• The decline of India’s trade and commerce began during the closing years of Aurangazeb’s reign when the Indian economy was afflicted with factor of so-called “shrinking economy”.


• The Company’s servants captured the trade in commodities like salt, betel-nut and tobacco which had so long been prohibited to all European traders.

• In 1765 Clive established monopoly of salt manufacture and trade trough a Society.

• This system was abolished in 1768 and the Zamindars and Indian merchants were permitted to manufacture salt, subject to payment of a duty of 30% to the company Government.

• In 1772 this privilege was withdrawn, and the Company’s monopoly was re-established.

• In 1776 Warren Hastings introduced a new scheme of leasing out to individuals the privilege of manufacturing and selling salt.

• In 1780 Warren Hastings assumed for the Company’s Government the exclusive right to manufacture salt.

• In 1758, Robert Clive secured from Mir Jafar.

• Monopoly of the saltpetre trade in Bengal for the company.

• Saltpetre was an ingredient for the manufacture of gunpowder.

• By 1793 indigo became another important item of export.

• The company also established its monopoly on the opium of Bengal and Bihar which was largely exported to China.

• The inventions of Hargreaves, Arkwright and others during the years 1767 to 1785 helped extensive production of cotton goods in England.

• In 1786, the Court of Directors made the first tentative efforts for sale of Lancashire cotton cloth in Bengal.

• In 1793 “the calicoes and muslins of India, even for Indian use, were supplanted in Bengal by the products of the steamlooms of Manchester”

• In 1815 the Bengal Government reduced the import duty on British goods by 2 ½ per cent, delivering thereby a severe blow to Indian Industry.

The Stages of British Colonialism

• Every year the wealth and resources of India began to be drained out; and as England became richer, India grew poorer.

• The decline of India’s centuries-old handicrafts and village industries, and agriculture became the only source of sustenance to the Indians.

• R.P. Dutt in his monumental work India Today has made a brilliant analysis of the Indian colonial economy and has elaborately commented upon Karl Marx’s theory of three phases of British colonialism and economic exploitation of India.

• During the first phase, i.e., the Mercantilist phase, from 1757 to 1813, the East India Company completely monopolized trade and by manipulating low prices of Indian finished goods for exports to England and Europe, began the direct the plunder of India’s wealth.

• With the second industrial boom in England, India entered the second phase of classic British colonialism, viz., Free Trade Industrial or Mercantile Capitalism (1813-1858).

• During this phase, India was converted into a free market for the import of industrially manufactured British goods and a source of raw materials to be exported to England.

The third stage of British colonialism is known as Finance Capitalism which began after 1860.


(1) Impact on Indian Agriculture

(a) British Land Revenue and Tenurial Systems and the Ruin of Indian Agriculture

• The earliest land revenue settlement introduced by Warren Hastings in Bengal was made on the assumption that all land belonged to the sovereign.

• He started the system of auctioning the land to the highest bidders.

• When Robert Clive obtained the diwani of Bengal, there used to be an annual settlement (of land revenue).

• Warren Hastings changed it from annual to quinquennial (five-yearly) and back to annual again.

• During the time of Cornwallis, a 10 years’ (decennial) settlement was introduced and it was made permanent settlement in 1793 in Bengal, Bihar and Orissa.

• Permanent settlement is also known as the zamindari system.

Permanent Settlement or the Zamindari System:

• Permanent settlements are made in Bengal, Bihar, Orissa, Varanasi division of UP, and Northern Karnataka, which roughly covered 19% of the total area of British India.

• A new class of zamindars was declared to be owners of the land and they had to collect land revenue of which 1/10th to 1/11th was retained by them as their remuneration, and the rest was handed over to the company.

• Initially this settlement was temporary, but in 1793 Cornwallis made it permanent.

• Under the Permanent Settlement of 1793, the Zamindar was declared the absolute owner and proprietor of his estate.

• The British Zamindar under the Permenant Settlement was a petty capitalist (“a mushroom gentleman”).

• The competition for land increased and there emerged a chain of middleman and intermediary rent – receiving interests between the original landlord and the cultivator, whose position was that of a mere tenant at the will or mercy of the Zamindar.

• Patni taluks i.e., ‘dependent tenures settled in perpetuity at fixed rent’.

• This system, though opposed to the spirit of the Permanent settlement, was recognized by law in 1819.

• The Bengal Tenancy acts of 1859 and 1885 aimed at ameliorating the position of the tenant.

• Failure to collect rent regularly from the tenants sometimes compelled the Zamindars to default in payment of revenue to the Government. This caused difficulty to the Government.

• Lord Wellesley considered it necessary to strengthen the authority of the
• Zamindars. For this purpose a regulation (known as Haptam) was passed in 1799.

• During the three decades preceding the passing of the Rent Act of 1859, the Muslim peasants in certain districts and the Santhals in the Bengal-Bihar border region restored to violence in defence of their customary rights.

• The rising of the indigo-cultivators followed in 1859-60.

• The government passed the notorious Regulations of 1799, which invested the Zamindars with arbitrary powers to eject the cultivator or attach his agricultural stock and implements for non-payment of rent.

• The law of 1799 opened the floodgates of exploitation of the helpless peasantry.

Raithwari System

• First introduced in Tamil Nadu (former Madras) by Thomas Munro and Captain Reed; and then it was gradually extended to Maharashtra (former Bombay Presidency), East Bengal and portions of Assam and Coorg (part of present Karnataka).

• Under this system, the ryots were given the ownership and occupancy rights in land and they were individually responsible for the payment of land revenue to the state. Thus a system of present proprietorship was introduced.

Main Features

a) Assessment upon individual cultivators.
b) Measurement of field and an estimate of produce.
c) Fixing of government demand at 55% of the produce.

• This system led to perpetual struggle between the money-lenders and the cultivators.

• “The zamindari system had revolutionized the relations between the landlords (revenue farmers) and tenants; the raithwari system revolutionized the relations between the creditors and debtors and thus introduced another grasping and exploiting elements into the rural society”.

• The primary aims of the raithwari system were the regular collection of revenue and amelioration (improvement) of the condition of the ryots. The first aim was realized, but the second remained unfulfilled.

• It was officially stated that the ryot could not be ejected so long as he paid the rent.

Mahalwari System

• In this system, the basis of assessment was the produce of mahal or estate and all the proprietors of a mahal were jointly and severally responsible, in their persons and property, for the sum assessed by the government on the mahal.

• This settlement was made with the old village community jointly and severally. It was a two-fold settlement.

• the ownership and occupancy right was reserved for the individual peasants and cultivation was to be done individually.

• the peasants were jointly responsible for paying the land revenue to the state.

• The mahalwari system was first adopted in Agra and Awadh, and later extended to other “added (ceded) and conquered” parts of the United Provinces.

Growth of Rural Indebtedness

• Due to expanding indebtedness of the agriculturists, large-scale transfer of land from the hands of the peasant proprietors to the money-lenders took place in the raithwari areas and mass ejection of tenants from land occupied by them in zamindari zones.

Commercialization of Agriculture

• Practice of growing specialized crops by the peasants.

(2) Growth of Poverty

• According to one estimate, between 1854 and 1901, nearly 24 famines hit India, in which about 29 million people perished.

• The Bengal famine of 1943 claimed 3 million lives.

(3) Decline of Village Industries and Town Handicrafts

• B.D. Basu has enumerated the following principal measures taken by the British to bring about the collapse of Indian handicrafts. England destroyed Indian industries principally by means of :

1.The forcing of british free trade on India;

2. Imposing heavy duties on Indian manufactures in England.

3. The export of raw products from India

4. The transit and customs duties.

5. Granting special privileges to the British in India.

6. Building railways in India.

7. Compelling Indian artisans to divulge their trade secrets.

8. Holding of the exhibitions.

(4) Growth of Foreign Capital and the Rise of Modern Industries in India

• In terms of chronology, the plantation industries of indigo, tea and coffee were the first to be introduced in India.

• During the 1850s cotton textiles, jute, and coal mining industries were started in India.

• It has been estimated that before 1914 nearly 97% of British capital investments in India was diverted towards completion of government projects (railways, road transport, etc.), plantation industry (tea, coffee, rubber, etc), and development of financial houses (banks, insurance companies, etc).

• The foreign banks in India held nearly 3/4th of the total bank deposits.

Drain of Wealth

• The theory of ‘Drain of Wealth’ by the nationalists like Dadabai Naouroji, M.G. Ranade and others.

• It was in Nauroji’s paper “England’s Debt to India” read before a meeting of the East India Association, London, on May 2, 1867, that the Naouroji first put forward the idea that Britain was extracting wealth from India as the price of her rule in India.

• Subsequently, “the moral and material drain” from India was the continuous theme of other papers written by Nauroji viz., Poverty and Un-British rule in India (1867), The Wants and Means of India (1870) and On the Commerce of India (1871).

• Two other Indian Leaders rose to point out the evils of the drain of wealth, Justice M.G. Ranade delivered, in 1872, a lecture in Pune on Indian Trade and Industry; R.C. Dutt, who in the preface to the first volume of the Economic History of India (1901).

• The Drain Theory was officially adopted by the Indian National Congress at its Calcutta session in 1896.

• The debt of the company began to increase immensely. It stood at ₤69 million when the rule of the company ended.

The home charges consisted of many items such as:

Purchase of military stores.

Expenditure on India Office Establishment

Interest on debts.

Interest on railway capital investment.

Non-effective charges of the army.

Pensions and gratuities payable in England to retired civil servants of the company.

• The national debt of India rose from ₤70 million in 1858 to ₤140 million in 1876, ₤224 million in 1900, ₤274 million in 1913 and ₤884 million in 1939.

• In 1945, Lorrence Rosinger estimated the drain at ₤135 million annually.

• William Digby has given the figure of total drain from the 19th century onwards as ₤60,080 million.


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