By 1750 the Mughal Dynasty was in a state of collapse, although emperors in name continued to preside over the court at Delhi and to provide forms of historic legitimacy to events over which they had no control. There was the rise of the Hindu Marathas in the western Deccan region, raids by Nadir Shah of Persia and the constant breaking away of states from Mughal control such as the states of Gujarat, Oudh and Bengal. It was due to these various factors and the emergence of these regional states that the mere traders of the British East India Company became participants in the power politics of the successors to the empire. Through a series of manipulations and victories, the British East India Company came to acquire a dominant position in the Indian landscape. They gradually ousted the other traders who had set up base in India and went on to monopolise the entire trading process while at the same time increasing their political strength.
Having consolidated their position, the British now went on to do everything possible to facilitate trade in India. The policy that they followed was essentially quite simple. They used India as a producer of raw materials as well as a market for finished goods. Thus not only was there an exploitation of the country's natural resources but also immense pressure on the Indian indigenous market which was unable to compete with the superior quality of the finished goods imported from Britain. For the purposes of extending their reach over the country, they developed transport and communication within the country. Railways, roads, canals, and bridges were rapidly built in India and telegraph links equally rapidly established in order that raw materials, such as cotton, from India's hinterland could be transported more efficiently to ports, such as Mumbai, for subsequent export to England. Likewise, finished goods from England were transported back, just as efficiently, for sale in the burgeoning Indian markets.
There were a number of areas where the British had ventured forth with their trading activities. The commodities that they exploited from India were mainly cotton, spices, silk, indigo dye, saltpetre, tea, and opium.
In their trade with China, the company was in search of a commodity which the Chinese would accept as they were almost self-sufficient. They focused at first, with reasonable success, on raw cotton from western India, carried by the 'country' traders as well as Company shipping. The takeover of Bengal opened up a new possibility. Mughal revenue-raising practices had routinely included state monopolies on the production and distribution of certain commodities. Following this example, in 1773 the Company assumed the monopoly of opium growing in Bengal. The drug was sold at public auction in Kolkata and soon began to be smuggled into China in ever increasing quantities. Company ships were strictly forbidden to carry opium, thus avoiding difficulties with the Canton authorities. It was carried instead by 'country' traders and a new breed of ruthless agency houses, which offloaded the opium at the regular rendezvous island of Lintin in the mouth of the Pearl River estuary. Corrupted Chinese bureaucrats and customs officials connived at the trade, but no more so than the Company. The hard cash received from the sale of opium to Chinese drug-runners at Lintin was paid into the Company's factory at Canton in return for bills of exchange drawn on London or Kolkata, so 'laundering' the proceeds and providing the Company with an immediate supply of silver for its legitimate purchases. Opium production at the Company's Patna factory soared, 'country' traders began to bring in further supplies from Malwa in western India, outside Company control, and other Europeans and the Americans bought supplies in Turkey. By 1825 opium imports had overtaken raw cotton and much of the silver that was needed to buy the Company's tea was no longer being carried to China, it was coming from within China. The raw opium was shipped in chests containing about forty large balls each. In 1828-29 alone 12,665 chests reached China.
The various trading policies that they followed in India were only beneficial to the British and proved extremely detrimental to Indian interests. The Indigo cultivation in India was resorted to by the British in order to get the dye at lower costs and export it back home. This was because the earlier places of Indigo cultivation, West Indies and Africa, had moved away from the cultivation of indigo towards more profitable cash crops, and thus it was cheaper to produce it in India now. The extremely oppressive conditions of Indigo cultivation were proving extremely difficult for the cultivators and to top that there was the introduction of synthetically produced indigo which further aggravated the problem. There was more pressure now on the estate owners to make a living out of indigo cultivation and this further intensified the sufferings of the peasants. Even in the realm of cotton trading and spice trading the situation was quite exploitative.
The result of all this on the Indian economy under British rule was rather devastating. Unlike in the case of Britain where the market risks for the infrastructure development were borne by private investors, in India, it was the taxpayers, mainly farmers and farm labourers who endured the risks. In spite of these costs, very little skilled employment was created for Indians. The agricultural economy of India faced a huge change due to the rapid advancement and introduction of technology. By the last decade of the 19th century, a large fraction of some raw materials including foodgrains, were being exported to faraway markets. Consequently, many small farmers, dependent on the whims of those markets, lost land, animals, and equipment to money-lenders. The Indian textile industry was practically in ruins due to the British trade policies. The export of raw cotton and the import of cheaper, machine-made goods dealt a rather heavy blow to the textile industry which was unable to face the strain of foreign competition.
One of the most disastrous outcomes of the British economic policy in India was the increased number of famines in the latter half of the 19th century. One of the worst famines ever to have hit the country, the Bengal famine of 1943, was also experienced under British rule. Although famines were not new to the subcontinent, these were particularly severe, with tens of millions dying, and with many critics, both British and Indian, laying the blame at the doorsteps of the lumbering colonial administrations.
A major change was also seen in the realm of taxation. From the field of revenue taxes to property taxes major changes were seen and felt resulting in mass impoverishment and destitution of the great majority of farmers. It also created an institutional environment that, on paper, guaranteed property rights among the colonizers, encouraged free trade, and created a single currency with fixed exchange rates, standardized weights and measures, capital markets, a well developed system of railways and telegraphs, a civil service that aimed to be free from political interference, and a common-law, adversarial legal system.
India's colonisation by the British coincided with major changes in the world economy-industrialisation, and significant growth in production and trade. However, at the end of colonial rule, India inherited an economy that was one of the poorest in the developing world, with industrial development stalled, agriculture unable to feed a rapidly growing population, one of the world's lowest life expectancies, and low rates of literacy.