British Economic Policies

Commercial Policy

The Phase Before 1757 – Mutual Gain

Between 1600 and 1757, the East India Company (EIC) was simply a trading corporation, not a ruling power.

• It brought precious metals (bullion) into India and exchanged them for high-quality Indian goods like cotton textiles, silk, indigo, and spices.
• These Indian goods were then exported to Europe and other parts of the world, earning the Company enormous profits.

👉 For Indian rulers, this arrangement was acceptable—even beneficial—because:

1. It encouraged the production of Indian handicrafts, especially textiles.
2. It increased exports and brought in foreign wealth.
3. The Company did not yet interfere in governance, so rulers tolerated and even welcomed its factories (trading posts).

But there was a problem back in England.

• Indian textiles—renowned for their fine quality and cheaper prices—became extremely popular in Britain.
• This created jealousy among British textile manufacturers, who feared for their survival.

So, from the early 18th century, heavy restrictions were imposed:

• 1720 laws in England prohibited the use of printed/dyed Indian cotton cloth.
• Heavy import duties were placed even on plain cloth.
• Similar restrictions were adopted across Europe (except Holland).

Despite this protectionism, Indian textiles remained competitive in world markets till the mid-18th century.

The Turning Point: After 1757 (Battle of Plassey)

Now comes a qualitative change.

• In 1757, the Company became a territorial power.
• By 1765, with the Diwani of Bengal, it gained control over Bengal’s revenues.

👉 This meant the Company no longer had to bring bullion from outside to buy Indian goods. Instead, it used Indian peasants’ taxes (revenue from Bengal) to buy goods cheaply for export.

Ideally, this should have boosted Indian industry. But instead, the opposite happened because of the Industrial Revolution in Britain.

• With modern machines, the factory system, and capitalist growth, British industries could mass-produce cheap goods.
• To safeguard these new industries, the British administration in India began deliberately suppressing Indian manufacturers.

Some coercive measures:

• Weavers in Bengal were forced to sell cloth at dictated low prices and buy raw cotton at artificially high rates.
• They were compelled to work for the Company at low wages, and prohibited from working for Indian traders.
• Result: Large-scale ruin of artisans and craftsmen, many of whom abandoned their professions.

An infamous example:

• In 1769, the EIC’s Court of Directors even ordered Bengal’s government to discourage silk manufacture, forcing workers into Company factories and eliminating competition for British silk manufacturers.

Thus, from being exporters of luxury handicrafts, Indian artisans began to face systematic destruction.

Policy After 1813 – Industrial Interests Dominate

By the early 19th century, a new class of powerful British industrialists had emerged.

• Their profits came not from trade, but from manufacturing machine-made goods.
• They wanted India as a market for their finished products and a source of raw materials (like cotton, indigo, silk).

So, they campaigned vigorously against the Company’s trade monopoly. Finally, in 1813, the Company lost this monopoly, and Indian markets were thrown open to all British manufacturers.

Consequences:

1. One-way free trade policy was imposed:
   • Imports into India (British goods) were allowed duty-free or with nominal tariffs.
   • Indian exports (especially textiles) faced heavy import duties in Britain and Europe.
2. Indian handicrafts collapsed under the flood of cheap machine-made imports.
3. India was gradually turned into:
   • A supplier of raw materials (cotton, silk, indigo, tea, food grains).
   • A consumer of British goods.

To expand this market further, the British followed policies such as:

• Conquest of new territories (e.g., annexation of Awadh).
• “Modernisation” to create demand for Western products.
• Even proposals to reduce land revenue, so that peasants might have more disposable income to purchase imported goods.

👉 In short, India was converted into an economic colony of industrial England.

Summing Up the Story

• Pre-1757: India was a manufacturing hub; British trade boosted production and exports.
• 1757–1813: With political control, Britain drained Indian revenues and destroyed handicrafts.
• Post-1813: Industrial Britain dominated policy—India was made a raw material supplier and market for British machine-made goods.

Thus, British commercial policy was never neutral—it was a deliberate economic strategy to serve the needs of English industries, achieved at the cost of India’s flourishing handicrafts and economic self-reliance.

👉 This explanation gives us a clear thematic arc:

• From mutual trade → to exploitation under Company rule → to systematic deindustrialisation under industrial capitalism.

Excellent, now let’s continue to the next part of the story—this time focusing on the process of Deindustrialisation in India.

Deindustrialisation in India

Why Did Britain Industrialise Rapidly?

From the late 18th century onwards, Britain underwent the Industrial Revolution—a period of rapid technological and economic transformation. Several factors were at play:

1. Capital Accumulation
   • Huge wealth was extracted through colonial exploitation:
     • From India (post-Plassey plunder, revenues of Bengal).
     • From Africa, the West Indies, and Latin America (slave trade, plantations, gold/silver mines).
   • This capital was reinvested into machinery, factories, and trade networks.
2. Colonial Markets
   • Colonies provided cheap raw materials (cotton, indigo, sugar, minerals).
   • At the same time, they were turned into captive markets for British machine-made goods.
3. Increased Production Efficiency
   • With the factory system and modern machines, Britain could produce at unprecedented speed and scale.
4. Population Growth
   • More people meant:
     • A larger workforce for industries.
     • A bigger domestic market for goods.
5. Government Support
   • The British state actively supported industrialists by shaping policies (e.g., tariffs, trade monopolies, infrastructure projects).
   • This alignment of political power with commercial interests created a strong industrial base.

The Industrial Revolution & Key Inventions

Industrialisation was powered by technological breakthroughs that transformed production:

Invention	Inventor	Contribution
Water Frame	Richard Arkwright	Revolutionised spinning with water-powered machines.
Spinning Jenny	James Hargreaves	Allowed one worker to spin multiple spindles → massive productivity jump.
Flying Shuttle	John Kay	Increased weaving efficiency; cloth production soared.
Steam Engine	James Watt	Provided cheap, reliable power → factories no longer limited to riversides.

👉 Important nuance: The Industrial Revolution was not caused by inventions alone. Rather, it was the capitalist drive for profits and markets that created the demand for inventions. Manufacturers invested heavily in innovation to expand production.

Broader Impact of Industrialisation

• It led to the rise of modern economies in Britain, Europe, USA, Japan, etc.
• By early 19th century, global inequality was still small. But because countries like India did not industrialise, while Britain did, the income gap widened enormously.
• This is why advanced economies today owe much of their early lead to this phase.

Deindustrialisation in India

Now, let us shift to the Indian side of the story.

(a) Trade Reversal

• Before the Industrial Revolution, India was a leading exporter of textiles, steel, ships, handicrafts.
• After industrialisation, Britain turned India into:
  • An importer of British manufactured goods,
  • An exporter of raw materials.

(b) Government Policy

• The British government in India deliberately pursued policies to expand markets for British goods while restricting Indian industries.
• Result: No modern machine-based industries were allowed to develop in India.

(c) Destruction of Traditional Industries

1. Textile Industry
   • Once the pride of India (Muslin of Bengal, Chintz of Gujarat), it was systematically destroyed through:
     • Heavy import duties on Indian textiles in Britain.
     • Flooding of Indian markets with cheap Manchester goods.
   • Weavers and artisans were ruined.
2. Shipbuilding Industry
   • Indian shipyards in Surat, Malabar, Bengal, Masulipatnam were world-renowned.
   • Britain deliberately crushed this industry:
     • 1813 law: Ships under 350 tonnes could not ply Indo-British trade routes → Bengal-built ships were sidelined.
     • 1814 law: Indian ships denied recognition as “British-registered vessels” → barred from trading with America and Europe.
   • Outcome: Indian shipping declined rapidly.
3. Steel Industry
   • India had an ancient tradition of high-quality steel (e.g., Wootz steel).
   • The British restricted Indian steel imports to protect their own iron and steel industries.
   • No effort was made to modernise or industrialise steel in India.

👉 In short, India experienced deindustrialisation—a decline of traditional crafts and industries—due to deliberate British policies.

Summing Up

• Britain industrialised because it had capital, colonies, inventions, and state support.
• India deindustrialised because British policies suppressed local industries and transformed India into:
  • A supplier of raw materials (cotton, silk, indigo, jute, food grains),
  • A captive consumer of British goods.

Thus, while Britain rose as the “workshop of the world”, India, once a leading manufacturer, was reduced to being its economic colony.

👉 For exam prep, the key takeaway is the contrast:

• Industrialisation of Britain and Deindustrialisation of India were two sides of the same coin. Britain’s rise was directly linked to India’s economic decline.

Perfect, now we are moving into the third dimension of British economic policies—the idea of the Drain of Wealth. This was not just an economic fact but also a rallying point for Indian nationalism. Let’s try to understand this.

Drain of Wealth

How Was the British Conquest Different?

Unlike earlier conquests (Turks, Afghans, Mughals), the British conquest had two unique features:

1. Disruption of the village economy – India’s largely self-sufficient rural economy was dismantled.
2. Drain of Wealth – India’s resources were systematically exported to Britain without equivalent return.

👉 Earlier rulers, even if oppressive, spent the collected revenue within India—on wars, palaces, temples, canals, forts, or luxuries. These expenditures still circulated money, generated employment, and indirectly benefited Indian artisans and traders.

👉 The Mughals, for example, made India their home. But the British remained outsiders—extracting wealth and transferring it abroad, without reinvesting.

What Was the “Drain of Wealth”?

• It referred to a continuous outflow of wealth from India to Britain with no proportionate economic or material return.
• This made British colonialism unique: revenue was not recycled inside the colony but siphoned out to develop Britain.

Major Components of the Drain:

1. Salaries, pensions, and allowances of British officials in India, remitted back home.
2. “Investments” of the Company – after the Diwani of Bengal (1765), Company used Bengal’s revenues to buy Indian goods for export. This was called “investment,” but it was really revenue drain.
3. Profits on foreign investment in India.
4. Interest on loans taken by the Indian government from abroad.
5. Payments for shipping, banking, insurance, all handled by European companies.

👉 By the end of the 18th century, this drain was about 9% of India’s national income.
👉 By the end of the 19th century, it was around 6% of national income, still a staggering figure for such a vast country.

Visible vs. Invisible Drain

Visible Drain (18th century)	Invisible Drain (19th century onwards)
Direct tribute after Battle of Plassey.	Salaries and allowances of British officials.
Gifts and bribes from Indian rulers.	Pensions and savings of retired officials.
Profits from unfair trade using Dastaks.	Secretary of State’s salary in London.
Private fortunes of Company employees.	Interest on foreign loans.
	Profits on British investments in India.
	Payments for shipping, banking, insurance.

Thus, what began as plunder in the 18th century turned into a systematic, institutionalised siphoning by the 19th century.

Nationalist Critique of Drain of Wealth

The Drain Theory became one of the most powerful weapons of early Indian nationalism.

• Dadabhai Naoroji
  • Book: Poverty and Un-British Rule in India (1901).
  • Argued that India’s poverty was caused by this drain of resources.
  • Explained how salaries, pensions, troop payments, and profits of British companies impoverished India.
• Other Critics:
  • R.C. Dutt – Economic History of India
  • G. Subramania Iyer – Some Economic Aspects of British Rule in India
  • Prithwis Chandra Ray – The Poverty Problem in India
  • M.G. Ranade – Essays on Indian Economics
  • William Digby – Prosperous British India (sarcastically exposing the misery behind “prosperity”).
• Maharashtrian Forerunners (1840s, even before Naoroji):
  • Bhaskar Pandurang Tarkhadkar, Govind Vitthal Kunte (Bhau Mahajan), Ramkrishna Vishwanath.
  • Criticised British policies for:
    • Destroying handicrafts.
    • No-tariff (free trade) policy.
    • Hindering modern industry in India.
    • Waging wars funded by Indian revenues.
  • Ramkrishna Vishwanath’s Marathi book (1843): Thoughts on India’s Past, Its Present Condition, and Their Impact on the Future – first systematic critique of the drain.

Impact of the Drain

1. Stagnation of Indian Industry
   • India lacked savings and capital formation because surplus wealth was constantly siphoned abroad.
   • This slowed industrial growth and kept India trapped in agrarian backwardness.
2. Britain’s Benefit
   • The drained wealth financed Britain’s industrial growth.
   • India’s poverty was the flip side of Britain’s prosperity.
3. Cycle of Loss
   • Sometimes the money returned to India as loans, but this only deepened dependence, since repayment again went out of India with interest.

👉 Hence, the drain not only pauperised India but also entrenched colonial dependency.

Why Was the Theory Politically Important?

• The drain was the simplest way to explain exploitation to ordinary Indians.
• Peasants and workers could easily grasp: “Our money is being taken away to England.”
• It became a rallying point for nationalists, making economic critique the backbone of early political awakening in India.

Books & Thinkers to Remember

Book	Author
Thoughts on India’s Past, Its Present Condition, and Their Impact on the Future	Ramkrishna Vishwanath (1843)
Poverty and Un-British Rule in India	Dadabhai Naoroji
The Economic History of India	R.C. Dutt
Some Economic Aspects of British Rule in India	G. Subramania Iyer
Essays on Indian Economics	M.G. Ranade
The Poverty Problem in India	Prithwis Chandra Ray

Later historians like Jadunath Sarkar, Irfan Habib, Tirthankar Roy, Bipin Chandra deepened the analysis of the colonial economy.

The Big Picture

• Earlier conquests extracted wealth but circulated it inside India.
• British conquest was different—it created a colonial economy where wealth was drained systematically.
• This economic drain laid the intellectual foundation of Indian nationalism, as leaders like Naoroji, Ranade, and Dutt used it to expose the “un-British” nature of British rule.

Wonderful. Now we are at another very crucial theme of British economic policies—the development of transport and communication in India.

At first glance, this looks like “modernisation,” but as we peel back the layers, we’ll see that the motives were colonial rather than developmental. Let’s try to understand this:

Development of Means of Transport and Communication

Transport in India Before the British

• Until the mid-19th century, India’s transport system was very primitive.
• Movement of goods relied mainly on:
  • Bullock carts,
  • Camels,
  • Packhorses.
• For a vast country with rich internal trade, this meant slow, expensive, and inefficient transport.

The British realised early on that a cheap and efficient transport system was vital if:

1. British manufacturers wanted to penetrate India’s interiors with their products.
2. Raw materials from India had to be exported quickly to British factories.

Thus, the introduction of roads, railways, steamships, and telegraphs was less about Indian progress and more about imperial profit and control.

The Railways – “Steel Arteries of Empire”

Early Push

• In Britain, George Stephenson’s railway engine (1814) sparked a railway boom by the 1830s.
• British manufacturers soon demanded similar development in India to open markets and speed up raw material exports.

Dalhousie’s Role

• Lord Dalhousie (1848–56) was the strongest advocate of railways in India.
• He planned four major trunk lines to:
  • Connect interior regions with major ports,
  • Link different parts of India for easier troop movement.
• The first railway in India ran from Bombay to Thane in 1853.

Real Objectives of Railway Development

The colonial motives can be summarised as:

1. Economic motives:
   • Facilitate export of raw materials and foodstuffs.
   • Expand the market for British machine-made goods.
   • Provide a guaranteed market for British capital goods (rails, engines, wagons, etc.).
2. Political and military motives:
   • Quick mobilisation of troops in case of internal revolts (like 1857) or external threats (like Russia in Central Asia).
3. Financial motives:
   • Offer safe investment opportunities for surplus British capital (with guaranteed profits).

Railway Economics – Private Profit at Indian Cost

1. Capital Source
   • Almost all railway capital (over ₹350 crore in the first 50 years) came from British investors.
   • Indian contribution was negligible.
2. Guaranteed Returns
   • The Indian Government guaranteed a minimum 5% return on investments of private railway companies.
   • This was far higher than Britain’s domestic interest rates (3%).
   • Thus, even when railways were not profitable, British investors faced no losses.
3. Burden on Indians
   • The cost of this guarantee came from Indian taxes.
   • Land was leased at cheap rates to railway companies.
   • All risks were borne by Indians, while profits went to Britain.

This is why Indian historians often call it a system of “private enterprise at public risk.”

Roads and Shipping

• Roads like the Grand Trunk Road (Calcutta to Delhi, begun 1839, completed 1850s) were upgraded, mainly to connect military garrisons and facilitate trade.
• Steamships were introduced on rivers for quicker internal transport.

The Postal System – “Half an Anna Revolution”

• Lord Dalhousie reformed the postal system.
• Earlier, postage was based on distance—sometimes as costly as four days’ wages of a skilled Indian worker just to send one letter.
• Dalhousie introduced uniform postal rates: half an anna per letter, regardless of distance.
• Postage stamps were introduced.
  👉 This created an efficient, cheap, and uniform communication network, though again primarily serving administrative and commercial needs of the Raj.

Telegraph – The Nerve System of Empire

• Dr William O’Shaughnessy, a Public Works Department officer, pioneered electric telegraph experiments.
  • First line: Calcutta → Diamond Harbour (1850–51).
  • First major line: Calcutta → Agra (1853).

Expansion of the Network

• 1858: First India–Ceylon cable.
• 1865: Indo-European telegraph line established.
• 1873: Duplex telegraph (two-way simultaneous communication) between Bombay and Calcutta.

👉 The telegraph was not for the masses—it was a strategic tool for quick communication between British officials, army garrisons, and commercial hubs.

The Larger Picture

At first glance, railways, posts, and telegraphs look like gifts of modernisation. And indeed, they did bring lasting benefits (railways unified India territorially, postal system created mass communication, telegraphs shrank distances).

But in the colonial context, their primary function was to:

• Strengthen British economic exploitation (markets, raw materials, investment opportunities).
• Enhance political and military control over India.

👉 Thus, while Indians eventually benefitted from these systems, their origins were rooted in colonial interests, not Indian welfare.

Quick Timeline Recap for Exams

• 1839–1850s: Grand Trunk Road (Calcutta–Delhi).
• 1850–51: First telegraph line (Calcutta–Diamond Harbour).
• 1853: First railway (Bombay–Thane); first telegraph Calcutta–Agra.
• 1858: India–Ceylon telegraph cable.
• 1865: Indo-European telegraph line.
• 1869: Government starts building railways directly.
• 1873: Duplex telegraph (Bombay–Calcutta).

👉 For UPSC answers, the key phrase to remember is:

“Railways, Posts, and Telegraphs were not instruments of Indian development, but instruments of British control and exploitation—though they inadvertently sowed seeds of Indian modernisation.”