Everyone nowadays seems obsessed about the question of whether or not Islam can be reconciled with modernization. In discussing this issue, what constitutes modernization is often confused with westernization. Understanding the difference is vital. India's encounter with the West over the past three centuries underscores the distinction between the two processes -- modernization and Westernization -- that are often assumed to be synonymous. In fact, modernization does not entail Westernization, as the example of contemporary Japan demonstrates. Whereas modernization entails a change in belief about the way the material world operates, Westernization entails a change in cosmological beliefs about the way that one should live.
Like China and unlike Japan, India resisted changes in its ancient beliefs about the way the world works (and should work) which modernization entails. Instead, like many Islamic countries today, India wrongly believed Gandhi's doctrine that modernization necessarily means Westernization. Fitfully, and under the influence of the British Raj, parts of the economy and society were modernized during the second half of the 19th century of laissez-faire and free trade. Some of the traditional literary castes also embraced Westernization.
British policy turned India into a pioneer of Third World industrialization, with an economy increasingly based on domestic capital and entrepreneurship combined with imported technology. But modernization stalled when protectionist pressures from Lancashire and the exigencies of Imperial finance led the British to abandon free trade and laissez faire. At the same time, Westernization fueled the rise of a nationalist movement.
The introduction of income taxes and UK labor laws in the late 19th century led to nearly a century of mounting state intervention in the economy, a process that accelerated after independence. This damaged India's growth prospects and hopes of alleviating its ancient scourge of mass poverty. The breakdown of the global economy in the first half of the 20th century in the wake of World War I further eroded India's incipient integration into the world economy during the British Raj. Finally, beginning with the economic reforms of 1991, India at last rejected inward-looking policies, returning to where it left off at the end of the 19th century.
We now have a fairly clear quantitative picture of the performance of the Indian economy throughout this period. During the 130 years from 1868 until 1999-2000, per capita income more than trebled, as national income increased by a factor of eight while the population grew nearly five-fold. This suggests that the age-old combination of economic stagnation and cultural stability that I call the "Hindu Equilibrium" seems finally to have been broken. But on closer inspection, it turns out that this was largely because of the economic performance of the last two decades.
The sub-period from 1868-1900 saw the beginning of industrialization and India's partial integration into the world economy under the Raj. National income did not stagnate, as nationalist historians once maintained, but grew modestly, at an average annual rate of 1.1 percent. Growth was fastest from 1870-1890, followed by large fluctuations in output. A fairly low rate of population growth ensured a modest annual rise in per capita income of about 0.7 percent during this period.