Millennium Post

Divide and conquer

Using New Institutional Economics to analyse the power games played by the dominant European power in India during the 17th-19th Century period and ascertaining how England managed to gain a decisive edge in the competition

We have seen in the past few articles how the big European powers fared in the race to find markets and territories in the 17th-19th Century. We also saw that the economic/financial, political and judicial institutions in these countries determined the policies and the development path they followed. The competition was fierce with many wars deciding which European country would get which colony. By the mid-18th Century, only France and England were still in fierce contention for colonies all over the world, with Spain, Portugal and Holland having conceded the race.

The echo of this European competition to find colonies was also felt in India. The institutional reasons that led to England forging ahead were also reflected in the way events unfolded in India during the same period. In addition, the institutional evolution in India, with the Mughal rule in decline, in combination with the institutional changes in Europe had much to do with how the British came out on top in India. In this article, we will focus on the interplay between the institutional changes in Europe and in India. The analysis will be from the New Institutional Economics (NIE) perspective like most of the earlier papers.

European powers in India between 17th-19th centuries

Mughal rule was at its peak in the early 17th Century when the East India Company of England got the charter to trade with India. The Dutch also first landed in Hooghly-Chinsura area in Bengal in 1610. France and Holland had their own East India companies. The primacy of the Dutch East India Company (VOC) among European powers was also felt in India. The Dutch were ahead in the trade of textiles, spices and salt and maintained this lead for at least the next hundred years. This was a reflection of the institutional development in Holland at the time. As we have seen earlier, the Dutch government could raise public debt at low-interest rates. They had a central bank and were innovators in corporate governance, having invented the joint-stock company.

Around the same time as the Dutch landed in India, Thomas Roe, the envoy of King James I had got the Mughal permission to set up a factory in Surat. However, the English were far behind the Dutch in trade. With two companies competing for the same trade, conflict was bound to arise. In these conflicts, the Dutch came out on the top until the Glorious Revolution of 1688, when there was a merger of sorts between the English and the Dutch. Recall that the Protestant Prince William of Orange who was Dutch ascended the English Throne after the revolution having bested the Catholic Stuart King James I. After this, the English borrowed a number of Dutch practices such as the setting up of a central bank, raising public debt at low-interest rates, setting up of private capital markets etc. In the early 18th Century, another demand-driven change worked to the advantage of the English. The demand for Indian textiles and silk outpaced the spices trade. As a result, the English closed shop in Surat and moved eastwards to Bengal.

The third active mercantilist power in India during this period was France. They had their centre of operations in South India, along the Coromandel coast. The French headquarters were located in Pondicherry. In fact, at the beginning of the 18th Century, France's economy was twice that of England and the population was three times of England. However, the French operations in India were a reflection of the institutional structure prevailing at home, i.e., in France. The French East India Company was firmly under government control, unlike the English East India Company which was run and controlled by traders. Further, the French company was run by aristocrats who were more concerned with political power than with trade. This was reflective of the political institutions in France where the monarchy was in control and economic institutions where financial and tax reforms were driven by the monarchy, rather than institutionally. The French Governor in India, Dupleix had taken the battle to the English in the 1740s and seized Madras. However, Madras had to be returned to England as a part of the treaty after the war of Austrian succession in 1748.

From 1756 to 1763, all of Europe got caught up in what is referred to as the Seven Years War. In this war, the principal adversaries were England and France and the fight was for global control. As Niall Ferguson, the historian from Harvard University has put it in his book 'Empire', '… stake was the future of the empire itself. The question was simply this: Would the world be French or British?'. As is well known, England won the Seven Years War because of their institutions, their naval superiority and their financial system, which allowed them to raise public debt for the war effort.

India during the European Competition: 17th-19th centuries

We must also remember that the period from early 17th Century to early 18th Century when the English, French and the Dutch were competing for trade routes and territories was also the period when India was an economically and militarily powerful country. Even in 1700, a full 100 years after the respective East India Companies started trading, India accounted for about a quarter of the world's output. The Mughal power was at its peak and anyone wanting to build forts or garrisons had to take their explicit approval. When Thomas Roe got an audience with Emperor Jahangir after much effort, the Emperor, who was an aesthete and had a wide knowledge of the world was rather dismissive. William Dalrymple has noted in his book 'The Anarchy' that Roe realised that relations with England were low on the priority of the Mughals. Notwithstanding his comment about India — 'religions infinite, laws none'— Roe was nevertheless impressed with the prosperity and development under the Mughal rule. The Mughal Empire was a well oiled administrative machine, with the provinces paying regular obeisance to the Throne in the form of land revenue. Money also used to flow on account of exports of various items such as spices. The Europeans learnt to live with the supremacy of the Mughal Empire, even though relations between the Company's men and the local Mughal administrators could get testy at times.

After the death of Aurangzeb, arguably the last powerful Mughal Emperor, not only did the decline of the Mughal Empire begin, but the dynamics between the European powers and the Mughals also started changing. This was most felt in the dealings of the East India Company with the administration. The powerful regional satraps such as the Nawabs of Awadh and Bengal and the Nizam in the South began to assert their authority in their provinces and only token allegiance to the Mughal throne was provided. Tax revenues to Delhi began to be withheld. This was also the beginning of the rise of the Maratha power. Other independent states sprang up such as the Sikhs of Punjab, the Rohillas, the Jats and many Rajput principalities. By the mid-18th Century, the invasion of Nadir Shah had further weakened the authority of the Mughal throne in Delhi.

Western Institutions meet Indian diversity

Meanwhile, the East India Company of England was gaining power and had put together a small armed force raised from the locals. The French under their ambitious Governor Dupleix also raised their military capabilities. The next step for both England and France was to win over support from as many regional satraps as possible. The stage was set for a grand English-French rivalry in India. The Seven Years War only sped things up.

The ambitious Nawab of Bengal, Siraj-ud-Daulah was backed by the French but was betrayed by his trusted lieutenant Mir Jafar in the Battle of Plassey in 1757. Clive, the ruthless commander of the English forces managed to outwit the Nawab of Bengal and the French, and won the Battle of Plassey in June 1757. Again, in the Battle of Buxar in 1761, the French supported the grand Mughal alliance comprising the Nawab of Avadh, Shuja-ud-Daulah, Nawab of Bengal, Mir Qasim, the Mughal Emperor Shah Alam and a mix of unlikely soldiers such as Naga sadhus and Afghan Rohillas. The English again came out on top. About three years earlier in 1761, the Marathas had been handed a resounding defeat by Ahmed Shah Abdali in the Third Battle of Panipat. Finally, the English and the French were in direct conflict in the three Carnatic wars from 1746-1763, the others being the Marathas and Mysore. Here again, the English defeated the French. In short, all the major challenges to the English East India Company, namely, the Marathas, the provincial satraps and the French had either been neutralised or greatly weakened.

The English managed to reach this pole position for the same reasons that they had defeated the French in other parts of the world: supportive political, economic/financial and judicial institutions. More specifically, in India, the East India Company managed to put together an army with better weaponry and military strategy, which slowly outmatched the large Mughal army. In addition, the financial institutions and organizations back home helped them to raise resources whenever necessary. Further, as the English strength increased and they started winning wars, revenues from local provinces also started flowing into the Company coffers as part of the settlement. After the Battle of Buxar, the Mughal Emperor granted the East India Company the Diwani of Bengal, Bihar and Orissa, which gave them the right to raise large amounts of tax revenue from 20 million people. This has been estimated by Niall Ferguson as about 2-3 million pounds. Clive's success followed by the consolidation of administration by successive Governor-Generals such as Warren Hastings and Cornwallis put off any challenge remaining to the English.

The Indian provinces and Princes, on the other hand, were divided, with the centralised institutions of Mughals such as the standing army and the vast revenue machinery in disarray. (Even the Nawab of Avadh, Shuja-ud-Daulah had his ally Mir Qasim, the Nawab of Bengal, arrested while the Battle of Buxar was underway). The Indian side also did not have the benefit of modern financial institutions such as a central bank, a stock exchange, private capital markets or instruments to raise public debt. It was the Jagat Seths, who played the role of the treasury and the banking system. The judiciary was also dominated by the religious qazis who mostly ruled on Sharia law matters. The secular aspects of the judiciary had been greatly weakened under Aurangzeb. In short, the political, economic/financial and the judicial institutions prevailing in India were no match for the more sophisticated English institutions.

Analysing the Indian conditions in the mid to late 18th Century from the prism of the NIE framework, there was a lack of a unified body politic (as was the case under the Mughals), absence of financial institutions, rudimentary markets and a judicial system more attuned to regulating religious practices. These factors raised the transaction costs of governing. The information asymmetry between the various Nawabs and chieftains because of the mistrust between them allowed the British to divide and rule. And while the revenue of the East India Company continued to grow, with many Indian provinces now paying them 'tax', the revenue stream of the Mughals fell to a trickle. There were some regional satraps such as the Marathas and Nawab of Bengal, who were still raising substantial revenues in the late 18th Century. But this also ended after the English victory in the Battles of Plassey (1757), Buxar (1764) and the Carnatic wars and the Maratha loss in Panipat in 1761 and subsequently the Peshwa's loss to the British in 1818. In other words, the institutions in India, which presented a unified picture under Mughal rule, were fragmented across the provinces. And these fragmented institutions displayed increasing returns, meaning that the provincial rulers had no incentive to change the state of play since it benefitted them without benefitting the province or the people at large. In Olson's words, the provincial rulers were acting more like 'roving bandits' rather than 'stationary bandits'.


We have looked at how the European rivalry played out in India and how the superior English institutions were responsible for England edging out its main rival France in the battle to capture trade and political power in India. We also saw how the interplay between the evolving institutions in India and those in England was largely responsible for the English victory in various wars. By the beginning of the 19th Century, the East India Company had slowly but surely spread its influence in trade, commerce and administration. It had a standing army, a civil service and the backing of the English Parliament. However, the Company came under increasing scrutiny and oversight of the English Parliament beginning with the Regulating Act of 1773, Pitt's India Act of 1784, whereby the governance of the Company came under a Board, which in turn was controlled by the British Government. After the Sepoy Mutiny of 1857, the British Government decided that the affairs of India could no longer be left to a private corporation and the Company's powers were transferred to the Queen in 1858, when British rule officially began in India.

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