, textile machinery, sewing machines etc. on the ground that these
 would divert productive capacity from the light munitions India was meant to
produce.
19. Despite official obstruction ambitious Indian houses committed to industrialization
process initiated the new industries, not expecting to make any profits in the
immediate or even foreseeable future.
20. Rajat Ray believes that Contrary to Claude Markovitz s assertion that there was no
evidence of a propensity of risk taking ,there is plenty of evidence to show that
Indian houses went well beyond cautious business considerations in initiating the
new industries.
21. It not difficult to show that the Indian enterprises were constrained by a backward
technology and technical difficulties.
a. Industries like metallurgical, chemical and engineering, automobile etc.
depended on easy availability of components.
b. In advanced societies such components were turned out in mass by specialised
firms at cheap rates.
c. In India such component industries evolved only after the 2 nd WW.
d. In consequence the costs and technical problems of initiating the latter were
more formidable than they were at advanced countries. Similar issues were
seen in other specialized engineering and chemical industries.
22. Thus, the narrow technological basis of Indian Industry undoubtedly proved a serious
hindrance to its growth in the new directions that came into view during the
2ndWorld War, for the first time. Given the prevailing set of conditions, it would not
have been possible before this at all.

CONCLUSION: WHY NO BREAKTHROUGH

1. Daniel Thorner has famously said,

a. Had the British never come to India, the great likelihood is not that India,
would now have transformed itself into a leading economic power, but rather
that there would have been an even slighter degree of industrialization. As
things did happen, India s development under the British has been strangely
lopsided. Amidst a general landscape characterized by backwardness and
perhaps even retrogression, there stands out a few substantial economic
achievements.
2. Rajat Ray feels that that this is a balanced judgement. He too feels that the British
rule produced in India a type of skewed development that reproduced the pre-
existing backwardness in novel forms.
3. Morris de Morris too has emphasized the general backwardness of the Indian
economy as the basic reason for its failure to transform itself. In his view, the
backwardness of the technological and organizational structure of the economy bred
in built constraints on its growth both on the demand and supply sides.
4. Rajat Rayfeels that so far as the above statement goes,Morris is right, but according
to Ray, Morris does not seem to take into account thespecific character of colonial
development, which as would appear from the most detailed recent study of
banking and business in 19th century, played a critical part in reproducing
backwardness at every step. In support of his argument he quotes A. K. Bagchi, who
states

The tributary extraction of the state and the operation of the

international economy drained away the surplus of the Indian
peasantry and destroyed the livelihood of the Indian
artisa s.At the sa e ti e, forced integration of the Indian
economy into the framework of an international capitalist
framework led to an unlooked for fragmentation of the
economic space and to the severance of many existing links
between the internal modes of trade and finance when these
came into conflict with the dominant links along the rivers,
roads and railways leading to the port

5. The repeated reversion to subsistence, the fragility of the markets prised open by
the railways in the interior, the low level of internal consumption and demand, were
all related to a feature associated with colonial rule from its inception the drain .
a. An official plan for the conversion and augmentation of current specie of
Bengal, 1785 estimated that prior to 1757, European and Indian merchants
a ually i ported ullio ore tha rores. After 757 this as re ersed
and there was an annual specie drai of rore
b. The early features of colonialism [drain], which spasmodically deflated and
depressed the Indian economy by draining it of specie, were accompanied from
around 1830 by a deliberate policy by means of discriminating duties against
Indian artisan manufacturers.
c. The triumph of free traders over the Company monopolists by the successive
Charter Acts of 1813 and 1833 had resulted merely in allowing free trade to
England without permitting the same freedom of trade to India.
d. The exports Indian manufactured goods were being hindered by a system of
prohibitive duties within the country and in England. By the time internal duties
were fully removedwithin India on the recommendations of the Travelyan
Report of 1838, and a perfectly free two-way oceanic traffic established
between the colony and the metropolitan country, India was already integrated
into the capitalist world economy of the First Industrial Nation as the supplier of
its raw materials and the market for its industrial products.
e. At this stage free trade itself became detrimental to India s economic growth.
6. As India s manufactured exports, especially textiles collapsed, which had previously
brought in voluminous amount of silver, and as India herself turned into a net
importer of textiles and other manufactures, there was a prolonged depression,
 marked by acute scarcity of specie, from which large parts of India suffered between
1825 and 1851 (please remember that most of the geographical territory that was to
eventually form the British India, had been captured by the EIC by that time)
7. Around 1852, however, there began a recovery: exports of primary articles of
produce reached sufficient volumes to induce a renewed influx of silver, and at the
same time a large amount of capital was imported from England, guaranteed by the
government or directly on the public account to build the railways.
8. However, a large part of that sum leaked abroad [Drain]as payment for men and
material imported from England for building and running the railways.
a. No attempt was made to mobilize resources in India, which might have
stimulated the money and capital in India and out of the 86 million pound
sterling invested in the Indian railways between 1849 and 1869, less than 1%
was subscribed in India.
b. The precipitous fall in the relative value of silver vis--vis gold added to the
drain.
c. The stimulating effect of the completed railway system and of the integration of
the emerging cash crop zones with the new trading outlets was patchy and
partial. They were offset by terrible agrarian calamities between 1850-1900
the famine of 1868-9 in Rajputana and Central India and the country wide
famines of 1876-8 and 1896-1900.
9. Rajat Ray asserts that through these years of patchy progress and recession, the
colonial government pursued a steadfast policy of laissez faire or more accurately
the one way free trade which retarded the industrial development of India at the
critical stage when a string industrial policy of the type pursued in contemporary
Russia and Japan might have enabled the country to take off .
a. For a brief interlude the government of Lord Rippon did contemplate
encouraging private enterprises in India to develop iron and steel industry in
India, but his proposals were shot down by the secretary of state for India in
1882.
b. Had Rippon s policy been adopted, India would by 1914 have been one of the
largest industrial producers in the world, she might have completed the stage of
industrialization through import substitution by 1913, an accomplishment
postpone by nearly half a century.
c. R. S. Rungta observed in relation to the same period

Had it not been for the subordination of the national interests

of India to those of Britain by the GOI, particularly in such
matters as industrialization and transport development, and
for the fact that the agricultural sector lagged far behind,
India might have reached the stage of take off many years
earlier than it is suppose to have done.
10. After the 1st WW, the changed political and economic climateforced the government
to abandon the policy of laissez faire, and to introduce the half hearted measure of
discriminating-protection (although Basudev Chatterjee says it was discriminating
against the Indian industry and protection for the British!) . It stimulated a certain
degree of industrialization by means of substitution of manufactured consumer s
goods imported from abroad, but it could not, and was not designed to encourage
the new chemical, engineering and metallurgical industries.
11. The narrow technical base of the industrial sector ruled out a pace of
industrialization faster than what the country enjoyed after the 1st WW. Hence the
legacy of backwardness handed over by the laissez faire policy of the 19th century
proved a stumbling block to progress in the age of discriminating protection.
12. The technical and infrastructural constraints inhibiting the growth of the basic
industries could not be overcome except by massive social overheads investment in
education, public health, communications, power, irrigation etc. Hence the Bombay
plan, prepared by Bombay based industrialists envisioned, national planning and a
massive investment by public sector. The cost of 15 year plan was at 10,000 crore, at
the end of which the Indian economy would be transformed.
13. In other words, by the late 1930s, then the requirements of Indian capitalism had
outgrown the policy framework laid down by the GOI in the early 1920s - the
outmoded policy of discriminating protectionbut the government still clung to it.
14. In contrast, the Indian business houses initiated a number of new projectsoutside
the framework of protection.
a. Sri Ram set up the Jay Engineering Works, Birla floated Texmaco, Walchand
started Premier automobiles (Discriminating protection by construct was not
available to new industries).
b. The outbreak of the 2nd WW brought up a unique opportunity to speed up plans
of Indian businessmen to turn out ships, automobiles, textile machinery etc.
15. But the government far from helping them, obstructed these plans on the ground
that such new projects would involve a diversion of industrial resources from the
immediate war-time needs of munitions supply. Thus, according to Ray, once again
India missed a substantial opportunity for quick industrialization.
a. By the time planning was adopted in the 1950s by the independent GOI, it was
in some respects a bit too late. For at the end of the 2nd WW, the advanced
countries experienced what is known as the 2nd Industrial Revolution, which
immediately widened the gap between them and the backward nations.
b. Rajat Ray feels that had the model of planning been adopted in the 1930s, as
the Indian businessmen were demanding, instead of the 1950s, the country
would not have missed the opportunity brought about unexpectedly by the 2nd
WW.
16. This was the 2nd occasion on which we had missed the bus, first being the coming of
railways, when Indian paid a heavy price for the policies of her colonial government.
17. To repeat Daniel Thorner s judgement, Indian probably would have less
industrialized if she had never fallen under the British domination;
a. but paradoxically, as Thorner pointed out, that domination also ensured that
the country would not achieve an industrial revolution.
b. Partial advances and offsetting retreats constituted that unique dynamics under
colonial rule; the reproduction of backwardness in ever newer forms in an
advancing world.
c. The country did not remain where it was. But it did not arrive.