Home / Mint-lounge / Mint-on-sunday /  The economic legacy of the British Raj

In a now famous speech at Oxford University, former Union minister Shashi Tharoor made a scathing attack on the former British empire. Tharoor eloquently argued that the British Raj had caused untold suffering to India and the Indian economy, and asked the British for reparations.

While Tharoor deservedly received praise for his wit and eloquence, the narrative of exploitation that he spun is at best incomplete, and misleading at worst. Recent research by economic historians suggests that the British Raj was not an unmitigated disaster for India, as it was thought to be by earlier historians and economists. While colonial rule in India had harmful aspects, such as the low provision of public goods, it also helped galvanize Indian industry, making the country a vital part of global supply chains.

For quite a long time, the dominant view about the British Raj in India was quite similar to what Tharoor had put forth: British rule impoverished the Indian economy by draining resources through taxation, and through a process of “de-industrialization" that robbed millions of artisans of their livelihoods. The earliest and most influential proponents of this view were two prolific writers, Dadabhai Naoroji and Romesh Dutt. Although these two gentlemen did not advocate an end to British rule, their writings turned into powerful weapons in the hands of Indian nationalists.

The birth of “economic nationalism"—or the idea that India needed to be free because foreigners had ruined its economy—gave a boost to India’s freedom struggle, but it proved detrimental to a dispassionate assessment of economic history, and led India to close its doors to the world in the first few decades following Independence, argued renowned economic historian Tirthankar Roy in a recently published essay in the Economic and Political Weekly.

The contributions of Marxist scholars such as Paul Baran and Samir Amin bolstered this view and led many influential leaders of the developing world to view openness with suspicion. The rich world became so by exploiting poor countries such as India, the Marxist scholars argued, and the narrative of drain and de-industrialization in India acquired even greater legitimacy.

Roy argues that de-industrialization was a myth, simply because factory production and employment had taken firm roots in British India by the early 20th century and grew at a rapid pace in the first half of the 20th century.

“Between 1850 and 1940, employment in Indian factories increased from near zero to two million," writes Roy. “Real GDP at factor cost originating in factories rose at the rate of 4-5% per year between 1900 and 1947. These rates were comparable with those of the two other emerging economies of the time, Japan and Russia, and without a close parallel in the tropical world of the 19th century. Cotton textiles were the leading industry of the 19th century. Outside Europe and the US, 30% of the cotton spindles in the world were located in India in 1910. Within the tropical zone, 55% of the spindles were in India."

The creation of the three great port cities of Calcutta, Bombay and Madras spurred India’s industrial boom, as it helped Indian merchants and producers to integrate with the global economy, writes Roy. This would not have been possible without the supply of skills and technology that the European settlers provided, Roy contends. Engineers, managers and partners from abroad who joined Indian firms to work under Indian bosses were integral to the success of Indian industry.

“…the so-called drain was also a payment for skills, and it is impossible to imagine an economy short of skills dealing with the world without having to buy skills from abroad. The services thus purchased contributed to national income, public goods, and political stability," writes Roy.

The real problem with the British Raj was not its neglect of industry—if anything, industry flourished—but the lack of public investments, especially in rural infrastructure such as irrigation, which led to stagnation in agriculture, crimped overall growth and limited the size of the domestic market, Roy argues.

The absence of public investments by the British Raj also extended to dismal achievements in other areas such as healthcare and education. In a widely cited 2012 paper, US-based economic historian Latika Chaudhary notes that the “government expenditures on human capital in British India were among the lowest in the world from 1860 to 1912". Government expenditure per capita averaged less than 0.01 pounds in British India, lower than average government spending in the Indian Princely States (0.02), in underdeveloped countries such as Brazil and Mexico (0.05), and in other dependent British colonies (0.18).

The spread of education remained limited to the elite and landed classes throughout colonial rule. The aftereffects of such policies could even be felt for years following India’s Independence. It was not until the 1970s that India finally emerged from the crippling effects of British education policies, wrote Chaudhary and her colleague Manuj Garg in a 2014 study on the impact of colonial-era educational investments on post-Independence education outcomes.

While Roy agrees with critics of the British Raj who point to the low investments in public goods under British rule, he also urges us to consider the counterfactual: had India remained under Mughal rule, would the state of public investment have been any better?

The impact of British rule was not uniform, and it depended greatly on the nature of institutional arrangements that the British fostered in different areas. The British land revenue system could be broadly classified into two: landlord (or zamindari) and non-landlord systems. The districts that had non-landlord revenue systems have higher levels of health, education and agricultural technology investments in the post-Independence period compared to those that had landlord systems, according to a 2005 American Economic Review research paper by economists Abhijeet Banerjee of the Massachusetts Institute of Technology (MIT) and Lakshmi Iyer of the Harvard Business School.

Landlord districts also had greater incidence of crime rates and the rate of poverty reduction between 1972 and 1987 was much lower than non-landlord districts.

In a 2011 study published in the Review of Economics and Statistics, Iyer found that the districts that were under the direct rule of the British empire performed poorly on indicators such as schools, health centres and roads after Independence. Iyer reasoned that since the princely states (indirectly ruled states) were under the threat of being annexed completely, they felt compelled to invest more in public goods to quell chances of any rebellion in their territory.

Any discussion of the economic legacy of colonial rule will be incomplete without considering the case of the railways—the single biggest investment of the British empire. Tharoor insisted in his speech that the railways, like many other colonial investments, only profited the British. However, the case of the railways is far more complex than Tharoor assumes it to be.

Economist John Hurd describes how complex the colonial railway system was in the Cambridge Economic History of India: “There were state lines worked by private companies, state lines worked by the state, lines owned by companies guaranteed under old contracts, lines owned by companies under new contracts, district board lines, assisted companies’ lines, princely state lines worked by companies, princely state lines worked by state railway agencies, and lines owned and worked by princely states. In 1902, for example, the Indian railways were worked by 33 separate administrations, including 24 private companies, four government agencies, and five princely states."

In a 1975 research paper, Hurd was the first one to explain how the railways helped integrate the food market in India. Hurd utilized data for average wheat and rice prices from 1861 to 1921 and showed that the coefficient of variation in prices was lower for districts that had railways vis-à-vis those that didn’t.

Not only did the railway network lead to a rise in income levels and a decline in the uncertainty in income, recent evidence suggests that the intensity of famines lessened as the railway network increased. Dave Donaldson of MIT, who collected archival data from 1861 to 1930 on agricultural prices, trade data for eight types of salt and information on the spread of the rail network, confirms Hurd’s findings that the railways helped in integrating markets, lowering price fluctuations and raising income levels (incomes shot up by 16% on average, suggests Donaldson).

In another paper co-authored with Robin Burgess of the London School of Economics, Donaldson finds that “the arrival of railroads in Indian districts dramatically constrained the ability of rainfall shocks to cause famines in colonial India". Donaldson and Burgess track districts from 1875 to 1919 and find that on an average, a district was more vulnerable to a famine before the railways arrived.

Clearly, the economic legacy of the Raj is far more complex than what politicians would have us believe. The narrative trap of economic nationalism not only impoverishes the study of India’s economic history but also blinds us to the benefits of economic openness that we had reaped years ago under British rule, argues Roy.

“It is not only the professional historian who is paying the price for economic nationalism and the narrative trap it created," writes Roy. “Economic nationalism is also a weapon in the hands of businesses that fear foreign competition. ‘Look what the British did to us’ is a potential tool in the aid of xenophobic backlash against globalization. I have suggested in this essay that the message of economic nationalism is not only wrong but also dangerous in a country that is trying to re-embrace openness and cosmopolitanism with a view to building a secure future for itself in the world economy."

Economics Express runs weekly, and features interesting reads from the world of economics and finance.

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