In order to have a better understanding on the present scenario it is necessary to maintain basic understanding, of the past. This general rule is applicable for the study of Indian economy too. A student of Indian economy should maintain knowledge about some fundamental factors of Indian economy which helped in shaping the present Indian economy. To understand the present Indian economy and to assess its future prospects we should begin from the past. We will attempt to get a bird’s eye-view On India’s economic past as we try to learn about the present state and future prospects. Let us start our discussion with the nature of Indian economy during the British period.

Indian Economy at the Eve of Independence

The British rule that started in India with the conquest of Plassy in 1757, lasted for about 200 years. It came to an end on 15th August 1947. When the British rule had begun in India, Indian economy was in good position. Her wealth and prosperity attracted many invaders to the Country. Indian economy was an industrial economy by the standards of those days.

As a result of the colonial rule, Indian economy became a crippled, backward and unbalanced one. The main purpose of British colonial rule in India was to convert the economy as a supplier of raw materials to the fast growing industries of England. Basically the British rule in India was exploitative in nature.

Low Level of Economic Development under the Colonial Rule

Indian economy was almost self sufficient before the advent of British Colonial rule. Agriculture was the main occupation of the people. There were sufficient manufacturing activities. There existed classes of people called weavers, goldsmiths, carpenters, potters, oil pressers, washer men, cobblers, barbers etc. All these occupations were hereditary and passed by tradition from father to son. Indian handicrafts industries in the fields of cotton and silk textiles had its reputation not only in India, but in abroad also, Indian handicrafts were famous for its excellent craftsmanship and quality.

Under the British rule Indian Economy underwent rapid change. The objective of the British ruler’s was protection of the economic interests of their home country rather than the economic development of India. In order to achieve this, they followed an economic policy with twin objectives. namely:

  1. To use India as a supplier of raw materials for British industries
  2. To convert India into a market for the finished products produced in Britain.
This step-motherly policy of the British destroyed India’s cottage industries. As a result of the machine made finished goods, thousands of Indians engaged in cottage industries lost their job.

The hostile economic policy of the British rulers led to stagnation of the Indian economy. There was no improvement in India’s GDP (Gross domestic products). During the period there was no official attempt to calculate India’s national income and per capita income (PCI). Some individual attempts were also made to measure such incomes during the period, Among these estimates made by Dadabhai Naoroji, William Digby, Findlay Shirras, V.K.R.V. Rao, and R.C Desai was notable. The study of V.K.R.V. Rao is considered as very significant. Most of these studies show that the average annual growth of aggregate real output during the first half of the twentieth century was less than two percent and per capita output was less than half percentage.

Agricultural Sector

During the British colonial rule India remained fundamentally an agrarian economy. Around eighty percent of India’s population lived in villages. Agriculture was their main source of livelihood either directly or indirectly, Agricultural productivity was very low and the sector continued to experience stagnation. Some marginal increase in agriculture production was there, due to the increase in area under cultivation.

Major reasons for agricultural stagnation were:

  1. The exploitative land settlement system
  2. Low level of technology use
  3. Low levels of chemical fertiliser use
  4. Inadequate irrigation facilities
Among the above factors, the exploitative land settlement system especially the Zamindari system was the most important reason for agricultural stagnation. The Zamindari system was introduced in the Bengal presidency (comprising parts of India’s present eastern states). Under the Zamindari system the Zamindars were owners of land, Though the Zamindars did nothing to improve the quality of land or to improve the condition of tenants they extracted very high rent from the tenants.

Since the Zamindars were interested only in collecting rent, regardless of the economic condition of the cultivators, it resulted in over-burden of rent on peasants and the economic and social backwardness of cultivators.

The Land System during 1793 — 1850

Zamindari System: In order to bring about stability in land revenue, the British rulers introduced land settlement 1793. In Bengal and neighbouring areas 'Permanent settlement’ (revenue settlement) was introduced. The settlement raised the status of revenue collectors to that of private land lords. It fixed land revenue in perpetuity. This was called Zamindari system.

Ryotwari System: Another land system was evolved for large parts of Bombay and Madras and subsequently extended to north-eastern and north-western India. Under this system, called the 'Ryotwari settlement’, cach peasant holding a land was recognized as the landlord and made directly responsible to the government for the annual payment of land revenue.

Mahalwari System: The Mahalwari system was introduced in northern India. Under this system, a settlement was made with village communities, which maintained a common ownership known as Bhaichara, or with Mahals which were groups of villages. Hence it came to be known as Mahalwari system.

The low level of technology use, low level of chemical fertiliser use and inadequate irrigation facility contributed to the productivity stagnation in agriculture. However in some segments like cash crops, productivity improved. But this commercialisation of agriculture hardly improved the condition of the farmers. It was only change in crops, instead of food crops they are now producing cash crops, which was ultimately used by British industries as raw materials. The transition from food crops to cash crops resulted to acute food shortage in the country.

India’s agricultural production received a major setback due to the partition of the country. Highly irrigated and fertile land went to Pakistan. The entire jute cultivating regions became part of East Pakistan (now Bangladesh). The jute mills in Calcutta found difficult to operate because of the shortage of raw jute. This ended the world monopoly in jute that India enjoyed for a long period.

Industrial Sector

India’s industrial sector could not make any significant progress during the British rule. India’s world famous and centuries old handicrafts industries perished due to the step-motherly policy of colonial rulers. Their objective was converting India as suppliers of raw materials for the British industries and make India as a market for their finished goods. The machine made goods were cheaper than the handmade goods. This caused massive unemployment of people who were employed in traditional handicrafts and cottage industries. The Indian consumers were deprived of the supply of locally made goods.

By the second half of the nineteenth century, modern industry began to take root in India. Initially cotton industries in Maharashtra and Gujarat (Bombay presidency) and jute industry in Bengal were established. Later iron and steel industries were started functioning. Then industries of fertilisers, rayon, rubber, cement, sugar, pepper, etc., were established in some regions of the country.

The setting up of Tata Iron and Steel Company (TISCO) in 1907 is a landmark in the industrialization of India. Sri. Jemshedji Tata established TISCO in Jamshedpur in Bihar.

During the British rule hardly any capital goods industry was established in the country.

Capital Goods Industries

Capital goods industries mean industries which can produce machine tools and other equipments, which are used to produce goods for current consumption. Establishing capital goods industries are crucial for industrialisation.

The establishment of a few manufacturing units here and there was not sufficient to compensate the loss caused by the decline of traditional industries. Therefore, contribution of industries to GDP (Gross Domestic Product) continued to remain very low. At the eve of independence the contribution to industrial sector to GDP was around thirteen per cent only.

The industries were mostly under private sector. Operation of public sector was confined to the railways, power generation, communication, ports and some other departmental undertaking.

Foreign Trade

Foreign trade adversely affected the Indian economy and caused the drain of resources due to the restrictive trade and tariff policy of the colonial rulers. It affected the structure, composition and volume of trade. From an exporter of quality finished goods, India became an exporter of primary products such as raw silk, cotton, wool, sugar, indigo, jute, etc.,.and importer of finished consumer goods like cotton textile, woolen and silk cloths; and capital goods like light machines and tools produced in the factories of Britain. Britain maintained monopoly control over India’s foreign trade. The tariff policy was in favour of England. More than fifty per cent of India’s trade was with Britain and the rest was with countries like China, Ceylon (Sri Lanka) and Persia (Iran). The opening of the Suez Canal further strengthened British control over India’s trade.

Due to the increase in volume of exports there was huge exports surplus for India. But unlike the general notion of favourable Balance of Trade (BoT), the export surplus adversely affected and harmed the Indian economy. In fact it served as a means to drain Indian resources to England. The excess exports of goods over imports caused:

  1. Acute shortage of many essential commodities like food grains, cloths, kerosene, etc., in the domestic market: and
  2. The export surplus (BoT) being used to make payments for expenses incurred by an office setup by the colonial government in Britain, financing war expenses, for import of invisible items. etc., instead of any flow of gold or silver into India.

Demographic Conditions

India’s first census was carried out in the year 1881, then subsequently after every ten years. This census revealed many interesting demographic features of India. India was in the first stage of demographic transition till 1921 (high birth rate and high death rate). The second stage of demographic transition began after 1921 (high birth rate and declining death rate).

Demographic Transition

The theory of demographic transition explains the relationship between economic development and changes in the population of a country. According to the theory, a country passes through four phases in the growth of population. First Phase: this is the period before the onset of transition. In the first phase, both birth rate and death rate are very high. The growth in population is very slow. The economy will be under developed. At this stage, the economy is agrarian in nature. The national income and per capita income are very low.

Second Phase: In this phase, the birth rate is high and death rate is low. There is rapid growth of population. It is a phase of population explosion. At this phase, economy shows signs of development. The availability of better medical care and food reduces death rate. The national income increases during the period, but per capita income continues to remain low due to population explosion.

Third Phase: in this phase, both birth rate and death rate fall in parallel, keeping growth rate high and steady.

Fourth Phase: Here, death rate becomes low and stagnates, but birth rate continues to fall. In this phase, growth rate declines. Finally, birth rate also become low and steady which results in the low growth rate.

India is in the third phase of demographic transition.

Note: Some demographers classify the transition phases into three. They combine the third and fourth phases together. For them, in the third phase, both birth rate and death rate are very low. The birth rate tends to be equal to death rate. There is no significant increase in population The economic development becomes high.

A summary of other important demographic and social development indicators are given below.

  • Literacy level was very low at less than sixteen percent (presently all India level is 65.4% and for Kerala state it is 90.92%)

  • Female literacy was as low as 7% ( presently all India 52.1%, Kerala state 87.86 %)

  • Public health facilities were largely unavailable.

  • Inadequate public health facilities resulted into high mortality due to water and air-borne diseases.

  • High death rate 32/1000, ( presently all India 7.5/1000 and Kerala 6.7/1000 )

  • High infant mortality rate, about 218/1000 ( presently all India 55/1000, Kerala 13/1000 )

  • Life expectancy was only 32 years ( presently all India 69.66 years, Kerala 73.8 years )

  • The poverty level was very high and there were frequent famines and death due to starvation

Occupational Structure

Occupational structure refers to distribution of working persons across different industries ‘and sectors. Broadly we divide occupations into three types. Agriculture, animal husbandry, forestry, fisheries, etc., are collectively known as ‘primary’ activities. Manufacturing industries, both small and large scale, are known as ‘secondary’ activities. Transport, communication. banking. financial services, etc., are ‘tertiary’ activities.

The occupational structure in India during the British period remained more or less stable. Majority of work force were employed in agriculture sector. The following table shows occupational structure during the British period.

Table 1.1 Occupational Structure during the British Period
Sector Percentage of work forcé During the British period In 1990 - 1991
Agriculture 70 - 75 62
Manufacturing 10 11
Services 15 - 20 27

Even though the occupational structure at the national level remained largely stable, there were regional variations. Parts of Madras Presidency (comprising areas of present-day Tamil Nadu, Andhra Pradesh, Karnataka and Kerala), Bombay (comprising areas of present-day Maharashtra and Gujarat) and Bengal showed a decline in dependency on the agriculture sector, with an increase in the manufacturing and service sector: while, on the contrary, states such Orissa, Rajasthan and Punjab showed an. increase in the share of workforce in the agriculture sector.


During the colonial rule infrastructure developed. The British had their own selfish motives in developing the infrastructure such as railways, ports, posts and telegraphs, water transport, etc., which contributed to India's economic growth in later years.

Highlights of infrastructure development by the British

  1. The British introduced railways in 1850. This had three main results.
    • (a) It enabled people to go for long distance travel. This broke geographical and cultural barriers.
    • (b) It connected production centres with markets thereby leading to growth of trade.
    • (c) It led to commercialization of agriculture. This adversely affected India's food self- sufficiency.
  2. Inland trade and sea transport also developed.
  3. Post and telegraph were developed (1837).
  4. Ports and harbours were developed.

Inland trade and sea lanes were developed during this period, But they were not strong enough to compete with railway.

The introduction of electric telegraph in India, though quite expensive was basically to maintain law and order. The postal services, though inadequate helped the general public.

English education substantially benefited India very much. India is now one of the leading computer software exporters in the world. Proficiency in English helped us to attain this success. Tata Airlines was established in 1932, inaugurating the aviation sector in India. Development of infrastructure and English education substantially contributed to the development of the nation.

Although through the infrastructure development, the colonial rulers were trying to promote their colonial interest, the infrastructure development indirectly benefited India.


On the eve of independence the Indian economy was showing all the ill-effects of the exploitative British colonial rule. Each and every sector of the economy was on the verge of collapse. The agriculture sector was marked by low productivity. The industrial sector was also in a bad shape. it required modernisation, diversification and capital investment. Large scale unemployment and poverty required welfare orientation of public economic policy.