The agrarian structure of India was sought to be transformed in a capitalist direction through the Permanent Settlement and the Ryotwari systems. In the 1830s and 1840s, that English replaced Persian as the official language in India. Modern education was now introduced basically with the objective to man the new vastly expanded administration. But it was also expected to help transform India’ society and culture. This transformation was needed for two reasons; it was expected to,

i)create an overall climate of change and development and,

ii)generate a culture of loyalty to the rulers.

The earlier forms of surplus extraction continued during this phase. This, plus the costly administration, plus the efforts at economic transformation led to a steep rise I taxation and in the burden on the peasant. 

Because of the constant needs of colonial administration for funds to maintain military and civil administration and for construction of railways. and its large reliance on taxation of land, which had its own limits, colonial administration suffered from constant financial constraint. Consequently, the process of modernization in other fields was reduced to paltry proportions. India played a crucial role in the development of British capitalism during this stage. British industries, especially textiles, were heavily dependent on exports.

This is described as the Era of Foreign Investments and International Competition for Colonies. A new stage of colonialism was ushered in India from about 1860s. This was the result of several major changes in the world economy:

i. Spread of industrialization to several countries of Europe, the United States an Japan with the result that Britain's industrial supremacy in the world came to a end.

ii.There was intensification of industrialization as a result of the application o scientific knowledge to industry. Modern chemical industries, the use of petroleum as fuel for the internal combustion engine and the use of electricity for industrial purposes developed during this period.

iii.There was further unification of the world market because of revolution in the means of international transport.

Moreover, the development of trade and industry at home and extended exploitation of colonies and semi-colonies produced large accumulations of capital in the capitalism countries.