Indian Political and Economic History

Stages of British Rule
1. What are the characteristics of the “First Stage “ of colonial rule in India?
2. How did East India gain by capturing political power in India?
3. Describe about early settlement Acts?
4. If one carefully studies the period of Indian history between 1757 and 1940 one finds clearly identifiable stages of British colonization each with its specific and distinguishable characteristics. Can you identify the main features of each stage with corresponding impacts on the Indian economy?
5. “The emergence of Industrial Britain resulted in De-industrialization and commercialization of Indian Agriculture in the early part of Nineteenth century”. Do you agree? Explain your conclusions.
6. Discuss the impact of the military and industrial revolutions upon India up to 1858. Which of these would you regard as more important?

Industrial Revolution
1. The industrial revolution in the UK changed the nature of British interest in India. Comment.
2. How was the Indian economy affected by the change?
3. What role did opium play in that regard?
4. Would you attribute the origins of the industrial revolution to the inventive genius of the English people? Provide reasons for your answer.
5. Analyze the cause and conditions of the emergence of the factory system of production in Western Europe. What are the chief characteristics?
Indian Business
1. Explain the difference in the process of industrialization of jute and cotton textile industries in India?
2. How do you explain the Indian Business Community’s increasing interest in the Indian national movement beginning with the post First World War period?
3. How do you explain the duality in the attitude of the Indian business community towards Indian nationalism?
4. How did colonial rule affect Indian business? How did businessmen respond to the new conditions they faced?
Others
1. List the main problems faced by lord Cornwallis when he arrived as Governor – General in 1786. How would you have tackled the situation in his place?

I-Stage in British rule:
“Colonization of India by Pre-Industrial Britain”
1. EIC given monopoly status by queen to trade with India
2. EIC paying in gold and silver for Indian exports.
3. Gaining control over Bengal by defeating Nawab
4. Unilateral flow of goods
5. Destroying old traders (Punjabis, marwaris and Afghanistan)
6. Creation of Bengali Babus
7. Permanent Settlement- Maximization of profit by maximization of revenue

Inception of Permanent Settlement
• Company realized that to maximize the profits it must maximize revenue from land.
• EIC auctioned Zamindaris to those who would pay them maximum tax.
• Zamindars in turn heavily taxed peasants who had no incentive to produce more.
• This over-exploitation led to number of famines greatest being 1776 in Bengal. There was overall decrease in production and efficiency of agriculture.
• To boost the production and to generate constant stream of revenue EIC decided to create gentry of landlords who had a stake in land. According to this system landlords would pay EIC a fixed amount of money and hence they would have greater incentive to increase production, as additional money would go to landlords.
Failure of Permanent Settlement
Proxy Zamindari:
• Bengali Babus bought Zamindaris for esteem reasons rather than commercial reasons.
• This led to creation of “proxy Zamindari” of Naibs who controlled the activities for Calcutta-based Bengali babus.
• This led to severe corruption and large no of hierarchies between whom profits needed to be shared.
• Peasants were taxed as heavily as before and they had no interest in greater production.
Price fall:
• There was a steep fall in price in period immediately after permanent settlement in 1795 and prices remained low.As per brij narain fell by 35%
• For next 15 years at this time most of Zamindars could not fulfill their commitment to EIC and sold their ownership.

II-Stage in British rule:
1. Industrial Revolution
2. Laissez faire replacing EIC’s monopoly
3. Lancashire captures Indian markets.
4. Reemergence of Marwaris traders as agents of Lancashire goods
5. De-industrialization.
6. Fundamental Change. India becoming “exporter of agricultural raw materials from exporter of industrial finished goods”
7. Problems of Tribute Realization: Opium Trade

Industrial revolution
• Took place in 1770 in Britain and changed the way production was done in Britain.
• There was great increase in production and productivity.
• And it decreased the price of handloom cloth and a great investment took place in this sector.

Laissez Faire:
• New class of entrepreneurs (goods-producers) emerged in Britain.
• They could enhance profits by expanding markets. They thrived on lower prices.
• They were not worried of competition and wanted removal of monopoly to gain access to new markets. They wanted “Laissez Faire” to replace mercantile monopoly. UK was a small market and Lancashire wanted to export its goods to India.
• There was conflict of interest with EIC who thrived on handlooms produced in India.

De industrialization:
• Lancashire got Monopoly charter removed in 1813 by parliament. EIC monopoly in India ended.
• Objective changed from “seizing Indian commodities” to “seizing Indian markets”.
• Lancashire did not pay any import duty on goods whereas Indian cotton weavers had to pay an excise duty Thus they had a great price advantage.
• Lancashire wiped out exports of Indian cotton goods. They also challenged them in their home market.
• This led to de-industrialization - massive shutdown of Indian industries.
• The impact of this de-industrialization was (a) Indian middle class became poorer due to unemployment (b) decline of other industries like cutlery, guns, machinery, etc.

Problem in Realization of tribute
• India’s de-industrialization seriously affected transfer-of-wealth mechanism.
• Till now the realization of tribute had taken the form of export from India.
• Rationally this could have been compensated by diversion of raw cotton to English factories. But this was not possible because Indian cotton was too short-stapled for English factories.
• Similarly Indian raw silk could not compete with Chinese and Italian silk for English factories. Its export remained limited.
• The problem became very acute by 1830.
• The solution was found in opium trade.

Opium trade
• British found a major market for opium in China.
• Chinese aristocracy consumed opium for centuries.
• British slashed opium prices and smuggled it into China through Shanghai and Hong Kong ports.
• Chinese king tried to stop this trade and fought two “Opium Wars” (1840-42 & 1856-58) with Britain.
• After losing the war opium trade was legalized in China.
• British sold Indian opium to China and imported Tea and Silk to England. A large amount of Bombay and Bengal capital can be traced to illegal opium trade.

The following figure showing imports and exports of Britain to Asia shows the gain to Britain by this triangular relationship.

Year Imports Exports Excess Imports over exports
1854 23 12 11
1855 24.3 13.1 11.2
1856 29.6 15.4 14.4 * All values in millions pounds

III-Stage

1. Flow of capital to Britain.
2. Development of Railways as an agent of deindustrialization.
3. Commercialization of Agriculture.
4. Zamindars to Landlords.
5. Emergence of Jute and Cotton Industry.

Flow of capital
At about 1850’s the capital investment had reached a saturation point with construction of basic networks of railways, the greatest absorbent of capital. The major characteristic of this stage was export of capital and intensified race for Indian markets. From 1857 to 1865 saw major movement of British capital to India.

Development of railways

Reason
No body was interested in investing in railways as no one could see economic viability in it. Lord Dalhousie wanted railways in India because of problem in administering such a large country. Thus railways were developed more in need for army personnel movement than movement of goods. East India Co. became the underwriter and assured 5% ROR in railways investment in India. Major investment was carried out in Calcutta region although first line was introduced in Bombay.

Complete Colonization:
Railways served as a catalyst of complete colonization of India. Railways led to massive increase in imports by the country.
• Imports of cotton doubled between 1859 and 1877.
• Imports of silk became 4 times between 1859 and 1877.
The railways also led to increased exports from India. The entire composition changed as bulk no longer remained a barrier to transport. In 1871 Opium was still principal item but Oilseeds and cotton came close second. Thus there was a real shift in Indian agriculture to production of raw material for England, a shift from food grains to non-food crops.

Commercialization of Agriculture
The railways also led to change in composition of Indian exports, as bulk no longer remained a barrier to transport. In 1871 Opium was still principal item but Oilseeds and cotton came close second. Thus there was a real shift in Indian agriculture to production of raw material for England, a shift from food grains to non-food crops. This vast change in Indian agriculture from food grains to non-food crops (jute, indigo) is sometimes known as “commercialization of agriculture”. The commercialization had a major impact as quantity of food available for home market declined and it led to great famines (famines of 1896-97 & 1899-1900) were millions perished. The commercialization made condition of poor peasant worse and only few rich landlords were the gainers.

Zamindars to Landlords
At this period due to “Sundown Laws” lot of absentee landlords lost their Zamindaris to their naïf. So there developed a new class of people who are the owners of land, peasants and who are also the traders.

M +W + L

This system of “pay interest and principal later” created a debt trap for the farmers. And they gradually lost their land and became bonded laborers.

3. Debt Trap
Consider a farmer R who is able to produce just enough for sustenance of his family under normal circumstances

Yt = Ct + St + Gt
Yield = + Savings +

I t+1 = St
Investment for the next period = savings for this year.

Y t+1 = Yt
Yield constant (no growth)

For a typical mono crop cycle from June Dec the price of the crop is as follows

(Show sine curve with min at Dec and max at June)

• Sometimes, due to some unforeseen circumstances, (for eg daughters marriage, death) the farmer may have to resort to borrowings.
• In case of non-monetised economy, borrowing is kind (seeds from the trader) but in monetised it is the value of seeds.
• He borrows when the price of seeds is the highest.
• Repayment time is the harvest time when the price is the lowest in Dec.
• Moreover with the exorbitant rate of interest charged by these moneylenders, it becomes virtually impossible for the farmer to erase the debt.
• He might be able to pay just the accrued interest and hence this process continues every year and gets trapped in the debt trap.
• Further the inability of the farmer to pay the debt (or the interest accrued on debt) led to seizure of the land by the moneylender and this also gave birth to a new class of bonded labor.

o Thus top landowners amounting to 10% of the population own 70% of the land. 70% of the agricultural people own 10% of the land. And remaining 20% of the people own 20%. o Thus it led to collusive oligopoly. Because the farmers were not in a position to take shocks, it led them to fall into the debt trap. o The landlords started becoming rich. o As the productivity increased they hoarded the goods at lower price and sold them when it was dear.

Post 1947(INCOMPLETE)
After independence the trap itself perpetuates. It was identified that to solve this problem, three ways were possible

1. Land reforms (EXPAND)
2. Co-operation in terms of marketing to increase productivity to buy inputs: Cooperative farming failed because big zamindars refused to be part of it.
3. Loanable funds access to bank funds: Nationalisation of banks only helped in strengthening the moneylender. They are the ones who get the loans based on collaterals.

Also only those who served the British Army were allowed to buy the land or very rich landowners (eg Punjab). This led to large clusters. Sikhs were the spearheads of the British army.

The productivity just shot up in these regions. Even today in the non-irrigated parts, we have bonded labour with its socio-political aftermaths.

Also attempts to seize the land of landowners failed as they hid the lands under benaami transactions (EXPAND).

However it did play some positive role also, in the form of interest-free advances especially in Opium cultivation. Some peasants even managed to evade the government and sell opium to the private traders.

Emergence of jute and Cotton industries

Jute Industries
Jute industry was developed in Scotland (around Dundee) but based on RM supplied from Calcutta.
The characteristics of jute industry were:
1. Labor intensive. The jute industry is highly labor intensive and does not require much skilled labor.
2. Dependant demand. The market of jute goods were other industries and hence demand for jute depended on demand or well being of other industries. Market was not local but world market.

The factors that led to growth of jute industries in Calcutta are:
1. Low wages in Calcutta as compared to Dundee and hence lower cost of production
2. Nature of RM. The volume/value ratio was high and that was not the case with cotton (jute could not be bent). The marginal cost of transportation was much higher in jute than in cotton.
3. Production process The raw jute had a high wastage in production process, which meant you would be importing extra jute and hence would be paying extra for that
4. Slave trade. The slave trade was declining and those in slave trade were looking for some other investment. They found good opportunity in jute mills in India. That is the reason we find all jute mills in India, were owned by Europeans till 2nd WW.

Impact of jute industry
The jute mills did not employ local laborers, as wage differential was the key to their success. So they brought people from different places, Sardars were appointed, sent to Bihar, Orrisa etc… . These Sardars would pay advance to villagers and brought people to town, they not knowing where they were heading (The operation was very similar to slave trade). These people would be settled in compound of the mills and that is the reason jute mills had huge compounds. The people in Calcutta saw jute mills as a symbol of foreign oppression. Whereas the people of Bombay saw cotton mills as symbol of national pride, owned and worked by Indians.

Cotton Industries
Came to India for reasons different than jute.
• Bombay came under British 60 years after Calcutta. By then the monopoly of EIC was withdrawn and mercantile attitude was replaced by Utilitarian capitalistic attitude. There was an attitude difference in British Bombay and British Calcutta.
• For 60 years of difference Bombay merchants enjoyed free trade in local market and they had a lot of capital accumulation. Deccan handloom had survived and it was a major cotton belt controlled by Bombay Parsis.
• Lancashire and European textile producers had moved from short Indian staple to long American staple causing obsolescence of previous spinning mills. The capital goods sector in cotton was looking for external buyer.
• The Bombay mills were dealing with short staple and producing coarser variety of cotton cloth. There was a small market of this cloth in Africa and Indian textile owners were competing with Chinese and Japanese textile manufacturers. The demand for yarn was increasing and hand spinning was not sufficient to meet the demand. The Lancashire did not enter into this market, as profit margins were lower.
• The Parsi traders bought the old spinning mills from the textile manufacturers against wishes of Lancashire and thus cotton-spinning mills came up in 1840-60’s.
• This is the reason why Bombay textile mills were not integrated whereas Ahmedabad had integrated spinning mills.

Other Industries in India

Sugar: Railways helped develop other industries like sugar. Previously sugar mills couldn’t be set up coz of transportation delays of sugarcane to the mills location. Now railways came to their rescue.

Leather: Madras was the only port to export leather to Europe till the end of the 19th century. Emergence of nation states led to building up of armies => more demand for leather (boots belts). Leather was tanned by vegetable (inefficient). Later, chemical tanned leather (chrome-tanned) emerged and US took advantage of this. This led to the death of Madras leather tanneries.

Indigo faced a similar fate as leather. Indigo was replaced by synthetic blue invented by a German scientist.

Spices were exported from Madras, Cochin. This was till the end of 19th century after which Indonesia took that lead from India.

Except China and US, the whole world was either colonies or colonizers’ property. Among the colonies, India was the most industrialized, which had indigenous industrial capitalists

IV-Stage
Rise of Indian nationalism – “British rule and Laissez faire reason for Indian poverty” Ranade, Telang, Dadabai Naroji branding laissez faire as reason for poverty.
Bengal partition and Boycott movement
Emergence of Gandhi as a National leader.
I WW and its impact on Indian industry
Need for planned economy
1929 depression
FICCI 1934, Birla Speech
1937 Provincial Election
II World War and Post war Reconstruction Committee
Bombay Plan

Indian nationalism developed in two major categories:
Militant groups/ Political extremism:
• Emphasized on glorious Hindu past.
• Believed in self-reliance and fell back on traditional handicrafts as means of prosperity.
• Opposed British rule as it destroyed traditional Indian society with destruction of local manufacturers.
• Boycott of foreign goods, and rejection of western mode of life.

Moderates:
1. Looked forward to industrial developed India
2. Telang, Naoroji, Ranade, Joshi, RC Dutt belong to this school of thought.
3. Protectionism was key for remedy of economic distress of country.
4. For both the reason for poverty was poor policies of British which led to economic ruin of the country (“ Unbritish rule of India”)
5. Identified lack of large-scale industrialization was identified as major reason for poverty and means to eliminate poverty. It was a shift in thinking from past swadeshi movement which considered development of traditional handicrafts as panacea for economic ills

Prewar

Role of state
Early criticism of British laissez faire developed into an idea of positive state participation in economic activities.
Role of state was defined as not only protecting nascent Indian industry against foreign competition but also to carry out social and agricultural reforms.

1st World War

Laissez faire policy broke down and govt of India placing orders with Indian firms.
Positive change in attitude of govt as regard to excise duty on cotton.
Accumulation of large capital but expansion constrained by capital goods
Complete breakdown of trade with Britain, and first experience with protectionism.

POST-1st WAR
Industries again facing foreign competition and demand for protection rising
After 1st WW we see emergence of new generation of economists KT Shah, Sarkar, Gadgil all were staunch supporter of protection and encouragement to industrialization.
Visvesvaraiya “Reconstructing Indian Economy” identified following problem of Indian poverty:
• Low standard of living of people
• Low level of education
• Dependence on agriculture
• Lack of industrialization and destruction of indigenous industries due to British tariff and fiscal policies.

Formation of FICCI in 1927 by GD Birla and Purshotamdas Thakurdas
1929 Depression
Deathblow to laissez faire, and planning taking up firm roots in India.
Sir George Schuster (finance minister) tried to setup Economic Advisory council in India.

FICCI in 1934 Birla and Sarkar spoke on necessity of planned economy in India.
1. Capitalization of west was based on exploitation of colonies, this was large capital accumulated that was looking for investment but in India there is no surplus and hence capitalization can develop only through protection and expansion of market.
2. Increasing the purchasing power of people is essential for growth of capitalism. Since 70% of people are in agriculture hence there is need to develop agriculture to raise PPP. This development requires new investments in power, irrigation. These investments cannot be made by private sector so state must develop them.
3. Dependence on imports of machine must be stopped. This means development of key industries/ Capital goods industries. These key industries require large investment and has larger gestation period, slower rate of profitability and hence must be developed by state

Conference of ministers of industries, for various provinces in 1938. Formation of National planning committee.
Identified 3 types of industries

Second World War
Post War Reconstruction committee was setup in 1941 to prepare “development plan for India”.
Bombay plan released in January 1944
Industrial policy of GOI in 1945. Both the plans supported license raj to ensure spread of industries in all parts of country to get true industrialization.

Industrial development of Bombay and Calcutta

There were distinct differences between the nature of growth of Bombay and Calcutta as centers of major modern industrial cities in India during nineteenth century.

Timing of arrival of British: British first came to Calcutta so the effect of Imperialism was seen very early there as compared to Bombay and other places in the country.

Existing local business community: Marwaris were the major business community in Calcutta. EIC established its monopoly by force so Marwaris were forced to abandon their business or just become EIC agents. These things were not seen in Bombay where the British reached around 40 yrs later.

Industrial Products: At this time, Calcutta became the center of tea & jute-production whereas Bombay became center of cotton-production. Bengal was the only jute-producing area and Cotton was found in the Bombay region Maharashtra, Nagpur, etc.

Ownership: In Calcutta, British-owned industries came up. Bombay most of the industries were started and owned by Indians themselves. So due to imperial domination the traders in Calcutta did not flourish whereas the traders in Bombay flourished since they had their own industries.

Labour demography: In Calcutta region, all bonded-labour was brought from MP, Bihar and Orissa. In Bombay the labor was from the region itself. They worked during he day and went back to their homes in the evening.

Special problems for Calcutta: Due to linguistic differences in Calcutta, this labor could not mix and contribute to society. Effect of this was that the responsibility of labor in Calcutta was that of the owners. This also proved to an extra expenditure in Cal, crucial to the industry’s survival later. It was not so in Bombay.

Exim structure: Being short staple, Bombay cotton generated indigenous demand and supply whereas as the industry in Calcutta was predominantly meant for export purposes.

LAISSEZ FAIRE

The Indian business community played a crucial role in developing the concept of planned economic growth through state intervention.

British preference: The preferred economic policy in Britain and other western countries was Laissez faire - free trade between countries.

Problem with LF: The policy seems to be perfect on paper - both the involved countries should benefit from this. However this policy results in discrimination against the weaker or late-coming partner and always benefits the more industrialized country.

LF in India:
In the name of laissez faire the Indian indigenous manufacturing was destroyed (particularly the Indian handloom industry).
In order to promote the British textile industry, India was reduced to only a raw material supplier by the British government.
It led to the large disproportion between the production of raw agricultural products and the production / distribution of industrial produce.

Thinking in India:
Moderates and the Swadeshi schools identified British-government policies causing the economic drain & hence abysmal poverty in India.
Large-scale organization of industry was recognized as being vitally necessary.
This thinking was also different from the other trends of the swadeshi movement that recognized indigenous traditional handicrafts through individual and community efforts as the panacea of the economic ills.

Propositions:
Protection: One of the chief proponents of industrialization Ranade also observed that there was a decided reaction against Laissez Faire in western countries also where State was recognized as the national organ for taking care of national needs in all matters. Even in England The Factory Legislation and Irish Land Settlement indicated this change of mind.
Planning: Once industrialization on a large scale was identified as the means to develop Indian economy, the role of state also became vital in such a program. The country was already bereft of capital and there was a severe lack of capital formation in the economy. Moreover the private capitalists also could not afford to set up large industries themselves in the face of stiff competition from British industries. It became essential for the State to contribute to the growth of large-scale industries.
The role of the state to these thinkers was also not confined to industrial growth but also included the responsibility of bringing about the agricultural and social reforms. The early criticism of Laissez faire policy in India, thus, gradually developed into the idea of positive state participation in the economic activities of the nation.

Change in thinking on LF: Later on another reason for this demand was the success of the first plan in Russia in sharp contrast to the prevailing crisis of the Great Depression. This also fueled the demand in India to involve state participation.

CHAPTER 7

Development of firms in modern economic activities finds its roots in the firms of pre modern times.These pre modern firms also help in understanding the aspects of present day Indian economy.

The Family Firms
1. They take deposits, make loans, transfer govt funds, engage in wholesale and retail trade.
2. They took up the role of a managing agency for newly founded industries.
3. So they could be bankers or consultants, selling/purchasing agents.

Three types of marwari firms : 1) The great firms , 2) The banians and the brokers, 3) The speculators.

GREAT FIRMS
1. Possesed large resources disposed off through large number of branches scattered throughout India.
2. Involved in various lines of trade (commission agents, bankers, employers).
3. They were a conglomerate of interacting firms belonging to closely related members of one family. Eg. Daddas created a merchants city state in Phalodi.
4. They obtained autoomy over harassment of employees and control over firms' personnel.
5. Fellow community members were employed in these firms to ensure loyalty.
6. All branches of the firms were separate units.

RELEVANCE OF GREAT FIRMS
These firms exemplified the steps by which marwari businessmen progressed.They had established the network on which the marwari emigrants spread themselves throughout the country.They provided initial employment to marwari emigrants.

BANIANS AND BROKERS
1. Bulk of marwaris were initially intermediaries between domestic producers and consumers and freign exporters and importers.
2. Local retailers purchased in bulk from wholesalers on 6 month credit of limited amount.
3. Market town stores purchased/sold through their commission agents in port cities.
4. These commission agents had to deal with European importers.So, they appointed a guaranteed broker called 'banian'.
5. These banians received around 1% of commission.
6. Their job was to guarantee the trustworthiness of Inidan businessmen who dealt with these European firms.
7. Their approval was necessary for any transaction.
8. They were responsible for quality/quantity of goods,merchandize, shipments etc.
9. They had to good any deficiencies in weight or quality.
10. They had to dispose off the goods at highest possible rates.
11. They were employed mainly in cloth, opium and raw cotton trade.
12. Jute firms did not use them mainly because it did not need their connections.
13. Europena firms in bombay employed banians(mostly parsees and bhatias).

Examples. Saraf and Musuddi , Goenka , Jhunjhunwala , Jatia.

The banian relationship with European firms and their large network formed the foundation for speculative markets

SPECULATORS AND INDUSTRIALISTS
1. The futures markets of Calcutta in opium,raw jute were started by marwaris as early as 1791.
2. Rapid oscillations in opium prices, compounded by the unstable conditions of exchange betwee India and China rendered opium market unstable and hence gave speculators a chance of making profits.
3. J K Birla along with Nirmal Lohia and others was known as the king of speculative markets.
4. Share market was a second major speculative market.
5. Calcutta Stock Exchange was formed in 1850.
6. Jute Exchange dominated by Indians was formed in 1906.
7. Bombay Stock Exchange was founded in 1875.
8. A common speculative transactio was Rain Bargain, wagers on when would the first rain would arrive.
9. Calcutta speculative markets were closed during WW I.
10. Slowly, with increase in jute shares, these markets gained momentum.

Fruits of Speculation
It was the speculative gains made by marwari businessmen that enabled some of them to start business right after WW I.
GD Birla started jute mills in 1918-19.Other commercial innovations were enabled by the speculative gains. In 1917, Birla Bros. became the first Indian owned Calcutta firm with its own export office for jute in London.

Speculative firms were successful as entreprenuers in the modern period.
Great firms, except Jatias and Singhanias, have receded relatively.
Banian firms, again except Jatias and Goenkas, have receded absolutely.