The known Economic history of India begins with the Indus Valley civilization. The Indus civilization's economy appears to have depended significantly on trade, which was facilitated by advances in transport. Around 600 BC, the Mahajanapadas minted punch-marked silver coins. The period was marked by intensive trade activity and urban development. By 300 BC the Maurya Empire united most of the Indian subcontinent. The political unity and military security allowed for a common economic system and enhanced trade and commerce, with increased agricultural productivity.
For the next 1500 years, India produced its classical civilizations such as the Rashtrakutas, Hoysalas and Western Gangas. During this period India is estimated to have had the largest economy of the ancient and medieval world between the 1st and 15th centuries AD, controlling between one third and one fourth of the world's wealth up to the time of the Marathas, from whence it rapidly declined during European rule.Indus Valley civilization
The Indus Valley civilization, the first known permanent and predominantly urban settlement that flourished between 2800 BC to 1800 BC boasted of an advanced and thriving economic system. Its citizens practiced agriculture, domesticated animals, made sharp tools and weapons from copper, bronze and tin and traded with other cities. Evidence of well laid streets, layouts, drainage system and water supply in the valley's major cities, Harappa, Lothal, Mohenjo-daro and Rakhigarhi reveals their knowledge of urban planning. One of the theories about their end is that they eventually overused their resources, and slowly died out.
Ancient and medieval characteristics
Though ancient India had a significant urban population, much of India's population resided in villages, whose economy was largely isolated and self-sustaining. Agriculture was the predominant occupation of the populace and satisfied a village's food requirements besides providing raw materials for hand based industries like textile, food processing and crafts. Besides farmers, other classes of people were barbers, carpenters, doctors (Ayurvedic practitioners), goldsmiths, weavers etc.
Religion, especially Hinduism, played an influential role in shaping economic activities. The Indian caste system castes and sub-castes functioned much like medieval European guilds, ensuring division of labour and provided for training of apprentices. The caste system restricted people from changing one's occupation and aspiring to an upper caste's lifestyle. Thus, a barber could not become a goldsmith and even a highly skilled carpenter could not aspire to the lifestyle or privileges enjoyed by a Kshatriya (person from a warrior class). This barrier to mobility on labour restricted economic prosperity to a few castes.
Pilgrimage towns like Allahabad, Benares, Nasik and Puri, mostly centred around rivers, developed into centres of trade and commerce. Religious functions, festivals and the practice of taking a pilgrimage resulted in a flourishing pilgrimage economy.
In the joint family system, members of a family pooled their resources to maintain the family and invest in business ventures. The system ensured younger members were trained and employed in the family business and the older and disabled persons would be supported by the family. The system, by preventing the agricultural land from being split ensured higher yield because of the benefits of scale. The system curbed members from taking initiative because of the support system and family or work.
Along with the family-run business and individually owned business enterprises, ancient India possessed a number of other forms of engaging in business or collective activity, including the gana, pani, puga, vrata, sangha, nigama and sreni. Nigama, pani and sreni refer most often to economic organizations of merchants, craftspeople and artisans, and perhaps even para-military entities. In particular, the sreni was a complex organizational entity that shares many similarities with modern corporations, which were being used in India from around the 8th century BC until around the 10th century AD. The use of such entities in ancient India was widespread including virtually every kind of business, political and municipal activity.
The sreni was a separate legal entity which had the ability to hold property separately from its owners, construct its own rules for governing the behavior of its members, and for it to contract, sue and be sued in its own name. Some ancient sources such as Laws of Manu VIII and Chanakya's Arthashastra have rules for lawsuits between two or more sreni and some sources make reference to a government official (Bhandagarika) who worked as an arbitrator for disputes amongst sreni from at least the 6th century BC onwards.There were between 18 to 150 sreni at various times in ancient India covering both trading and craft activities. This level of specialization of occupations is indicative of a developed economy in which the sreni played a critical role. Some sreni could have over 1000 members as there were apparently no upper limits on the number of members.
The sreni had a considerable degree of centralised management. The headman of the sreni represented the interests of the sreni in the king’s court and in many official business matters. The headman could also bind the sreni in contracts, set the conditions of work within the sreni, often received a higher salary, and was the administrative authority within the sreni. The headman was often selected via an election by the members of the sreni, who could also be removed from power by the general assembly. The headman often ran the enterprise with two to five executive officers, who were also elected by the assembly.
Punch marked silver ingots, in circulation around the 5th century BC and the first metallic coins were minted around 6th century BC by the Mahajanapadas of the Gangetic plains were the earliest traces of coinage in India. While India's many kingdoms and rulers issued coins, barter was still widely prevalent. Villages paid a portion of their agricultural produce as revenue while its craftsmen received a stipend out of the crops at harvest time for their services. Each village, as an economic unit, was mostly self-sufficient.
Surplus of Indian manufactures, like the muslin of Dacca, calicos of Bengal, shawls of Kashmir, steel and iron works, silk, and other textiles and handicrafts, agricultural products like pepper, cinnamon, opium and indigo were exported to Europe, the Middle East and South East Asia in return for gold and silver.
According to economic historian Angus Maddison in his book The World Economy: A Millennial Perspective, India had the world's largest economy from the first to 11th century, and in the 18th century, with a (32.9%) share of world GDP in the 1st century to (28.9%) in 1000 AD, and in 1700 AD with (24.4%).
During the Maurya Empire (c. 321-185 BC), there were a number of important changes and developments to the Indian economy. It was the first time most of India was unified under one ruler. With an empire in place, the trade routes throughout India became more secure thereby reducing the risk associated with the transportation of goods. The empire spent considerable resources building roads and maintaining them throughout India. The improved infrastructure combined with increased security, greater uniformity in measurements, and increasing usage of coins as currency enhanced trade. During this time, the Arthasastra ("science of the state") was written by the Chanakya, an adviser to Chandragupta Maurya. The Arthasastra is one of the most important ancient texts on economics, politics and administration. It was a treatise on how to maintain and expand power, obtain material gain, and administer an empire. It covers both theory and implementation and contains many clear and detailed rules regarding the governing of an empire. The exhaustive account of the economic ideas embedded in the Arthasastra has been given by Ratan Lal Basu in his famous work "Ancient Indian Economic Thought, Relevance For Today".
The economic situation in the Maurya Empire is comparable to the Roman Empire several centuries later, which both had extensive trade connections and both had organizations similar to corporations. While Rome had organizational entities which were largely used for public state-driven projects, Maurya India had numerous private commercial entities which existed purely for private commerce. This was due to the Mauryas having to contend with pre-existing sreni hence they were more concerned about keeping the support of these pre-existing private commercial entities. The Romans did not have such pre-existing entities to contend with; hence, they were able to prevent such entities from developing.
During this period, Mughal India was the second largest economy in the world. The gross domestic product of India in the 16th century was estimated at about 24.5% of the world economy, in comparison to Ming China's 25% share.
An estimate of India's pre-colonial economy puts the annual revenue of Emperor Akbar's treasury in 1600 at £17.5 million, in contrast to the entire treasury of Great Britain in 1800, which totalled £16 million. The gross domestic product of Mughal India in 1600 was estimated at about 22.6% the world economy, in comparison to Ming China's 29.2% share.
By this time, the Mughal Empire expanded to almost 1,000 million acres (4,000,000 km2), or 90 per cent of South Asia, and a uniform customs and tax administration system was enforced. Annual revenue reported by the Emperor Aurangzeb's exchequer exceeded £100 million in 1700 (twice that of Europe then). Thus, India emerged as the world's largest economy, followed by Manchu China and Western Europe.
Nawabs, Marathas and Nizams
1725 - 1750
During this period, Mughals were replaced by the Nawabs in north India, the Marathas in central India and the Nizams in south India. However, the Mughal tax administration system was left largely intact. China was the world's largest economy followed by India and France. The gross domestic product of India in 1750 was estimated at about 80 per cent that of China.
1750 - 1775
During this period, about two-thirds of the civil service in India was still dominated by Muslim officers though the Maratha empire expanded to almost 250 million acres (1,000,000 km2), or 34 per cent of Indian landscape, while the Nizam's dominion expanded to almost 125 million acres (510,000 km2), or 17 per cent of Indian landscape. China was the world's largest economy followed by India and France. The gross domestic product of India in 1775 was estimated at about 70 per cent that of China. Nevertheless, a devastating famine broke out in the eastern coast in early 1770s killing 5 per cent of the national population.
The British colonial rule created an institutional environment that did stabilise the law and order situation to a large extent. The British foreign policies however stifled the trade with rest of the world. They created a well developed system of railways, telegraphs and a modern legal system. The infrastructure the British created was mainly geared towards the exploitation of resources ofin the world and totally stagnant, with industrial development stalled, agriculture unable to feed a rapidly accelerating population. They were subject to frequent famines, had one of the world's lowest life expectancies, suffered from pervasive malnutrition and were largely illiterate.
An estimate by Angus Maddison argues that India's share of the world income went from 24.4% in 1700, comparable to Europe's share of 23.3%, to a low of 3.8% in 1952. While Indian leaders during the Independence struggle and left-nationalist economic historians have blamed the colonial rule for the dismal state of India's economy, a broader macroeconomic view of India during this period reveals that there were segments of both growth and decline, resulting from changes brought about by colonialism and a world that was moving towards industrialization and economic integration.
|Period||Price of Silver (in pence per Troy ounce)||Rupee exchange rate (in pence)|
|Source: B.E. Dadachanji. History of Indian Currency and Exchange, 3rd enlarged ed. |
(Bombay: D.B. Taraporevala Sons & Co, 1934), p. 15.
The fall of the Rupee
After its victory in the Franco-Prussian War (1870–71), Germany extracted a huge indemnity from France of £200,000,000, and then moved to join Britain on a gold standard for currency. France, the US and other industrializing countries followed Germany in adopting a gold standard throughout the 1870s. At the same time, countries, such as Japan, which did not have the necessary access to gold or those, such as India, which were subject to imperial policies that determined that they did not move to a gold standard, remained mostly on a silver standard. A huge divide between silver-based and gold-based economies resulted. The worst affected were economies with a silver standard that traded mainly with economies with a gold standard. With discovery of more and more silver reserves, those currencies based on gold continued to rise in value and those based on silver were declining due to demonetization of silver. For India which carried out most of its trade with gold based countries, especially Britain, the impact of this shift was profound. As the price of silver continued to fall, so too did the exchange value of the rupee, when measured against sterling.
British East India Company rule
During this period, the East India Company began tax administration reforms in a fast expanding empire spread over 250 million acres (1,000,000 km2), or 35 per cent of Indian domain. Indirect rule was also established on protectorates and buffer states. China was the world's largest economy followed by India and France. The gross domestic product of India in 1800 was estimated at about 60 per cent that of China, not taking into account the falling price of Rupee.
The Company treasury reported annual revenue of £111 million in circa 1800. This needs to converted to Indian Rupees with the falling price of Rupee to assess the impact on Indian economy. Almost all of the Indian land revenues were diverted by the Company to help the British Crown defend herself in the Napoleonic Wars.
China was the world's largest economy followed by India and France. The gross domestic product of India in 1825 was estimated at about 50 per cent that of China. British cotton exports reach 3 per cent of the Indian market by 1825.
China was the world's largest economy followed by the UK and India. Industrial revolution in the UK catapulted the nation to the top league of Europe for the first time ever. During this period, British foreign and economic policies began treating India as an unequal partner for the first time.English replaced Persian as the official language of India. The gross domestic product of India in 1850 was estimated at about 40 per cent that of China. British cotton exports reach 30 per cent of the Indian market by 1850.
Decline of the cotton textile industry
Ray (2009) raises three basic questions about the 19th-century cotton textile industry in Bengal: when did the industry begin to decay, what was the extent of its decay during the early 19th century, and what were the factors that led to this? Since there is no data on production, Ray uses the industry's market performance and its consumption of raw materials. Ray challenges the prevailing belief that the industry's permanent decline started in the late 18th century or the early 19th century. The decline actually started in the mid-1820s. The pace of its decline was, however, slow though steady at the beginning, but reached crisis point by 1860, when 563,000 workers lost their jobs. Ray estimates that the industry shrank by about 28% by 1850. However, it survived in the high-end and low-end domestic markets. Ray agrees that British discriminatory policies undoubtedly depressed the industry's export outlet, but suggests its decay is better explained by technological innovations in Britain.
The formal dissolution of the declining Mughal Dynasty heralded a change in British treatment of Indian subjects. During the British Raj, massive railway projects were begun in earnest and government jobs and guaranteed pensions attracted a large number of upper caste Hindus into the civil service for the first time. China was the world's largest economy followed by the USA, UK and India. The gross domestic product of India in 1875 was estimated at about 30 per cent that of China (or 60 per cent that of the USA), not taking into account the falling price of Rupee. British cotton exports reach 55 per cent of the Indian market by 1875.
USA was the world's largest economy followed by China, UK, Germany and India. Collapse of the central authority of the Qing Dynasty and the resultant chaos triggered China's short but rapid decline on the world stage. The gross domestic product of India in 1900 was estimated at about 20 per cent that of the USA.
The Crown treasury reported annual revenue of £122 million in circa 1900. While the revenue in terms of Pound Sterlings reported very low growth, it does not take into account the price of Rupee falling drastically, which is needed to understand the growth of revenue in terms of Indian economy.
The Crown treasury reported annual revenue of £125 million in 1925.
The Great Depression of 1929 had a very severe impact on India, which was then under the British. During the period 1929–1937, exports and imports fell drastically crippling seaborne international trade. The railways and the agricultural sector were the most affected.
The international financial crisis resulted in the soaring prices of commodities. The discontent of farmers manifested itself in rebellions and riots. The Salt Satyagraha of 1930 was one of the measures undertaken as a response to heavy taxation during the Great Depression.
The Great Depression and the economic policies of the Government of British India worsened the already deteriorating Indo-British relations. When the first general elections were held according to the Government of India Act 1935, anti-British feelings resulted in the Indian National Congress winning in most provinces with a very high percentage of the vote share.
The newly independent but weak Union government's treasury reported annual revenue of £334 million in 1950. In contrast, Nizam Asaf Jah VII of south India was widely reported to have a fortune of almost £668 million then.
Economic impact of British imperialism
Debate continues about the economic impact of British imperialism on India. The issue was actually raised by conservative British politician Edmund Burke who in the 1780s vehemently attacked the East India Company, claiming that Warren Hastings and other top officials had ruined the Indian economy and society. Indian historian Rajat Kanta Ray (1998) continues this line of reasoning, saying the new economy brought by the British in the 18th century was a form of plunder and a catastrophe for the traditional economy of Mughal India. (Economic Drain Theory) Ray believes that British depleted the food and money stocks and imposed high taxes that helped cause the terrible famine of 1770, which killed a third of the people of Bengal.
P. J. Marshall, a British historian known for his work on the British empire, has a reinterpretation of the view that the prosperity of the formerly benign Mughal rule gave way to poverty and anarchy. Marshall argues the British takeover did not make any sharp break with the past. British control was delegated largely through regional rulers and was sustained by a generally prosperous economy for the rest of the 18th century, except the frequent famines with very high fatality rate(Famine in India). Marshall notes the British raised revenue through local tax administrators and kept the old Mughal rates of taxation. Instead of the Indian nationalist account of the British as alien aggressors, seizing power by brute force and impoverishing all of India, Marshall presents a British nationalist interpretation in which the British were not in full control but instead were controllers in what was primarily an Indian play and in which their ability to keep power depended upon excellent cooperation with Indian elites. Marshall admits that much of his interpretation is still rejected by many historians.