Book II, Chapter 10: Finance and the Indian Debt

CHAPTER X

FINANCE AND THE INDIAN DEBT

THE system of presenting the annual accounts underwent alterations from time to time, between 1858 when the Queen took over the direct administration of India, and 1877 when she assumed the title of Empress of India.

In the accounts presented to Parliament for 1859-60, the interest on guaranteed railway capital was for the first time shown as a charge on the revenues of the year.

In 1867-68, the policy of constructing large “Productive Works” with borrowed money, and of excluding the capital so borrowed from the ordinary revenue and expenditure accounts, was sanctioned. It was by such exclusion that a surplus was shown in the accounts under Lord Mayo’s administration. The capital borrowed was shown under the heading of Debt for Productive Public Works; and the interest on the debt was shown in the ordinary revenue and expenditure accounts.

In 1870-71 the system of allotting to the different Provincial Governments certain grants of money, with the responsibility of meeting therefrom certain charges, was inaugurated under Lord Mayo’s decentralisation scheme. In that year the only financial effect was an advance of £200,000 to provide those Governments with a working balance. But from 1871-72 to 1875-76 certain receipts, estimated at about £650,000, were deducted from the expenditure, and both sides of the account were reduced to that extent; while expenditure to the amount of £500,000 was shown in a lump sum as Allotments for Provincial Services.

From 1871-72 the statement of Nett Income was abandoned; revenues were shown in the gross, and expenses of collection were included in the expenditure.

From 1876-77 the system of showing the Allotments to Provincial Governments was altered. Instead of one sum being shown as Allotments to Provincial Services, the receipts and expenditure were exhibited in detail under the proper headings. From the same year also, the annual revenue from Productive Public Works, and the annual charge for interest and working expenses in connection with them, were shown.

From 1877-78 a new heading of Provincial Rates was introduced, under which were entered the receipts from the special taxation imposed upon land in 1877. A further change was made in the following year by bringing into the general revenue account all the Local Funds previously accounted for separately, a corresponding charge being entered under various headings on the other side.¹

The figures on the next page, showing the revenues and expenditure of India during the nineteen years which elapsed from 1858-59 to 1876-77, are taken from the Statistical Abstracts for India annually presented to both Houses of Parliament. Under the head of revenue we show the Land Revenue separately; and under the head of expenditure, we exhibit separately the portion of it incurred in England.

It will appear from these figures that the gross revenues of India increased from 36 millions to 51 millions in eighteen years, i.e. by the end of 1875-76; and the portion of it spent in England, i.e. the Home Charges, increased within the same period from 7½ millions to 10 millions.

Then followed the eventful year, 1876-77, when there was a decrease of Land Revenue on account of the Madras famine. The somewhat sudden increase in the figures, representing the gross revenue and the gross expenditure of that year, is due to the inclusion in the accounts of the receipts and charges for interest in connection with Productive Works, as has been already explained. The whole of the nett railway receipts is shown on the revenue side from that year; and the whole of the Guaranteed Interest and Profits paid to Companies is shown on the expenditure side.

The total Debt of India just before the Mutiny in 1856-57 was 59½ millions, and in the following year it rose to 69½ millions sterling. As the whole charge of the Mutiny wars was thrown on India, the Public Debt rose in 1860 to over a hundred millions. And as the construction of railways was undertaken by the State after the Guarantee System was abandoned, and railway lines were recklessly extended with borrowed capital, the Public Debt rose rapidly from 1870.

It is necessary to explain that the figures for 1870-71 were revised at the instance of the Select Committee on Indian Finance so as to include some obligations not previously exhibited, and this plan was followed in subsequent years. The total Debt of 139 millions at the close of 1876-77 includes the money borrowed and spent by the Government on State Railways and Irrigation Works, but does not include the money spent by private companies under guarantee of interest from the Indian revenues. Down to 1876-77 the Government had spent about 24 millions on State Railways and Irrigation Works; that is to say, £14,651,353 on State Railways, and £9,651,618 on Irrigation Works.

It is also necessary to explain that the figures given above do not include the East India Stock of twelve millions sterling, forming the capital of the East India Company on which India still paid interest.

We have seen in a previous chapter that the East India Company had piled up a Public Debt of 69½ millions during the century of their rule in India. It is painful to observe that the Administration of the Crown doubled this Debt in nineteen years, bringing it up to 139 millions—not including the East India Stock.

Let us suppose once again that an independent and impartial tribunal—an International Arbitration Court not composed purely of British or of Indian judges—had to deal with this Indian Debt of 139 millions in the memorable year 1877, when the Queen assumed the title of Empress of India.

There can be little doubt what the verdict of the Court would have been. The arbitrators would have made a clean sweep of the Company’s Debt of 69½ millions, as made up of a part of the unjust demand of an annual tribute which India should not have paid.² They would probably have given an award to Great Britain for the Mutiny Debt of 40 millions—the cost of British troops employed in India—after deducting from it the cost of Indian troops employed in Imperial wars in Afghanistan, China, Persia, and Abyssinia; and the balance against India, if any, would have been small. And lastly, the arbitrators would have allowed the Public Works Debt of 24 millions to stand—with perhaps an injunction against the borrowing of more capital for such works—as minor railway lines could wait until taken up by private enterprise, and irrigation works could be annually extended from the ordinary revenues of the empire. A hundred millions of the so-called Public Debt of India would thus have been struck off as not justly due from India. And the balance³ would soon have been extinguished from the revenues of India, once freed from the payment of interest of this enormous and unjust liability. There would have been no National Debt; for there need be no National Debt in India.

The institution of a National Debt was unknown in India under her old rulers. Hindu and Mahomedan kings sometimes borrowed money from bankers on their own credit, as English kings in the olden days borrowed money by pledging their Crown jewels, or assigning specific revenues for the discharge of the debt. So late as 1688, the year of the English Revolution, England had scarcely any National Debt—the amount was less than a million.⁴ And it would have been better if British rulers of India had followed the Indian precedent, or the old English precedent of the seventeenth century, instead of importing into India the more recent European institution of a National Debt.

Modern European nations create National Debts mainly to extend their conquests and colonies, and to maintain their position among rival nations. India seeks no conquests; she has no rivals in Asia; her position under a strong and good government is invulnerable. The cost of the British conquest of the country had been defrayed from her annual revenues; the cost of useful public works could be met from those revenues. There was no need for creating a permanent National Debt in such a country; and there was no need for continuously increasing it when peace had followed the Mutiny wars, and the administration had been assumed by the Crown. Lord Lawrence endeavoured to meet all expenditure from the annual income. Lord Mayo’s plan of constructing Public Works with borrowed capital was a mistake. When money is easily borrowed it is easily spent, and the Debt accumulates.

The alarming growth of Debt and expenditure in India attracted the attention of Mr. Gladstone, the greatest British financier of the nineteenth century. He wished to arrest it, and he moved for a Select Committee on Indian Finance in 1871. It would have been well for India if Mr. Gladstone himself could have sat on that Committee; but as Prime Minister of Great Britain he could not do so. He did what was possible when he appointed Mr. Henry Fawcett as one of the members. Select Committees sat for four years, from 1871 to 1874, and unfortunately discontinued their inquiries soon after the Liberal Government was upset in 1874. No final recommendations and no great remedial measures therefore ensued. But the evidence recorded during the four years is valuable, and has been referred to in preceding chapters. And it is interesting to turn again and again to this evidence, given by men who conducted the administration and directed the finances of India a generation ago.

One of the most important witnesses examined was the Right Honourable W. N. Massey, who had been Finance Minister of India from 1865 to 1868. And he impressed on the Committee, in the strongest words he could use, the necessity of limiting the expenditure in India to the annual income.

“The principle of English Finance is,—adjust your income to your expenditure. In my opinion the contrary principle should be adopted in Indian finance. The truth is that your resources are so limited, that if you should outrun the constable a little, you are at once landed in a deficit. You cannot expand any of your taxation; you cannot create new taxation with the exception of the Income Tax. I wish to say that in round terms, for there is no new source of taxation, as far as I am aware, that it is possible for you to invent. Therefore it is that I would most earnestly impress upon all Indian financiers the expediency of accommodating their expenditure to their income.” And referring to the Duke of Wellington’s reply to the Court of Directors in 1834, to make the expenditure keep within the income, the witness said, “I wish the spirit of the Duke of Wellington’s reply was made applicable to the present administration throughout the whole of India.”⁵

Still more emphatic was the evidence of another Finance Minister of India, Sir Charles Trevelyan. He had been the colleague of Lord William Bentinck and Macaulay in Indian administration forty years before; he had been Governor of Madras and had been recalled from that post for protesting against increase of taxation; and he had then been Finance Minister of India from 1863 to 1865. A venerable man of sixty-six years, he still spoke with the fire of youth; and a veteran administrator of India both under the Company and under the Crown, he protested against the increased expenditure of the Crown Government.

“Do you think,” he was asked, “that since the direct administration of affairs by the Secretary of State for India in Council, there has been a greater disposition to give way to demands for expenditure of Indian finances?”

“Yes, no doubt,” he replied. “The Queen’s Government has shown itself profuse and squeezable. . . . I refer to the great point which was made in the transfer of the Government, of building up the personal independence of the Members of the Indian Council by a life tenure of office, and the arrangement that was made to continue in the Council the exclusive control over payments out of the revenue which had attached to the East India Company. But as regards expenditure, it has all gone for nothing. . . . The influences which press upon the Government outside, through the Press and through their influential supporters, have altogether been too strong, and every safeguard has been over-borne.”⁶

“Stout resistances,” said Sir Charles on a subsequent day, “which the East India Company opposed to the demands of the Queen’s Government in former days, show that a substantial barrier did exist; and I can answer for those resistances having been, to a great extent, effectual. . . . The most striking comparison is that between the administration of Public Works under the Queen and their administration under the Company.”⁷

Four times had Sir Charles Trevelyan, as Governor of Madras, protested against the increase of expenditure and taxation. In 1859, he had protested against a tax on tobacco; and “from that time,” he said in his evidence, “two conflicting policies prevailed in India; one the policy advocated by me of reduction of expenditure; the other, which was the favourite of Calcutta and in England, increase of taxation.” His second and third protests were also submitted in the same year; but it was his fourth protest, dated March 20, 1860, which cost him his high post. “Taxes,” he wrote, “are a portion of the property of the community taken by the Government to defray necessary public expenditure. The Government therefore has no right to demand additional taxes unless it can be shown that the object cannot be secured by a reduction of unnecessary expenditure. In other words the reduction of expenditure is the primary mode for making good deficiency. . . . If we use the strength which our present advantages give to force obnoxious taxes upon the people, we shall place ourselves in a position towards them which will be totally incompatible with a simultaneous reduction of the native army. We cannot afford to have a discontented people and a discontented army upon our hands at the same time.”⁸ It was the publication of this Minute, urging obvious but unpalatable truths, which led to Sir Charles Trevelyan’s recall. But a man like him could not be spared by the Indian administration; and three years after his recall, he was sent back to India as Finance Minister.

In urging reduction, Sir Charles did not fail to see the difficulties in its way. Practically all Great Britain as well as official India was interested in increased expenditure; the people of India who were interested in reduction had no voice and no hand in the administration of their own concerns. Trevelyan boldly faced this difficulty, and the most valuable portion of his evidence is that in which he recommended that the people should be consulted before new taxes were imposed.

“I am of opinion,” he said, " that as in other countries where the same principle has been carried out, Representation must be commensurate with Taxation. I think there ought to be, first, Provincial Councils, i.e. eight quasi-representative Councils, (I do not say that they should be appointed by popular election at first), at the chief seats of the eight Local Administrations; then there should be Zilla or County Councils, each district being represented by its notables and confidential men. And lastly there should be Town and Village Municipalities, and the principle of direct election should be introduced within such limits as may be safe and expedient."

“The Natives are by no means deficient in public spirited liberality; the country is covered with ancient works, tanks, caravansaries, and works of various kinds, which have been constructed by individual munificence; and the extraordinary liberality of Parsees and others, who have acquired fortunes during the late time of mercantile activity, is well known. If the Councils were merely consultative, the members would never become emancipated from the control of the European official Presidents. The Natives should not always be made to go in leading strings. It is the old story of not allowing a boy to go into the water till he can swim; he never will learn to swim unless he goes into the water and incurs a little risk and paddles about. At first, no doubt, they will be timid and frugal; but a little done willingly is better than a great deal done under compulsion, or done for them. Give them the raising and spending of their own money, and the motive will be supplied, and the result will be confidence and a feeling of responsibility, as well as of interest in the business of their country. All would act under a real personal responsibility under the eye of those who would be familiar with all the details, and would have the strongest possible interest in maintaining a vigilant control over them. And it would be a school of Self-Government for the whole of India—the longest step yet taken towards teaching its 200,000,000 of people to govern themselves, which is the end and object of our connection with that country.”⁹

Thirty years have passed since the above evidence was recorded, but even Consultative Provincial Councils have not been created yet to give the people of India some voice in the administration of their finances. Expenditure has not been reduced; taxes have not been lightened; and there is more widespread poverty, with more frequent and severer famines to-day, than thirty years ago.

With regard to the capacity of the people of India, Sir Charles Trevelyan, with his more than forty years’ knowledge of India, had no misgivings.

“The Natives,” he said, “have all the qualities to make them good revenue officers. From Todar Mall, Akbar’s Minister, who made the first revenue survey of India, and Purnea, who made Mysore so flourishing . . . down to Madhava Rao, and a very remarkable man, although less known to fame, Ramia Ayangar, the Natives are specially qualified for revenue functions. The whole of the appointments to the Customs might be filled by Natives.”

“Then there is the great judicial department; it stands a fortiori, that if they are fit to be Judges of the High Court, they are fit for the subordinate appointments.”

“They have shown practical talent [in engineering]; and on the main point of all, that of irrigation, nothing can be better than the ancient irrigation works of Southern India; in fact, they have been a model to ourselves. Sir Arthur Cotton is merely an imitator, on a grand scale and with considerable personal genius, of the ancient Native Indian engineers.”¹⁰

Other great administrators, distinguished by their work in various provinces in India, also felt the necessity of consulting the people in some way or other in the matter of assessments and taxation.

“There seems to me a great necessity,” said Sir Bartle Frere, who had been Governor of Bombay, “for having some means of ascertaining directly from the cultivators their views regarding assessments, which used to be ascertained by general communication with them, and for which there has been every year less and less facility, as our officers become more completely occupied and less able to put themselves in intimate communication with the taxpayers. I think that it would be very desirable that, before every revision of assessment after the expiration of the thirty years’ leases, there should be some means of directly ascertaining what the cultivator and the cultivating class have to say upon the subject.”¹¹

“In India,” said Sir Robert Montgomery of Punjab fame, “we set aside the people altogether; we devise and say that such a thing is a good thing to be done, and we carry it out without asking them very much about it.”¹²

“I think if each local Governor had a Consultative Native body, which he would select from year to year or from time to time, and before which he would put certain points or questions, whether on taxation or on law, which might affect their welfare generally, he would get a most excellent opinion from them; and with that opinion, and the opinions of the officers of the Local Government, he would be able to arrive at the right decision.”¹³

Robert Elliot, who spoke with an intimate knowledge of the people of Madras and Mysore, regretted that there was no channel of communication between the Government and the people, and suggested the formation of Councils of the People. “I would first of all accustom the people to the idea that the Government had something to communicate to them, and they to the Government, and you might develop that system gradually towards Representative Institutions.”¹⁴

“If there were a Local Council of the composition that you describe,” Sir Charles Trevelyan was asked, “such taxes as were passed by the Bombay Legislature, viz., a tax on the non-agricultural rural population, or such a tax as the one on feasts or on marriages, would not be passed by any freely chosen representative body?”

“They certainly would not have been passed,” replied Sir Charles Trevelyan; “and that is a striking example of calling the Natives to our Councils.”

“And very possibly, if the Government should recommend them an unobjectionable tax in itself, they may say, ‘We will not burden the people of this Province; this sum of money must be provided for by a reduction of expenditure in some other item;’ you would not interfere with their decision in the matter?”

“No.”

“You would give them independence, subject to veto on any measure they may pass?”

“Yes; it would be their own affair?”¹⁵

A paper was handed in by Mr. Gay to the Finance Committee¹⁶ comparing the taxation of 1856–57, the year before the Mutiny, and 1870–71, the twelfth year of the Crown Administration. The limits of the empire had not been extended within this period; the resources of the people and their industries and manufactures had not increased; the taxable wealth of the country and the material condition of the people had not improved; and yet there was increase in taxation, specially in salt and in assessed taxes, which is startling. We note some of the items below:—

Twelve years of Crown Government had increased the taxation by more than 50 per cent. “During the last twelve years,” wrote the Bombay Association in their petition to the House of Commons, dated March 29, 1871, “the salt tax has been raised 100 per cent. in Madras, 81 per cent. in Bombay, and 50 per cent. in other parts of India; the duty on sugar has been enhanced 100 per cent.; the Abkari or excise on spirits 100 per cent.; the stamp has been repeatedly revised and enhanced, and is now so complicated, vexatious, and excessive, as frequently to lead to a denial of justice; customs duties have been increased several times; heavy court fees and a succession tax of 2 per cent. have been recently imposed; a local land cess of 6 1/4 per cent., village service cess at the same high rate, rural town cess, taxes on trades and callings, house-tax, tolls; and a considerable variety of municipal and local rates and taxes, amounting in the aggregate to an extremely large and oppressive sum, have been levied in different parts of the country. It is now proposed to impose fresh Local Taxes to supply the deficiency caused by the conduct of the Government of India in curtailing the grant of several Provincial Services. Your Petitioners submit that over-taxation has, for many years of British Rule, been the bane of India; and that strenuous endeavours have not been made by the authorities to reduce the public expenditure, which has been increased from year to year, until the augmentation now amounts to the vast sum of 19 millions over and above the expenditure of 1856-57.”¹⁷

And Mr. Dadabhai Naoroji, the patriotic Indian representative who appeared as a witness before the Finance Committee, placed before the Committee with equal force and cogency the fact of the extreme poverty of the people of India, their decadence in wealth and resources under British Rule, and the heavy and growing taxation of the country.

“I may put this great financial fact before the Committee,” he said. “The United Kingdom out of its resources (I use Lord Mayo’s word) obtains 70 millions, from which about 27 millions being deducted for interest on Public Debt, there remains about 43 millions for the ordinary wants of the Government. This amount is about 5½ per cent. of the income of the country of 800 millions. The British [Indian] Government out of its resources obtains 50 millions, from which about 8 millions being deducted for interest on Public Debt, Railways, &c., there remain 42 millions for its ordinary wants; this makes 14 per cent. of the income of the country of 300 millions. So that the Indian Government is two and a half times more expensive than the Government of the United Kingdom.”¹⁸

It is painful to note that these protests from the people of India led to no reduction in expenditure and in taxation. On the contrary, Lord Mayo’s Decentralisation Scheme, which will be specially referred to in the succeeding chapter, led to the imposition of various new taxes by the Provincial Governments. And every proposal made by Sir Charles Trevelyan and other able administrators, to allow the people some voice in limiting taxation and reducing expenditure, was disregarded. For the cry from England was for fresh lines of railways and fresh expenditure in India; and official India was bent on increased expenditure, rather than reduction. And as if the requirements of India were not more than enough for the resources of that country, other burdens like the cost of the Chinese War and of the Abyssinian War, the cost of telegraph lines and military charges properly payable from English estimates, were again and again thrown on India.¹⁹ For there was no body of men in the Constitution of the Indian Government who could effectually resist such unfairness, in the manner in which the Directors of the East India Company had endeavoured to resist it before 1858. The Secretary of State was a Member of the British Cabinet, and could not resist the joint wishes of the Cabinet; the Members of his Council, not representing the people of India, failed to resist British influences and British demands; and the Viceroy of India and his Council, unsupported by Indian representatives, had to carry out the mandates which came from England. How entirely the interests of India were sacrificed, whenever there was sufficient pressure put on the India Council, will appear from the statements of Lord Salisbury himself, who was once more Secretary of State for India in 1874, when he gave his evidence before the Finance Committee.

Henry Fawcett.—Then it comes to this simply—without saying whether any one is justified or not in doing it—that throughout the existence of an administration, the Secretary of State for India is aware that India is being unjustly charged; that he protests and protests, again and again; that the thing goes on, and apparently no remedy can be obtained for India unless the Secretary of State is prepared to take up this line of policy and say—“I will not submit to it any longer; I will resign”?

Lord Salisbury.—It is hardly so strong as that, because the Secretary of State, if his Council goes with him, can always pass a resolution that such and such a payment is not to be made; but, of course, any Minister shrinks from such a course, because it stops the machine.

Henry Fawcett.—You have these alternatives; you must either stop the machine, or you must resign, or you must go on tacitly submitting to what you consider to be an injustice?

Lord Salisbury.—Well, I should accept that statement barring the word “tacitly.” I should go on submitting with loud remonstrances.²⁰

These extracts disclose the real weakness in the machinery of the Indian Government. There is no effective resistance to financial injustice towards India: no possible opposition to increasing taxation and expenditure. The system of taxation without any form of representation has failed in India as in every other civilised country. And future statesmen will be forced, before long, to introduce some form of representation in the financial administration of India, to save the country from calamities which no longer threaten, but have actually overtaken the Indian Empire.

Footnotes