Book II, Chapter 12: History of Tariffs

CHAPTER XII

HISTORY OF TARIFFS

WHILE Indian administrators thus strove to maintain an equilibrium in the Indian finances by new taxes on agriculture, a mandate came from England in 1874 that an old and legitimate revenue, derived from a moderate import duty, should be sacrificed to meet the wishes of the manufacturers of Lancashire. We have, in preceding chapters, given some account of Indian tariffs down to 1871; but a brief connected history of Indian tariffs will help a clearer comprehension of the controversy which arose three years later.

When the Empire of India came under the direct administration of the Queen in 1858, the import duties consisted of 3½ per cent. ad valorem upon cotton twist and yarns, and 5 per cent. on other articles of British produce and manufacture, including cotton piece goods. The duties were double on foreign articles.

In 1859, on account of the heavy financial pressure after the Mutiny, all differential tariffs were abolished; duties on all articles of luxury were raised to 20 per cent. ad valorem; duties on other articles, including cotton piece goods, were raised to 10 per cent.; and those on cotton twist and yarn to 5 per cent.

In 1860, Mr. James Wilson, the first Finance Minister of India, reduced the 20 per cent. duty on luxuries to 10 per cent., and raised the 5 per cent. duty on cotton twist and yarn to 10 per cent.; so that the import tariff consisted of a uniform rate of 10 per cent. ad valorem, with special rates upon beer, wine, spirit, and tobacco.

In 1861, the duty on cotton twist and yarn was reduced to 5 per cent.

In 1862, the duty on cotton twist and yarn was further reduced to 3½ per cent., and the duty on cotton and other manufactures was reduced to 5 per cent.

In 1863, the duty on imported iron was reduced to 1 per cent.

In 1864, the general rate of import duties was reduced from 10 to 7½ per cent.

In 1867, a great number of articles were added to the free list, export duties were abolished from time to time, the only increase being that the duty on grain was raised in 1867.

In 1871, a new Tariff Act was passed which we have referred to in chapter viii. of this Book. The valuations were revised. The import duty on cotton twist and yarn remained 3½ per cent., and that on cotton goods 5 per cent. They were maintained, like other import duties, merely as a source of revenue, and did not operate as a protection to the infant cotton industry of India.

But Lancashire manufacturers were jealous of the new cotton mills of Bombay; and in 1874 they made an attack on the moderate import duties on cotton twist and piece goods, representing them as protective duties. The time was well chosen. The first administration of Mr. Gladstone, which had carried out great reforms in Ireland and had established a system of national education in England, had in its last stages become unpopular in the country. The position of the Ministers became so unbearable that they dissolved Parliament in 1874. A general election therefore was at hand, and the Lancashire vote counts for much at an election. The time was opportune, and on January 31, 1874, the Manchester Chamber of Commerce addressed a memorial to the Secretary of State for India.

The Memorialists urged that the duties of 3½ per cent. on yarns and 5 per cent. on British cotton manufactures imported into India were assessed on tariff rates fixed many years ago, when values ruled much higher than at present; so that the duties thus levied actually amounted to 4 per cent. on the actual price of yarn in India, and nearly 6 per cent. on cloth.

That the tax was found to be absolutely prohibitory to the trade in yarn and cloth of the coarse and low-priced sorts.

That the Chamber were informed that it was proposed to import Egyptian and American raw cotton into India (no duty being charged thereon) to manufacture the finer yarns and cloth, and would thus compete with goods received from England on which duty was levied.

That a protected trade in cotton manufacture was thus springing up in British India to the disadvantage both of India and Great Britain.

That the duties increased the cost to the Native population, or at least to the poorest of the people, of their articles of clothing, and thereby interfered with their health, comfort, and general well-being.

And the Memorialists therefore prayed that early consideration might be given to the subject of the duties levied on yarn and cotton piece goods on import into India, with a view to their abolition.

On receipt of a copy of this memorial the Government of India pointed out that the tariff had been carefully revised at the beginning of 1869, when the tariff valuations of cotton yarns and cloths were largely reduced. The Government, however, held out a promise that a committee of revision would again be convened in the following cold season.

This did not satisfy the Manchester Chamber. They reminded the Secretary of State that in their memorial they had only incidentally referred to valuations, and that their main object and prayer was the total and immediate repeal of the duties themselves. And they added:—

“The statements as to the baneful operation of these duties on commerce, and on the best interests of her Majesty’s subjects, both in India and in England, are abundantly confirmed by the latest advices from Bombay, which show that, under the protection extended by the levying of duties on imports, to the spinning and weaving of cotton yarns and goods in India, a large number of new mills are now being projected.”¹

According to their promise the Government of India formed a Committee in November 1874 with a view to the revision of tariff valuations. Mr. Alonzo Money, C.B., was appointed president, and all the members were English merchants or officials.

The Committee differed in their opinions on some points, but were unanimous in rejecting the Manchester demand for the repeal of import duties on cotton yarn and goods.

Lord Northbrook was then the Viceroy of India, and was a free-trader to the backbone. But he was a strong and just ruler; and would not sacrifice a source of revenue which did not operate as protection. After mature consideration of the Committee’s Report, the Viceroy in Council passed a new Tariff Act in 1875.

The new Act abolished all export duties except on indigo, rice, and lac.

Retained the import duties on cotton twist and goods, being of opinion “that a duty of 5 per cent. ad valorem upon cotton goods cannot practically operate as a protection to native manufacture.”²

Largely reduced valuations.

Imposed a 5 per cent. duty on the import of long staple cotton to prevent Indian mills competing at an advantage in the production of the finer goods.

Reduced the general rate of import duties to 5 per cent.

And raised the duties on spirits and wines.

The loss to the Indian revenues by the reduction of valuations in respect of cotton goods was £88,000; while the total loss to the Indian revenues effected by the new Tariff Act of 1875 was £308,000, taking 10 rupees as equivalent to a pound sterling. But, by retaining the import duties on cotton yarns and goods, Lord Northbrook saved the Indian revenues from a further loss of £800,000. Meanwhile, the General Election in Great Britain had returned a majority of Conservatives, and the Liberal Government had resigned in 1874.

Mr. Disraeli had formed a Conservative Government; and Lord Salisbury had succeeded the Duke of Argyll as Secretary of State for India. Lord Salisbury was never a vehement free-trader, but he was vehement in his desire to conciliate Lancashire. In July 1875 he wrote to the Viceroy:—

“If it were true that this duty is the means of excluding English competition, and thereby raising the price of a necessary of life to the vast mass of Indian consumers, it is unnecessary for me to remark that it would be open to economical objections of the gravest kind. I do not attribute to it any such effect; but I cannot be insensible to the political evils which arise from the prevalent belief upon the matter.

“These considerations will, I doubt not, commend to your Excellency’s mind the policy of removing, at as early a period as the state of your finances permits, this subject of dangerous contention.”³

On August 5, 1875, Lord Northbrook wired to Lord Salisbury that the new Tariff Act had been passed that day. We quote the first portion of the telegram, detailing the changes which we have already mentioned before.

“Act for revision of customs duties passed this day.

“Export duties abolished, except those on indigo, paddy, rice, and lac, which are unchanged.

“General rate of import duty reduced from 7½ to 5 per cent. Valuations revised.

“No alteration considered necessary in import duty on cotton goods, but their valuation reduced, which diminishes duty by £88,000.

“Five per cent. import duty imposed on long staple raw cotton.

“Duty on spirits raised from 3 to 4 rupees a gallon, London proof.

“Duty on sparkling wines raised from 1½ to 2½ rupees, and on other wines, except claret and Burgundy, from 1 to 1½ rupees a gallon.”

And it was pointed out towards the end of the telegram that the net loss to the Indian revenues by this Act was £308,000.

Lord Salisbury was not yet satisfied. He wired back: “Provisions of Act very important. Some objectionable.” And he desired to know why the Act was passed without a previous reference to the Secretary of State, according to Legislative Despatch No. 9 of 1874.

An unpleasant correspondence then ensued. Lord Northbrook and his Council explained in August 1875 that the matter was urgent and could not be delayed; and that a reference to the Secretary of State would have had the effect of disclosing the intentions of the Indian Government, and caused inconvenience to trade.

Lord Salisbury was still dissatisfied. He proposed, in November 1875, to send his Under Secretary, Sir Louis Mallet, to India, to confer with the Indian Government in regard to fiscal legislation; and he urged the gradual but complete removal of the import duty on cotton goods.

Lord Northbrook and his Council replied in February 1876 that it was undesirable to sacrifice a duty “which brings in a revenue of more than £800,000;” and that there was “no precedent of a measure so seriously affecting the future of Indian finance as the prospective removal of a tax which brings in a revenue of £800,000 per annum, having been directed by the Home Government.” “It is our duty,” concluded Lord Northbrook and his Council, “to consider the subject with regard to the interests of India; we do not consider that the removal of the import duties upon cotton manufactures is consistent with those interests; and we hope that the statement contained in this despatch of the whole circumstances of the case, and of the condition of the Indian finances, will show that the real effect of the duty is not what is supposed, and that it cannot be removed without danger to the Indian finances, and that the imposition of new taxes in its stead would create serious discontent.”

And in a further letter, dated March 1876, Lord Northbrook protested against the restrictions imposed by the Secretary of State on the action of the Viceroy of India. “It is our duty to represent to her Majesty’s Government that the withdrawal from the Governor-General in Council of the power of prompt action on the most important occasions that can arise, will, in our opinion, seriously weaken the authority and hamper the action of the executive Government of India.”

Lord Northbrook, one of the soundest and wisest of Indian Viceroys, differed largely from the new policy of the British Cabinet. He could not carry out the unwise frontier policy urged by the Conservative Government; and he could not accept the fiscal policy dictated by Lancashire. He resigned his high office, and left India early in 1876.

It would interest our readers to know how far Lord Salisbury had the support of his Council in pressing for the remission of Indian import duties, and proposing to send his Under Secretary to India to carry out this scheme. This proposal had been made by wire on September 30, 1875.

Sir Erskine Perry, one of the strongest Members of the India Council, objected to this telegram. “The Government of India,” he recorded, “is necessarily despotic, and the useful function of the Home Government is, by careful revision of all measures originated there, to prevent the usual concomitants of despotism, such as caprice, hastiness, injustice, from springing up. If the telegraphic wire is to convey peremptory orders during the concoction of measures in India, it will greatly enhance the difficulties of government in that country, and will increase the repugnance of statesmen of mark to accept the office of Governor-General.”

Sir Henry Montgomery, who had been a Member of the Council for seventeen years, knew of no previous instance of sending the Under Secretary to confer with the Indian Government on their fiscal policy. It is startling also to learn that he, as a Member of Council, had been allowed no opportunity to see the official correspondence on the contemplated change in the fiscal policy of India. “I had no opportunity,” he wrote, “of seeing any of the official or other documents, nor was I aware of the objections which the Secretary of State entertained regarding the financial policy of the Viceroy. . . . Not having seen the official proceedings of the Government of India, not being aware of the objections of the Secretary of State, and not having had an opportunity of conferring with my colleagues, I feel myself still constrained to refuse being a party to a measure which, as far as I understand it, is more likely to provoke than prevent a crisis which would deprive India at this moment of the abilities and experience of Lord Northbrook.”

Even General Richard Strachey, who agreed with Lord Salisbury in the principle of abolishing the import duty on cotton goods, wrote: “My reason for objecting to the draft of the telegram first proposed to the Council was that it virtually committed the Council to opinions on subjects, the papers relating to which had not been brought before them.”

Sir Robert Montgomery, Vice-President of the Council, explained that the Council did not desire to express any disapprobation of Lord Northbrook’s tariff. And Lord Salisbury, who had been in such haste to conciliate Lancashire that he had forgotten to consult his own Council, recorded the very characteristic explanation: “I was at a distance from London when the above telegram was sent to the Council.” “I was not aware that they had not had the opportunity of reading the papers.”

When Lord Lytton succeeded Lord Northbrook as Viceroy, the path of Lord Salisbury became smoother. On May 31, 1876, he sent two letters to India. In one of them he insisted on the repeal of the import duty on cotton goods; and in the other he explained the relations of the Indian Government with the Secretary of State. Lord Salisbury had the majority of his Council with respect to both these letters, but Sir Frederick Halliday, Sir Barrow Ellis, and Sir Erskine Perry dissented on the question of the fiscal policy; and Sir Erskine Perry and Sir Robert Montgomery dissented on the letter defining the relations of the Indian Government with the Secretary of State.

It is unnecessary to go into these dissents fully. Sir Frederick Halliday wrote: “The duties should be withdrawn only as far as they are actually protective; and hereafter to such extent, and to such extent only, as they may become protective. I do not see why a valuable and very needful revenue, to which avowedly there is no objection not derived from its protectiveness, should be given up so far and so long as it is shown not to be protective.”

And Sir Erskine Perry contended that the initiative in Indian administration should be left with the Government of India, the revision with the Secretary of State. “If the initiative is to be exercised by the Secretary of State, no careful deliberation can be ensured, for no revision is possible.”

But the dissenting Members were in the minority; Lord Salisbury had the majority of the Council with him in demanding the repeal of the import duties on cotton goods; and Lord Lytton was nothing loth to comply. But a new difficulty had arisen in India. The terrible famine of Madras—the severest and most fatal which had yet occurred within the century—made the Indian authorities pause. The new Finance Minister, Sir John Strachey, spoke on March 15, 1877:—

“Financial embarrassments arising from the depreciation of silver prevented any practical steps being taken last year in this direction. It was thought unwise to give up any revenue at such a time, and the Secretary of State concurred in this decision. It is with great regret that I have to announce that, for reasons similar to those which prevailed a year ago, it has been decided that nothing can be done at the present moment towards the abolition of these duties; the financial difficulties caused by the famine are so serious that we cannot sacrifice any source of income.”⁴

But Lancashire was getting impatient. No political party in Great Britain could afford to neglect the Lancashire vote; and Mr. Disraeli’s Government did not wish to do so. On July 11, 1877, while accounts of the terrible Madras famine were already appearing in British papers, the British House of Commons thought it fit to pass a Resolution calculated to hasten and expedite the repeal of the cotton import duty. The Resolution ran thus:—

“That, in the opinion of this House, the duties now levied upon cotton manufactures imported into India, being protective in their nature, are contrary to sound commercial policy, and ought to be repealed without delay, so soon as the financial condition of India will permit.”

The last clause of the Resolution has no meaning. The financial condition of India, since the Mutiny, had never permitted the repeal of any source of revenue. Local cesses had been imposed on land, severe and cruel in their operation, to secure a surplus; and these should have been repealed before the finances of India repealed any other source of revenue. But this was not how the Resolution was understood, or was meant to be understood.

Lord Salisbury forwarded the Resolution of the House of Commons to the Indian Government, and referred with something like alarm to the fact “that five more mills were about to begin work; and that it was estimated that by the end of March 1877 there would be 1,231,284 spindles employed in India.”⁵

Accordingly, in the following year, the Government of India made a further sacrifice of revenue by exempting from duty some imports with which Indian manufactures were supposed to compete. “These are unbleached T-cloths under 18 reed, jeans, domestics, sheetings, and drills. . . . The Government of India has determined to commence by exempting these descriptions, with the further condition that the goods so exempted shall not contain finer yarn than what is known as 30 s., that is, yarn of which 30 hanks of 840 yards each weigh 1 lb. The loss of duty, calculated on the figures of 1876-77, cannot exceed £22,227 sterling.”⁶

Even this, however, did not give satisfaction to the Manchester Chamber of Commerce. They pointed out that the list of free goods required to be materially added to; that shirtings and longcloths made from 30 s. and coarse yarns still remained subject to impost; that in the case of yarns the objection to the fixed limits of the free list was even stronger; and that therefore “it is resolved to urge upon her Majesty’s chief Secretary of State for India the desirableness of simplifying those provisions of the new Indian Budget that affect manufactured cotton, by exempting from duty all goods made from yarns not finer than 30 s., and all yarns up to 26 s. water and 42 s. mule.”⁷

Lord Lytton, the new Viceroy of India, was prepared to submit to all demands unconditionally. But be it said to the honour of the Indian Civil Service that a majority of the members of his Council protested strongly against being thus bullied into submission, and compelled to sacrifice Indian revenues in a year of famine, war, and increasing taxation. And some of the minutes recorded by the dissenting members are among the finest passages in Indian official literature.

Mr. Whitby Stokes objected to the remission, firstly, because the financial condition of India was deplorably bad. “We have spent our Famine Insurance Fund, or what was intended to be such. We are carrying on a costly war with Afghanistan. We may any day have to begin one with the King of Burma. We have now to borrow five crores (five millions sterling) in India, and we are begging for two millions sterling from England.”

Secondly, because the proposed surrender would eventually lead to the surrender of the import duty on all cotton goods. “The powerful Lancashire manufacturers will be encouraged by their second victory to new attacks on our revenue. . . . If ever we have any true surplus, we should, in my opinion, lessen some of our direct taxes rather than abolish any of our moderate import duties.”

Thirdly, because the proposed repeal would be a relinquishment of the contribution which Native States made towards the revenues of British India.

Fourthly, because no one complained against the duties except the manufacturers of Manchester. The people of India did not ask for their repeal.

Fifthly, because, by the proposed repeal, “the Manchester manufacturers would practically compel the people of India to buy cotton cloths adulterated, if possible, more shamefully than such goods are at present. The cost of the clothing of the people would thus be increased rather than lessened.”

Sixthly, because Indian newspapers will proclaim in every bazaar that the repeal was made “solely in the interest of Manchester, and for the benefit of the Conservative party, who are, it is alleged, anxious to obtain the Lancashire vote at the coming elections. Of course the people of India will be wrong; they always must be wrong when they impute selfish motives to the ruling race.”⁸

Mr. Rivers Thomson, afterwards Lieutenant-Governor of Bengal, dwelt on the financial difficulties of India. The estimated Budget for 1879–80 showed a deficit of £1,395,000. The proceeds of the special tax imposed twelve months before to create a Famine Insurance Fund had been misapplied to other purposes. Fresh taxation to meet future famines would excite “the very injurious suspicion that the Government has been wanting in good faith.” “It is not at such a time that in my judgment any portion of the cotton duties should be repealed; and I deprecate the procedure all the more because in impending circumstances at home, the measure has all the appearance of the subordination of the reasonable claims of the Indian administration to the necessities of English politics.”⁹

Sir Alexander Arbuthnot also dwelt on the financial condition of India; and he stoutly maintained that the resolution of the House of Commons did not set the Indian Government free from the responsibility of maintaining the solvency of India. “The people of India attribute the action which has been taken by her Majesty’s Government in this matter to the influences which have been brought to bear upon it by persons interested in the English cotton trade; in other words, by the manufacturers of Lancashire. It is notorious that this impression has prevailed throughout India from the time, just four years ago, when the Marquis of Salisbury informed a large body of Manchester manufacturers that the Government of India would be instructed to provide for the gradual abolition of the import duties on cotton goods.

“Nor is this feeling limited to the Native community. From communications which have been received from the Chambers of Commerce at Madras and Calcutta, it is evident that the feeling is shared by the leading representatives of the European mercantile community in those cities.

“It is equally shared by the great body of the official hierarchy throughout India. I am convinced I do not overstate the case when I affirm my belief that there are not at the present time a dozen officials in India who do not regard the policy which has been adopted in this matter as a policy which has been adopted, not in the interests of India, not even in the interests of England, but in the interests or the supposed interests of a political party, the leaders of which deem it necessary at any cost to retain the political support of the cotton manufacturers of Lancashire.

“During the rule of the East India Company, the Court of Directors furnished what often proved an effective barrier between the interests of the people of India and the pressure of powerful classes in England. In this respect the Council of India, as the Council of the Secretary of State is called, has in no way taken the place of the Court of Directors. . . . The Council of the Governor-General, on the other hand, has large power and heavy responsibilities imposed upon it by law. . . . It will be an evil day for India when the Members of this Council fail to discharge the duty thus appertaining to them.”¹⁰

Sir Andrew Clarke was also unable to recognise any justification for a departure from the policy on which the Tariff Act of 1875 was based.¹¹

But all these strong protests were made in vain. The Governor-General of India has the power to act against the opinion of the majority of his Councillors in certain cases; and Lord Lytton somewhat strained this power to exempt from import duty “all imported cotton goods containing no yarn finer than 30 s.” The only Members of his Council who supported him in this undignified surrender were Sir John Strachey and Sir Edwin Johnson.¹²

It is needless to add that the Secretary of State approved of the action of Lord Lytton.¹³ General Richard Strachey supported the Secretary of State, as his brother, Sir John Strachey, had supported the Viceroy. Five other members also approved of the action taken. On the other hand, seven members, including Sir Frederic Halliday, Sir Robert Montgomery, Sir William Muir, and Sir Erskine Perry, dissented from the Secretary of State. The import duty on coarse cotton goods had been surrendered by Lord Lytton against the opinion of the majority of his Councillors. The surrender was approved by Lord Salisbury against the opinion of the majority of the members of his Council.

We have passed beyond the limits of this Book in referring to the events of 1879, which properly falls within the limits of the succeeding Book. We have done so in order to give the reader a connected account of the fiscal controversy which went on from 1874 to 1879. The circumstances under which the import duty was surrendered are a curious comment on the last clause of the Resolution of the House of Commons. That clause desired the repeal of the duty “so soon as the financial condition of India will permit.” The duty was actually repealed when Southern India had not yet recovered from the Madras famine of 1877; when Northern India was still suffering from the famine of 1878; when new cesses on land had recently been added to the Land Revenue; when the Famine Insurance Fund created by special taxes had disappeared; when the estimated budget showed a deficit; and when troubles and a vast expenditure in Afghanistan, brought about in quest of a scientific frontier, were impending.

If the House of Commons exerted an undue pressure on India by passing its Resolution in 1877, the Indian Government was guilty of a weak betrayal of trust in carrying out that Resolution in 1879. It may be safely asserted that no Viceroy who has ever ruled India would have sacrificed the revenues of India at such a moment except Lord Lytton; and no financier who has ever held the post of Finance Minister in India would have advised and supported such a sacrifice except Sir John Strachey.

This mean sacrifice to party politics did not even secure a party triumph. The Conservatives were defeated at the general election of 1880.

Footnotes