The political economy of the Raj

Posted in economic history, economics, history, South Asia by jrahman on May 7, 2012

I was looking through some old correspondence, and I decided to do this post apropos nothing.  Basically, I want to jot down my understanding of the literature on the political economy of the British Indian Empire at its zenith — the last quarter of the 19th century.  This is not a literature review.  I amnot an expert on the subject.  Winston Churchill’s take on the subject was very different from Pundit Nehru’s, and Amartya Sen and Niall Ferguson don’t agree on it either — so if you disagree with what I say, you probably have very good reasons on your side.

One way to look at the economic relationship between India and Britain during the late 19th century is to use the prism of ‘home charges’.  Indian government (that is, the Indian taxpayers through the British imperial administration) was required to pay the British government the cost of running a cabinet department on India in London, costs of all wars where British Indian army participated (of course, Indians had no say in which wars to participate in), maintenance of British Indian army and other security services, pensions of all British military and civilian officers, and an annual 6% guaranteed return to the shareholders who invested on the Indian railway.  Annually, these charges amounted to about 5% of the economy.

Another way to look at the economic relationship is through trade balances between India, Britain, and the rest of the world.  India ran huge deficit with Britain — Britain sold manufactured goods and bought agricultural products.  India ran huge surplus with the rest of the world, who bought Indian agricultural products but couldn’t sell much to Indians because the market was closed.  Britain ran large deficits with the rest of the world, which was paid for by the surplus with India.

One argument is that the trade relationships just reflected comparative advantages of different economies, and there wasn’t anything  sinister about it.  A stronger argument is that the 5% of the income flowing from India to Britain every year reflected return on investment which benefitted both the British and the Indians — railway was after all what unified India, and without the British ‘justice’, India would have been a far worse place to live in.

But then again, it’s hard to argue that it was in the Indian taxpayers’ interest to pay for wars in faraway places.  Even with the railway, not everything was beneficial — tracks were laid with no consideration to local factors, keeping only the ease of troops movement in mind, resulting in major ecological problems.

More importantly, what was the opportunity cost of the 5% ‘drained away’ every year?  Without the Raj, could that income have been invested into something productive at home?  Here the nationalist critique is on thinner ground.  It’s difficult to make a convincing argument that these resources would have resulted in homegrown economic growth, and not simply been consumed by a rapacious local elite. 

In any case, the British manufacturers needed a sizeable class of consumers in India to buy their products.  And the Empire neeed a local collaborator class — they learnt the lesson of alienating powerful locals in 1857.  The solution was to encourage cash crops like jute or cotton, which produced a local middle class that could buy the British goods.  Eventually, it’s this class that also took on British ideas like democracy and nationalism. 

The rest, as they say, is history.

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2 Responses

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  1. Diganta said, on May 8, 2012 at 7:09 pm

    Without the raj, none would have calculated deficit and surplus … even in those days no-Indians did calculate those. Even if money would have stayed in India, it would have been used in something else than development. The modern way of development was never in Indian genes before raj kicked in …

  2. […] Diganta’s comment in the post on the Raj.  This goes really to the heart of the debate about the economic history of British India.  While […]

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