At independence (15 August 1947) India inherited a stagnant, semi-feudal, agrarian economy with low per-capita income, a deindustrialised handicraft base, primitive technology in agriculture, and a foreign-trade pattern designed to serve Britain. Nearly two centuries of colonial rule had turned a once-prosperous economy into a supplier of raw materials and a market for British manufactures. This is the baseline against which planning (planning era) and the 1991 reforms (liberalisation 1991) are measured.
- Britain ran India as a colony to serve the British economy, not to develop India. There was no genuine effort to estimate national income; the most accepted pre-independence estimate (by V.K.R.V. Rao) suggested very low and barely rising per-capita income through the first half of the twentieth century.
- Aggregate real output is estimated to have grown at under one percent a year in the half-century before independence, with per-capita growth close to zero.
- About 70 to 75 percent of the working population depended on agriculture, yet it was stagnant and at times declining in productivity.
- Causes: the various land-revenue and tenure systems (notably the Zamindari or Permanent Settlement of 1793 in Bengal), which made revenue extraction the priority while the actual cultivator had little incentive or capital to improve the land.
- Low technology, negligible irrigation, no use of fertilisers, and dependence on the monsoon kept yields low. Commercialisation of agriculture often meant cash crops grown for export under compulsion rather than for the cultivator's benefit.
- India had a world-renowned handicraft industry (the cotton and silk textiles of Bengal, Murshidabad and the south, and metal and stone work). Colonial policy systematically ruined it.
- The mechanism: a two-fold motive, to reduce India to a mere exporter of raw materials for the rising British machine industry, and to turn India into a market for finished British goods. Tariff-free entry of British manufactures and discriminatory duties on Indian goods destroyed the artisan base.
- The result was massive unemployment among artisans and a forced shift of population back onto an already overcrowded land, with no modern industry to absorb them.
- A few modern industries grew late: cotton textile mills (largely Indian-owned, in Maharashtra and Gujarat) and jute mills (largely foreign-owned, around Kolkata). The Tata Iron and Steel Company (TISCO) was set up in 1907.
- The public sector was confined to railways, ports, communications and some departmental undertakings. There was almost no capital-goods (machine-making) sector, so the country could not produce the machines needed for further industrialisation.
- India was a net exporter of primary products (raw silk, cotton, jute, indigo, sugar, wool) and an importer of finished goods (cotton and silk textiles, woollens) plus capital goods.
- Britain held a near-monopoly over India's trade; more than half of India's foreign trade was with Britain alone.
- A large export surplus was generated, but it did not bring gold or money into India. It paid for the so-called Home Charges (the cost of the colonial office in London, war expenses and pensions of British officials) and for invisible imports. This unrequited export, the "drain of wealth," was first systematically argued by Dadabhai Naoroji in Poverty and Un-British Rule in India.
- The first official census was held in 1881; the demographic transition (when the death rate falls and population growth accelerates) is dated to about 1921, called the Year of the Great Divide. Before 1921 the population was broadly stationary; after it, it grew steadily.
- Indicators in 1947 were dismal: literacy below 16 percent, female literacy around 7 percent, an infant mortality rate around 218 per thousand, and life expectancy of about 32 years. Public-health facilities were grossly inadequate and water-borne and other diseases were widespread.
- Heavily skewed toward the primary sector. Roughly 70 to 75 percent in agriculture, about 10 percent each in manufacturing and services. There was sharp regional variation: the share of agriculture had begun to fall in some provinces (then Madras, Bombay, Bengal) but rose in others (Orissa, Rajasthan, Punjab), reflecting deindustrialisation.
- Drain of wealth: India's export surplus financed British administrative and military costs rather than returning as income to India.
- Deindustrialisation: the decline of indigenous handicrafts without a compensating rise of modern industry.
- Commercialisation of agriculture: production of crops for the market (often for export), frequently coerced and not benefiting the cultivator.
- Year of the Great Divide (1921): the turning point after which India's population began sustained growth.
The colonial inheritance explains why early independent India prioritised self-reliance, public-sector heavy industry and food security. For the security and human-rights lens, the destruction of the artisan economy and the famines of the colonial period (the Bengal famine of 1943 being the most cited) frame how economic deprivation and state neglect feed unrest, a theme that recurs in poverty and in internal-security writing. Border and tribal regions inherited the deepest backwardness, which is why border-area development is a continuing concern for the forces.
- Who systematically developed the "drain of wealth" theory in the colonial period? (Answer: Dadabhai Naoroji.) Authored practice, not a verbatim PYQ.
- The year 1921 is called the Year of the Great Divide in Indian demography because: (a) literacy crossed 50 percent (b) the population began sustained growth as death rates fell (c) the first census was held (d) the partition of Bengal. (Answer: b.) Authored practice, not a verbatim PYQ.