Colonialism was not only the political domination of the country. It was a complete unified structure which sustained itself through various institutions and structures. However, the primary aim of this unified structure was to facilitate the drain of surplus from India to Britain in one form or the other. This drain which continued for the entire 200 years of colonial rule damaged the Indian economic structure. The colonial structure linked the Indian economy to world in a subordinate position. As a result, on the eve of independence, the Indian economy was a backward stagnant economy characterised by widespread poverty. The entire economic structure had been geared to the colonial needs of the British; it was totally a dependent system. Apart from this, the partition of the country brought in its wake innumerable problems for the country, not only in political and social arena but the economic aspects as well. Some of the aspects of the Indian economy at the time of Indian independence are as under:
Agriculture has always been the primary occupation of India, and it was so in 1947 i.e. on the eve of independence. About 70 per cent of the total labour force was engaged in this sector. About 50 per cent of the national product was generated in this sector. Food crops accounted for most of the land under cultivation. Low productivity necessitated large areas for food crop cultivation. Even this failed to meet the food requirements of the country. Important crops that were produced were wheat, rice, millets, sugarcane, cotton and jute. Low productivity in the agricultural sector could be explained by a number of factors; more important among these were (i) the rising pressure of population on land; and (ii) the neglect of agricultural improvements at the hands of the British Government in India.
British industries could not be absorbed in the indigenous industries. These took to agriculture for subsistence. It was this overcrowding on land, which primarily explained the ruinous subdivision and fragmentation of land resulting in the growth of uneconomic holdings. This, in turn, resulted in a steady decline in the income of the large section of the agricultural population. The impoverishment of the agriculturists disastrously affected agriculture. The impoverished agriculturist could not renew his livestock or properly manure the field. He and his family lost physical energy due to malnutrition and thereby, capacity for labour on the field. Thus, agriculture stagnated, in fact, deteriorated.
Pre-British India was a land of artisans and handicraftsmen. It was during the British period that the modern machine-based industries were established in India. But the industrial development of India was insufficient and lop-sided. The relative backwardness of industrial development in India may be judged from the fact that in 1948-49 factory establishments accounted for only 6.6 per cent of total national income. The total labour force engaged in such establishments was about 2.4 million or 1.8 per cent of the working population in the country. While in the aggregate India’s industrial output may look massive, per head of population it was very much lower than the industrial output in advanced countries. Prior to the First World War the only major industries, which had developed substantially were cotton and jute textiles, for which the country had exceptional natural advantages. The industrial development since the twenties was associated with the adoption of a more progressive industrial and fiscal policy. The Second World War created conditions for improved utilisation of the existing capacity in Indian industries. This was the major factor responsible for the increase in the recorded industrial production. Industrial development during the war and the post-war period was influenced, largely by the prevailing inflationary conditions and scarcities, with the result that long term factors such as the most-advantageous location or scale of operation, the availability of raw materials, the size of the market and the adequacy of the financial and technical organisation for successful operation under competitive conditions did not receive the attention they deserved. In the established industries, the need during the war period to work multiple shifts and difficulties in the way of securing imports for depreciation and replacement led to a large accumulation of deficit in the maintenance of capacity. It took the country several years to make good this deficit.
Major emphasis in industrial development in India was on consumer goods industries; while the development of basic capital goods industries lagged far behind. A high and sustained rate of industrial advance could not be achieved without increasing substantially the production of basic industries such as iron and steel, aluminum, ferro-alloys, and other metal-making industries, chemical industries such as caustic soda and ash, fertilisers and petroleum products. In respect of the manufacture of plant and machinery required by various industries only a small beginning had so far been made with the textile machinery industry. The developments in power generation had to depend on generating equipment from abroad. In the manufacture of synthetic drugs and antibiotics and of dyestuffs and organic chemicals only small beginnings had been made. Thus industrial growth was neither evenly spread across regions nor across the various industrial sub-sectors. Industrial structure remained, palpably dependent on imports of plant and equipment, raw materials as well as spares.
Before the British came to India, every independent province had a distinct currency of its own. This hampered free trade among various states. The East lndia Company adopted silver rupee coin as the standard unit of currency in 1806. Rupee was also declared the legal tender currency, i.e. everyone was made to accept rupee in various trade transactions. These developments helped to establish a unified monetary system, which helped in expansion of the market system. Banking on the modern lines was introduced in India during the last quarter of the 18th century and the 19th century. In 1840s, three residency banks were established, one each in Bengal (1840), Bombay (1840), and Madras (1843). The three banks were amalgamated in 1921 to form a new bank, which came to be known as Imperial Bank of India ( after its nationalisation in 1955, this bank acquired the name of State Bank of India). The Reserve bank of India, which served as the central bank of the country, was established in 1935. Establishment of the chain of commercial banks in the country helped to promote the money and the market system.
The slow and lop-sided growth of the Indian industry could also be attributed to inadequate availability of infrastructure, specially industrial infrastructure. During the British rule, although some steps had been taken to create and spread infrastructure facilities, specifically in the form of irrigation, railways, roads and telephone, these were more intended to gear up colonial exploitation and were also grossly inadequate in relation to the requirements. Communications facilities were outdated and could hardly be of use to facilitate economic transactions by the industrial sector. Likewise, largely because of the indifference shown towards raising generating capacity, power generation in the economy was nearly negligible. It could not have provided a basis for strong industrial growth in future. Similarly, the design of the railway system and the freight policy of the railways, both favoured the movement of manufactured goods and raw materials from and to port towns and not within the country itself. This encouraged export of raw materials rather than their domestic use, and import of industrial products rather than their domestic manufacture. In short, infrastructural inadequacies at the time of Independence proved a formidable challenge for the economic policy-makers in the post-independence era.