In this chapter, I will describe and analyze the historical process through which colonialism shaped the structure of the Indian economy before independence, by understanding the nature of the global economy in the 19th and 20th centuries and how these dynamics shaped the colonial relationship between Britain and India. Further, I will describe the colonial policies that created and transformed the Indian economy, a critique of and resistance to these policies by Indian political actors, and how these dynamics shaped the economic policies of independent India. This chapter is global in outlook and will digress from India to explain how changes in the world economy affected the Indian economy. This will provide a context to understand the structural issues that the economy faced after independence and the trajectory of economic policies that were implemented. Throughout this chapter, I will frame the importance of contingent events, contestation between different interest groups, the crisis in shaping colonial economic policies, and the independence movement in India.

The Great Divergence

Look closely at a graph of GDP growth over the course of the millennia (Bowles 2013, fig. 1.1a) of countries in the world, and you will find that most countries or regions in the world had experienced similar low-level steady growth for 1,500 years. Then something happened in western Europe in the 16th century, when some countries such as Portugal, the Netherlands, and Spain started growing at a slightly faster speed. Then in the mid-18th century, Britain's growth rate took off and left all other countries behind. It took more than half a century for some of the early developing countries like the United States of America (USA), Germany, and France to catch up to Britain. It took more than two centuries for other developed countries in the world to catch up. India joined the race in the mid-20th century, and there's still a long way to go before it catches up. The initial jump in growth experienced by Britain is referred to as the Great Divergence (Pomeranz 2021). This phenomenon is referred to by terms such as the Industrial Revolution, and the birth of capitalism is marked by major social and political transformations in the world – such as the French and the American revolutions, the institution of representative democracy in Britain and France, urbanization, and colonization of land, labor, and resources – on a hitherto unseen scale.