Protectionism was limited and conditional in the interwar period. The emphasis on industrialisation did not devalue the role of trade. National policy after 1947 changed the balance. It prioritised industrialisation, prioritised the production of machinery and chemicals in India, and devalued traditional activities like textiles and trade. State regulation of markets had increased in extent during World War II, and at the end of the war, the measures stayed on and acquired a developmental meaning. Breaking with the past, the regime increased the role of the state and reduced the role of the world economy as the driver of economic development.

Protectionist industrialisation delivered unprecedented opportunity to established domestic groups to diversify in the priority areas, and away from the older foundations of capitalist enterprise, trade, and textiles. Government efforts sharply raised industrial investment, and rewarded entrepreneurship with the permission to buy technology abroad through collaborations. This process favoured the already established conglomerates, who started production of machinery, chemicals, cement, and metals. It also nurtured many offbeat enterprises, and encouraged little known business groups to become conglomerates.

But protectionist industrialisation came with two types of cost. First, the closed economy hurt business formerly integrated with the world economy. Thus, the corporate textile industry went bankrupt, trade and banking were partnationalised, part-regulated, and part-outlawed, and restrictions were imposed on cross-border capital and labour movements damaging the managing agency companies. In the process, some of the traditional sources of investment funds, like profits from foreign trade, played a reduced role in the new regime. Second, the regime compromised macroeconomic stability. Whereas earlier India exported agricultural commodities and bought machines and services with the proceeds, now traditional exports were restrained to conserve investment funds, even when the decision to go for heavy industry needed more imports than before. With the repression of trade, textiles, and global firms, the capacity to export and earn exchange had been impaired. Banks were under pressure to lend to new clients of uncertain capacity, such as peasants, and when they did not comply easily, were nationalised. In this way, the economy's capacity to pay for investment was impaired. Repeated shocks from the world economy (1967, 1973, 1979, and 1991) underscored this obvious fact.

The trading world that joined the land (agriculture) and the sea (foreign trade) enabled industrialisation in an important, if indirect way. Marketing agents, managers, machines, and engineers needed for a factory to succeed were in short supply in 1850. Agricultural export created the capacity to pay for skilled services and machinery purchased from abroad. Merely the capacity to import machines or hire abroad would not be enough to explain factories. Industry required a great deal more money than did trade, and kept capital locked in for longer. Money was difficult in India. Leveraging would be suicidal for industries in this world, unless the process was carefully planned.

Here, organisation mattered. These resources were procured by different groups by different means. Indians usually operated in the home market, recruited managers from within the extended family, raised investment money from existing businesses, friends, and family. Those people already in longdistance trade had better chance of doing this – another way that agricultural trade helped industrial investment. The Europeans relied more on knowledge of foreign markets and agency networks in these markets. They recruited managers and partners from abroad. Most raised money from London, though increasingly they floated shares in India (mainly Calcutta). Because of these differences, the Europeans were more likely to use the corporate form for their firms, whereas Indians used a hybrid between a family and corporate, adapting the mix depending on their access to capital markets. Both sets of actors relied equally on the recruitment of technical people from abroad.

Because stock markets were undeveloped in India, the London money market did not value Indian investment highly until the railway companies began operation. Banks financed trade and not industrial investment. Industrial firms needed to tap into trading profits. This was true both of Europeans and Indians. But after the Indian Mutiny ended and Crown rule began (1858), a different type of foreign firm entered India. These came to India from an industrial base in Britain, or were fortune hunters with some money who joined industry after a short career in trade. I call them born-industrial, though the term should not be read literally. The British Empire spawned these enterprises in a sense. Faster transportation links, uniform legal framework, and the use of one official language within the Empire encouraged capitalists to become mobile.

Chapter 2 described the land trade and the sea trade. This chapter will describe how their separation began to end. Early in the 1700s, the Mughal Empire disintegrated, and merchants and bankers started to leave their former settlements on overland trading routes, for the safety of the capital cities of new states like Awadh, Bengal, Hyderabad, Maratha domains in central India, and Gujarat. In the late 1700s, warfare and conflict would cause the decline of many of these states as well. The cities with a secure future at this time were Calcutta, Bombay, and Madras, three settlements under the British East India Company. Merchants and bankers now went to these cities or developed strong connections there. At the turn of the next century, these towns had transformed from the Company's garrison and fort to Indian business cities.

During the 150 years covered in this chapter, state power changed in India. In the last quarter of the eighteenth century, the Company was changing from being a business firm to a political entity. Between 1757 and 1765, the British East India Company emerged as the effective ruler of Bengal, one of the richer independent states of post-Mughal India. It was also a strong military force in Bombay and Madras. In 1813, the monopoly charter was withdrawn, and trade became formally free. The effect was dramatic as not only European private merchants, but also artisans, planters, skilled professionals, and fortunehunters, migrated from Britain to the port cities.

While trading and diaspora links between Britain and India were thus developing, the Industrial Revolution unfolded in Britain. India changed from being a textile exporter to a textile importer, and at the same time, started exporting agricultural goods, like opium, indigo, cotton, and tea to Britain and to the Company's sphere of influence in China. In the early 1800s, Indo- European firms based in Bombay, Calcutta, and Madras exported agricultural goods that came from the interior. Sea trade and land trade began to converge.

What did this twofold change mean for business firms? Migrant merchant families relied on their own traditional contacts and organisation. At the same time, in the port cities, new types of hybrid enterprises emerged.

When I started a career in economic history in the 1990s, interest in history was growing in the top economics schools of the world. The availability of cross-country historical income data, popularity of institutionalism, and new developments in the theory of growth rekindled interest in an old and halfforgotten question: Why do some countries grow rich and others remain poor? In the 2000s, historians criticised institutionalism. The exchange that followed became known as the divergence debate. In the last 20 years, the divergence debate formed the stem of the economic history field.

I joined this discussion from a base in Indian history, and with a vague feeling that the divergence debate did not serve India well. Over the years, that feeling developed into an argument. The argument has two parts. First, the theoretical models used to explain how the world became more unequal from the nineteenth century, failed to explain the recent emergence of India and China. Models that predicted divergence could not predict convergence in an easy way, and therefore, they were unreliable as theories about the past. Second, the debate encouraged the student of world history to ask the wrong question, that is, why India fell behind Europe and stayed poor. Capitalists in the region – where the volume of trade grew hundredfold, and the fourth largest cotton mill industry of the world emerged in 1850–1950 – did not either fall behind or stay poor. By starting with the falling-behind question, divergence historians missed the central paradox of Indian economic history: the coexistence of robust capitalism and stagnant agriculture.

This book turns the narrative around. It is not about falling behind, nor about what went wrong with India. It is about capitalism, and what went right. As business history, it does what business historians do the world over, which is to study how firms, entrepreneurs, communities, and organisations adapt to the environment, or what happens to corporate governance when companies are run by families and small groups like the managing agents of the past. As economic history, it foregrounds what I believe is the biggest puzzle about India, indeed about emerging economies in general – how does capitalism grow in a region where capital is an expensive resource? The book is an attempt to answer this question.

Why Write a Business History of Modern India?

The mood of the present shapes opinions about the past – perhaps nowhere is this effect stronger than in business history. In the bleak 1970s, western scholars attributed Indian poverty to the weakness of its entrepreneurship. The ‘immaturity’ of Indian capitalists, Marxist economists held, was an outcome of British colonial rule; though Karl Marx himself believed that, after the despotic Mughals who bullied merchants, the British would set capitalists free.

In the new millennium, resurgence of economic growth led to a different view of history, one that suggested that Indian entrepreneurship was always robust – only politics or external factors held it back. ‘The common belief,’ writes a team of eminent executives, entrepreneurs, and academics, ‘is that India has risen from nowhere a few years ago.’ History, the team goes on, proves this belief to be wrong. India was a great place for doing business in the distant past, but fell from grace thanks to ‘waves of invasion’. In the same spirit, India's emergence represents, for one author, the persistence of a ‘long tradition as buyers and sellers … Indians are very entrepreneurial’.

But the new mood cannot be trusted either, for India gets very bad scores on the Global Competitiveness Index, and the Ease of Doing Business Index. Key services from retail trade, to healthcare, hotels, print media, tourism, banking and finance, education and films, which together contribute about half of the gross domestic product (GDP), have grown in scale but not much improved in the quality that they deliver. India has the world's largest film industry, but its films do not win prizes in international competitions. India has one of the biggest university systems, but only a handful figure among the 500 best universities of the world. An HSBC index comparing the quality of expatriate lifestyle ranks India very low (20–30 among 34 countries) on healthcare, accommodation, utilities, finance, and ease of local travel. India is hardly the haven of capitalism that it is projected to be. If it is not now, perhaps it was not in the past either.