Third Phase of British Colonialism

The third phase is seen to have begun from the 1860s, when British India became part of the ever-expanding British empire, to be placed directly under the control and sovereignty of the British crown. This period was one of ‘finance-imperialism’, when some British capital was invested in the colony. This capital was organized through a closed network of British banks, export-import firms and managing agencies.

Although the process of colonization has been divided into stages, one should keep in mind that this periodisation is in some ways arbitrary. The third phase was merely a consolidation of the trends that were already witnessed clearly in the second phase. It may be more useful to study these phases as heavily overlapping, where new and more subtle forms of exploitation existed alongside older, cruder forms.

However, the new development that marked out the third phase was an intensification of the rivalry between developed and industrialized countries, for colonies in Asia, Africa and Latin America. In the 19th century, countries like France, Belgium, Germany, the United States, and even Japan witnessed rapid industrialization. In the face of competition in the world market, Britain’s lead in this regard dwindled.

In search for newer markets and sources of raw material, these countries stepped up their drive for colonies and strengthened their control over existing ones. Industrial development also led to capital accumulation, which was concentrated in a small number of banks and corporations. This capital was invested in the colonies to sustain the rapid inflow of raw materials to fuel further expansion of industrial production.

High tariff restrictions in other developing capitalist countries led to a contraction of markets for British manufactured goods. And the need for heavy imports of agricultural products into Britain, was making her position vulnerable in her trade with other countries. India proved crucial in solving the problem of Britain’s deficits. Britain’s control over India ensured that there would always be a captive market for Lancashire textiles. Moreover, India’s export surplus in raw material with countries other than Britain, counter-balanced her deficits elsewhere.

While on the one hand indigenous handicrafts faced impoverishment, on the other hand, there were few attempts at developing modern industries in the colony. Although the colonial government spoke about ‘free trade’, indigenous enterprise faced many obstructions perpetuated by the state’s discriminatory policies. British capital was initially invested in railways, jute industry, tea plantations and mining.

The Indian money market was dominated by European banking houses. While British entrepreneurs had easy access to capital made available by this banking network, Indian traders had to depend on family or caste organizations for their capital needs.

British banking houses and British trading interests were well organized through Chambers of Commerce and Managing Agencies and could also influence the colonial state, to carefully deny Indian entrepreneurs access to capital. Before the First World War, British Managing agencies controlled 75% of industrial capital, and most of the profits from this limited industrialization were also sent back to Britain.

But, inspite of heavy odds, Indian entrepreneurs found opportunities to expand and grow, whenever Britain underwent periods of economic hardship. It was during the First World War that some Marwari businessmen from Calcutta, like G.D.Birla and Swarupchand Hukumchand invested in the jute industry. Gradually their control started expanding into other areas like coal mines, sugar mills and paper industry, and they could even buy up some European companies.

The greatest success of Indian capital was seen in the cotton industry in western India, which took advantage of high demands during the war years (1914-18) to consolidate its successes, and eventually was in competition with Lancashire. Certain traditional trading communities like Gujarati Banias, Parsis, Bohras and Bhatias became important in this sector. The Tata Iron and Steel Company under government patronage provided leadership to the fledgling iron and steel company of India.

After the first world war, links with the foreign market was re-established, but again in the Depression years (1929-1933), the domestic market became relatively free to be exploited by indigenous industry, as foreign trade declined. The colonial government also provided some protection to the sugar and cotton industries, in the face of falling prices in the agricultural sector. Low prices forced capital from land into the manufacturing sector. Indians also ventured into the field of insurance and banking.

Again, during the Second World War (1939-45), as foreign economic influence declined, Indian entrepreneurs managed to make huge profits. Strengthened by its limited success, the Indian capitalist class strengthened their links with the nationalist movement. They soon started demanding the establishment of heavy industries under state ownership and started organizing themselves to resist the entry of foreign capital.

But, to place these markers of success in perspective, on an overall level, these developments remained confined to the domestic market and indigenous capital still had a long battle ahead, against the structural weaknesses of a colonial economy. The potential for growth remained depressed given the massive poverty of the Indian people.

Early Indian nationalists like Dadabhai Naoroji, M.G. Ranade and R.C.Dutt had expected Britain to undertake capitalist industrialization in India, but were deeply disillusioned with the results of colonial industrial policies. Consequently, they formulated a strong economic critique of colonialism in the late nineteenth century.

Dadabhai Naoroji put forward the drain of wealth theory. Poverty in India, according to them, was the result of a steady drain of Indian wealth into Britain - a result of British colonial policy. This drain occurred through the interest that India paid for foreign debts of the East India Company, military expenditure, guaranteed returns on foreign investment in railways and other infrastructure, importing all stationery from England, ‘home charges’ paid for the Secretary of State in Britain and salaries, pensions and training costs of military and civilian staff employed by the British state to rule India. Even if this drain was a small fraction of the value of India’s total exported, if invested within the country it could have helped generate a surplus to build a capitalist economy.

The ultimate question that has been asked of colonial economic policies in India is whether there had been any development at all. The answer to this question is not simple. We may start with looking at eighteenth-century Mughal India, before the British had entrenched themselves as an invincible territorial power. The view that eighteenth century Mughal India was undergoing a deep economic crisis and decline has been pervasive among historians. It has been seen as the decisive broader context within which we may locate the decline of the Mughal empire.

But some later historians have refuted this view, and have instead drawn attention to the rise of new rebellious groups into power, to account for the fall of the empire. They have argued that the Mughal period was in fact a period of over all well-being and economic growth rather than stagnation or crisis. Within the political structure, there was sufficient space and autonomy in the hands of local landed elites and urban guilds to generate and accumulate surplus.

Moradabad-Bareilly, Awadh. Banaras and Bengal were some such ‘surplus areas’. Forests were being cleared to expand cultivation. Consequent rises in agricultural yield and the establishment of a cash nexus made surplus accumulation possible in the hands of erstwhile landlords and zamindars, who challenged Mughal paramountcy to emerge as the new regional power elite.