How British Rule Changed India’s Economy: The Paradox of the Raj

How did British colonial rule shape the economic development (or underdevelopment) of South Asia? My new book answers the question.

Those who wish to find an answer to this question have two choices. First, they can read books and articles that tell a story. The story is this: the British government extracted resources from India and insisted on foreign trade being free. The policy enriched Britain and impoverished India. Thus, colonialism reduced a rich region to poverty. The advocates of this narrative include a collection of Marxists, politicians like Shashi Tharoor who dabble in history, blog-writers, and economists seeking an explanation of world inequality.

Second, they can read books and articles the professional historians of India write, which are more reliably evidence-based than the former set and reject many of the claims the former set makes: for example, that India was once a prosperous land, or that the state extracted resources. But this scholarship does not suggest another paradigm. It goes deep into the working of the state and the economy, so deep that it loses its way in detail. Few of these works get noticed.

My new book steps in to meet the gap that the historians leave behind. It is evidence-based, and it tells a story. What story is that?

HBRCIE

The evidence tells us three things. First, the open economy the British Raj sponsored delivered two extraordinary benefits to the Indians: it stimulated business and reduced mortality rates. Second, the state’s fiscal capacity was too small for it to make a difference in any other way. And third, some of the most stressed peoples in the region – most peasants, lower castes, and women – did not become better-off in this time. They needed the state, but the state was not there for them. The story is that colonialism led to more inequality while it helped private enterprise grow. The book shows why the outcome of colonialism was such a paradoxical mixture of success and failure.

The story shows how difficult it is to sum up or represent India’s development trajectory in the colonial times with a benchmark like an average (per capita) income. Economists overlook the difficulty, behave as if the region’s experience can be represented by one average income dataset. The dataset shows that India fell behind the West in income growth, suggesting that we must all try to answer why Indian development was such a tragic case of falling behind the West. This is a non-problem, and a misreading of the region’s history. It fails to notice that Indian economic history is in fact marked by a very diverse pattern of change, extraordinary growth in business and extraordinary stagnation in agriculture and social development.

The article that changed my life

I was recently asked to discuss a piece of writing that “changed my life.” I am going to discuss an article that I read as a student and reread many times. It is not the best article I have read. It is quite speculative, and if submitted to a journal today, may not pass the referees. It is, however, one of the most cited articles in the economic history of India. I will explain why it is so influential.

The article is “Towards a reinterpretation of nineteenth-century Indian economic history.” It was published in the Journal of Economic History in 1963. The author was an American scholar named Morris David Morris. Before I talk about the article, let me talk a little about its author.

Morris (1921-2011) was a member of that generation of American social scientists who chose India as their main field of research and contributed to developing South Asian studies in the USA. His first major work was a history of the industrial workers in Bombay city, for which he did fieldwork in the 1950s. He lived in Bombay city long enough to know many of India’s business leaders of that time. These people owned textile mills, were rich for generations, some were educated in international schools, and were sponsors of colleges, hospitals, charities, associations, music, and theatre. Some of them were conservative in their private lives, but in their public life, were modern and outward-looking.

Socializing in this milieu, Morris understood that there was a capitalist India that was cosmopolitan, global, wealthy, modern and confident. Still, most Indians were poor. Why wasn’t all of India like Bombay? Why weren’t all Indians like Bombay’s business elite that he met? What made most Indians poor?

When Morris started to write, about 1960, there were two answers to this question. One of these answers had been developed by Morris’ colleagues in the North American sociology departments and later became known as the modernization school. They said that poor countries were poor because their societies lacked modernity, like capacity for hard work, working for material gain, individualism, and enterprise. These qualities had made western societies rich, the poorer societies needed to copy them to get richer. The second answer to the question came from the poorer countries themselves. Here, radical thinkers and activists said that poor societies became poor because the western countries had exploited them through trade and colonial rule.

Morris’ exposure in Bombay must have shown him that both answers were wrong. India’s business elite was as modern as anywhere. That they were sometimes traditionalist or religious in their private lives made no difference to the quality of their enterprise. And many of these families got rich by trading within the British Empire, so it cannot be true that trade and colonial rule made the Indians poor.

What then made the average Indian poor? Morris’ writings reflect a belief that there were two different Indias, one entrepreneurial, urban, cosmopolitan and dynamic, and another trapped in poverty. The 1963 article was an attempt to explain this dualism. He started by saying that India was backward or poor not because its society, or the British Empire, or nineteenth-century trade was at fault. These very forces still produced an industrial hub like Bombay. However, much of India was agricultural, and land did not produce enough value. Thus, there were two Indias.

When Morris published the essay in 1963, many established academics based in India reacted to it very critically, sometimes suggesting (as Tapan Raychaudhuri almost openly did) that Morris had a hidden purpose in writing the essay, that he wanted to show that British colonial rule in India was not so exploitative as the radicals had claimed. His paper was a disguised defence of colonialism.morris

But beyond such feral response, there was another more constructive one. Morris made his case with several informed conjectures. Many younger scholars felt that these conjectures needed to be tested with statistical data. For example, he said that nineteenth-century trade wasn’t such a bad thing for India after all. Was he right? We need national income data and trade data to test if he was. As a result of that enterprise, the first and most reliable set of national income for colonial India was produced.

Let me end with my encounter with this article. When I did my first course in economic history, Morris and his critics were essential reading. Marxist radicals and nationalists, the people who dismissed Morris, were our gurus. I was convinced that Morris was an evil apologist of British rule in India.

Like other students in my field in the 1980s, my doctoral dissertation tested one of Morris’ conjectures, that the nineteenth-century free trade did not have a universally destructive impact of India’s artisanal industry. When I finished my work, my findings supported Morris’ conjecture. This was a bit of a surprise. A few years after this I met him in the USA and found him to be a rather different kind of character from the way he was portrayed by Indian radical historians. Senior figures in the Indian history establishment of my student days were generally aggressive, bad-tempered, ideological, and bullied students. Unlike them, Morris was a warm-hearted fun-loving liberal with a sense of humour who did a lot of charity work in poor countries.

I re-read the article and found that its basic insight that India was a divided society was powerful if a speculative one. A great deal of my own later work confirmed this big picture of a society that was structurally unequal, and not one made unequal or backward by some outside force like trade and colonialism.

Why is India’s business history important?

business history book cover

In September last year, Professor Dwijendra Tripathi passed away. Until recently, he was the only business historian of India whose works were internationally recognized and respected. In the last twenty years, he produced as author or co-author a set of books, the Oxford History of Indian Business. The deep knowledge of the facts, love of the field, and a direct writing style, for which Tripathi was known, are in full display in these books.
I had interacted with Professor Tripathi closely in the 1990s, reviewed his books, visited his home, and admired him for his warm personality, scholarship, and his distance from ideological camps. On the last occasion we were in touch (7th July 2017), I emailed him the draft of a paper where there was a reference to Tripathi and Jumani in a mildly critical fashion, asking him if he would think that my criticism was unfair. He wrote: “Please go ahead with your paper; criticism is the life blood of scholarship.” Few Indian scholars I know of are so sporting.
With Tripathi’s benchmark books in existence, why write another book called business history of India? For that is what I did in 2018 (Cambridge University Press).

What is the idea of this new book?
This book is different because it asks two questions that I have not seen others ask before. The first question is, how does a study of history help us understand the resurgence of private enterprise in India in recent times? We can ask this question for all emerging economies, which have seen dramatic transformations led by private capital. What are the historical roots of this emergence? I will call this the emergence question and come back to it ahead.
The second question is this. In a Bengali essay from the 1980s, Ashin Dasgupta wrote, “the more I browse the history of the last 300 years, the more I believe that Indian business has certain Indian features.” Dasgupta was writing about the descendants of Akrur Datta, a Bengali merchant of the 18th century. If this is true, if capitalism – like human beings – have different personalities, we should ask, what is Indian about Indian capitalism?
When I was a student, we learnt a way to connect the present with the past, according to which India was a great place for business until the 18th century — a dark age unfolded when the British made money exploiting Indian resources, and Indians struggled to get a share of it — and after 1947, a new dawn broke out. Most professional historians do not believe in this epochal transition model, because its facts are mostly wrong. But what is the alternative model linking the present with the past?
Observe any emerging economy today, and what we should see are hubs of private enterprise that are wealthy, innovative, and institutionally advanced, against the backdrop of a poor countryside that is changing slowly, even regressing by some benchmarks. The past looked exactly like this. Hubs of dynamic, wealthy, innovative capitalists did business in the backdrop of a poor countryside. We find such hubs in the Mughal cities, in the 18th-century textile trade, in 19th-century port cities, and in the IT or garment clusters today. We can then connect the past with the present by asking, are these hubs similar or are they different? That is what the book does.
We see surprising parallels across time. The most dynamic business towns of the past and those in the present are cosmopolitan, outward-looking, globally-connected places. They traded with the world. Whether they exported textiles, or raw cotton, or software is a matter of detail. The people whom trade made rich had access to state-of-the-art knowledge and technology of their times and knew the value of such knowledge. As an example, without the rich Indian merchants of 19th-century selling cotton or indigo, you would not get the Presidency College of Calcutta (Kolkata) or the Elphinstone College of Bombay (Mumbai).
But this isn’t a happy story. Making money was a struggle against enormous odds. Interest rates were high, institutions were undeveloped, politics often unfriendly. Have these obstacles disappeared today? Hardly. Capital is still costly in India, all global metrics measuring institutional quality still place India towards the bottom of the list, and politics is still unpredictable. Why does capitalism work at all in an environment of expensive capital and dangers of expropriation by State agencies? The book answers, cosmopolitanism helped. And so did some very Indian resources, such as the idiom of caste or community, if only in some situations. These obstacles and the resources used to overcome them make Indian business history Indian.
This is my story.

Who am I writing it for?
Three types of audience: business historians, economic historians, and India-watchers.
Business history emerged in the US and until recently was North American in its choice of examples and theoretical frameworks. This is changing and there is a drive to include more emerging market examples. While the book was not written with that aim, it helps that project.
My own field, economic history, has been preoccupied with a different question. For us, the big question is, “why do some countries grow rich while others stay poor”? While the modern West forged ahead (from early-1800s), why did countries like India and China stagnate and fall behind? Writers like Daron Acemoglu and James Robinson call this one of the most important questions for social scientists. I am not sure of that, but certainly, the divergence has been the only game in town for some time.
I think this is a bad question to ask, for many reasons. Let me show only one reason here: The question prejudges India to be a basket case. Those who think this is the greatest question are forced to ignore and overlook the hubs of enterprise that I talked about above.
Business history does not judge. It does not carry the burden on its shoulder as economists do, that we must answer the greatest question in social science. It treats individual business decisions as context-bound, which is a more flexible approach to doing history.
My third intended reader is anyone interested in the historical roots of economic emergence. Many people try to answer the emergence question, and the answers can be odd. Around 2007, a team of 11 people published an article in the IIMA house journal about India’s emergence. The authors were top professionals, and like many thinking people, they felt compelled to say something about history. This is what they said. We should not be surprised that Indians are so good at buying and selling things, they have been doing that for centuries. Still, until now they failed in their historic mission to create a world-class capitalism thanks to “foreign invasions”. The authors wisely left the identity of the invaders open, you can write your favourite invader (Turks, Europeans, Mughals) in the blank space.
But this cannot be right. India has not had a foreign invasion in the last 70 years and still scores poorly on Ease of Doing Business index. Indeed, India has not been a cradle of capitalism, not now, not in the past. Doing business has always been a struggle to overcome obstacles. Economic history tends to exaggerate the obstacles. Business history shows the struggle as it was, and helps us understand the struggle today.
My book is about that endeavour.

The East India Company and India: Myths and real history

Popular history and serious history do not always tell the same story. The gap is big with the British East India Company. Popular history projects an image of the Company as the “bad foreigners” who enriched themselves at the expense of the “good locals”, that is ordinary Indians who lost wealth, status, and dignity.

In Britain especially, many people believe that holding anti-Western sentiment makes them morally superior and use trashy readings of Indian history to support their biases. The Company serves that sentiment.

Answering seven questions, I set the record straight.

Was the Company a political entity?

The East India Company is often described as a political or military outfit that set out to plunder India and subjugate its people. In fact, for the first 160-170 years of its existence (the Company started in 1600, and effectively ended in 1858), it was a business firm with no power to loot. If anything, it was often bullied by Indian kings, who did not go too far because the Company was a strong power in the seas.

rowlandson1808max[1]
Tea auction at India House, London, c 1800 (source columbia.edu)
 

Did Indians lose from the Company’s operations?

Their vast trading operation could never have survived without the collaboration and partnership of thousands of Indian merchants, agents, artisans, bankers, and transporters. The Company was the biggest business firm in the world of its time, and therefore, made many Indians fabulously rich. Some of the most famous entrepreneurs and business families of nineteenth-century India made their money trading with the Company or with European merchants. Palatial homes in the north of Calcutta attest to that wealth. These profits were much larger in scale than the profits the Company sent back to England.

rajbari-2[1]
Raja Nabakrishna Deb’s home in north Calcutta (source: aamarcity.com)
 

Did the Company cause an economic decline in India?

Claims that the Company presided over a period of national economic decline are spurious. My economic historian colleagues (Read Broadberry-Custodis-Gupta in Explorations in Economic History, 2015) have analysed India’s income and found that it fell sharply between 1600 and 1750, when Indians ruled, stabilized and started rising after 1810 when the British had consolidated their rule.

Was the Company state the bad foreign rule?

In the 1770s, few Indians would even have seen this as a ‘foreign rule’. When the Company started sharing power in Bengal, there was no such thing as an Indian nation or Indian citizens, as the country existed as a set of kingdoms. Bengal, where Company rule began, was ruled by a Nawab who spoke Persian, not Bengali. The most powerful of these kingdoms were embroiled in near-constant warfare, which worried wealthy Indian merchants. Many saw the East India Company as their benign force and plotted with them to overthrow the state and install the Company as the ruler of Bengal.

Did Indians resent Company rule?

At the time, Indians themselves had mixed feelings about the East India Company – and many viewed their rule as the least bad option. Prior to the Company’s takeover around 1757-65, the strongest military power in India belonged to the Maratha Empire. Just before Company takeover, Maratha forces invaded Bengal, killed and robbed merchants, destroyed crops, and raped women. Merchants fled from this horror to Calcutta, then under the Company’s possession. One of the biggest roads in the city today was built over a huge barrier created in defence of the city from the Marathas, called Maratha Ditch, later renamed Circular Road.

Certainly, the average Bengali or Marwari merchant of that time would have felt positively about the Company. Similar sentiment prevailed among the Parsis of Bombay and Surat, and the Telugu and Tamil merchants of Madras. The most influential Indians in the port cities like Calcutta, Bombay, and Madras actively welcomed Company’s rule over Indian ones. Of course, merchants gained an economic advantage. But many contemporary intellectuals and reformers supported Company rule, believing that it would bring the best elements of European and Indian cultures closer to each other.

One, Rammohun Roy of Calcutta – described as the ‘first modern Bengali’ – was inspired by the great works of scholarship on Indian language, law, literature, geography, and botany produced by Europeans in East India employ. The Company’s own law courts used Sanskrit and Persian law books. Wealthy and influential Indians who supported the Company pooled money to set up colleges that taught students following western curricula. Without the Company rule, Bombay’s Elphinstone College and Calcutta’s Presidency College, two of India’s best institutions, would not exist.

Rammohun Roy
Ram Mohun Roy (1772-1833)

 

Did the Company leave a destructive legacy in India?

By the time of independence in 1947, the port cities of India and Pakistan were home to some of the best schools, colleges, hospitals, universities, banks, insurance companies, and learned societies available outside the western world. A big part of that infrastructure was created by the Indians, with help from the state and with European manpower to run them. These developments had their origin in the East India Company’s rule.

eic
Fort St George from the sea

 

What is the ‘right’ history?

Well, we cannot generalize. Some Indians gained and some lost out. Those who gained did not just gain in money. Many felt they gained because the Company and its port cities in India represented a cosmopolitan culture. Some felt freer because the interior of India was steeped in religion, feudal loyalty, and a murderously brutal caste system. Their reasons are varied and diverse. One thing is for certain – branding Indians who lived under East India Company rule as ‘victims’ is just as reductive as portraying every foot soldier of the Company as a bloodthirsty oppress

The South Asian miracle: Why did it happen? Is it sustainable?

South Asia contains five large countries (India, Pakistan, Bangladesh, Nepal, and Sri Lanka) and several smaller ones. Together, the region contains a sixth of the world’s population. its share in world income is smaller (less than five per cent), but increasing fast, thanks to an average growth rate that is almost double that of the world average.
Its size is not the most interesting feature of the recent economic history of South Asia. The more interesting feature is a dramatic reversal in its economic performance that took place around 1980-85. Between 1947-48, when British colonial rule ended in the region, and 1980-85, South Asia saw slow economic growth, followed by rapid economic growth. Alongside, there was another reversal, from a belief that nation states should manage and lead the process of economic development to a loss of that belief. Why was there a reversal? What, if anything, had the nation states to do with it?
Experts on India explain the turnaround by choices made by the political classes or economists. Such people, they say, decided to enlarge the states in the 1950s by collecting more money through taxes, aid and debt, and used the money to achieve state-led industrialization and redistribution to the poor. At the same time, they underestimated the power of the market and private enterprise to achieve investment and economic growth. Realizing this error, they took steps to reduce state intervention and increased the role of the market, and the miracle followed. The story differs in detail, but most country-specific accounts tend to be state-centric in this fashion.
There are two problems with a state-centric explanation. Politicians and their economic advisers differed a lot between the South Asian countries, and yet all experienced the reversal. Besides, there is no direct evidence to suggest that politicians had a change of heart around 1980-85. It is no more than a guess that they had.

I offer an alternative view in The Economy of South Asia: From 1950 to the Present (Palgrave Studies in Economic History, 2017). The alternative view is that the world economic conditions in which these countries functioned changed for the better around 1980-85. Politicians and economists in the region were always weaker than they imagined them to be. Even as national governments grew bigger and more interventionist, they still needed to buy technology and skills from the world. During the British colonialist era, South Asia exported agricultural commodities and purchased skills and knowhow from abroad with the proceeds. After 1947, this balance was upset. The shared enthusiasm for state-intervention and industrialization undermined the power of foreign trade and the export capacity of the region.

978-3-319-54720-6[1]

The regimes after 1947-48, therefore, became more exposed to foreign exchange crises, and found it difficult to sustain state intervention. They responded by erecting even stricter control on foreign trade. The two oil shocks of 1973 and 1979 made conditions worse. Paradoxically, it was oil that saved South Asia. From the late-1970s, the region led the world in exporting the millions of wage-workers needed by the expanding Persian Gulf states. The remittances that followed made the politicians in the region willing to relax controls of foreign trade and allow import of technologies. The South Asian miracle began.

From the 1980s, China and South Asia both re-joined globalization offering a new basket of export articles, while buying technology with export earnings. There was a difference between the two regions, China’s basket contained more industrial goods, South Asia’s contained more services (Bangladesh is a partial exception). Still, the two regions had a common history. Both China and South Asia had, in their zeal for state-led development in the 1950s, 1960s and 1970s, neglected the power of trade. They exported less than before, and yet needed technology more than before. Both successfully reset the relationship between the regional economy and the world economy.
What promises does the South Asian miracle hold for the future of the region, and the future of the world? Given the huge size of the population of South Asia, a growth turnaround has tremendous positive potential for the people who live here. It also sends out strong vibes throughout the world economy.
But is it sustainable? Economically, yes, it is sustainable. Every emerging economy needs to perform a macroeconomic balancing act, export enough to buy knowledge and skills from abroad. South Asian countries managed this well, by exporting of services (like people, and software) and labour-intensive goods (like clothing) to import technology and skills. By getting this act right, they gave the miracle a stability.
Politically, the scenario is less certain. Any market-led economic growth is likely to be unequal, it favours those with goods and skills the world market demands. Those livelihoods which do not trade much suffer. In the region, agriculture is in a crisis, environment is under severe pressure, many remote regions have not seen much growth, poverty persists, gender inequality takes extreme forms because women still struggle to gain a share of the benefits, and often take enormous risk and trouble to work away from home. Discontents are rife and should temper any celebratory view that we may take about the miracle.

Tirthankar Roy
Professor of Economic History
London School of Economics and Political Science