Indian Economic Development Explaining the colonial rule from 1863-1945.
It is very much clear that a general model of colonialism and underdevelopment cannot explain the variations in India’s growth trend during the colonial period from 1863 to 1947. However, there are three structural features that define the entire colonial period. Structural features which include the importance of natural resources and labour to economics growth and welfare. Land intensive agriculture, Labour -intensive handicrafts, and modern industry in natural resources, were the main livelihoods throughout this period and beyond. Global features which saw a more open Indian economy and the fact that India took part in the first globalisation of the 19th century, which saw a rapid integration of world economy in terms of commodity trade, capital flows, and labour migration. Due to the opening of Suez canal in 1867 India also witnessed the revolution in transport and communication, Railways and telegraph which were introduced in this phase. There were Colonial features suggesting India was a colony is evident from the large remittances that government of India paid to the government in Britain. Thus, development in India was not resultant of a single factor but can be summed as the culmination of various factors which shaped, in mutual interaction, the economic growth in the region.
Economic historians divide the period into two parts pre-war : from 1867 to 1920-5 and interwar : 1920-5 to 1947, moreover, they define National income in the periods as the following expression :
Gross Domestic Product or GDP + Net factor Income from Abroad +Taxes
To explain the growth trends, we move to the sectoral analysis. Indian economy can be divided into two parts, Agricultural sector and Non-agricultural sector. The agricultural sector was the mainstay of economic growth in the pre-war period, moreover, Agricultural stagnation was the main reason for declined growth in the interwar period. World demand for peasants exports was rising, and real agricultural income and the cultivated land area grew. Further, terms of trade between export, consisting of peasants goods sold abroad, and import, consisting mainly of mass consumption goods was increasing . It signifies the rise in external demand and its contribution to domestic income. During the pre-war period, Real agricultural income increased by 33 percent between 1870 and 1914. After 1925, world agricultural trade entered a crisis. Growth in Real Agricultural income fell from 33% to 3% between 1914-1944. Added to that, a resource crisis began to unfold within India. Further, the population growth rate, which was in the range of 0.5-0.8 percent during 1881-1921, exceeded and accelerated from 1 percent in 1920’s and afterwards. Before this demographic turning point, the agrarian turning point had been reached, cultivated land area stopped growing and became stagnant, so was the average product which resulted in declining per capita food availability. The culmination of these factors resulted in the ‘Rural Crisis’ after the ‘Great Depression’.
In the non-agricultural sector growth rates varied, and an acute crisis was missing. The index of production of modern Industries was increasing at a comfortable pace both before and after world war I. GDP in large scale industries increased at over 4 percent per year between 1900-47, whereas, small-scale industries grew at less than 1 percent. Within the tertiary sector, the contribution of government administration grew at over 2 percent per year. Industrialisation , the growth of the government, and of long distance trade was three powerful positive forces driving the non-agricultural sector.
Between 1900-47, the share of non-agricultural income was increasing. the extent was same in the first quarter of the century, and greater in the second quarter of the century. The employment shares of major sectors show no significant trend. Colonial India saw a marked intensification of poverty. Such an inference can be drawn from the fact that real wages of most types of unskilled and semi-skilled manual labour did not rise quickly or at all, even as the number of wages, such wage earners increased steadily. From a year or two after two depression, real wages in agriculture stagnated, and the stagnation continued for the next 30 years. The distance between average income and the poverty line which was defined at Rs.100 in 1875 (adjusted from 1973 scale) did not change significantly in the colonial period. poorest did not become poor contrary to that more people joined their ranks.
India witnessed globalisation during that period. Globalisation affected mainly in two ways. The price of manufacturers chiefly cloth, fell , inducing an extent of deindustrialization , whereas the demand for agricultural goods exported from India increased, accompanied by sustained upward pressure on agricultural prices. But, this does not explain the setting up of modern industries as all India had was abundant land, scarce capital and skilled labour needed to develop the modern industry. Product differentiation, and knowledge spillovers that integrated the factor markets. Product differentiation and consumer preference sustained demand for specific skills, including artisanal skills. Knowledge exchanges that India’s colonial connection facilitated, explains in large measure the growth of factories despite high cost of capital and skilled labour . In the interwar period, Growth process faced three new difficulties. First, agriculture experienced exhaustion of land and fall in external demand. Second, in modern industry, the colonial links weakened from 1920s. After the war, the British attention shifted to stabilise their own suffering economy and less attention was paid to the well-being, of colonies. Artisans became more inward looking in seeking material and market. Ironically, at the same time, domestic demand for consumers demand went down due to slowing of the agricultural sector. Third, Population was accelerating from 1920s.With agricultural growth struck at near-zero levels, the demographic transition put pressure upon the average product in agriculture, and in turn, upon real wage.
If we look at patterns of trade then we will come across four general features. First, Increasing openness and trade dependencies 19th century which was marked by the assumption of the political power by the British crown in 1858 and opening of Suez canal in 1869. It integrated India closely with the rest of the world. The growth of the tertiary sector consisting of trade, commerce, and finance reflected India’s openness. Second, initial specialization in agricultural export, between 1880 and 1925, the real volume of trade doubled. More than half of Indian export consisted of agricultural goods. Foreign trade as a ratio of national income increased significantly from late 19th century. Total foreign trade expressed as a ratio of national income increased from possibly less than 10% in 1860’s to about 20% in 1914. Export-to-income ratio as about 8-9%in 1900-39, with a drop around the time of the Great Depression. Third, gradual shift away from agriculture as industrialisation progressed. the composition of trade changed during the colonial period. If major exports are classified into three broad groups- peasants exports, semi-processed natural resources, and manufactured goods- then the pre-war period saw mainly a great burst of peasant exports. But in the interwar period, as industrial capability improved in a number of directions, manufactured exports increased. This tendency altered the composition of trade in favour of machinery and intermediate goods. Fourth, dependence non the Chinese and British markets was initially large, but declined in the pre-war period. In the interwar period, there was a drop in Britain’s share whereas increase in those of Japan, USA, Germany, and Italy. Intra-asian trade also boomed during this period with the emergence of modern cotton textile industry in Japan.
A sufficiently high proportion of investment is required in national income for sustained economic growth. The level of net capital formation and savings was around 2-4% in the 1st half of 20th century . Investments are financed partly form domestic savings in bank deposits and securities, and partly from foreign investment inflow. Indians saved a substantial form in Precious metals, in addition, smaller parts of saving went to abroad as purchases of government bonds in India. further , Net foreign private investment was small, well below 1% of national income. Reasons such as Climatic risk and price risk explain trends for translation of saving into unproductive investment. The low level of savings led to low level of investment in the agricultural sector. Rural credit market was completely monopolised by the money lenders. A different account of scarcity rests on public investment.
Expenditure in India and expenditure abroad were the two major expenditures by the government during British Raj . Paying for the pension of the retied servicemen in sterling, and interest on public debt raised in London were included in the later . The government could finance it’s expenditure by three means. The first was current revenues, in which 70-80% was raised in axes. Second was borrowing from abroad and third was borrowing from home. The government borrowed heavily to finance during the two world wars, which as generally met by issuing of securities in both denomination . Public investment was raised to finance the construction of railways whose share declined wth time, irrigation which received the lowest, and roads and building whose share increased over time. the capacity of state to raise funds depended on the balance of payments.
Net exports of goods and net inflow of foreign investment formed only 4% of national income. Outflows as Private remittances( 2.7%), government remittance (0.4%) and net purchase of gold and silver (1.3%) balanced the inflow. India received several types of capital flow, short-term and long-term. Short term flows were meant to meet the seasonal demands of export transaction that peaked during the harvest season. Long-term capital came in two forms, net private foreign investment and, net increase in public debt. Railways dominated the private investment in third quarter . Of all this the item of prominent notice was the part of government remittances as mentioned under ‘Home Charges’ followed by cost of maintaining the armies and marine forces. A third expense was named under pensions to its officials who retired from India. These payments by ‘Indian nationalists’ is refereed to as ‘Drain theory’ which diverted funds from home country thereby reducing the capacity by domestic economy to generate savings and investment. Home charges were financed from taxes, government’s own investment or foreign borrowing, all three measures were used. A major critique is given for the stabilisation policy followed by the Britishers, those policies were bereft any economic interest for them. High degree of instability on prices was inevitable for the agricultural products were dependent on monsoon which was unpredictable. Thus, an unpredictable monsoon would result in very similar foreign trade which in turn would cause the prices to increase i.e., inflation.
Prices were rising during 1875 due to expansion of trade for increase in export led to increase in prices. In the mid 1920s prices followed short term fluctuations and inflation was around 20-30%. Reasons as Price of agricultural produce, money supply, changes in demand for non-monetary gold aggravated the price rise. The Great Depression was experienced by India in following ways . First, demand for agricultural exports fell, and second, the prevailing currency system ensured deflation. falls in prices increased the real interests which further a indebted the households for liquidate their assets to repay loans. Real domestic product changed little during the peak of depression , 1929-33. the depression became a political watershed ensuring rural unrest over rent and wages.
In the orthodox leftist nationalist interpretation interpretation of colonial India, colonialism impaired the capacity of the economy to grow rapidly. Nationalists emphasise on ‘Drain Theory’ as the most important link between colonialism. But, it was this remittances which paved the way for the industrialisation and pave the way for modern industry in India. It is hard to characterise all the colonial period as ‘growth’ or ‘stagnant’. There were phases which saw expansion and some phases which saw the downward trend, even the sectoral analysis has varied results. Geographically, some regions saw more growth and some were stagnant. So, a general model of colonialism and underdevelopment cannot explain these variations. A better way would be to include the structural features into our analysis.
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