Economic Impact of British Rule & Three Phases of Exploitation - UPSC Notes
Comprehensive UPSC notes on the economic impact of British rule - Three phases of exploitation, land revenue systems, deindustrialization, and drain of wealth.
The economic exploitation of India under British rule evolved over time through three major phases:
Mercantilism
Free Trade Capitalism
Finance Capitalism
Each phase reflected changes in British economic interests, but the core objective remained the same, i.e., the maximum extraction of wealth from India.
Mercantilism Phase
The first phase, i.e., mercantilism, roughly between 1757 and 1813, began after the Battle of Plassey, when the English East India Company gained political control. In simple terms, mercantilism meant that Britain wanted to accumulate wealth by controlling trade. The Company collected land revenue from peasants and used that money to buy Indian goods, such as textiles, which were exported to Europe. This system was often called investment, but in reality, it was exploitative because Indians were not paid fairly, and India's wealth was being used to purchase goods that were sold in England. At the same time, Indian artisans suffered because British policies supported the export of Indian goods at cheaper prices. This phase marked the beginning of the drain of wealth from India to Britain.
Free Trade Capitalism Phase
The second phase, free trade capitalism (1838 to 1858), started after the Charter of 1833 and ended the Company's monopoly over Indian trade. Now, India was open to British private merchants and industries. The nature of exploitation changed. Britain, which had undergone the Industrial Revolution, began exporting machine-made goods to India. Indian handicrafts, especially textiles, could not compete with cheap factory products from Britain, leading to deindustrialization in India. Many artisans lost their livelihoods and were forced into agriculture, increasing pressure on land. At the same time, India was turned into a supplier of raw materials, such as cotton, indigo, and jute, for British industries. Thus, India became a market for British goods and a source of raw materials for British industries, while its own industries declined.
Finance Capitalism Phase
The third phase of finance capitalism began when the British Crown took direct control of India after the Revolt of 1857. In this phase, the focus shifted from trade to investment and financial control. British capital was invested in railways, plantations, banks, and infrastructure, mainly to secure British interests.
These projects were financed through loans, and India had to pay heavy interest, which further drained its wealth. There was also a continuous system of Home Charges, through which India paid for British administration, pensions, and wars.
British Land Revenue Settlement
Land revenue is a tax or revenue levied on agricultural production or land. In 1765, the British acquired the Diwani rights of Bengal, Bihar, and Odisha. Until 1772, during the period of dual government in Bengal, revenue administration was in the hands of Indian officials called Naib Diwans. The first two Naib Diwans were Md. Raza Khan and Raja Shitab Rai.
In 1772, Lord Warren Hastings introduced the Quinquennial Settlement. Under this system, any bidder who promised to pay the highest amount of revenue from an area was given the right to collect revenue from that land for five years. The bidder collected land revenue from villagers and paid it to the Company's authorities. As the system proved harmful, Hastings also experimented with annual settlements and appointed the Amini Commission in 1776 to evaluate India's land resources so that a fair land revenue settlement could be formulated. This led to the introduction of new settlements, such as:
Permanent Settlement
Ryotwari Settlement
Mahalwari Settlement
Permanent Settlement
The Permanent Settlement was first introduced in Bengal and Bihar by Lord Cornwallis in 1793. It was later extended to Odisha, the Northern Circars of Madras, and the districts of Varanasi. The main aim was to create a stable and predictable source of revenue for the country. Under this settlement, Zamindars were responsible for paying revenue to the Company on time. If a Zamindar failed to pay the revenue on or before the fixed date, they could be removed from the
ir Zamindari. The revenue demand between the Company and the Zamindars was fixed permanently. Zamindars were recognised as landowners and were granted hereditary rights over the land. The fixed revenue ensured a stable and predictable income for the British, but high revenue demands and the pressure to pay a fixed amount led to the widespread exploitation of peasants, who fell into debt and poverty.
This system created a class of Zamindars who had significant control over rural society, contributing to social stratification and inequality. The exploitative practices of the Zamindars caused severe distress, leading to landlessness and increased rural poverty. The permanent revenue demand discouraged Zamindars from investing in land, leading to stagnation in agricultural productivity.
One of the consequences of the settlement was an increase in litigation due to the removal of court fees and the extension of the right of appeal.
Ryotwari Settlement
The Ryotwari Settlement was a land revenue system introduced by the English East India Company. Thomas Munro and Alexander Read are associated with the implementation of the Ryotwari Settlement in Madras. Major Wingate and Mr. Goldsmid are associated with its implementation in Bombay. Later, this settlement was introduced in other parts of India, such as Assam and Coorg in Karnataka.
The objective was to eliminate intermediaries and establish a direct relationship between the government and the cultivator. Under this settlement, the government recognised peasants as the owners of the land. Revenue was calculated on individual holdings based on soil fertility, the type of crop grown, and other factors. The peasants were exempted from revenue payments in cases of bad harvests or natural calamities. However, such exemptions were rarely granted, and the high revenue demands often placed a significant financial burden on peasants, leading to indebtedness and economic distress. This contributed to the rise of a new class of landlords called Mirasidars.
Mahalwari Settlement
The Mahalwari Settlement was first implemented in Agra and later extended to parts of the United Provinces, Punjab, the Gangetic Plains, and parts of Central India. It was introduced in 1822 by Holt Mackenzie and was later refined by Lord William Bentinck in 1833. Other officials associated with this settlement included James Thomson and Merttins Bird.
The objective was to create a more flexible system of land revenue collection that could adapt to local conditions and agricultural productivity. The system was based on the collective responsibility of a village or an estate called a Mahal. Revenue was estimated for the entire Mahal. It was subject to periodic revision based on agricultural productivity and market conditions. The entire Mahal was collectively responsible for paying the revenue.
However, as with other land revenue settlements in India, the high revenue demands under the Mahalwari Settlement placed a significant financial burden on peasants, leading to indebtedness and economic distress.
Commercialization of Agriculture
It is a process wherein agricultural production is governed by market forces rather than the need for subsistence. In British India, this meant growing cash crops such as indigo, cotton, jute, opium, etc. The peasants were no longer producing for their own consumption but to fulfil the demands driven by colonial trade policies.
Causes of Commercialization of Agriculture
The Company and the Crown aimed to integrate the Indian economy into the global capitalist system to serve British economic interests. India was seen as a source of raw materials for British industries and a market for British manufactured goods.
The British land revenue policies aimed at maximising land revenue collection, which led to land tenure systems that incentivised cash crop cultivation.
The British supported the establishment of plantations, particularly tea, coffee, and rubber, which led to large-scale commercial farming.
The expansion of the railway network and the construction of roads facilitated the movement of agricultural produce from rural areas to ports and urban markets, enabling farmers to sell their produce more easily. Similarly, British investment in irrigation projects, such as canals, supported the cultivation of water-intensive cash crops.
The commercialization process was also supported by the availability of credit from moneylenders, who provided loans to farmers for purchasing seeds, fertilisers, and other inputs required for cash crop cultivation.
Consequences of Commercialization of Agriculture
Farmers' dependence on cash crops exposed them to market fluctuations and price volatility. Many times, poor peasants were forced to sell their produce just after the harvest at whatever price they could get, as they had to meet the demands of the government, landlords, and moneylenders on time.
The emphasis on cash crop production reduced the area under food crop cultivation, leading to food shortages and increased vulnerability to famines.
Commercialization of agriculture led to the exploitation of labour, particularly on plantations, where workers faced harsh conditions, low wages, and poor living conditions.
Commercialization of agriculture facilitated the economic drain from India to Britain, as the profits from cash crop exports benefited British traders and industrialists more than their Indian counterparts.
Deindustrialization in India
Deindustrialization in colonial India refers to the decline of India's traditional industries. Before the establishment of British colonial rule, India had a globally dominant and highly advanced textile industry, known for its fine cotton and silk textiles.
Factors Responsible
In the 19th century, Indian industries declined as a result of the following factors:
The British administration prioritised Britain's economic interests by promoting British manufactured goods and extracting raw materials from India. The imposition of high import duties on Indian goods sent to Britain and low import duties on British goods sent to India made Indian handicrafts more expensive and less competitive in domestic and international markets.
The Industrial Revolution led to the mass production of machine-made goods. These goods were cheaper and had more consistent quality compared to handmade Indian products. The influx of British machine-made goods into the Indian market led to the decline of Indian handicrafts.
The British focused on exporting raw materials such as cotton and indigo from India to supply British industries. This disrupted the supply of raw materials for local artisans. Traditional Indian export markets and other European markets were lost due to the dominance of British manufactured goods and changing trade patterns.
The development of railways and other forms of transportation facilitated the availability of British goods in remote areas of India, further displacing local handicrafts. Improved communication also facilitated the management of the British trade network.
The introduction of new land revenue settlements increased the financial burden on peasants and artisans. They had to focus more on agricultural production to meet revenue demands, reducing the time and resources available for artisanal work.
Consequences
The decline of traditional handicrafts led to widespread unemployment among artisans and craftsmen, who lost their primary source of income. Many displaced artisans fell into poverty and debt, unable to sustain themselves without their traditional means of livelihood. The loss of traditional handicrafts also led to the decline of artisanal skills and knowledge, which were often passed down through generations.
Many artisans were forced to migrate to urban areas in search of work, leading to the breakdown of traditional communities and societies. The economic distress caused by deindustrialization aggravated social inequality and increased the vulnerability of lower-caste and marginalised communities, who were often engaged in artisanal work.
Traditional handicrafts were not just economic activities but also an integral part of India's cultural heritage. Their decline led to the loss of traditional art forms, techniques, and cultural expression. Many handicrafts were associated with specific festivals and rituals. Their decline affected the cultural fabric of Indian society.
The displacement of artisans led to an overreliance on agriculture as the primary source of livelihood, increasing pressure on land and agricultural resources. The increased dependence on agriculture contributed to agrarian distress, as many former artisans lacked the necessary skills and struggled to make a living from agriculture.
Famine in British India
Famine is a widespread scarcity of food caused by man-made factors such as war, inflation, crop failure, population imbalance, or government policies. Ancient and medieval India did not enjoy absolute immunity from famines, but what differed under British rule was the state's response and the proactive measures undertaken to prevent them.
Lack of adequate relief measures. The policies implemented by the British government were often reactive rather than proactive, leading to delays in providing aid to affected regions. The measures were often inadequate and insufficient.
Large amounts of food grains were exported to meet the demands of British imperialism outside India, leading to local food shortages.
The integration of Indian agriculture with the global market made local farmers more vulnerable to international market fluctuations.
The Indian subcontinent was also affected by variations in rainfall, which could lead to periods of drought and floods. Prior to British rule, indigenous agricultural practices and local storage systems had evolved to mitigate the impact of such variations. However, during British rule, the lack of infrastructure to manage these disasters aggravated their impact on food production and availability.
The colonial period also witnessed significant population growth, which put additional pressure on available resources.
The entry of the British into tribal areas and the enactment of various Forest Acts restricted tribal access to forest produce and prohibited Jhum cultivation, leading to famines in tribal areas.
Remedial Measures
The first committee was the Baird Smith Committee, constituted in 1860–61 during the famine in the Delhi–Agra region. However, no specific famine relief measures were taken based on its recommendations. After the Orissa famine of 1866, which caused over a million deaths, the British Indian Government appointed a committee under George Campbell in 1866 and began devising systematic famine relief policies.
Lord Lytton constituted the First Famine Commission (Richard Strachey Commission) in 1880. Its recommendations were accepted by the government and provided a basis for specific famine policies. The Commission's recommendations led to the formulation of the Famine Code.
The Famine Codes emphasised the importance of relief works, such as road and railway construction, which could provide employment to the famine-stricken population, thereby enabling them to buy food. They also laid down principles for the distribution of food and monetary relief, the establishment of relief camps, and measures for sanitation and medical care to prevent disease outbreaks.
Second Famine Commission — It was constituted in 1897 under the chairmanship of Sir James Lyall. This commission recommended the development of irrigation facilities.
Lord Curzon appointed the Third Famine Commission under the presidency of Anthony MacDonnell in 1900. Its recommendations included the creation of the office of Famine Commissioner, the establishment of agricultural banks, and the improvement of irrigation facilities.
On 1 April 1904, the foundation of the Agricultural Research Institute was laid at Pusa, Bihar, by Lord Curzon, the Viceroy and Governor-General of India. On 15 January 1934, a devastating earthquake damaged the institute's main building, and on 29 July 1936, the institute was shifted to Delhi.
Bengal Famine of 1942–43 — The John Woodhead Commission was appointed in 1945, and it was the last Famine Commission.
Sir Arthur Cotton is widely regarded as a pioneer of irrigation works in South India. He was a British Army officer and civil engineer who served in the Madras Presidency (British India). He constructed a major dam (anicut) across the Godavari River at Dowleswaram (near Rajahmundry, Andhra Pradesh), transforming barren areas into fertile agricultural lands.
He developed extensive canal networks for irrigation and navigation, which boosted the local economy and agriculture. He earned the nickname “Bhagiratha of South India” for bringing water to arid lands.
Development of Railways in India and Its Impact
The first railway in India operated between Red Hills and Chintadripet in Madras. It was called the Red Hills Railway. It was built by Arthur Cotton to transport granite stone for road construction. Lord Dalhousie prepared the overall development plan in his Railway Minute of 1853. In the same year, the first passenger train service operated between Boribandar in Mumbai and Thane.
On 1 August 1849, the Great Indian Peninsula Railway was incorporated with a guarantee system that provided free land and a guaranteed 5% rate of return to private British companies building railways in India. These companies were to build and operate the railways under a 99-year lease, with the government having the option to buy them earlier.
Positive Impact of the Railways
The railways connected people from different areas, enabling them to communicate with one another irrespective of caste and race, which helped develop a common consciousness among Indians.
They helped mobilise the Indian masses in general and the leadership in particular during the nationalist struggle. The railways were used by nationalist leaders to connect the masses from different parts of India.
The railways played an important role in popularising the vernacular press. As a result, the ideas of Indian leaders and their criticisms of British policies could reach the common masses. The railways also played a role in uniting the Indian economy.
They significantly reduced the cost and time of transporting goods across the country, which promoted businesses such as steel, coal mining, and cement.
Railways made long-distance travel easier and more accessible, increasing mobility and facilitating large-scale migration for employment, religious pilgrimages, and social gatherings, thereby contributing to a more interconnected and mobile society.
Railways were instrumental in the growth of cities. New railway stations became centres of urban development, leading to the emergence of new towns and the expansion of existing cities.
It is in the context of the positive outcomes of railways in India that the British journalist A. O. Hume commented, “Railways may do for India what dynasty never done, they may make India a nation”.
Negative Impact of the Railways
The very nature of British rule was colonial, and therefore, the introduction of railways promoted the economic exploitation of India to fulfil British interests. Railways played a role in promoting a large-scale drain of wealth from India to England.
The railways were used as a means to consolidate British imperialism and colonialism in India, enabling the rapid movement of troops. They allowed the British to respond quickly to uprisings and also facilitated the centralisation of governance.
Railways damaged India's traditional handicraft industries, which became uncompetitive compared to British goods whose reach into Indian markets increased because of the railways.
The Drain of Wealth
The drain of wealth refers to the continuous flow of wealth from India to England for which India did not receive an adequate return. The theory was first highlighted by Dadabhai Naoroji in the late 19th and early 20th centuries. He wrote about the drain in his works England's Debt to India, Poverty of India, and Poverty and Un-British Rule in India. Along with Naoroji, R. C. Dutt highlighted the idea of the drain in his work The Economic History of India. The theory was supported by V. C. Roy, G. K. Gokhale, M. G. Ranade, G. Subramania Iyer, Lala Lajpat Rai, and Sakharam Ganesh Deuskar.
Sakharam Ganesh Deuskar was a close associate of Aurobindo Ghosh. He published a book titled Desher Katha, in which he described the British commercial and industrial exploitation of India and portrayed British rule in India as the result of the hypnotic conquest of the mind.
Sir S. Subramania Iyer, popularly known as the Grand Old Man of South India, also supported the theory, along with John Sullivan, who said, “Our system acts very much like a sponge, drawing up all the good things from the banks of Ganges and squeeze them down in the banks of Thames”.
The major components of the drain of wealth are:
Home Charges: Expenditure incurred in England by the British government on behalf of expenses in India.
Payments to British Companies: Money transferred to British companies for their industrial and other infrastructure investments in India.
Remittances to England: Money sent to England by Europeans living in India.
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