An Economic History of India

Dietmar Rothermund

• Publisher: Routledge
• Year: 2002
• Print ISBN: 9780415088718
• eBook ISBN: 9781134879441
• Edition: 2
• Topic: History
• Subtopic: World History
• Index: History

Much has been written on the Indian economy but this is the first major attempt to present India's economic history as a continuous process, and to place the development of agriculture, industry and currency in a political and historical context.

1
The Structure of the Traditional Economy

1.1 APPROPRIATE TECHNOLOGY AND THE FAMILY UNIT

The traditional Indian economy was characterised by what we would call today an ‘appropriate technology’ geared to small-scale production in family units of peasants and artisans. Land and labour as factors of production were abundant, and therefore the third factor—capital—which is substituted for the other factors whenever they are scarce, was not required. There was, of course, some capital formation in trade and also in terms of the construction of wells and tanks for local irrigation, but there was no capital accumulation that would lead to a concentration of the ownership of the means of production. The tools and implements were simple and could be made locally and cheaply. The manufactures sponsored by some rulers for the making of arms or of luxury goods were very rare indeed. Wealth was sometimes amassed by successful merchants or victorious warlords, but such wealth was usually lost as quickly as it had been gained.

In agriculture, the small family farm was predominant. Land was not yet a commodity that was freely bought and sold. The peasant family who tilled the soil was in greater demand than the land, ‘which belonged to him who first cleared it’, as ancient law codes proclaimed. Landlords were not landowners; they only had the right or privilege to collect taxes from the peasants. They kept some of these dues for themselves and handed over the rest to the ruler or another privileged person in the hierarchy of those who lived on the work of the peasantry. If these dues were too high, peasants would flee and look for the protection of a less rapacious lord. Nobody ever thought of organising agricultural production on a large scale with hired wage labour. The vagaries of the monsoon would have made such an operation very risky. It was much better to let peasant families bear the risk, and usually also the entire cost of production, and get hold of their surplus when the harvest was in.

A strong ruler would tend to eliminate middlemen and concentrate the collection of surplus in his capital city, but there were several problems which he would face when doing this. Such concentration was impossible without coercion and this meant overheads in terms of armed retainers, weapons, horses, etc. The growth of such overheads would then lead to more taxation and more coercion, which would finally meet with resistance. Moreover, the concentration of the collection of surplus in kind was difficult because of the cost of transportation, and the high degree of monetisation which was required for the large-scale collection of revenue in cash could not be attained in many periods of Indian history. Decentralisation prevailed most of the time. Medieval Indian kings normally controlled only a circle of about 100 km radius around their capital in terms of direct taxation; from more distant parts they could at the most extract some tribute. These kings were used to granting a great deal of local autonomy to their subjects; they emphasised their ritual sovereignty and bestowed land on temples and brahmins, who in turn provided moral support for their rule. They also profited from the control of ports and trade routes. Urbanisation and monetisation were limited and money circulated only in the centres of trade and pilgrimage.

1.2 MILITARY FEUDALISM, URBANISATION AND MONETISATION

The traditional structure of the medieval kingdoms was rudely shaken when Northern India was conquered by Islamic horsemen, whose new strategy of swift cavalry warfare soon spread throughout India, as no ruler could hope to survive unless he adopted the new style of warfare and military organisation. Horses were rare in India and horsebreeding somehow did not meet with great success; thus horses for the cavalry had to be imported at great cost from Persia and Arabia. This required increased taxation and the man on horseback was a more formidable tax collector than his pedestrian predecessors. Local autonomy was crushed by the man on horseback. New urban centres arose in the countryside; they housed the garrison of the cavalry, the treasury of the tax collector and served as market places too. Increased international trade brought precious metals to India and this contributed to the spread of monetisation, which enabled the tax collectors to get their revenue in cash.

The military commander and tax collector, who ruled the countryside from his garrison town, was usually a stranger with no local roots. In the north, he would be a Turk or Afghan; in the south, Telugu warriors had penetrated the Tamil country. Whenever central control was reduced, such a commander could turn into an independent warlord and start a dynasty of his own. In order to guard against such a challenge, the central rulers tried to concentrate a larger military force in their capital. The type of urbanisation bred by this system of military feudalism was a strange one: there were no patricians, no municipal autonomy in these towns. The military elite was in complete control and civil administration was already subject to the control of military officers.

The universal spread of cavalry warfare and the distribution of the cavalry units in various garrisons made the assertion of central control more and more difficult. Only the introduction of an even more powerful force could help to support a new central dynasty. The Mughal field artillery was such a force and the Great Mughals saw to it that it remained under their direct control. This type of armament was very expensive and although the Mughals were successful in conquering most of India with their guns, they finally exhausted the land-revenue resources on which their empire was based. The enormous overheads of innumerable soldiers, courtiers and administrators were too much for the revenue-paying peasant, who had to sell an ever-increasing proportion of his produce in order to pay his revenue in cash. This monetisation under a military feudal regime did not lead to a genuine commercialisation, just as the new pattern of feudal urbanisation did not lead to the rise of a bourgeoisie. The Indian traders who bought and sold grain and provided credit to the ruling elite could never hope to achieve a corporate autonomy. They were very astute in going about their business, but the conditions under which they had to operate were not conducive to the growth of genuine capitalism. The sluggishness of the seasonal circulation of money in the vast agrarian economy also handicapped the financial operations of the traders. Sometimes they emerged as large-scale revenue contractors, but more often they were cautious and did not want to get involved in such risky business. Knowing the rapacity of the military elite, they hid their wealth and adapted themselves to the prevailing conditions. In addition to the appropriate technology, which has been mentioned above, there was thus an appropriate capitalism of merchants, who were used to dissimulation rather than to an active assertion of their influence.

1.3 LONG-DISTANCE TRADE AND FRAGMENTED MARKETS

The political unification of most of India under Mughal rule did not imply the emergence of an integrated market economy. There were many regional markets, which remained isolated from each other owing to the high cost of transportation. Only expensive goods with little weight such as textiles or precious raw materials such as indigo were traded over long distances and also entered the international market via maritime trade. Bullock carts, which are now the universal means of transportation, were rare in Mughal India because there was a lack of adequate roads. Pack animals were the only means of transportation. Long-distance trade in grain was impossible under such conditions. Only the Great Mughal could afford to hire thousands of pack animals to transport grain for his army when it was deployed on distant battlefields. Only where coastal and river transport by ship was possible did grain shipments occur over long distances, such as Bengal rice being sent to Sri Lanka or up the Ganges to North Indian markets or rice from Gujarat reaching ports in East Africa or in the Persian Gulf. Inside the country, grain rarely ever reached the next regional market, even when there was a famine and prices were rising. Thus there coexisted long-distance trade routes for certain commodities and regionally fragmented markets for most other goods.

The lucrative and risky long-distance trade and maritime trade were well financed. Rich merchants as well as high officers and princes participated in these ventures. There were even speculative ventures such as the initial stages of freight insurance, when merchants not directly involved in the respective trade themselves undertook to bear the risk of loss in transit for a share of the profit of the sale of goods after their safe arrival. Futures trading was also widely practised. Islamic merchants who wished to abide by the religious injunction against the taking of interest nevertheless managed to provide credit and to get debts serviced by including the interest rate in the price fixed in advance for a future sale. Large-scale transactions were facilitated by the circulation of promissory notes (hundi), which were sometimes handed on like bank notes before they were encashed. Each merchant who passed them on to another would endorse them and with such additional endorsements they were even more welcome to the next recipient. Thus there was a well-developed trade and a great deal of sophistication in dealing with money and credit, but all this was never institutionalised or guaranteed by any authority. Credit was based on personal relations and not on an impersonal legal system. Therefore all established channels of trade were well financed, but new ventures and investments would rarely find the necessary credit. Among the most well-established branches of trade was the export trade, and especially trade with Europeans who brought precious metals to India, for which there was such an enormous demand.

1.4 THE SILVER STREAM AND STATE FINANCE

The monetisation of the land revenue was very important for the rulers of a great agrarian state because only cash could be easily transferred from the local to the central level so as to support a powerful government and a large army. As India had no silver mines and paper money was not yet in circulation (except for the private promissory notes), the monetisation of the revenue depended directly on the influx of silver from abroad. In their own interest, the Great Mughals had standardised and improved the minting of coins in their empire. Their silver rupee was of good quality and was universally accepted. Anybody could go to the mint and could get silver converted into rupees at a small charge of 5.6 per cent. By means of a clever device the Mughals assured the steady circulation of these coins: the rupee was accepted at its full value only in the year in which it was minted; in subsequent years there was an increasing discount. People who hoarded money thus had to bear a certain loss, unless they replaced the coins in their hoards every year. If they forgot to do this or if they inherited an old hoard, they had to take it to the mint to get new coins, because the discount on the old coins in the market would far exceed the charges of the mint master. In this way the rupees were kept in constant circulation, and the mints and the treasury were assured of a steady flow of money. But the system in which this circulation took place kept on growing at a fairly rapid rate. New regions were made to pay revenue in cash, government expenditure increased and the population grew too. Around 1600, India had a population of about 150 million; 200 years later there were about 200 million. This meant that India’s capacity for the absorption of the silver stream coming from the West was also growing, but the stream was so big that it led to a price inflation, in spite of this absorptive capacity. Spurts of inflation could be noticed in times when the import of silver was particularly large.

The output of the American silver mines was transferred to India with a certain time-lag. Thus the price inflation that could be noticed in Spain in the early sixteenth century spread to India only a few decades later. From 1500 to 1600 the circulation of coins increased in Spain from 5 to 91 million ducats (that is, eighteen times), whereas prices increased fourfold. The pattern of inflationary price increases was regionally differentiated. In the coastal regions of Spain prices were three times higher than in the interior of the country. Merchants accumulated capital, whereas the real income of the higher nobility declined and its dependence on the king increased.

The high level of prices in Spain encouraged imports and contributed to an outflow of precious metals. A large amount of this Spanish money found its way to India. In the period from 1591 to 1639, the circulation of silver coins trebled in India. The conduct of Mughal public finance was an additional factor that could contribute to spurts of inflation. It is said that Jahangir, who inherited Akbar’s throne and treasury in 1605, spent about 60 million of the 70 million rupees he found in that treasury. The great stream of imported silver of the early seventeenth century was thus augmented by Jahangir’s lavish expenditure. Jahangir died in 1627 and his successor Shah Jahan then tried to replenish the treasury by saving 5 million rupees per year. The deflationary effect of this measure was not immediately felt, as imports of silver remained fairly high. Prices doubled in India in the period from 1595 to 1637. Some reduction in the circulation of money could only be noticed around the middle of the seventeenth century, although during its last decades the stream of silver increased once more and Aurangzeb’s enormous expenditure on his wars contributed to a new spurt of inflation.

These spurts of inflation ruined Akbar’s rational system of land revenue assessment and of carefully graded salary scales for the hierarchy of imperial officers. Just as the higher nobility of Spain felt the pinch of declining real incomes, the Mughal mansabdars found it difficult to make both ends meet. Instead of revising Akbar’s system, however, his successors merely adjusted it in a piecemeal fashion. The very rationality of the system thus proved to be a handicap. Inflationary pressure and increasing government expenditure led to a stepping up of the land revenue demand. Modern states can ride the tide of inflation by collecting customs duties, income tax, sales taxes, etc., whereas Mughal public finance was tied to land revenue, a sluggish and regressive tax which cannot be revised in a short period of time. Mughal finance was thus faced with a dilemma: the silver stream which came into the country by means of trade was welcome, because it enabled the monetisation of the land revenue, but at the same time this stream of silver led to an inflation that could not be tackled with the existing methods of taxation. Therefore it was necessary to rely even more on the land revenue, which was ill suited for the purpose of coping with the problems of public finance in a period of inflation.

The agrarian state of the Mughals was unable to meet the challenge of these new economic conditions. As far as external relations were concerned, the Mughals were practically liberal free traders, but in internal affairs they unwittingly followed the doctrine of the physiocrats, who believed that there should be no other tax than the tax on agriculture, as this tax was anyhow passed on to the consumer and was thus the most universal tax imaginable. The Mughals in fact succeeded in adjusting the land revenue to the rising level of prices, but in collecting this revenue they faced more and more resistance. The bulk of the peasantry in subsistence agriculture did not profit from the rise in prices. They were forced to sell some of their produce only in order to meet the revenue demand. That demand was regulated by the needs of the central government, whereas the price the peasant received was dictated by the conditions of the local market, which was not yet integrated into a national market. Tensions increased in that way. Rebellious peasants got hold of guns, which could be produced by the local blacksmith, in spite of strict orders of the Mughal government against this type of manufacture of arms. However, this ‘appropriate technology’ of rural resistance could not be easily checked. The Mughal empire, which owed its rise to the stream of silver and the introduction of new arms, was challenged by the consequences of the developments that were the secret of its own success. Military feudalism was at the end of its tether. Finally, the bourgeois servants of the East India Company stepped in where the Mughals had failed.

2
The Development of Maritime Trade and the Beginnings of Colonial Rule

2.1 MEDIEVAL CORPORATE EMPIRES AND MARITIME TRADE

From ancient times, India had had active maritime trade relations with many countries around the Indian Ocean. In the medieval period, South Indian states were particularly involved in this trade. Kings used to get a good deal of their income from trade and could thus afford to maintain a large army and to build a powerful navy without exhausting their land revenue base, which was mostly confined to the fertile core area of their dominion. The peasantry enjoyed a great deal of local autonomy, while the king’s power grew nevertheless.

Around 1000 AD there was a remarkable change in the structure of Asian maritime trade. The previous pattern of pre-emporia trade changed into the new pattern of emporia trade. Whereas in the phase of pre-emporia trade goods were shipped directly from the place of origin to that of final consumption, the rise of emporia, particularly along the Indian coasts, implied new practices of re-export, breaking bulk, assorting shipments according to the demands of various ports of call, etc. This major change in the pattern of Asian maritime trade was related to the simultaneous rise of powerful corporate empires in several parts of Asia. The Chola empire of South India, the Khmer empire of Cambodia and the empire of Champa in Vietnam, and China under the Sung dynasty emerged in the amazing eleventh century AD, which witnessed a rapid extension of rice cultivation and a large-scale increase both in local and long-distance trade. The goods traded were no longer only a few luxury items, but a wide variety of commodities such as processed iron, spices, sandalwood, camphor, pearls, textiles, as well as horses and elephants. Customs duties played a major role in the budgets of these corporate empires, which differed from the land-revenue-based agrarian states of a later period. The political order of these medieval corporate empires was not so much that of territorial sovereignty, but of a corporate network of rulers, merchants, temples, priests and/or royal officers. A brief survey of the rise of the Chola empire and of China under the Sung dynasty will illustrate this new development.

The Chola empire experienced a sudden spun of expansion under the powerful rulers Rajaraja I and Rajendra I in the early eleventh century AD. The power of these rulers was partly based on the control of the fertile rice basin of the Kaveri delta, but also on their intimate links with prosperous and influential merchant guilds which controlled long-distance trade. In fact, Chola imperial expansion was planned according to the advice of such merchants. It was a merchant who told Rajaraja about the weakness of Sri Lanka’s king and suggested a military intervention. The main thrust of the Chola expedition was then aimed at the Pollonaruva-Trincomalee region, which was obviously of strategic importance for the South-East Asian trade. At the same time the complete control over the Gulf of Mannar gave the Cholas and their merchants a monopoly of the pearl trade, as this region was famous for its pearl fisheries. The Cholas had trade relations with China, Burma, Srivijaya and other South-East Asian realms. Rajaraja’s embassy, which reached China in 1015 AD, advertised his realm as an important member of the new emporia network. For the most part, these maritime trade relations were peaceful, but Rajendra’s naval expedition against Srivijaya in 1025 AD clearly demonstrated that diplomacy could be backed up by military intervention. The issue at stake was undoubtedly the access to the Chinese market, which developed very fast under the Sung dynasty.

At the end of the tenth century the Sung dynasty suddenly rose to prominence and established its stronghold in a fertile area on the lower Yellow River, where Kaifeng was their first capital. Under this dynasty, China experienced a veritable renaissance in the eleventh century AD. Pressed by the powerful hordes of the northern steppes, the Chinese turned towards the sea. New varieties of rice imported from Champa enabled them to have two harvests a year in the fertile southern provinces. The circulation of coins and the volume of trade increased by leaps and bounds in the eleventh century, which was a golden age in medieval Asia. The printing of banknotes and the circulation of cheques and other negotiable instruments (‘flying money’) greatly expanded the scope of monetisation and commercialisation. Chinese reformers conceived of an expanding economy which would increase both the standard of living of the people and the income of the state. Mandarins and merchants prospered in this state and became the main supporters of its corporate structure. The Chinese junks, which were the most advanced vessels of their day and age, crossed the high seas. The nautical use of the compass was introduced by the Chinese at that time. (The Venetians adopted it only several centuries later in order to cross the Mediterranean in the cloudy winter, thus sending out two fleets to the Levant per year rather than only one.) In the eleventh century Asia was definitely ahead of Europe in most respects, and its corporate empires, whose power was based on an ample supply of rice and a buoyant trad...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• PREFACE
• 1: THE STRUCTURE OF THE TRADITIONAL ECONOMY
• 2: THE DEVELOPMENT OF MARITIME TRADE AND THE BEGINNINGS OF COLONIAL RULE
• 3: THE AGRARIAN STATE AND THE COMPANY: PARASITISM AND PARALYSIS
• 4: THE EVOLUTION OF AN INDIAN MARKET IN THE NINETEENTH CENTURY
• 5: THE LIMITS OF INDUSTRIALISATION UNDER COLONIAL RULE
• 6: THE IMPACT OF THE FIRST WORLD WAR
• 7: ECONOMIC CONFLICTS IN THE POST-WAR PERIOD
• 8: THE CONSEQUENCES OF THE GREAT DEPRESSION
• 9: INDIA’S WAR PROFIT: THE DEBTOR TURNS INTO A CREDITOR
• 10: INDIA’S DILEMMA: DYNAMIC INDUSTRIALISATION AND STATIC AGRICULTURE
• 11: THE ‘GREEN REVOLUTION’ AND THE INDUSTRIAL RECESSION
• 12: RESURGENCE, CRISIS AND RECOVERY
• 13: POPULATION GROWTH AND NATIONAL INCOME
• 14: METROPOLISATION AND REGIONAL DISPARITIES
• 15: TASKS OF THE FUTURE
• ANNOTATED BIBLIOGRAPHY