Tomlinson B.R. The New Cambridge History of India, Volume 3, Part 3: The Economy of Modern India, 1860-1970
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TRADE
AND
MANUFACTURE,
1860-1945
Current expenditure
Year
Interest
pay-
ments
Military
expend-
iture
Civil
expend-
iture
3
Government
sterling
debt
b
1899-1900/1913-14
9-4
4-2
4-i
177.1
1914-15/1920-1
13.1
4-i
5-5
153.2
1924-5
14.4
10.1
7-4
262.5
1933-4
4-7
8.1
5-o
385.1
Note: 1899-1925, Rs 15 = £1; 1934-5, Rs 13 = £1.
a
Pensions, furlough, stores and
other
civil
expenditure.
b
Total outstanding on 31 March in end year of period (viz
31.3.14
for 1899-1900/
1913-14)
Source: Dharma Kumar, The Fiscal System', CEHI, 2, table
12.10;
Reserve Bank of India, Banking and
Monetary
Statistics of India, Bombay, 1954,
table
7
, p. 881.
because of implacable competition for scarce resources between
imperial and domestic interests. The additional difficulties for financial
and monetary policy created by India's sterling debts and payment
obligations represented a more intractable economic and political
problem in the inter-war years. The Home Charges amounted to more
than
a quarter of current government revenues by the 1930s, with
interest payments on the accumulated sterling public debt of £350
million
taking over half the total; the composition of the Home
Charges
over the first half of the twentieth century is shown in table
3.10.
Continuing the payment of interest and principal on loan capital,
and the rest of the Home Charges, was an important aim of British
policy
in India between the wars, especially during the sterling crisis of
the early 1930s when the British Government became convinced
that
it
would
have to make good these payments should India default. The
result was
that
the London authorities, at the urging of the British
Treasury, ensured
that
New Delhi followed a conservative financial
and monetary policy during the slump to retain confidence and
convertibility,
and insisted on creating 'safeguards' to guarantee
that
43
Table
3.10. Government of India expenditure and liabilities in
London, 1899-1900 to 1933-4 (annual averages in £ million)
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THE
ECONOMY OF MODERN INDIA
any further constitutional reforms would not lead to a real transfer of
authority over external financial policy to an assembly of elected
politicians.
This was done by creating an independent central bank (the
Reserve
Bank of India) in 1935, which was to be accountable to the
Viceroy
rather
than
to an Indian finance minister. Once the nego-
tiations for the federal centre envisaged in the 1935 Government of
India Act ran into difficulties in the late 1930s, these arrangements
made it difficult for the colonial authorities to secure further political
support in India by new financial or constitutional concessions. No
real progress on this issue was possible until 1945, by which time the
new
system for financing India's participation in the imperial war
effort
during the Second World War had reversed the financial
relationship between Britain and India. By the end of the war all the
Government of India's pre-war sterling debt had been repaid, and was
replaced by credits in London (India's sterling balances) amounting to
over
£1,300 million.
53
The
particular interests of the colonial government required
that
its
economic
policy favour the externally oriented sectors of the local
economy
at the expense of purely domestic activities. This was a
plausible position so long as it seemed likely
that
the international
economy's
influence on India was benign, or would become so with
the evolutionary growth of appropriate domestic economic institu-
tions and markets. In the inter-war years, however, this
view
became
increasingly
hard to sustain, yet the colonial government was still
inescapably
committed to securing its external obligations as a first
priority. During the
trade
depression in the late 1920s, for example, the
Government of India had to contact the currency to secure remittance
to pay the Home Charges, just at the point
that
the domestic credit
system
was undergoing a liquidity crisis associated with the onset of
the agricultural depression. Thus the actions of government to
fulfil
one arm of its imperial commitment caused further dislocations in the
domestic economy, leading to economic retardation and to widespread
social
discontent and political protest in the 1930s.
Once
the international open economy of the long
trade
boom of
1860-1929
had collapsed in the early 1930s the British raj ran out of
room to manoeuvre. The colonial administration of South
Asia
was
53
See below, pp.
16c—1.
44
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TRADE
AND MANUFACTURE, 1860-1945
conditional on the smooth working of a domestic and international
economy
that
could supply adequate tax revenues from production,
and a foreign exchange surplus on private account. Before 1914 the
colonial
administration provided
important
linkages, through its
Council
Bill
and domestic treasury system of financial and monetary
institutions, between the Indian, British and international economies,
and was able to combine the political acquiescence of its subjects with
an export-oriented free-trade economy run on laissez-faire principles.
After
1929, however these circumstances changed fundamentally, as
global
depression and war broke down the established systems of
marketing and credit supply within India. In attempting to repair the
damage, government was sucked into a new relationship with the
domestic economy in the 1930s and, as we
will
see shortly, by the 1940s
it had to improvise new institutions to allocate scarce goods, capital
and foreign exchange among competing local interests. Operating a
government of this type required a much more sensitive and participa-
tory political system
than
the colonial administration, could provide,
and its failure to manage the economy
effectively
during the war and in
the immediate post-war period helped to intensify the nationalist and
communal passions pushing inexorably towards Partition and the
Transfer of Power. By 1947 the British were happy to abdicate their
responsibilities in South
Asia,
hoping
that
the successor governments
of
India and Pakistan had enough political skill and legitimacy to run
the interventionist economic systems
that
a century of colonial neglect
had made necessary.
15
5
Cambridge Histories Online © Cambridge University Press, 2008
CHAPTER
4
THE
STATE
AND THE
ECONOMY,
1939-1970:
THE
EMERGENCE
OF
ECONOMIC
MANAGEMENT
IN
INDIA
The
independent India
that
came into existence on 15 August 1947 was
a large, diverse and poor country
that
inherited many economic
problems from its colonial past. It was operating within novel political
boundaries, and the separation of sizeable areas of the north-western
and north-eastern areas of British India to create the new
state
of
Pakistan created some important economic difficulties and dislo-
cations,
especially in the supply of Punjabi wheat and Bengali jute. The
Indian Union had a federal constitution, with powers over economic
policy
split between the central government in New Delhi and the
state
administrations. In several
parts
of the country, notably in central and
western India, the administrative units were made more unwieldy by
the problems of incorporating the old Princely States into the new
administrative system, and of meeting demands for the creation of
linguistically
based states out of the old provincial administrative units
of
British India. This process continued throughout the first thirty
years
of Independence, resulting in the boundaries and units shown on
the political map of contemporary India in map 4.1. The Indian
economy
at Independence was, as we have already seen, largely
agricultural, with over four-fifths of the population
living
in rural
areas, and only about 10 per cent working in the manufacturing sector.
The
economy was also strongly regionalised, with important differ-
ences
in resources and sectoral distribution in different
parts
of the
country. Some indicators of the regional diversity of the economy in
the early 1950s are
given
in table
4.1,
while map 4.2 shows the sectoral
distribution of the labour force and per capita income for the whole
subcontinent in 1961.
The
most decisive break with the past
that
was achieved in economic
matters by independent India was in the role of government policy and
state
agencies in the running and directing of the economy. Since the
announcement of the First
Five
Year
Plan in 1952 the Indian economy
has been subjected to a regime of strict controls and close economic
management. This extensive web of government regulations has been
156
Cambridge Histories Online © Cambridge University Press, 2008
Table
4.1.
Population, area, agricultural labour, foodgrains
output
and literacy rates: regional distribution, 1951.
Area
Population
Distribution Agricultural
Foodgrains
Literacy
1951
of
area,
1951
labour, as %
output av. rates
1951-2
of
total
1949-50
to
agricultural
1951-2
population,
1951
(millions)
/0
/0
%
('000 tons)
0/
/0
%
India
361.9
100.0
100.0
17.8
51,748
100.0
-
Andhra
Pradesh
3i-3
8.6
8.4
7-2
4^43
8.2
18.0
Assam
9.6
6.7
*-S
i,59i
3-i
18.2
Bihar
38.8
10.7
S-2
25.8
4,75*
9-2
12.1
Bombay
3
48.3
13-3
15.1
19-5
6,031
11.7
21.2
Kerala
13-5
3-7
1.2
39-2
684
i-3
40.5
Madhya
Pradesh
26.1
7-2
13.6
19.4
5,433
10.5
9.8
Madras
b
29.2
8.3
3-9
26.6
3,070
5-9
20.8
Mysore
3
19.4
5-4 5-9
14.7
2,528
4-9
19-3
Orissa
14.6
4.0
4.8
15-5
2,258
4-4
15.8
Punjab
0
16.1
4-4 3-7
4-5
3-33
6
6.4
15.2
Rajasthan
15-9
4-4
10.5
4-2
1,313
2.5
9.0
Uttar Pradesh
63.2
J
7-5
9.0
7-7
11,187
21.6
10.8
West
Bengal
26.3
7-3
2-7
20.6
4,499
8.7 24.0
3
Bombay and Mysore were later re-formed into the states of Gujerat, Maharashtra and Karnataka.
b
Later renamed Tamil Nadu.
c
Punjab was subsequently divided into the states of Punjab, Haryana and Himachal Pradesh.
Source:
Pramit Chaudhuri, The
Indian
Economy: Poverty and Development, London, 1978, table 2.
Cambridge Histories Online © Cambridge University Press, 2008
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India:
political
divisions,
1978
158
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