Class 12th – Economics

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Chapter 1- Indian Economy at the Eve of Independence

1.1 Introduction

The structure of India’s present economy is not just of current making; it has its
foundations saturated with history, especially in the period when India was ruled by
Britishers, which lasted for almost two centuries before India finally got independent on
15 August 1947. The only purpose of the British colonial rule in India was to limit India
from being a raw material provider for Great Britain’s own rapidly growing modern
industrial base.

India had an independent economy prior to the approach of British rule. However,
agriculture was the major source of income for the public, and the country’s
economy was identified by different types of manufacturing industries. India was
popularly known for its handicraft industries or business in the fields of cotton and
silk materials, metal and precious stone works, and many more. These items
enjoyed a global market based on recognition of the marvelous quality of materials
used and the high standards of craftsmanship found in all imports from India.

“An economy is the large set of inter-related production, consumption, and exchange
activities that aid in determining how scarce resources are allocated. The production,
consumption, and distribution of goods and services are used to fulfill the needs of those
living and operating within the economy, which is also referred to as an economic
system.” – Will Kenton

Lower Level of Economic Development under Colonial Rule:

The economic policies adopted by the colonial government in India were more concentrated
on security and promotion of the economic interest of the nation rather than the
development of the economy. Such policies brought about a major change in the
construction of the Indian economy — transforming the country into providers of raw
materials and customers of finished industrial products from Britain. Obviously, the colonial

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government never made an honest attempt to estimate India’s national and per capita
income.

A few individual attempts were made to measure such incomes yielded clashing and
conflicting results. Amongst the notable individual estimators — Dadabhai Naoroji,
William Digby, Findlay Shirras, V.K.R.V. Rao and R.C. Desai, it was Rao,
whose estimates, during the colonial period were considered very important. However,
most research did find that the country’s growth of aggregate real output during the
beginning of the twentieth century was less than 2 percent, coupled with a mere half
percent growth in per capita output per year.

1.2 Agricultural Sector

Indian economy is an agriculture-based economy. This is clear from the fact that the
national income of India comprises 70% of the income generated from agriculture.
Before independence, 95% of the economy was based on agriculture and the income was
generated from agriculture.
Besides, around 85% of the population was living in small-town or villages, and the only
means of subsistence was agriculture. When talking about agriculture, the condition of
the Indian economy, on the eve of independence was demoralizing. Agriculture, even
after being the most important sector, was facing economic degradation and stagnation
in the economy.
Agricultural Sector of India – Causes of Stagnation
There are various causes for stagnation in India’s agriculture sector during the colonial
period. Some of these are as follows:

1. Zamindari System/ land settlement system

 One of the major reasons behind the cause of the stagnation of the Indian agricultural
sector was the Zamindari System. Zamindars were recognized as the permanent
owners of the soil. This agricultural framework was chiefly practiced in Bengal, which
was the capital of India under British rule.

 According to this system, most of the profits (Lagaan) went to Zamindars rather
than cultivators. The Zamindars used to exploit the cultivators by charging high

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revenue from the agriculturalists, which left the cultivators with insufficient food.

 The main interest of the zamindars was only to collect rent regardless of the economic
condition of the cultivators; this caused immense misery and social tension among the
latter

 To a very great extent, the terms of the revenue settlement were also responsible for
the zamindars adopting such an attitude; dates for depositing specified sums of revenue
were fixed, failing which the zamindars were to lose their rights.

2. Forced Commercialization

. Commercialization of agriculture means producing agricultural crops with the aim

of selling them instead of self-consumption. The British rulers wanted to make this
industry advance and go through ‘cultivation for sale’ from the orthodox approaches
of ‘cultivation for self’.

In India, where most of the crops were produced for self-consumption, they were then
sent to markets for selling. The Britishers made farmers cultivate commercial crops, like
Indigo to boost their profits. Undoubtedly indigo is an ideal crop for the commercialized
agricultural sector. It proved to be more harmful to India as it damaged the soil fertility to
large extent. Also, the Britishers offered higher prices to farmers if they produce cash crops
instead of food crops as the cash crops were used by British Industries as raw materials.
The increase in the rate of production of more cash crops and less food crops led to various
issues in the Indian economy, including frequent famines.

3. Lack of Irrigation Facilities and Technology

 Besides this, low levels of technology, lack of irrigation facilities and negligible use of
fertilizers, all added up to aggravate the plight of the farmers and contributed to the
dismal level of agricultural productivity.
 During British rule, the irrigation facilities and technology of India were not good,
and the Britishers did not care about these things. The lack of proper irrigation
facilities and technological upgrades reduced the productivity and production of crops
in India. These problems forced cultivators or agriculturalists to live in misery.

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4. Scarcity of investment

India’s agriculture was starved of investment in terracing, flood-control, drainage and

desalinization of soil. While a small section of farmers changed their cropping pattern from
food crops to commercial crops, a large section of tenants, small farmers and
sharecroppers neither had resources and technology nor had incentive to invest in
agriculture.

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1.4 Foreign trade

Foreign trade refer to exchange of goods & services between two or more nations or within
boundaries. India has been one of the major trading countries from the time of independence
and primarily exports goods like cotton, silk, jute, indigo, wool, etc. India is also an importer
of finished products, like woollen clothes, silk, cotton & capital goods like light machinery
made in Britain, etc.

During the colonial period, Britain held a monopoly over India’s imports & exports. Hence,
the major part of foreign trade was restricted to Britain only, while the rest was permitted
to trade with nations like Ceylon(Sri Lanka), Persia(Iran), and China. India was a massive
exporter during the colonial period. However, it did not affect the economy of the country.
The scarcity of basic necessities like food grains, kerosene, clothes, etc., badly affected the
country.

State of India’s Foreign Trade:

1. Monopoly control of Britain over foreign trade

 Britain exercises their monopoly rights and control over India’s imports & exports.
 Half of India’s foreign trade was limited and authorized to Britain only.
 The rest half of foreign trade was permitted to trade with countries like Ceylon(Sri
Lanka), Persia(Iran) & China.
 In the year 1869, the introduction of the Suez Canal resulted in increased British
authority over India’s foreign trade.

2. Exporter of raw material & importer of finished goods

 Exporter of raw materials: India became an exporter of raw materials such as silk,
wool, sugar, cotton, jute, indigo, etc.
 Importer of finished products: India also became an importer of finished products
like silk, cotton and woollen clothes, and capital goods like machinery made in
Britain.
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3. The Indian wealth drained during the colonial period

 Drain of wealth with respect to the Indian economy means the transfer of Indian
wealth to England, for which the country did not even get the proportionate
economic return.
 During the colonial period, India’s foreign trade generated surplus export due to
excess exports.
 however, this surplus export did not bring any gold or silver into India, rather this
surplus export was used to make payments for the cost of setting up offices in
Britain by the colonial government and for bearing the expenses of the wars fought
by the Britain government.

Suez Canal
The Suez Canal is an artificial waterway that runs from Africa and Asia through the Isthmus of
Suez in the North-Eastern part of Egypt. The Suez Canal is the shortest maritime route from Europe
to Asia as it connects the Mediterranean Sea to the Red Sea. Since its completion in 1869, it has
become the most heavily used shipping lane in the world.
The 193km Suez canal was developed in November 1869. Almost 12% of global trade passes
through the Suez canal, representing 30% of all the global container traffic and goods worth over
$1 trillion per annum. In 2020, around 19,000 ships used this route, which means 50 ships per
day making the journey between Suez Port and Port Said, carrying cargo worth between USD 3-9
billion. As per Egypt’s Suez Canal Authority (SCA), the waterway carried over a cargo of 1 billion
tonnes in 2019.

The Suez Canal is very important as it is the shortest maritime route from Europe to Asia. Before its
construction, ships moving toward Asia had to undertake a difficult journey around the Cape of
Good Hope at the southern tip of Africa. Due to its strategic location, the canal is both heavily used
and protected.

1.5 Demographic Condition

 The British Indian population was first counted with the help of a census in 1881.
 The census of 1881 shows the unevenness in India’s population growth. India
witnessed high birth & death rate during this period.
 The year 1921 caused a great transition, as after 1921, India experienced a high
birth rate and a fall in the death rate due to improvements in health facilities.

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Major Indicators of Demographic Condition in India on the Eve of

Independence

1. Literacy Rate

Literacy rate refers to total number of literate person, expressed as percentage of the total
population. The overall literacy rate was less than 16%. Out of this, the female literacy rate
was almost negligible, about 7%.

2. Health

Public health facilities were either not accessible or, when accessible, were highly
inadequate. Therefore, air and water-borne diseases were uncontrollable and took a huge
charge on life.

3. Infant Mortality Rate

​
Infant mortality rate refers to the number of infants dying before reaching one year of age
per 1000 live births in a year. The infant mortality rate was​ quite scary, about 218 per
thousand in comparison to the current infant mortality rate of 40 per thousand.​ ​ ​ ​

4. ​ Life Expectancy ​

Life expectancy refers to the average number of years for which people are expected to live.
The life expectancy rate was also very low, 32 years in comparison to the present 69
years.

3. Widespread Poverty

There are no official records regarding poverty. However, it can be assumed that
widespread poverty was the general problem. Therefore, the Indian population had to live
in crawling poverty, with never-ending fear of diseases, death, and starvation. In a
nutshell, the Indian demographic condition during the colonial period was horrible.

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1.6 Occupational Structure

Occupational structure is the distribution of working professionals in the different sectors

across the region. Every economy is segregated based on its occupational structure namely,
the agriculture sector, industrial or manufacturing sector, and service sector.

 Primary Sector – It includes production units exploiting natural resources

 Secondary Sector – This unit convert raw material into finished goods
 Tertiary Sector – It includes production units engaged in producing services.

Features of Occupational Structure on the eve of Independence

1. Pre-dominance of Primary Sector

Indian agricultural and allied sector provided livelihood to around 70-75 % of the population
of India, directly or indirectly at the time of colonial rule and even today it employs nearly
half the workforce. The manufacturing and service sectors, at that time, accounted for
merely 10% and 15-20% of the workforce respectively..

2. Regional Variations in the workforce

There were regional shifting trends observed in all three sectors. Regions of Gujarat,
Karnataka, Bengal, and Tamil Nadu showed a shift in the workforce from agriculture to
manufacturing and service sectors whereas the states like Rajasthan, Orissa, and Punjab
showed an opposite trend.

1.7 Infrastructure

Infrastructure is the set of fundamentally necessary systems or facilities that helps a country
sustain itself and function properly. This includes physical, social, and economical
infrastructures. During the colonial regime, India undoubtedly saw development in its
physical infrastructure namely, roads, ports, water transport, railways, ports, and
telegraph; but the social and economical infrastructure remained highly untouched. However,
in this case, the motive of the British Government was to fulfill its interest rather than to
focus on providing amenities to Indians.

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Roads

The main aim of building roads was to make it easier for them to transport raw materials
or intermediate goods to the nearest railway station or port and export them to Britain,
and for the mobilization of the British army within the country.

Water Transport, Electric Telegraph, and Postal Services

The agenda of the British government to develop sea lanes and promote inland trade proved
to be very expensive and inefficient in comparison to the railways. It was highly
uneconomical and was developed at the cost of huge economic losses to the country. The
system of electric telegraph developed during this era was also an expensive affair that only
served the purpose of maintaining law and order for British officials. On the contrary, postal
services remained inadequate even though they served the public interest.

Railways

In the 1850s, when the railways were introduced, it was considered Britain’s most
prominent contribution to India. Even so, it came with its own sets of pros and cons, but the
two big impacts it left on the country were:

 It enabled inter-state mobility and helped break geographical and cultural barriers in
the nation. People covered long-distance journeys easily at cheap rates and discovered
different cultural and employment pursuits.
 Inter-state mobility fostered the commercialization of agriculture thereby affecting the
self-sufficiency regime of an ideal Indian village. Even though it increased Indian exports
to many folds, the benefit was reaped by Britain.

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1.8 State of Indian Economy on the Eve of Independence

At the time of British rule, Indian economy was transformed into a colonial, backward,
semi-feudal, stagnant, depleted, and amputated economy by the Britishers.

1. Colonial Economy: India has faced colonial exploitation for over 200 years. By
supplying raw materials from India to facilitate the growth of British industry, British rulers
drained a huge wealth of India. The Britishers also encouraged commercialisation of Indian
agriculture in order to transform the Indian economy into a British colony. Besides, even at
the time of independence, the British colonial policy had a deep impact on India.

2. Semi-feudal Economy: By the end of British rule, there were two aspects of the
Indian economy; i.e., the Introduction of the Feudal System and the Introduction of the
Capitalist System. Introduction to Feudal System or land settlement system initiated feudal
relations; i.e., landlord-tenant relations. The landlords were cruel to the cultivators and used
to charge high Lagaan rates to them. Also, the introduction of the Capitalist System
increases modern industries resulting in the creation of two classes, which are labourers and
capitalists.

3. Stagnant Economy: An economy that is growing at a very low rate is known as a

stagnant economy. On the eve of independence during the first half of the 20th century,
India’s growth of aggregate real output was less than 2% and its growth per capita output
was only 0.5%.

4. Depleted Economy or Depreciated Economy: A depleted economy is one where

there are no arrangements to replace the physical assets which are depreciated because of
excessive use. The Indian economy at the time of independence was a depreciated economy.
Besides, at the time of the 2nd World War, the Indian industries had to work beyond their
capacities in order to fulfill the increased demand for machinery, plant, etc., for the war.
However, the Britishers did not make any arrangements for replacing the depleted assets,
because of which the British rulers left a seriously depleted economy.

5. Backward Economy: At the end of British rule, India was an underdeveloped and
backward economy. The main reasons behind the Indian economy’s backwardness were Low

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Productivity Level, Low per Capita Income, Mass Illiteracy, Traditional Methods of
Agriculture, High Birth rate, and High Death Rate.

6. Amputated Economy: Britishers had a policy of divide and rule, which quickly
gave rise to discrimination between different groups based on caste, culture, language, and
religion. Because of this policy, at the time of independence, India was geographically divided
into two different parts; India and Pakistan. This partition of the country into two parts
virtually disrupted the Indian economy because of two main reasons. Firstly, there was a
shortage of raw materials for cotton and jute mills because most of the areas where cotton
and jute used to grow went to Pakistan. Secondly, the partition gave rise to the problem of
rehabilitation of a large number of refugees from Pakistan.

Conclusion

Not only the industrial and agricultural sectors of the country were affected, but foreign
trade was also affected. Foreign trade plays an essential role in the development and
earnings of a country. In fact, it is great to be a self-maintaining and independent country,
foreign trade, and globalization are crucial to a country’s success. Indian economy on the eve
of independence in relation to foreign trade was extremely poor. Due to the rules forced by
the British, none of India’s products or skills had any acknowledgment, and hence, it badly
affected the structure, composition, and volume of the country’s foreign trade and income.

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