India’s long history of resistance to economic domination 

External Affairs Minister S Jaishankar said that an understanding with the US is necessary as it is the world’s largest market, but he also reiterated that India’s ‘red lines’ should be respected. Jaishankar questions, in a world where consideration of trade has now become tariffs, where are comparative advantages and competitiveness? 

This not only turns the spotlight back to the growing tilt to protectionism over free trade, but also prompts a deeper introspection into India’s long legacy of resistance. In this context, it’s worth revisiting India’s resistance to the colonial economic order and exploring how it overcame economic backwardness and ensured economic consolidation after independence.

Economic exploitation by British 

Dadabhai Naoroji, the first modern Indian economic thinker, said, “The British Indian Empire is formed and maintained entirely by Indian money and mainly by Indian blood, and, moreover, Britain has drawn thousands of millions of pounds besides.” 

The sole purpose of the colonial Indian economy was to serve the interests of the British Empire. The pre-colonial economy, characterised by self-sufficiency in agriculture, flourishing handicrafts, and a favourable trade balance, was systematically undermined under colonial rule.

During the mercantile phase of economic colonialism, the East India Company raised excessive revenues from India and diverted it to finance the export of Indian goods to Britain. Later, with the rise of British industrial capital, the Indian economy was gradually reduced to a mere supplier of raw materials and a market for finished goods from Britain. Industrialisation in Britain was thus at the direct expense of India’s economy.

Later, once assured of disproportionately high returns, the colonial administration encouraged private investment in India under conditions of unequal competition and monopoly. These exploitative policies led to a large-scale de-industrialisation, stagnation in agriculture, heavy tax imposition, and recurring famines that plunged millions into extreme poverty.

How colonisers reduced India to a dependent economy

The Indian Marxist R Palme Dutt, in his popular book India To-day (1940), categorised this imperialist rule into three phases – early capitalism, industrial capital, and finance capital. Other pioneering nationalist efforts to expose the exploitative nature of British economic policies include: Dadabhai Naoroji’s drain theory, espoused in Poverty and Un-British Rule in India (1901); R C Dutt’s analysis of exploitative British policies in his book, The Economic History of India (1901-1902); M G Ranade’s critique of the dependent nature of the Indian economy.

These thinkers demonstrated how India was reduced to a dependent economy, beginning with the East India Company’s trade monopoly and culminating in the British administration’s support for private investment under terms deeply unfavourable to India.

Even much-celebrated colonial infrastructure projects, such as the railways, were designed to serve British commercial interests rather than India’s economic growth. As G V Joshi rightly observed, expenditure on the railways was to be reconsidered “as an Indian subsidy to British industries”. Therefore, one of the foremost tasks for leaders of independent India was to consolidate and rebuild the economy devastated by nearly two centuries of colonial exploitation.

Formative years of planned economy  

India attained independence at the height of the Cold War, when two conflicting economic ideologies – capitalism and socialism – were shaping the world order. Having emerged from prolonged devastation caused by the dependence on a foreign power, India chose not to align with either ideology. Instead, it resorted to a pragmatic economic path that combined the features of both capitalist and socialist economies to address its unique challenges.

Drawing from the Soviet model of economic planning, the leadership of independent India chose a planned approach to development and introduced the Five-Year Plans. However, the idea of economic planning predated independence, and some early proposals had already been advanced, including the Visvesvaraya plan (1934), the establishment of the National Planning Committee by the Indian National Congress (1938), the Bombay Plan (1944), the Gandhian Plan (1944), and the People’s Plan (1945).

The economic vision underlying the Five-Year Plans was not the complete replication of the socialist economy. Rather, it envisaged a mixed economy in which the state was primarily concerned with increased capital expenditure in the public sector while allowing the private sector to operate without complete subordination. The Planning Commission, established through an executive resolution in 1950, was entrusted with the task of formulating and overseeing the Five-Year Plans.

While the First-Five Year Plan focussed primarily on agriculture, the focus shifted to rapid industrialisation during the Second Five-Year Plan, guided by the Mahalanobis model. The formative years of planned development laid the foundation of India’s economic trajectory, and aimed at the eradication of poverty, expansion of heavy industries, raising national income, modernising agriculture, promoting import substitution, and strengthening the leading role of the public sector.  

Centralised economy and minimal role of states

The emulation of the Socialist model of economic planning and the adoption of the Five-Year Plans made the Indian economy distinctly centralised. Policymakers envisaged a ‘command economy’ in which important economic decisions were taken by the Union Government. The urgent need to address the nation-wide issues such as de-industrialisation, agricultural backwardness, trade imbalances, low national income, inadequate investment in the capital sector, and poor public infrastructure in the early years of independence further justified the need for centralised economic policies.

The institutional structure of the Planning Commission reinforced these centralising tendencies. The Planning Commission, which was neither a constitutional nor a statutory body, was chaired by the Prime Minister and consisted of members from the Union Cabinet and experts appointed by the central government. This arrangement placed policy-making under the control of the Union Government.

In this process, the Finance Commission, mandated under Article 280 of the Constitution, was gradually sidelined by the Planning Commission. To balance the centralising tendencies, the National Development Council (NDC) was established in 1952 as an apex body of the Planning Commission. The NDC ensured the participation of the Chief Ministers of states and administrators of Union Territories by providing a consultative platform.

The changing role of states

The states had the minimal role in the economic planning in the formative years of independence, as they were directed and regulated by the centralised plans and the programmes of the Planning Commission and the Union Government. Nevertheless, states were the agents for implementing policies directed by the Union Government and were entrusted with the crucial task of resource mobilisation.

These centralising tendencies diminished with the structural changes brought about by economic liberalisation and globalisation. The abolition of the Planning Commission in 2014 marked the formal end of the era of planned development in India. Its successor NITI Aayog, established in 2015, was envisaged more as a federal institution. Its Governing Council is chaired by the Prime Minister and includes Chief Ministers of all states and Administrators of Union Territories, thereby ensuring greater participation in policymaking.

The new framework of cooperative and competitive federalism sought to replace the earlier top-down, one-size-fits-all approach with consensus-driven decision-making. It was intended to make states equal and responsible partners in the country’s economic development. However, certain measures such as the introduction of Goods and Services Tax (GST), which curtailed states’ fiscal autonomy, have been seen as running contrary to the spirit of fiscal federalism, and paved the way for continuing tensions in centre-state relations.

The newly independent India’s response to the exploitative colonial economic policies laid the foundation of a planned model of economic development. The “command economy” that was envisaged to overcome economic backwardness and to rebuild the national economy reduced the states to mere agents of implementing the plans formulated by the Planning Commission and directed by the Central government.

Gradually, this centralised model underwent significant changes due to factors like globalisation, decentralisation, privatisation, and changes in taxation. The economic consolidation achieved in the formative years of independence, followed by paradigm shifts in the economic policies, illustrates India’s enduring capacity to respond to challenges posed by external factors and its adaptability in adverse circumstances.

Post read questions

Trace India’s consolidation process during early phase of independence in terms of polity, economy, education and international relations.

How did the colonial economy shape India’s economic backwardness at the time of independence?

Examine how India’s planned economy sought to address the economic challenges inherited from colonial rule.

Analyse the impact of replacing the Planning Commission with NITI Aayog on India’s fiscal federalism.

The framework of cooperative and competitive federalism sought to replace the earlier top-down, one-size-fits-all approach with consensus-driven decision-making. How do you see the introduction of Goods and Services Tax (GST) in this context?

(Dileep P Chandran is an Assistant Professor at the Department of Political Science in P M Government College, Chalakudy, Kerala.)

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