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Economic Impact of British Rule

Three Stages of British Colonialism

First phase: The Mercantile phase (1757-1813)

  • The East India Company used its Political power to monopolize trade and dictate terms to traders of Bengal.
  • Imposition of inflated prices of goods led to buccaneering capitalism whereby wealth flowed out of barrel of British trader’s gun.
  • Revenues of Bengal were used to finance exports England.

Second phase: The Industrial phase (1813-1858)

  • India was exploited as a market of British goods.
  • Act of 1813 allowed one way trade for the British, as a result of Indian market flooded with cheap and machine-made imports. Indian traders lost foreign as well as home market.
  • Indians were forced to export raw material and import finished goods.
  • Heavy import duty on Indian products to England discourages them in the market.

Third phase: Financial phase (1860 onwards)

  • The British consolidated their position in India and made India a market for manufacturers and a supplier of foodstuffs and raw material.
  • Introduction of Railways (1853), Post and Telegraph (1853), Banking System (Awadh Commercial Bank-1881).
  • Heavy British Investment in India and burden of public debt increases.
  • Industries came into existence (Tata Iron and Steel in 1907).

Drain of Wealth

  • Dadabhai Naoroji cited it in his book ‘’Poverty and Un-British Rule in India’’ (1867).
  • RC Dutta in his ‘’Economic History of India’’ (1901) blamed British policies for Indian economic ills.
  • Drain of Wealth theory refers to a portion of national product of India which was not available for consumption to its people.

Constituents of drain were :

  • Extortion by company servants the fortunes from rulers, zamindars, merchants and common man and sending them home.
  • Purchasing good out of revenues of Bengal and exporting them. This was called investment.
  • Duty free trade were provided to the British gave them competitive edge over Indian traders. These subsidies were financed from Indian treasury.
  •  Remittances or salaries and other income by company officials send to England.
  • Home charges or cost of salaries and pensions of company officials in India were paid from the treasury of India.
  • Hefty interests were paid to British investors.


  1. It stunted the growth of Indian enterprises and checked and retarded capital formation in India.
  2. It financed capitalist development in Britain.
  3. India was kept as a zone of free trade without allowing it to develop the ability to compete.
  4. Plantations, mines, jute mills, banking, shipping, export-import concerns promoted a system of interlocking capitalist firm managed by foreigners. It drained resources from India.

Land Revenue Systems

Permanent settlement/Istamarari (Sthayi) Bandobast

  • Introduction in Bengal, Bihar, Orissa, and districts of Benaras and Northern Districts of Madras by Lord Cornwallis in 1793.
  • John Shore planned the Permanent Settlement.
  • It declared zamindars as the owners of the land. Hence, they could keep 1/11th of the revenue collected to themselves while the British got a fixed share 10/11th of the revenue collected. The Zamindars were free to fix the rent.
  • Assured of their ownership, many zamindars stayed in towns (absentee landlordism) and exploited their tenants.

Ryotwari System

  • Introduction in Bombay and Madras. Munro (Viceroy) and Charles Reed recommend it.
  • In this, a direct settlement was made between the government and the ryot (cultivator).
  • The revenue was fixed for a period not exceeding 30 years, on the basis of quality of the Soil and the nature of the crop. It was based on the scientific rent theory of Ricardo.
  • The position of the cultivator became more secure but the rigid system of the revenue collection often forced him into the clutches of the moneylenders.
  • Besides this, the government itself became big zamindars and retained the right to enhance revenue at will while the cultivators were left at the mercy of its officers.

Mahalwari system

  • Modified version of zamindari settlement introduced in the Ganga valley, NWFP, parts of Central India and Punjab.
  • Revenue Settlement was to made by village or estates with landlords. In Western Uttar Pradesh, a settlement was made with the village communities, which maintained a form of common ownership known as Bhaichare, or with Mahals, which were group of Villages.
  • Revenue was periodically revised.

Colonial Impact of Land Revenue Systems

  1. The land Settlement introduced market economy and did away with customary rights. Cash payment of revenue encouraged money-lending activity.
  2. It sharpened social differentiation. The rich land access to the courts to defend their property.
  3. Forcible growing of Commercial crop led the peasants to buy food grains at high prices and sell cash crop at low prices.
  4. The stability of the Indian Villages was shaken and the entire set up the rural society began to break up.

Positive and Negative Impacts of British Rule in India

Impact of British Rule – Positive Aspects

  • New Job Opportunities: The British introduce new job opportunities that were especially beneficial to the members of the lower caste. With these opportunities, there was a better chance of upward social mobility for them
  • Rise of the modern middle class in India: British rule led to the rise of an influential middle-class who would become pioneers of Indian industrialization in the post-independent era.
  • Development of Infrastructure: The British authorities built many important infrastructures such as hospital schools and the most important of all, railways. Of course, this was done not to enhance the lives of the local Indians but rather to facilitate their exploitation. Regardless these infrastructures laid the foundation of India becoming a major economic powerhouse
  • Introduction of new technology and ideas: The introduction of new technology like steamships, telegraphs and trains completely changed the economic landscape of the Indian subcontinent. Culturally, the British put an end to social evils such as Sati (with the passing of the Bengal Sati Regulation Act on  December 4, 1829) and weakened the caste system to an extent.
  • Protection from external enemies: India was known as the “jewel in the crown of the British Empire”. Thus the British provided protection against like Persia and Afghanistan. Even other western nations like France were deterred from being too involved with India. Though a boon, it turned out to be a bane in the long run as it made India too heavily dependent on the British. 

Impact of British Rule – Negative Aspects

  • Destruction of Indian Industry: When Britain took over, they forced the governments to import goods from the British Isles rather than create their own products. This led to the local cloth, metal and carpentry industries to fall into disarray. It made India a virtual hostage of Britain’s economic machinations which meant breaking away from it would destroy India’s economy.
  • British mismanagement led to famines: The British rule placed more emphasis on the cultivation of cash crops rather than growing crops that would feed India’s huge population. They imported food from other parts of the empire to feed its citizens. This policy, combined with the unequal distribution of food, led to 24 famines killing millions between 1850 and 1899 alone. The first and if not the worst of this lot was the Bengal Famine of 1770.
  • The Divide and Rule Policy: The British realised that they could never rule a vast territory like India without breaking up strong kingdoms into small easily conquerable segments. The British Empire also made it a policy to pay religious leaders to speak out against each other, slowly poisoning relations between different faiths. The hostile relationship between India and Pakistan can be attributed as a direct result of this policy.
  • Britain plundered the Indian Economy: Due in no small part to the unethical business practices of the East India Company it can be estimated that trillions were siphoned off by Britain. Such practices even destroyed the Indian industries and ensured that money flowing through the Indian economy ended up in the hands of London.