The Economics of British Colonialism in India
Without carefully analyzing data media outlets continue to endorse the narrative that Britain’s policies drained India of resources and culminated in deindustrialization. Colonialism is a contentious subject and perceptions are shaped by visceral emotions, and hence dispassionate analyses are required to arrive at a logical conclusion. For conclusions to be fruitful, we must desist from entertaining romantic notions about colonialism by admitting that colonialism is an extractive system and it is rarely the goal of colonial powers to develop local economies.
Even if colonialism produces favorable social outcomes, this is merely an indirect effect and not a testament to the benevolence of colonialists. Secondly, it’s always a plus to survey economic data on precolonial India before presenting the conclusion that British colonialism retarded growth. Unappreciated in the debate on colonialism is that the state is naturally extractive and prior to the ascendance of Western colonialism, conquered regions were already under the aegis of autocratic states.
Before the establishment of British rule in India, the Mughal Empire was the predominant player on the subcontinent, and to fund military exploits taxes were levied on the working population—although the spoils of war were appropriated by elites. It’s quite obvious that the Mughal Empire suppressed the potential for growth by extracting resources from working people to finance military expenditures. Failure to apply similar standards to judge the Mughal Empire prevents the debate from evolving beyond gimmickry.
Critics of the British Empire can’t possibly expect to be taken seriously, when they argue that the British drained India of resources by using local taxes to compensate English bureaucrats but suddenly forget that Mughals also excelled at raiding the working population to advance political projects. Concerning the policy of extraction during the Mughal era, Irfan Habib suggests that peasants were under immense pressure:
The imposition of the land tax (usually called mal in Mughal times) remoulded the relations of the peasant with his superiors…. True, says a fourteenth century document, the peasants are “free born” (hurr-asl), but their obligation to pay tax requires that they be bound to the villages where they have been cultivating the soil. The right of the authorities to force the peasants to cultivate the land, restrain them from leaving it, and bring them back if they did so, is also asserted on various occasions during the Mughal period. Finally, if the peasants failed to pay the tax, they would become subject to raids and enslavement by the king’s troops.
Yet noting that both the Mughal and British Empires were exploitative fails to invalidate the assumption that Britain drained resources from India’s economy. Defenders of the British Empire are mistaken in thinking that exposing the hypocrisy of critics refutes their arguments, when it has only made these positions less tenable. To debunk their theories, we would have to grapple with rigorous data claiming to confirm the drain theory.
According to a widely circulated study by Utsa Patnaik, from 1765–1938, Britain drained India of approximately $45 trillion. The key point of Patnaik’s paper is that after 1765, instead of using precious metals from Britain to acquire Indian goods, the East India Company instead taxed the Indians and then used that revenue to purchase goods from the Indians for British consumption. Of course, the British employed this tactic to increase savings at home—but this finding offers no credibility to the drain theory. However, it has received validation in academic quarters, with Jason Hickel even stating that the British benefited from free goods, since taxes imposed on Indians were used to purchase these goods: “Instead of paying for Indian goods out of their own pocket, British traders acquired them for free, ‘buying’ from peasants and weavers using money that had just been taken from them.”
Now, we get Hickel’s point that Britain would have accrued substantial savings by using tax revenues to pay for the goods instead of silver. Yet missing from Hickel’s observation is a broader appreciation of how governments operate. Being a parasitic entity, the state derives income via extractive tools—such as taxes and tariffs. Hence, Hickel’s analogy is applicable to public spending—we only benefit from public projects because of coercion to pay taxes. It’s immaterial that Indian imports were bought with local taxes because this is how governments normally behave.
Hickel is on firmer footing when he upbraids the British for shortchanging Indian traders by centralizing payments:
After the British Raj took over in 1858, colonisers added a special new twist to the tax-and-buy system…. Basically, anyone who wanted to buy goods from India would do so using special Council Bills—a unique paper currency issued only by the British Crown. And the only way to get those bills was to buy them from London with gold or silver. So, traders would pay London in gold to get the bills, and then use the bills to pay Indian producers. When Indians cashed the bills in at the local colonial office, they were “paid” in rupees out of tax revenues—money that had just been collected from them.
Surely, this unsavory act would have depreciated the value of local savings. Gold and silver are valuable commodities and hence are better suited to hedge against risks. Despite the negative impact on Indian traders, the degree to which this policy had a considerable impact on the living standards of Indians remains debatable. Moreover, the British built the Indian civil service, railways, and introduced modern technologies, so even though locals were taxed to provide these luxuries, if the benefits outweigh the cost of taxation, can we still argue that the British drained India?
Furthermore, in assessing the economic policies of the British Empire Niall Ferguson rebuffs the drain theory, citing Tirthankar Roy: “Roy … casts doubt on the idea that taxation under the British was excessive, showing that the land tax burden fell from around 10 per cent of net output in 1850s to 5 per cent by 1930s. The supposed ‘drain’ of capital from India to Britain turns out to have been comparatively modest: only ‘about 0.9 to 1.3 per cent of Indian national income from 1868 to the 1930s’, according to one estimate of the export surplus.”
On the other hand, that India encountered deindustrialization during colonialism is uncontroversial. Therefore, scholars are more interested in uncovering the causes of deindustrialization. To contextualize the issue, David Clingingsmith and Jeffrey G. Williamson in a 2005 paper showed that India experienced deindustrialization in two periods—1760–1810 and 1810–60. For the former, deindustrialization was an outcome of the dissolution of the Mughal Empire. The collapse of the Mughal Empire and deteriorating climatic conditions, created aggregate supply-side problems which eventually led to the erosion of India’s advantage in manufacturing. Clingingsmith and Williamson wrote:
As central authority waned, revenue farming expanded, the rent burden increased, warfare raised the price of agricultural inputs, and regional trade within the subcontinent declined, all serving to drive down the productivity of foodgrain agriculture. Grain prices rose, and given that ordinary workers lived near subsistence, the nominal wage rose as well. As a consequence, the own-wage in Indian textile manufactures increased, hurting India’s competitiveness in the export market.
During the second wave, deindustrialization occurred because the global incorporation of the factory system lowered the relative price of textiles, rendering production in India uneconomical. Nevertheless, the forces of globalization resulted in some positive outcomes. Globalization entails the decline of old industries and the creation of new ones, and this process unfolded in India, according to Bishnupriya Gupta. New industries emerged as a result of British investment in sectors like tea and jute and also due to the responsiveness of Indian entrepreneurs, who retooled their businesses and adopted European technology. And contrary to the deindustrialization theory, studies indicate that though employment in the manufacturing industry among men dropped from 9.1 percent to 8.4 percent in the epoch 1911–31, manufacturing increased as a share of the total output and on a per capita basis.
British rule in colonial India was indeed imperfect; however, the current debate is highly political, and as such ideas emanating from all sides must be scrutinized before writers decide to advertise them as incontrovertible facts.