Purpose: By the mid-19th century the British colonial state introduced liberal education to India. Amongst various disciplines, political economy illustrates the concerns of the colonial state with the education of Indians, and its anxiety with quelling political discontentment. The emerging Indian nationalist intelligentsia also utilized ideas from classical political economy, first taught in educational institutions, to critique colonial policy and proposed the development of "Indian Economics", suited to national economic interests. This paper explores the development of political economy as a specific knowledge form in Calcutta University and Bombay University, and its connection with colonial educational policy. Design/methodology/approach: This study relies primarily on university records and the proceedings of the Education Department to bring out the politically sensitive nature of the teaching of economics in colonial India. Findings: The study finds that political economy grew from being a minor part of the overall university syllabi to becoming part of the first university departments created in early-20th-century India. The government and nationalist forces both found the discipline to be relevant to their respective agendas. The circulation of knowledge theoretical framework is found to be relevant here. Originality/value: The history of political economy in Indian universities, especially during the 19th century, has not been dealt with in any detail. This study tries to fill this gap. The close connection between politics and the teaching of economics has also not been studied closely, which this paper does.