Even after securing the control over the trade routes during sixteenth-seventeenth centuries, the Europeans did not solve the basic pattern which had long dominated trade between India and the West.
Indian goods were in far greater demand in Europe than were European goods in India. Merchants might profit handsomely through the sale of Indian goods, which were of both better quality and lesser price than similar European products. The result was both a drain of bullion from Europe to India, as well as stiff competition for European producers who were unable to match either the price or quality of Indian goods.
In fact the British East India Company, in the first 50 years of its existence, had no interest in the development of colonies, preferring to engage in trade only, following the pattern set by the Portuguese. This pattern was changed by 1650 when the power of the old guard British royalist merchants was broken, and a new class of merchants wrested control of the Company. They followed the pattern set by the colonial merchants in American colonies and the West Indies, and sought to establish a network of colonies linking England, Africa and India in a complicated network of exchange relationships.
The Mughal Empire declined in the first half of the eighteenth century. The political vacuum was filled by the rise of regional states like Bengal, Hyderabad, Awadh, Punjab and Maratha Kingdoms. But these regional powers could not provide lasting political stability resulting into a lustful chance for the British East India Company to establish a territorial empire in India.
Now a set of institutions and regulations were required to rule India through colonial mechanism. They adopted three methods to
expand the British Empire. They were:
Initial method was outright military conquest or direct annexation of territories; it was these areas that were properly called British India. Latter on to consolidate its position diplomatic efforts through treaties and agreements with indigenous rulers were also made.