Interestingly, this quote comes before the actual narration of the shooting of the elephant, which indicates the theme of the rest of the story that is conveyed through the elephant story. This concerns, as Orwell describes it, "the real nature of imperialism."
As Orwell demonstrates through the subsequent narration, the "real motives" for imperialism seem to be nothing more than saving face and not being laughed at. Orwell discovers through this story that actually, in spite of his power and prestige, he has lost his freedom by the very power that he has gained, because he is forced to act "like the white man" and kill the elephant:
Here was I, the white man with his gun, standing in front of the unarmed native crowd - seemingly the leading actor of the piece; but in reality I was only an absurd puppet pushed to and fro by the will of those yellow faces behind. I perceived in this moment that when the white man turns tyrant it is his own freedom that he destroys. He becomes a sort of hollow, posing dummy, the conventionalised figure of a sahib.
Thus, in turning "tyrant," Orwell explains the paradox that white man actually destroys his "own freedom," being forced to act in a way that he has conditioned the oppressed natives to expect. The danger of not to act in this way would be to look "like a fool," as Orwell says as he closes this essay, which would be an anathema to a colonial officer. The fiction must be sustained.