The period between the two world wars created a paradoxical scenario in India. Manufacturing and urban services flourished against the backdrop of a stagnant countryside staring at a food, credit, and wage crisis. The population growth rate, which had hovered between 0.5 and 0.8 percent per year in 1881–1921, exceeded 1 percent in the 1920s and accelerated. A few years before this demographic turning point, cultivated land area had stopped growing. In the late 1920s, the world demand forprimary goods collapsed. What the peasants sold to the world market was worth less than it was before in terms of manufactured goods. Manufacturing by and large escaped the worst effects of the turmoil. The Great Depression, however, drove a wedge between the mainly Indian-owned businesses that sold goods in India and the mainly foreign-owned businesses that sold goods in the world market, strengthening the one and weakening the other. In turn, the two groups developed conflicting interests in politics and saw themselves as potential competitors. The imperial umbrella was in tatters. The old mechanism of paying for service imports with export receipts broke down, adding fuel to a nationalistic upsurge.

In this chapter, the fall of the imperial system and the run-up to independence will be described. It is useful to begin with a snapshot of the domestic economy at the conclusion of World War I.

In the years after colonial rule ended (1947), the Indian state recast theinternational element in its economy. India steadily withdrew from foreign tradeand investment. Labor migration flows slowed for about twenty years, beforereviving from the 1970s. India also emerged as one of the world’s largestrecipients of foreign aid, and this aid had a well-defined role in thenation’s strategy of development.

Before independence, a main current of intellectual thought within the IndianNational Congress stressed the need for state control of productive resources toensure a more equal distribution of income and wealth. This socialist strand wasinspired by the Soviet developmental model. The accent was on state ownership,redistribution, and planning. Between the 1950s and the 1980s, these ideasbecame part of an informal consensus among Indian intellectuals. In this way,the communists and the mainstream came to a compromise. The country’sfirst prime minister, Jawaharlal Nehru, represented this conjunction of twopolitical traditions of interwar India.

The state established industries and nationalized some of them. Expansion in steeland heavy machinery was almost entirely in the state sector, whereas civilaviation was nationalized. The government retained for itself privileged accessto imported capital goods. The government also became the main vehicle forbilateral technical collaboration agreements. Much foreign aid came in ascapital goods and as an adjunct to these agreements. The private sector acceptedthe arrangement. In the division of labor between the state and the market, themarket was allocated the task of supplying consumer goods. The restrictionsimposed on foreign trade and foreign capital were an incentive. In return,employers had to swallow a legal regime that protected manufacturing jobs. Onceagain, a compromise was reached between the leftist and the centrist traditionsin nationalism.

The British Empire represented a watershed in the relationship between India and the world economy, one with far-reaching effects on both enterprise and labor in the region. Yet, the processes by which the empire led to economic change often get obscured in ideological debates about development and underdevelopment. What were these processes? In this chapter, the question is explored. I suggest that market integration via institutional and technological change should be the starting point in this project. It is necessary, however, to begin with a developmental discourse on the empire.

Perspectives on empire

Early theories of economic imperialism, introduced by J. A. Hobson and V. I. Lenin in particular, held that the nineteenth-century European expansion into the tropics expressed a necessity for capitalism to reach out to the periphery in order to avert a falling return to capital in the core. Critics of the view countered that the attraction of the periphery was a more important driver behind capital export than was crisis at the core. Sporadically from the 1950s, and more systematically from the 1960s, Marxists helped place this debate at the heart of the discourse on comparative development. The European empires in Asia and Africa emerged during a period that also saw the onset of modern economic growth in Europe and a rise in economic inequality among regions of the world. Did empires cause inequality? The Hobson-Lenin process did not imply a rise in inequality; in fact, it could very well lead to the transmission of modern economic growth from Europe to the colonized world. The Marxists agreed that there was a link between empires and inequality but disputed the nature of the link.