In 1892-3, when the
exchange
had fallen to
IS.
IS.
Cambridge History of India - v4 - Indian Empire
"
Holland, The Indian Outlook, p. 137.
a
## p. 314 (#352) ############################################
CHAPTER XVIII
THE FINANCES OF INDIA
1858-1918
The transfer of the government of India from the East India
Company to the crown brought with it wide-reaching changes in the
financial system of India. By the act of 18581 it was provided that the
expenditure of the revenues of India should be subject to the control
of the secretary of state in council, and that no grant or appropria-
tion of any part of such revenues should be made without the con-
currence of a majority of votes at the meeting of the council. Though
limited discretionary powers of incurring expenditure were delegated
to the Government of India, the regulations of this act placed on the
secretary of state and his council the final responsibility for the ad-
ministration of finances. In India, the somewhat antiquated financial
machinery had almost broken down under the strain of the Mutiny.
In the reconstruction which followed there was a noticeable tendency
to bring the organisation and procedure into closer conformity with
English practice. The management of the finances had been hitherto
in the collective charge of the governor-general and his council, who
exercised a control, that at times had not proved very effective, over
the expenditure of the presidency governments. In 1859 the first
finance minister was appointed and assumed control over all branches
of public accounts. The whole administration of finance was vested
in the central government, the provincial governments becoming, as
regards expenditure, merely administrative agencies and having no
power of spending without sanction the revenue they collected. Phe
budget system was introduced, the English model of preparing the
accounts being in general followed. The first budget was presented
for the year 1860–1 (the Indian financial year ending 31 March), to be
followed in due course by annual statements showing closed accounts.
The main preoccupations of the financial advisers of the Government
of India between the years 1859 and 1873—which forms the first
stage in the history of the period dealt with-were, after restoring
order in the public accounts, to balance income and expenditure,
and, subsequently, to meet endless demands for improved adminis-
tration and for the economic development of the country. The
Mutiny had involved the government in serious embarrassments.
Some of the sources of revenue had been wholly or partially cut off,
and the heavy military expenditure had been met by constant
borrowings. In all, over £42,000,000 had been added to the debt,
1 21 & 22 Vic. c. 108.
## p. 315 (#353) ############################################
REORGANISATION
315
and the accounts statement of 1859-60 showed a deficit of £7,250,000.
The total debt, which was largely a legacy of the numerous wars in
which the East India Company had been engaged, amounted to
about £98,000,000. The state of Indian finances had excited some
apprehension in England, and it was decided to appoint an ex-
perienced English financier to their charge. The choice fell on James
Wilson, to whom the credit for the reforms carried out was largely
due. Under his guidance, drastic reductions were effected in civil
and military expenditure, while the revenues were enhanced by the
imposition of an income-tax for a period of five years. With prosperous
seasons, the finances rapidly improved and, by 1864, the deficit
disappeared from the budget.
The gross revenue of 1860–1 amounted to £43,000,000. This
income was derived largely from sources which differed materially
from those most common in European countries, a fact which ac-
counted for some of the peculiar features of Indian finance. Under
the revenue system which the government had inherited from its
predecessors the main productive sources, the land-revenue and
opium, were not derived from taxation: of the taxation heads the
chief contributory was the salt monopoly; the ordinary excise,
customs and stamps being comparatively unimportant. Direct taxa-
tion was at first only intermittently imposed. Though an income of
this nature imposed a lighter burden on the public, it was less stable
and more costly to realise than that of countries relying in a greater
measure on taxation for their revenues. The fate of the budget
depended on the course of the monsoon. If the rainfall were favour-
able, the necessarily cautious anticipations of revenue were, more than
realised: if unfavourable, the returns from heads such as land-revenue,
opium and salt fell off, and the estimated surplus was converted to
a deficit, often swollen by the extraordinary expenditure called for
by measures of famine relief.
The mainstay of the finances was the land-revenue, which, in 1860,
contributed over 40 per cent. to the total of the gross revenues. From
time immemorial the ruling power in India had been entitled to a
share in the produce of the land. Where there was an intervening
landlord, the Government of India exercised its right by taking a
portion of the rent paid by the tenant. Where the settlement was made
direct with peasant proprietors, it took, as a rule, a portion, either of
the estimated net produce of the land, or of the rental accepted as
fair for the class of soil. The land-revenue, except in permanently
settled tracts, was revised periodically, usually after thirty years, when
an assessment was imposed on land brought under cultivation in the
interim, or an enhancement made in the rate of assessment, if justified
by a rise in rents, or an increase in the value of agricultural produce.
1 Cf. Bastable, Public Finance, bk 11, chap. v.
* Baden Powell, Land Systerns of British India, vol. 11, chaps. i and ii, vol. in, chap. ii.
## p. 316 (#354) ############################################
316
THE FINANCES OF INDIA, 1858–1918
a
The position of part proprietor thus occupied, however historically
or economically justifiable, in practice exposed the state to constant
pressure to reduce its claims. The material condition of the small
holders, due mainly to the density of population and excessive sub-
division of the land, in itself called for caution in enforcing enhance-
ments. There was consequently a tendencytowards greater moderation
in revising the assessments, so as to leave in the hands of the cul-
tivators a larger portion of the profits of their holdings. Though the
income from land-revenue shows a fairly steady increase, it was not
in proportion to the rise in the rental value of the land. The ratio of
land-revenue to the total gross income of the state gradually diminished
and at the beginning of the present century had fallen to 25 per cent.
Next in importance was the opium revenue, derived from profits of
the state monopoly of the sale of the drug to China and other coun-
tries, the revenue from opium sold in India being treated as excise. 1
The receipts under the former head were of a fluctuating nature,
depending on the character of the crop in India and the price of the
drug in China. The gross income, too, was subject to material de-
ductions, arising out of the purchase of the raw article and its manu-
facture for export. Though the maintenance of the traffic in opium
with China was subject to frequent attack, it survived in much the
same form until 1907, when an agreement was entered into with the
Chinese Government under which that government undertook to
suppress the cultivation of the opium poppy within a period of ten
years, while the Government of India consented to the extinction of
the import of opium into China within the same period.
Of the revenues derived from taxation the salt duty was the most
remunerative. Being an article of local production in certain parts
of India, the tax varied in its incidence and method of collection.
With the improvement of inland communications, the diversity in
rates encouraged smuggling from lower to higher taxed areas, the
suppression of which called for a great increase in the preventive staff
and so reduced the net receipts. The problem was not satisfactorily
solved until the Government of India was able to obtain control of
the most important sources of supply in the native states. The estab-
lishment of state factories at which salt was sold at a price that in-
cluded the duty rendered it possible to abolish the expensive inland
customs line and fix a uniform rate for all India. The equalisation of
the salt duties was completed in 1882, when a single rate of Rs. 2 per
maund (82 lbs. ) was levied, representing an annual tax of about 5d.
per head of population. There were frequent fluctuations in the rate
of duty imposed, but, generally speaking, the tax was raised only in
emergencies and was one of the first to receive the benefit of an
improvement in finances.
In 1860 the customs income was derived mainly from a general
· Strachcy, Finances and Public Works of India, chap. xiv. • Idem, chaps. xiii, xv.
## p. 317 (#355) ############################################
SOURCES OF REVENUE
317
rate of 10 per cent. ad valorem on most articles imported. " A smaller
duty of 4 per cent. was levied on many articles of export. As finances
improved, the rate on imports was reduced to 7 per cent. in 1864,
and again to 5 per cent. in 1875; many exemptions being made from
time to time from export duty. With the growth of industries in India,
particularly of cotton manufacture, objections were raised in England
to the form in which this duty was levied on the ground that its
practical effect was to operate as a measure of protection in favour
of Indian manufactures and so conflicted with accepted economic
principles. The main issue was the retention of the duty on cotton
goods which, so long as the Indian home industry was undeveloped,
constituted some 60 per cent. of the total imports. The avowed policy
of the Government of India was to adopt complete freedom of import,
which was carried into effect in 1882 by the abolition of the general
import duties. It was found, however, impossible to forgo this source
of income permanently, and the customs-duties were subsequently
reimposed.
of the other heads of taxation, the stamp revenue was realised
mainly from fees levied in the form of stamps on proceedings in the
judicial courts and from stamps on commercial documents. The
excise revenue was derived from intoxicating liquors, hemp, drugs,
and opium consumed in India. In 1860 the receipts were unimportant,
only slightly exceeding a million sterling, but with morecareful adminis-
tration, excise became one of the most valuable sources of income.
In India, as in England, the income-tax was first introduced as a
temporary expedient to meet war expenses. The first general tax
was imposed in 1860 to restore the finances after the Mutiny, being
levied at the rate of 4 per cent. on all incomes of Rs. 500 or upward,
and at half that rate on incomes between Rs. 200 and Rs. 500. It was
'abolished after five years, but in 1867 bad seasons compelled a resort
to direct taxation. An experiment was made with a licence tax on
trades and professions, which was of the nature of a tax on incomes.
In this modified form the proceeds were insufficient to cover the
deficit, and in 1869 the scope of the tax was enlarged and it was
converted into a general income-tax. As finances improved, this
unpopular form of taxation was dropped. But in 1877-8 financial
difficulties again arose, and no means of raising additional revenue,
except by direct taxation, being considered practicable, it was re-
introduced by the imposition of a licence tax on trades. In 1886 a
further step was taken and a tax was imposed on all incomes derived
from sources other than agriculture. Experience had been gained to
secure the smoother working of the tax and from that time it took its
place as one of the permanent heads of revenue.
The above summary indicates the gradual evolution of the revenue
Imperial Gazetteer of India, vol. rv, chap. vi.
• Strachcy, op. cit. chap. xii; Findlay-Shirras, The Science of Public Finance, chap. xxi.
## p. 318 (#356) ############################################
318
THE FINANCES OF INDIA, 1858–1918
system. Starting with a somewhat primitive system under which the
income was mainly derived from rent on land and fiscal monopolies
on opium and salt, the government was able, with the progress of the
country, to develop more elastic sources of revenue realised from
taxation, such as customs, excise and income-tax. Its general aim
being to keep down the incidence of the land-revenue and to reduce
the salt duty to as low a point as its finances permitted, the receipts
from these heads gradually came to bear a smaller proportion to the
gross revenues. As the older sources of economic revenue declined
in importance, they were supplemented by newer forms in the shape
of receipts from railways and irrigation works.
The distractions of wars by which the empire had been built up
left the East India Company little time or money to devote to the
prosecution of public works. Not till near the termination of its
existence was there any serious attempt to make good the short-
comings of the past. The succeeding government found itself faced
with the problem of bringing the country up to date in the matter of
roads, public buildings and the public utility services of a modern
state. Equally imperative was the need for protection against famine
by the construction of irrigation works. The funds required were far
beyond the scope of the ordinary revenues, and, in the absence of
private enterprise, the government was compelled to fall back on the
assistance of foreign capital. Though its fruits have been of incal-
culable benefit to the country, the public works policy imposed a
heavy strain on the finances, and the financial history of the fifty
years following the Mutiny is a record of constant struggle to meet the
obligations incurred and to maintain uninterrupted progress. Ulti-
mately, as will be shown, the commercial services were to-prove a
remunerative source of revenue.
In order to secure the essential lines of railway communication the
government, from 1853 onward, arranged for their construction
through the agency of joint-stock companies with an English domicile,
to which a guarantee was given of 5 per cent. on the capital outlay
and half the surplus profits. The primary defects of these contracts
were that the companies were relieved of responsibility for the cost of
construction and the only incentive to economy was the somewhat
remote prospect of sharing in the profits. Even allowing for the
necessity of gaining experience in railway construction in India, the
cost was high and for a number of years the payment of interest
charges imposed a considerable burden on the general revenues. In
a
all, the capital outlay on the railways guaranteed under the earlier
system amounted to some ninety-seven millions. Under the terms of
the contracts the state was able to exercise the right of purchase and
the old guaranteed railways were gradually acquired.
Strachey, op. cit. chap. vii; Chesney, Indian Polity, chaps. xviii, xix; Imp. Gaz.
vol. II, chap. vii.
1
O
## p. 319 (#357) ############################################
FINANCIAL DECENTRALISATION
319
In 1869 it was decided to embark on a policy of construction
through direct state agency, mainly with borrowed capital. Fair
progress was made with the project, but the fall in the gold value of
silver rendered the scheme abortive. The burden of paying interest
on the sterling debt began to press heavily on the state, and there was
a natural reluctance to add to these charges. Borrowings were ac-
cordingly limited to such sums as could be raised in India. But a
railway policy under which the rate of progress was determined by
annual borrowings in a limited market soon proved inadequate to the
needs of the country. It was found necessary to fall back on the
former system of inviting assistance of private companies by the offer
of guarantees, or other forms of state aid. The various contracts
differed widely in their conditions, but the terms obtained were more
favourable than in the earlier contracts. Where a guarantee was given,
the rate in no case exceeded 4 per cent. and the share in the surplus
profits payable to the companies was smaller. The construction of
railways by direct agency was not discontinued, but the tendency was
rather to employ this method for lines required for strategic purposes,
or for protection against famine.
In the construction of irrigation works, the government could look
for even less assistance from private enterprise. Nearly all the
important systems were constructed by state engineers, either from
borrowed funds, or special revenues set aside for famine insurance.
On the whole the money so spent proved a very remunerative invest-
ment, quite apart from the indirect advantages accruing to the state
in securing the land-revenue and restricting expenditure on famine
relief. But on the other side of the ledger must be set the growing
charges for interest on capital, the long delays which often supervened
before any return commensurate with the outlay was received, and,
over a series of years, the loss in exchange on the sterling portion of
the debt.
Apart from the rearrangement of the financial relations between
the central and provincial governments, there were no events of out-
standing importance prior to 1873. The system of a highly centralised
financial control, introduced under circumstances previously men-
tioned, had not becn found to work well in practice. The provincial
governments, though responsible for the collection and development
of a large part of the revenue, were allowed no discretion in incurring
expenditure, and derived no benefit from the growth of income or
economy in administration. The position they occupied was in fact
something more than that of a department and something less than
that of a government, a state of affairs which inevitably led to friction.
From the Government of India's point of view the situation was
described as one in which “the distribution of the public income
degenerated into something like a scramble, in which the most violent
Report of Indian Irrigation Commission, 1903.
1
## p. 320 (#358) ############################################
320
THE FINANCES OF INDIA, 1858–1918
had the advantage, with little attention to reason”. From the other
point of view, the Government of India, in endeavouring to control
all items of expenditure over so large a country, had assumed a task
which no central authority had the capacity or knowledge to perform.
A beginning was made in financial decentralisation in 1871, which
was further developed in 1877. The principle adopted was that certain
branches of administration, such as the postal services and railways,
should be treated as wholly imperial and their receipts taken by the
central government. That government, being responsible for the
heaviest charges on the state revenues, retained in its hands the income
from certain main heads, such as salt, opium and customs. The
revenues from other heads, viz. land-revenue, excise, stamps, forests
and registration, were shared in a proportion determined according
to the requirements of the several provinces. From the income de-
rived from their share, the latter met the expenses of the collection
of the revenues and the greater part of the expenses of their civil
administration. The financial arrangements between the central and
provincial governments were for some time subject to periodical
revision, when they were amended according to the state of the public
revenues; but, ultimately, more permanent shares in the divided
revenues were assigned to the different provinces. As originally
framed the system had nothing of a federal character about it. The
object in view was mainly to effect an administrative improvement
by relieving the central office of an impossible burden of work and
freeing the provincial governments from unnecessary interference.
The control over, finance was not surrendered, since the central
government was always at liberty to view the terms of the settlement.
Roughly, the provincial expenditure amounted to one-third of the
imperial.
Previously to 1873 currency questions had played little part in
Indian finance: from that date they dominated it. Though an attempt
had been made in 1868 to introduce the sovereign into India, it had
not proved successful and the rupee remained the basis of the currency.
Silver being received without limit when tendered for coinage at the
Indian mints, the gold value of the rupee depended on the gold price
of silver bullion. This value had continued up to 1872-3 fairly con-
stant at about 2s. , and fluctuations in exchange had been compara-
tively small. About this time, however, largely in consequence of
the demonetisation of silver, first by Germany and subsequently by
the Latin Union, the rupee exchange began to drop. Its downward
course was for some time gradual, and temporary improvements
favoured a policy of inaction. By 1885 it had fallen to an average rate
of is. 7d. From this point the decline was more rapid and by 1890
i Strachey, op. cit. chap. ix; Hunter, Life of the Earl of Mayo, vol. 11, chap. vi.
: Decentralisation Commission Report, Parl. Papers, 1907.
; Barbour, The Standard of Value, chap. xii, 1893.
## p. 321 (#359) ############################################
THE FALL IN EXCHANGE
321
it had fallen to is. 4d. For a brief period in 1891 the decision of the
United States to purchase annually large quantities of silver brought
about a sharp rise to is. 6d. , only to be followed by a reaction until,
in 1893, the average rate was in the region of is. 2d. 1 This depre-
ciation disastrously affected India's finances by increasing the cost of
making remittances to liquidate her gold obligations in England.
These consisted mainly of interest on the sterling debt, guaranteed
interest on the railways or, after their purchase, of the annuity
charges, payment fo railway stores, army charges, and furlough and
pension allowances of civil and military servants. They were defrayed
by the secretary of state's selling for sterling rupee drafts on the Indian
treasuries. But so long as the mints remained open to the free coinage
of silver, the sterling amounts obtainable at the secretary of state's
sales could not ordinarily exceed the cost of procuring silver and
remitting it to India for coinage. Each fall in the gold value of the
rupee meant proportionately increased cost in defraying the charges
to be met in England.
In 1892-3, when the exchange had fallen to
IS. 2d. , the government had to pay 87,300,000 more rupees to meet its
gold obligations, amounting to £16,500,000, than would have been
required had the exchange stood at the same rate as in 1873.
It will now be convenient to outline the main events between 1873
and 1893 which moulded the course of Indian finance. During the
early part of this period India was visited by a cycle of bad seasons
which resulted in partial or total failure of the crops over wide areas
of country. Two famines, onc in Bihar and the other in Southern
India, called for expenditure on an unprecedented scale. These and
other minor disasters cost the government in relief operations, or
remission of revenue, over £15,000,000. A commission appointed in
1877 to enquire into the subject of famine relief recommended that
a sum of £1,500,000 should be set aside in prosperous years to meet
the cost of these recurring calamities, without further increase of debt.
In years free from famine, the surplus was to be devoted, either to the
paying off of existing debt, or the avoidance of debt by constructing
works, such as railways, the cost of which must otherwise have been
met by borrowing. As the condition of the finances did not admit of
the sum required being set aside from revenue, additional funds were
provided by a fresh cess on land, the imposition of a licence tax on
the trading classes, and by reducing provincial assignments. Wars,
threats of wars, and falls in exchange caused these arrangements to
break down on several occasions, but, as soon as pressure was relieved,
the grant was resumed. The operations under the famine insurance
scheme enabled the Government of India, in addition to meeting
the cost of famine relief, to spend on development projects roughly
£5,000,000 from the inception of the scheme up to 1893. During these
| Report of Indian Currency Committee (Parl. Papers, 1893, Accounts, c. 7060).
Report of Indian Famine Commission, 1878.
CHIVI
21
## p. 322 (#360) ############################################
322
THE FINANCES OF INDIA, 1858-1918
years the government was in constant financial difficulties. The
Afghan war which broke out in 1878 proved very costly. Hardly had
the situation improved, when the Government of India was called
upon, in deference to the free-trade views obtaining in England, to
abolish the duty on all imported cotton goods, the import tax on
coarser goods, which formed the main product of the Indian mills,
having been removed in 1879. With the abolition of the duty on these
goods, which provided the bulk of the customs revenue, it was im-
possible to justify the retention of the rest of the import tariff levied
on a number of miscellaneous articles, many of which yielded an
insignificant revenue. It was accordingly decided to abolish all import
duties, except those levied on articles, such as liquor and salt, which
were subject to internal taxation.
From 1885 the government was again confronted with heavy
military expenditure as a result of the threatened advance on India
by Russia, and the operations which terminated in the annexation of
Upper Burma. An increase in the strength of the army and defensive
works on the frontier entailed a steady growth in expenditure between
1886 and 1893. With the limitations imposed on the customs tariff,
it was necessary to fall back on other heads of taxation which promised
to yield the additional income required. In 1886 the licence tax was
converted to an income-tax leviable on all non-agricultural incomes
above Rs. 500, and in 1887 the salt-tax was raised from Rs. 2 to
Rs. 2} per maund. With the aid of the revenue thus obtained
and by the exercise of rigid economy, a deficit was avoided, but the
income-tax in its new form had not been imposed without a good deal
of opposition, while the enhancement of the salt-tax was open to the
objection that it fell most heavily on the poorest class of the popula-
tion. The fiscal policy at the time was affording a handle of attack to
the newly formed congress party. Though these attacks contained
much misrepresentation, they indicate the growing irritation at the
financial straits to which the government had been reduced, mainly
owing to the neglect to deal with the currency problem. When a fresh
crisis in exchange took place in 1892-3, it became obvious that the
Indian finances could not support the strain of the enormous losses
involved and that a reform of the currency system could no longer
be avoided.
The first proposals to this effect were made in 1878, in which the
Government of India pressed for the establishment of a gold standard
and control of silver coinage: the scheme involved acceptance of gold
in payment of government demands but not its immediate recognition
as legal tender. Though it differed in many of its features from the
system ultimately adopted, the main principle was the same, and
some reform on these lines could undoubtedly have been carried out
more easily at that time than at a later date when exchange had fallen
further and the country was flooded with silver coin. When its pro-
a
1
1
1
## p. 323 (#361) ############################################
CURRENCY REFORM
323
posals were rejected by the secretary of state, the Government of India
turned its attention to international bimetallism as a solution of its
currency difficulties. Its hopes were kept alive by international
monetary conferences, at which the question came under discussion,
and the pronounced desire of other governments to rehabilitate silver.
But the condition into which the finances of India had fallen, and
international currency events from 1890 onward, finally forced the
hands of the government and the secretary of state. The world pro-
duction of silver showed a very decided increase and, in spite of pur-
chases on a large scale by the United States Government, imports into
India were rising. India's trade was becoming disorganised by the
constant fluctuations of silver, and the banking and trading classes
brought pressure to bear on the Government of India to close the
mint: and establish a gold standard. There was also a grave appre-
hension that the United States Government might discontinue its
purchases of silver, in which case it was impossible to foresee to what
lower levels the gold price of silver might fall
. Proposals were again
submitted for the adoption of a gold standard which were referred
by the secretary of state to a committee of which Lord Herschell
was chairman. Its recommendations were carried into effect in
1893
In accordance with these recommendations the mints were closed
to the free coinage of silver, the government reserving to itself the right
of coining silver as required. It was notified at the same time that
sovereigns and half-sovereigns would be received by government at
the equivalent of Rs. 15 and Rs. 7} respectively, and that gold coin
and bullion would be held in the paper currency reserve as a backing
against notes. No action was taken with regard to making gold coin
legal tender. It was believed that, with the closing of the mints to free
coinage, a scarcity value would be placed on the rupee and, as it was
no longer possible to settle the excess of exports over imports by
sending silver to India and coining it into rupees, settlement would
have to be made mainly through the secretary of state's council
drafts. If the rate of these sales could be kept at about is. 4d. the
rupee, the exchange value of the rupee might be forced to this level.
,
With the gradual accumulation of gold coin, it was hoped to build up
a reserve which would make the gold standard effective. As soon as
the mints were closed exchange rose to the desired level of is. 4d. , but
soon fell to lower rates. Several factors militated against the imme-
diate success of the scheme. The heavy coinage before and after the
closing of the mints—the government having taken over the silver in
transit and with the banks—had led to a redundancy of silver coin
over currency requirements. The closing of the mints in India and
1 Cf. Barbour, The theory of bimetallism and effects of partial demonetization of silver on
England and India.
• Report of Indian Currency Committee, 1893 ut supra.
Act VIII of 1893.
• Cf. Barbour, The Standard of Value, chap. xvii.
21-2
## p. 324 (#362) ############################################
324
THE FINANCES OF INDIA, 1858–1918
the repeal of the Sherman Act in the United States caused a heavy
drop in the gold price of silver, and bullion poured into the country
to be used for commercial purposes, thereby decreasing the demand
for the secretary of state's bills. The rate of exchange continued to
decline with the diminishing value of silver, the average for 1894-5
being only slightly over is. id. From this point it rose steadily, being
materially influenced by the expansion of th, internal and external
trade of the country. These favourable trade conditions tended to
absorb the superfluous currency, thus accelerating the effect of the
closure of the mints. The progress was, however, so slow that the
government seriously considered the possibility of melting down large
numbers of rupees and even of reducing the standard to be aimed at
to is. 3d. In 1897 there was definite improvement, the average rate
being nearly is. 3d. , and by 1898–9 the goal had been reached and
the exchange value of the rupee forced up to is. 4d. , though its
bullion alue had fallen as low as rod. At this rate it remained with
minor fluctuations, until circumstances arising out of the war com-
pletely upset pre-existing standards.
Little confidence was felt at the time that the rate would be main-
tained. The feeling of uncertainty was reflected in representations by
the various chambers of commerce regarding the unstable condition
of the currency which was disturbing the trade of the country and
driving away capital. Fresh proposals by the Government of India for
stabilising exchange led the secretary of state to appoint a committee
under the presidency of Sir Henry Fowler to review the situation. 1
This committee approved of the closing of the mints as the only
practical method of securing a stable exchange between India and
the countries with which she principally traded. It recommended the
establishment of a gold currency as well as of a gold standard, to
secure which it proposed that the sovereign should be legal tender in
India and that the Indian mints should be open to unrestricted coinage
of gold. The committee was impressed by the view that it would not
be feasible to maintain the gold standard without an actual gold
currency, and, for this reason, it urged the encouragement of the use
of gold in currency. Th conviction led it to reject schemes, strongly
supported at the time, of establishing a gold standard without a gold
currency in India. The advocates of these views held that a gold
currency was not wanted in India and that exchange with other coun-
tries could be adequately maintained with a sufficient reserve of gold. ?
The most fruitful of the suggestions of the committee was that any
profit on the coinage of rupees should not be treated as revenue, but
credited to a special reserve to be used for supporting exchange. Its
adoption led to the establishment of the special reserve known as the
Gold Standard Reserve.
>
2
1 Report of Indian Currency Committee (Parl. Papers, 1899, Accounts, c. 9390).
* Lindsay, Ricardo's Exchange Remedy.
## p. 325 (#363) ############################################
A GOLD CURRENCY
325
The Government of India, acting on these recommendations, passed
an act making the sovereign and half-sovereign legal tender at Rs. 15
and Rs. 7} respectively. The proposal for coining gold in India fell
through, owing to difficulties with the English treasury. The efforts to
put gold into circulation were the reverse of successful. The currency
was not popular, and was continually finding its way back to the
treasuries. The result was that the stock of gold in the Paper Currency
Reserve, where it was held as a backing to notes issued, rose steadily
and the silver reserve came to be inconveniently low. In March,
1900, the stock of silver had fallen to about £3,500,000 and gold had
increased in proportion. So long as the public was unwilling to take
gold, this small reserve of rupees had to maintain the convertibility
of some £18,000,000 of notes. To relieve the strain fresh efforts were
made to force gold into circulation, under which the sovereign went
to a discount. The coinage of silver was then taken up in earnest, the
profits being devoted to building up a special gold reserve. These
were transferred to London and, for the most part, invested in govern-
ment securities,
During the years immediately following 1893 the only events of
financial importance were those connected with the improvement of
the currency. Until there was a definite rise in the rate of exchange,
the main concern of the administration was to balance the budget and
curtail expenditure. In 1894 the general import duty at the rate of
5 per cent. ad valorem was reimposed. The duty extended to cotton
goods, but, to deprive it of its protective character, a countervailing
excise duty was imposed on fabrics manufactured at the power mills
in India. a' Aided by this new revenue and the steady growth of the
ordinary revenues, the government was enabled to tide over the period
of transition to a stable rupee. In 1896–7 Northern India suffered
from a famine of unusual severity which cost over £4,000,000 in direct
relief. A frontier war in the following year, involving military opera-
tions on an extensive scale, caused further embarrassment and both
these financial years showed considerable deficits. These, however,
may be described as the last of the lean years; from this time onward,
owing to the steadiness of exchange, growth of revenues, and improved
receipts from public works, the aspect of Indian finances underwent
an entire change and, with flowing balances, the government was not
only able to reduce taxation but also to provide more adequately for
the public services, the development of which had been retarded by
the enforced economy of the preceding years.
One of the main factors in the improvement of the finances was
that the railways and irrigation works became, about the beginning
of the present century, a source of direct profit to the public revenues. 3
a
1 Indian Cuinage and Paper Currency Act, XXII of 1899.
Cf. Roberts, History of British India, pt 11, chap. xii.
• Robertson, Report on the Administration and Working of Indian Railways.
## p. 326 (#364) ############################################
326
THE FINANCES OF INDIA, 1858–1918
In arriving at these results all interest charges, not only on open works
but also on those under construction, were charged against revenue,
as well as annuities for the redemption of commuted capital and
annual outgoings of every description. Many of the older undertakings
had been returning handsome dividends on the capital invested for
a number of years past, but the profits did not counterbalance the loss
on newer constructions. In 1900 the revenue account drawn up on
the above method showed a small gain, which by 1901–2 had risen
to three-quarters of a million and in 1904-5 to two millions. The
profits, as in all operations of a commercial character, varied with the
season, and in 1907-8 a loss again was incurred, largely owing to
increased working expenses. In the following year there was a re-
covery and from that time the net receipts became an important item
in the national revenue.
The greatly improved condition of its finances after 1901–2 enabled
the Government of India to allot funds on a largescale to the provincial
governments for the purposes of education, sanitation and agricultural
development, as well as to reduce taxation. The salt-tax was reduced
by successive stages from Rs. 2} per maund to Ri. Incomes
under Rs. 1000 per annum were exempted from income-tax, and, as
a relief to the agricultural population, certain cesses on the land were
abolished. When the periodical settlements with the provinces were
revised in 1904-5, definite shares in the incomes realised within the
provinces were permanently surrendered. This was the first step
towards the grant of fiscal independence to the provincial legislative
councils, some measure of which was essential if any genuine system
of local self-government were to be set up. But in 1907–8 there was
a turn in the tide. The monsoon was poor and the sources of income
which varied with the prosperity of season declined: exports fell off
and an exchange crisis supervened. The Government of India was
further faced with the problem of losing the greater part of its opium
revenue under the terms of the Indo-Chinese agreement of 1907. 1
As three-quarters of the opium revenue was derived from the China
trade, this meant that by 191° a sum of about £3,000,000 would have
to be made good from other sources. To provide for future losses in
revenue, the customs-duties on a number of articles, such as tobacco,
beer, spirits and petroleum, were raised and a higher ad valorem duty
imposed on silver bullion. The seasons following, up to the outbreak
of the war, were prosperous. Revenues from almost all sources showed
increases, and speculative purchases of the exportable opium greatly
reduced the losses anticipated in the receipts from sale of the drug.
In the financial year ending March, 1911, there was a budget surplus
of nearly £6,000,000, and in 1913 an even larger surplus of £7,600,000.
These large balances excited some criticism of under-estimation of the
revenue; but they left India in a strong financial position when the
Strachey, India, note to chap. x.
1
## p. 327 (#365) ############################################
REVENUES AND DEBT
327
war broke out, and enabled the government to meet successfully some
of the difficulties which arose during its early stages.
Figures of revenue have hitherto been sparingly quoted. The rupee
has varied so greatly in value that it is impossible to adopt any fixed
standard for conversion into sterling. Apart from this, owing to
alterations in the system of keeping the public accounts, no compari-
sons of any accuracy can be instituted between the figures of different
periods. But by 1913–14 the rupee had become comparatively stable,
and the figures of that year may usefully be quoted to illustrate
generally the increase in revenues since 1860 and the main sources
from which they were derived.
. . .
. . .
. . .
5,318
Revenues of India, 1913-14 (in thousands of pounds sterling)
£
Land-revenue
21,391
Opium
1,624
Salt . . .
3,445
Stamps
Excise
8,894
Customs
7,558
Income-tax
1,893
Forests
2,220
Interest
1,352
Post Office and Telegraphs (net receipts) 3,598
Railways (less working expenses)
17,625
Irrigation
4,713
Military receipts
1,369
Other heads. . .
4. 307
. . .
. . .
. . .
Total . . .
£85,307
. . .
The gross revenue of the country had nearly doubled, but, though
the sources remained much the same, there had been a material
change in their relative importance. The contribution of land-revenue
to the total had fallen to 24 per cent. , while the commercial services
were yielding a steadily increasing surplus. The opium revenue had
become unimportant. Though excise and customs had increased in
productiveness, the proportion of economic to tax revenues was still
high. But the pressing demands of the state in war time could only
be met by resort to taxation, and, consequently, in the following years
there was a great expansion in the receipts from excise, customs and,
above all, income-tax.
The total debt after the Mutiny amounted to some £98,000,000,
the whole of which had been borrowed for unproductive purposes and
the interest was a dead weight on the revenues. There were additions
to the debt in 1877-8, as a consequence of the famine of that year and
the military operations in Afghanistan which followed the famine.
Some further debt was incurred in 1896 to 1898, again to meet deficits
caused by famine and war, but, with these exceptions, the great bulk
of the rupee and sterling debt was incurred in connection with the
## p. 328 (#366) ############################################
328
THE FINANCES OF INDIA, 1858–1918
construction of railways and other public works. By a system in-
stituted in 1880-1, an amount of the ordinary debt, equivalent to the
capital expenditure on public works supplied from ordinary revenues,
or from the famine insurance grant, was transferred to the public
works portion of the debt. As the state of finances improved after
1901-2, larger allotments were made to public works, resulting in a
corresponding reduction of the ordinary debt. In 1881–2, reckoning
the rupee at is. 4d. for purposes of comparison, the ordinary debt
stood at £74,000,000 and the public works debt at £48,000,000. By
1898–9, the figures were £63,000,000 and £169,000,000 respectively.
There were subsequent changes in the method of distributing the debt
between the productive and unproductive heads, but the net result
of the transactions up to the outbreak of the war was that by far the
greater portion of the debt stood invested in public works which more
than repaid the interest due on the capital outlay, while that portion
of the debt which imposed an actual burden on the country had been
reduced to very small limits. The position was summed up by the
finance minister as follows:
Out of a total debt equivalent to £274,000,000 outstanding at the end of March,
1914, only about £13,000,000 represented ordinary, or unproductive debt. Our
total annual interest charges amounted to some £9,250,000. Railways and irriga-
tion works in the same year yielded us a return of £15,250,000.
Holland, The Indian Outlook, p. 137.
a
## p. 314 (#352) ############################################
CHAPTER XVIII
THE FINANCES OF INDIA
1858-1918
The transfer of the government of India from the East India
Company to the crown brought with it wide-reaching changes in the
financial system of India. By the act of 18581 it was provided that the
expenditure of the revenues of India should be subject to the control
of the secretary of state in council, and that no grant or appropria-
tion of any part of such revenues should be made without the con-
currence of a majority of votes at the meeting of the council. Though
limited discretionary powers of incurring expenditure were delegated
to the Government of India, the regulations of this act placed on the
secretary of state and his council the final responsibility for the ad-
ministration of finances. In India, the somewhat antiquated financial
machinery had almost broken down under the strain of the Mutiny.
In the reconstruction which followed there was a noticeable tendency
to bring the organisation and procedure into closer conformity with
English practice. The management of the finances had been hitherto
in the collective charge of the governor-general and his council, who
exercised a control, that at times had not proved very effective, over
the expenditure of the presidency governments. In 1859 the first
finance minister was appointed and assumed control over all branches
of public accounts. The whole administration of finance was vested
in the central government, the provincial governments becoming, as
regards expenditure, merely administrative agencies and having no
power of spending without sanction the revenue they collected. Phe
budget system was introduced, the English model of preparing the
accounts being in general followed. The first budget was presented
for the year 1860–1 (the Indian financial year ending 31 March), to be
followed in due course by annual statements showing closed accounts.
The main preoccupations of the financial advisers of the Government
of India between the years 1859 and 1873—which forms the first
stage in the history of the period dealt with-were, after restoring
order in the public accounts, to balance income and expenditure,
and, subsequently, to meet endless demands for improved adminis-
tration and for the economic development of the country. The
Mutiny had involved the government in serious embarrassments.
Some of the sources of revenue had been wholly or partially cut off,
and the heavy military expenditure had been met by constant
borrowings. In all, over £42,000,000 had been added to the debt,
1 21 & 22 Vic. c. 108.
## p. 315 (#353) ############################################
REORGANISATION
315
and the accounts statement of 1859-60 showed a deficit of £7,250,000.
The total debt, which was largely a legacy of the numerous wars in
which the East India Company had been engaged, amounted to
about £98,000,000. The state of Indian finances had excited some
apprehension in England, and it was decided to appoint an ex-
perienced English financier to their charge. The choice fell on James
Wilson, to whom the credit for the reforms carried out was largely
due. Under his guidance, drastic reductions were effected in civil
and military expenditure, while the revenues were enhanced by the
imposition of an income-tax for a period of five years. With prosperous
seasons, the finances rapidly improved and, by 1864, the deficit
disappeared from the budget.
The gross revenue of 1860–1 amounted to £43,000,000. This
income was derived largely from sources which differed materially
from those most common in European countries, a fact which ac-
counted for some of the peculiar features of Indian finance. Under
the revenue system which the government had inherited from its
predecessors the main productive sources, the land-revenue and
opium, were not derived from taxation: of the taxation heads the
chief contributory was the salt monopoly; the ordinary excise,
customs and stamps being comparatively unimportant. Direct taxa-
tion was at first only intermittently imposed. Though an income of
this nature imposed a lighter burden on the public, it was less stable
and more costly to realise than that of countries relying in a greater
measure on taxation for their revenues. The fate of the budget
depended on the course of the monsoon. If the rainfall were favour-
able, the necessarily cautious anticipations of revenue were, more than
realised: if unfavourable, the returns from heads such as land-revenue,
opium and salt fell off, and the estimated surplus was converted to
a deficit, often swollen by the extraordinary expenditure called for
by measures of famine relief.
The mainstay of the finances was the land-revenue, which, in 1860,
contributed over 40 per cent. to the total of the gross revenues. From
time immemorial the ruling power in India had been entitled to a
share in the produce of the land. Where there was an intervening
landlord, the Government of India exercised its right by taking a
portion of the rent paid by the tenant. Where the settlement was made
direct with peasant proprietors, it took, as a rule, a portion, either of
the estimated net produce of the land, or of the rental accepted as
fair for the class of soil. The land-revenue, except in permanently
settled tracts, was revised periodically, usually after thirty years, when
an assessment was imposed on land brought under cultivation in the
interim, or an enhancement made in the rate of assessment, if justified
by a rise in rents, or an increase in the value of agricultural produce.
1 Cf. Bastable, Public Finance, bk 11, chap. v.
* Baden Powell, Land Systerns of British India, vol. 11, chaps. i and ii, vol. in, chap. ii.
## p. 316 (#354) ############################################
316
THE FINANCES OF INDIA, 1858–1918
a
The position of part proprietor thus occupied, however historically
or economically justifiable, in practice exposed the state to constant
pressure to reduce its claims. The material condition of the small
holders, due mainly to the density of population and excessive sub-
division of the land, in itself called for caution in enforcing enhance-
ments. There was consequently a tendencytowards greater moderation
in revising the assessments, so as to leave in the hands of the cul-
tivators a larger portion of the profits of their holdings. Though the
income from land-revenue shows a fairly steady increase, it was not
in proportion to the rise in the rental value of the land. The ratio of
land-revenue to the total gross income of the state gradually diminished
and at the beginning of the present century had fallen to 25 per cent.
Next in importance was the opium revenue, derived from profits of
the state monopoly of the sale of the drug to China and other coun-
tries, the revenue from opium sold in India being treated as excise. 1
The receipts under the former head were of a fluctuating nature,
depending on the character of the crop in India and the price of the
drug in China. The gross income, too, was subject to material de-
ductions, arising out of the purchase of the raw article and its manu-
facture for export. Though the maintenance of the traffic in opium
with China was subject to frequent attack, it survived in much the
same form until 1907, when an agreement was entered into with the
Chinese Government under which that government undertook to
suppress the cultivation of the opium poppy within a period of ten
years, while the Government of India consented to the extinction of
the import of opium into China within the same period.
Of the revenues derived from taxation the salt duty was the most
remunerative. Being an article of local production in certain parts
of India, the tax varied in its incidence and method of collection.
With the improvement of inland communications, the diversity in
rates encouraged smuggling from lower to higher taxed areas, the
suppression of which called for a great increase in the preventive staff
and so reduced the net receipts. The problem was not satisfactorily
solved until the Government of India was able to obtain control of
the most important sources of supply in the native states. The estab-
lishment of state factories at which salt was sold at a price that in-
cluded the duty rendered it possible to abolish the expensive inland
customs line and fix a uniform rate for all India. The equalisation of
the salt duties was completed in 1882, when a single rate of Rs. 2 per
maund (82 lbs. ) was levied, representing an annual tax of about 5d.
per head of population. There were frequent fluctuations in the rate
of duty imposed, but, generally speaking, the tax was raised only in
emergencies and was one of the first to receive the benefit of an
improvement in finances.
In 1860 the customs income was derived mainly from a general
· Strachcy, Finances and Public Works of India, chap. xiv. • Idem, chaps. xiii, xv.
## p. 317 (#355) ############################################
SOURCES OF REVENUE
317
rate of 10 per cent. ad valorem on most articles imported. " A smaller
duty of 4 per cent. was levied on many articles of export. As finances
improved, the rate on imports was reduced to 7 per cent. in 1864,
and again to 5 per cent. in 1875; many exemptions being made from
time to time from export duty. With the growth of industries in India,
particularly of cotton manufacture, objections were raised in England
to the form in which this duty was levied on the ground that its
practical effect was to operate as a measure of protection in favour
of Indian manufactures and so conflicted with accepted economic
principles. The main issue was the retention of the duty on cotton
goods which, so long as the Indian home industry was undeveloped,
constituted some 60 per cent. of the total imports. The avowed policy
of the Government of India was to adopt complete freedom of import,
which was carried into effect in 1882 by the abolition of the general
import duties. It was found, however, impossible to forgo this source
of income permanently, and the customs-duties were subsequently
reimposed.
of the other heads of taxation, the stamp revenue was realised
mainly from fees levied in the form of stamps on proceedings in the
judicial courts and from stamps on commercial documents. The
excise revenue was derived from intoxicating liquors, hemp, drugs,
and opium consumed in India. In 1860 the receipts were unimportant,
only slightly exceeding a million sterling, but with morecareful adminis-
tration, excise became one of the most valuable sources of income.
In India, as in England, the income-tax was first introduced as a
temporary expedient to meet war expenses. The first general tax
was imposed in 1860 to restore the finances after the Mutiny, being
levied at the rate of 4 per cent. on all incomes of Rs. 500 or upward,
and at half that rate on incomes between Rs. 200 and Rs. 500. It was
'abolished after five years, but in 1867 bad seasons compelled a resort
to direct taxation. An experiment was made with a licence tax on
trades and professions, which was of the nature of a tax on incomes.
In this modified form the proceeds were insufficient to cover the
deficit, and in 1869 the scope of the tax was enlarged and it was
converted into a general income-tax. As finances improved, this
unpopular form of taxation was dropped. But in 1877-8 financial
difficulties again arose, and no means of raising additional revenue,
except by direct taxation, being considered practicable, it was re-
introduced by the imposition of a licence tax on trades. In 1886 a
further step was taken and a tax was imposed on all incomes derived
from sources other than agriculture. Experience had been gained to
secure the smoother working of the tax and from that time it took its
place as one of the permanent heads of revenue.
The above summary indicates the gradual evolution of the revenue
Imperial Gazetteer of India, vol. rv, chap. vi.
• Strachcy, op. cit. chap. xii; Findlay-Shirras, The Science of Public Finance, chap. xxi.
## p. 318 (#356) ############################################
318
THE FINANCES OF INDIA, 1858–1918
system. Starting with a somewhat primitive system under which the
income was mainly derived from rent on land and fiscal monopolies
on opium and salt, the government was able, with the progress of the
country, to develop more elastic sources of revenue realised from
taxation, such as customs, excise and income-tax. Its general aim
being to keep down the incidence of the land-revenue and to reduce
the salt duty to as low a point as its finances permitted, the receipts
from these heads gradually came to bear a smaller proportion to the
gross revenues. As the older sources of economic revenue declined
in importance, they were supplemented by newer forms in the shape
of receipts from railways and irrigation works.
The distractions of wars by which the empire had been built up
left the East India Company little time or money to devote to the
prosecution of public works. Not till near the termination of its
existence was there any serious attempt to make good the short-
comings of the past. The succeeding government found itself faced
with the problem of bringing the country up to date in the matter of
roads, public buildings and the public utility services of a modern
state. Equally imperative was the need for protection against famine
by the construction of irrigation works. The funds required were far
beyond the scope of the ordinary revenues, and, in the absence of
private enterprise, the government was compelled to fall back on the
assistance of foreign capital. Though its fruits have been of incal-
culable benefit to the country, the public works policy imposed a
heavy strain on the finances, and the financial history of the fifty
years following the Mutiny is a record of constant struggle to meet the
obligations incurred and to maintain uninterrupted progress. Ulti-
mately, as will be shown, the commercial services were to-prove a
remunerative source of revenue.
In order to secure the essential lines of railway communication the
government, from 1853 onward, arranged for their construction
through the agency of joint-stock companies with an English domicile,
to which a guarantee was given of 5 per cent. on the capital outlay
and half the surplus profits. The primary defects of these contracts
were that the companies were relieved of responsibility for the cost of
construction and the only incentive to economy was the somewhat
remote prospect of sharing in the profits. Even allowing for the
necessity of gaining experience in railway construction in India, the
cost was high and for a number of years the payment of interest
charges imposed a considerable burden on the general revenues. In
a
all, the capital outlay on the railways guaranteed under the earlier
system amounted to some ninety-seven millions. Under the terms of
the contracts the state was able to exercise the right of purchase and
the old guaranteed railways were gradually acquired.
Strachey, op. cit. chap. vii; Chesney, Indian Polity, chaps. xviii, xix; Imp. Gaz.
vol. II, chap. vii.
1
O
## p. 319 (#357) ############################################
FINANCIAL DECENTRALISATION
319
In 1869 it was decided to embark on a policy of construction
through direct state agency, mainly with borrowed capital. Fair
progress was made with the project, but the fall in the gold value of
silver rendered the scheme abortive. The burden of paying interest
on the sterling debt began to press heavily on the state, and there was
a natural reluctance to add to these charges. Borrowings were ac-
cordingly limited to such sums as could be raised in India. But a
railway policy under which the rate of progress was determined by
annual borrowings in a limited market soon proved inadequate to the
needs of the country. It was found necessary to fall back on the
former system of inviting assistance of private companies by the offer
of guarantees, or other forms of state aid. The various contracts
differed widely in their conditions, but the terms obtained were more
favourable than in the earlier contracts. Where a guarantee was given,
the rate in no case exceeded 4 per cent. and the share in the surplus
profits payable to the companies was smaller. The construction of
railways by direct agency was not discontinued, but the tendency was
rather to employ this method for lines required for strategic purposes,
or for protection against famine.
In the construction of irrigation works, the government could look
for even less assistance from private enterprise. Nearly all the
important systems were constructed by state engineers, either from
borrowed funds, or special revenues set aside for famine insurance.
On the whole the money so spent proved a very remunerative invest-
ment, quite apart from the indirect advantages accruing to the state
in securing the land-revenue and restricting expenditure on famine
relief. But on the other side of the ledger must be set the growing
charges for interest on capital, the long delays which often supervened
before any return commensurate with the outlay was received, and,
over a series of years, the loss in exchange on the sterling portion of
the debt.
Apart from the rearrangement of the financial relations between
the central and provincial governments, there were no events of out-
standing importance prior to 1873. The system of a highly centralised
financial control, introduced under circumstances previously men-
tioned, had not becn found to work well in practice. The provincial
governments, though responsible for the collection and development
of a large part of the revenue, were allowed no discretion in incurring
expenditure, and derived no benefit from the growth of income or
economy in administration. The position they occupied was in fact
something more than that of a department and something less than
that of a government, a state of affairs which inevitably led to friction.
From the Government of India's point of view the situation was
described as one in which “the distribution of the public income
degenerated into something like a scramble, in which the most violent
Report of Indian Irrigation Commission, 1903.
1
## p. 320 (#358) ############################################
320
THE FINANCES OF INDIA, 1858–1918
had the advantage, with little attention to reason”. From the other
point of view, the Government of India, in endeavouring to control
all items of expenditure over so large a country, had assumed a task
which no central authority had the capacity or knowledge to perform.
A beginning was made in financial decentralisation in 1871, which
was further developed in 1877. The principle adopted was that certain
branches of administration, such as the postal services and railways,
should be treated as wholly imperial and their receipts taken by the
central government. That government, being responsible for the
heaviest charges on the state revenues, retained in its hands the income
from certain main heads, such as salt, opium and customs. The
revenues from other heads, viz. land-revenue, excise, stamps, forests
and registration, were shared in a proportion determined according
to the requirements of the several provinces. From the income de-
rived from their share, the latter met the expenses of the collection
of the revenues and the greater part of the expenses of their civil
administration. The financial arrangements between the central and
provincial governments were for some time subject to periodical
revision, when they were amended according to the state of the public
revenues; but, ultimately, more permanent shares in the divided
revenues were assigned to the different provinces. As originally
framed the system had nothing of a federal character about it. The
object in view was mainly to effect an administrative improvement
by relieving the central office of an impossible burden of work and
freeing the provincial governments from unnecessary interference.
The control over, finance was not surrendered, since the central
government was always at liberty to view the terms of the settlement.
Roughly, the provincial expenditure amounted to one-third of the
imperial.
Previously to 1873 currency questions had played little part in
Indian finance: from that date they dominated it. Though an attempt
had been made in 1868 to introduce the sovereign into India, it had
not proved successful and the rupee remained the basis of the currency.
Silver being received without limit when tendered for coinage at the
Indian mints, the gold value of the rupee depended on the gold price
of silver bullion. This value had continued up to 1872-3 fairly con-
stant at about 2s. , and fluctuations in exchange had been compara-
tively small. About this time, however, largely in consequence of
the demonetisation of silver, first by Germany and subsequently by
the Latin Union, the rupee exchange began to drop. Its downward
course was for some time gradual, and temporary improvements
favoured a policy of inaction. By 1885 it had fallen to an average rate
of is. 7d. From this point the decline was more rapid and by 1890
i Strachey, op. cit. chap. ix; Hunter, Life of the Earl of Mayo, vol. 11, chap. vi.
: Decentralisation Commission Report, Parl. Papers, 1907.
; Barbour, The Standard of Value, chap. xii, 1893.
## p. 321 (#359) ############################################
THE FALL IN EXCHANGE
321
it had fallen to is. 4d. For a brief period in 1891 the decision of the
United States to purchase annually large quantities of silver brought
about a sharp rise to is. 6d. , only to be followed by a reaction until,
in 1893, the average rate was in the region of is. 2d. 1 This depre-
ciation disastrously affected India's finances by increasing the cost of
making remittances to liquidate her gold obligations in England.
These consisted mainly of interest on the sterling debt, guaranteed
interest on the railways or, after their purchase, of the annuity
charges, payment fo railway stores, army charges, and furlough and
pension allowances of civil and military servants. They were defrayed
by the secretary of state's selling for sterling rupee drafts on the Indian
treasuries. But so long as the mints remained open to the free coinage
of silver, the sterling amounts obtainable at the secretary of state's
sales could not ordinarily exceed the cost of procuring silver and
remitting it to India for coinage. Each fall in the gold value of the
rupee meant proportionately increased cost in defraying the charges
to be met in England.
In 1892-3, when the exchange had fallen to
IS. 2d. , the government had to pay 87,300,000 more rupees to meet its
gold obligations, amounting to £16,500,000, than would have been
required had the exchange stood at the same rate as in 1873.
It will now be convenient to outline the main events between 1873
and 1893 which moulded the course of Indian finance. During the
early part of this period India was visited by a cycle of bad seasons
which resulted in partial or total failure of the crops over wide areas
of country. Two famines, onc in Bihar and the other in Southern
India, called for expenditure on an unprecedented scale. These and
other minor disasters cost the government in relief operations, or
remission of revenue, over £15,000,000. A commission appointed in
1877 to enquire into the subject of famine relief recommended that
a sum of £1,500,000 should be set aside in prosperous years to meet
the cost of these recurring calamities, without further increase of debt.
In years free from famine, the surplus was to be devoted, either to the
paying off of existing debt, or the avoidance of debt by constructing
works, such as railways, the cost of which must otherwise have been
met by borrowing. As the condition of the finances did not admit of
the sum required being set aside from revenue, additional funds were
provided by a fresh cess on land, the imposition of a licence tax on
the trading classes, and by reducing provincial assignments. Wars,
threats of wars, and falls in exchange caused these arrangements to
break down on several occasions, but, as soon as pressure was relieved,
the grant was resumed. The operations under the famine insurance
scheme enabled the Government of India, in addition to meeting
the cost of famine relief, to spend on development projects roughly
£5,000,000 from the inception of the scheme up to 1893. During these
| Report of Indian Currency Committee (Parl. Papers, 1893, Accounts, c. 7060).
Report of Indian Famine Commission, 1878.
CHIVI
21
## p. 322 (#360) ############################################
322
THE FINANCES OF INDIA, 1858-1918
years the government was in constant financial difficulties. The
Afghan war which broke out in 1878 proved very costly. Hardly had
the situation improved, when the Government of India was called
upon, in deference to the free-trade views obtaining in England, to
abolish the duty on all imported cotton goods, the import tax on
coarser goods, which formed the main product of the Indian mills,
having been removed in 1879. With the abolition of the duty on these
goods, which provided the bulk of the customs revenue, it was im-
possible to justify the retention of the rest of the import tariff levied
on a number of miscellaneous articles, many of which yielded an
insignificant revenue. It was accordingly decided to abolish all import
duties, except those levied on articles, such as liquor and salt, which
were subject to internal taxation.
From 1885 the government was again confronted with heavy
military expenditure as a result of the threatened advance on India
by Russia, and the operations which terminated in the annexation of
Upper Burma. An increase in the strength of the army and defensive
works on the frontier entailed a steady growth in expenditure between
1886 and 1893. With the limitations imposed on the customs tariff,
it was necessary to fall back on other heads of taxation which promised
to yield the additional income required. In 1886 the licence tax was
converted to an income-tax leviable on all non-agricultural incomes
above Rs. 500, and in 1887 the salt-tax was raised from Rs. 2 to
Rs. 2} per maund. With the aid of the revenue thus obtained
and by the exercise of rigid economy, a deficit was avoided, but the
income-tax in its new form had not been imposed without a good deal
of opposition, while the enhancement of the salt-tax was open to the
objection that it fell most heavily on the poorest class of the popula-
tion. The fiscal policy at the time was affording a handle of attack to
the newly formed congress party. Though these attacks contained
much misrepresentation, they indicate the growing irritation at the
financial straits to which the government had been reduced, mainly
owing to the neglect to deal with the currency problem. When a fresh
crisis in exchange took place in 1892-3, it became obvious that the
Indian finances could not support the strain of the enormous losses
involved and that a reform of the currency system could no longer
be avoided.
The first proposals to this effect were made in 1878, in which the
Government of India pressed for the establishment of a gold standard
and control of silver coinage: the scheme involved acceptance of gold
in payment of government demands but not its immediate recognition
as legal tender. Though it differed in many of its features from the
system ultimately adopted, the main principle was the same, and
some reform on these lines could undoubtedly have been carried out
more easily at that time than at a later date when exchange had fallen
further and the country was flooded with silver coin. When its pro-
a
1
1
1
## p. 323 (#361) ############################################
CURRENCY REFORM
323
posals were rejected by the secretary of state, the Government of India
turned its attention to international bimetallism as a solution of its
currency difficulties. Its hopes were kept alive by international
monetary conferences, at which the question came under discussion,
and the pronounced desire of other governments to rehabilitate silver.
But the condition into which the finances of India had fallen, and
international currency events from 1890 onward, finally forced the
hands of the government and the secretary of state. The world pro-
duction of silver showed a very decided increase and, in spite of pur-
chases on a large scale by the United States Government, imports into
India were rising. India's trade was becoming disorganised by the
constant fluctuations of silver, and the banking and trading classes
brought pressure to bear on the Government of India to close the
mint: and establish a gold standard. There was also a grave appre-
hension that the United States Government might discontinue its
purchases of silver, in which case it was impossible to foresee to what
lower levels the gold price of silver might fall
. Proposals were again
submitted for the adoption of a gold standard which were referred
by the secretary of state to a committee of which Lord Herschell
was chairman. Its recommendations were carried into effect in
1893
In accordance with these recommendations the mints were closed
to the free coinage of silver, the government reserving to itself the right
of coining silver as required. It was notified at the same time that
sovereigns and half-sovereigns would be received by government at
the equivalent of Rs. 15 and Rs. 7} respectively, and that gold coin
and bullion would be held in the paper currency reserve as a backing
against notes. No action was taken with regard to making gold coin
legal tender. It was believed that, with the closing of the mints to free
coinage, a scarcity value would be placed on the rupee and, as it was
no longer possible to settle the excess of exports over imports by
sending silver to India and coining it into rupees, settlement would
have to be made mainly through the secretary of state's council
drafts. If the rate of these sales could be kept at about is. 4d. the
rupee, the exchange value of the rupee might be forced to this level.
,
With the gradual accumulation of gold coin, it was hoped to build up
a reserve which would make the gold standard effective. As soon as
the mints were closed exchange rose to the desired level of is. 4d. , but
soon fell to lower rates. Several factors militated against the imme-
diate success of the scheme. The heavy coinage before and after the
closing of the mints—the government having taken over the silver in
transit and with the banks—had led to a redundancy of silver coin
over currency requirements. The closing of the mints in India and
1 Cf. Barbour, The theory of bimetallism and effects of partial demonetization of silver on
England and India.
• Report of Indian Currency Committee, 1893 ut supra.
Act VIII of 1893.
• Cf. Barbour, The Standard of Value, chap. xvii.
21-2
## p. 324 (#362) ############################################
324
THE FINANCES OF INDIA, 1858–1918
the repeal of the Sherman Act in the United States caused a heavy
drop in the gold price of silver, and bullion poured into the country
to be used for commercial purposes, thereby decreasing the demand
for the secretary of state's bills. The rate of exchange continued to
decline with the diminishing value of silver, the average for 1894-5
being only slightly over is. id. From this point it rose steadily, being
materially influenced by the expansion of th, internal and external
trade of the country. These favourable trade conditions tended to
absorb the superfluous currency, thus accelerating the effect of the
closure of the mints. The progress was, however, so slow that the
government seriously considered the possibility of melting down large
numbers of rupees and even of reducing the standard to be aimed at
to is. 3d. In 1897 there was definite improvement, the average rate
being nearly is. 3d. , and by 1898–9 the goal had been reached and
the exchange value of the rupee forced up to is. 4d. , though its
bullion alue had fallen as low as rod. At this rate it remained with
minor fluctuations, until circumstances arising out of the war com-
pletely upset pre-existing standards.
Little confidence was felt at the time that the rate would be main-
tained. The feeling of uncertainty was reflected in representations by
the various chambers of commerce regarding the unstable condition
of the currency which was disturbing the trade of the country and
driving away capital. Fresh proposals by the Government of India for
stabilising exchange led the secretary of state to appoint a committee
under the presidency of Sir Henry Fowler to review the situation. 1
This committee approved of the closing of the mints as the only
practical method of securing a stable exchange between India and
the countries with which she principally traded. It recommended the
establishment of a gold currency as well as of a gold standard, to
secure which it proposed that the sovereign should be legal tender in
India and that the Indian mints should be open to unrestricted coinage
of gold. The committee was impressed by the view that it would not
be feasible to maintain the gold standard without an actual gold
currency, and, for this reason, it urged the encouragement of the use
of gold in currency. Th conviction led it to reject schemes, strongly
supported at the time, of establishing a gold standard without a gold
currency in India. The advocates of these views held that a gold
currency was not wanted in India and that exchange with other coun-
tries could be adequately maintained with a sufficient reserve of gold. ?
The most fruitful of the suggestions of the committee was that any
profit on the coinage of rupees should not be treated as revenue, but
credited to a special reserve to be used for supporting exchange. Its
adoption led to the establishment of the special reserve known as the
Gold Standard Reserve.
>
2
1 Report of Indian Currency Committee (Parl. Papers, 1899, Accounts, c. 9390).
* Lindsay, Ricardo's Exchange Remedy.
## p. 325 (#363) ############################################
A GOLD CURRENCY
325
The Government of India, acting on these recommendations, passed
an act making the sovereign and half-sovereign legal tender at Rs. 15
and Rs. 7} respectively. The proposal for coining gold in India fell
through, owing to difficulties with the English treasury. The efforts to
put gold into circulation were the reverse of successful. The currency
was not popular, and was continually finding its way back to the
treasuries. The result was that the stock of gold in the Paper Currency
Reserve, where it was held as a backing to notes issued, rose steadily
and the silver reserve came to be inconveniently low. In March,
1900, the stock of silver had fallen to about £3,500,000 and gold had
increased in proportion. So long as the public was unwilling to take
gold, this small reserve of rupees had to maintain the convertibility
of some £18,000,000 of notes. To relieve the strain fresh efforts were
made to force gold into circulation, under which the sovereign went
to a discount. The coinage of silver was then taken up in earnest, the
profits being devoted to building up a special gold reserve. These
were transferred to London and, for the most part, invested in govern-
ment securities,
During the years immediately following 1893 the only events of
financial importance were those connected with the improvement of
the currency. Until there was a definite rise in the rate of exchange,
the main concern of the administration was to balance the budget and
curtail expenditure. In 1894 the general import duty at the rate of
5 per cent. ad valorem was reimposed. The duty extended to cotton
goods, but, to deprive it of its protective character, a countervailing
excise duty was imposed on fabrics manufactured at the power mills
in India. a' Aided by this new revenue and the steady growth of the
ordinary revenues, the government was enabled to tide over the period
of transition to a stable rupee. In 1896–7 Northern India suffered
from a famine of unusual severity which cost over £4,000,000 in direct
relief. A frontier war in the following year, involving military opera-
tions on an extensive scale, caused further embarrassment and both
these financial years showed considerable deficits. These, however,
may be described as the last of the lean years; from this time onward,
owing to the steadiness of exchange, growth of revenues, and improved
receipts from public works, the aspect of Indian finances underwent
an entire change and, with flowing balances, the government was not
only able to reduce taxation but also to provide more adequately for
the public services, the development of which had been retarded by
the enforced economy of the preceding years.
One of the main factors in the improvement of the finances was
that the railways and irrigation works became, about the beginning
of the present century, a source of direct profit to the public revenues. 3
a
1 Indian Cuinage and Paper Currency Act, XXII of 1899.
Cf. Roberts, History of British India, pt 11, chap. xii.
• Robertson, Report on the Administration and Working of Indian Railways.
## p. 326 (#364) ############################################
326
THE FINANCES OF INDIA, 1858–1918
In arriving at these results all interest charges, not only on open works
but also on those under construction, were charged against revenue,
as well as annuities for the redemption of commuted capital and
annual outgoings of every description. Many of the older undertakings
had been returning handsome dividends on the capital invested for
a number of years past, but the profits did not counterbalance the loss
on newer constructions. In 1900 the revenue account drawn up on
the above method showed a small gain, which by 1901–2 had risen
to three-quarters of a million and in 1904-5 to two millions. The
profits, as in all operations of a commercial character, varied with the
season, and in 1907-8 a loss again was incurred, largely owing to
increased working expenses. In the following year there was a re-
covery and from that time the net receipts became an important item
in the national revenue.
The greatly improved condition of its finances after 1901–2 enabled
the Government of India to allot funds on a largescale to the provincial
governments for the purposes of education, sanitation and agricultural
development, as well as to reduce taxation. The salt-tax was reduced
by successive stages from Rs. 2} per maund to Ri. Incomes
under Rs. 1000 per annum were exempted from income-tax, and, as
a relief to the agricultural population, certain cesses on the land were
abolished. When the periodical settlements with the provinces were
revised in 1904-5, definite shares in the incomes realised within the
provinces were permanently surrendered. This was the first step
towards the grant of fiscal independence to the provincial legislative
councils, some measure of which was essential if any genuine system
of local self-government were to be set up. But in 1907–8 there was
a turn in the tide. The monsoon was poor and the sources of income
which varied with the prosperity of season declined: exports fell off
and an exchange crisis supervened. The Government of India was
further faced with the problem of losing the greater part of its opium
revenue under the terms of the Indo-Chinese agreement of 1907. 1
As three-quarters of the opium revenue was derived from the China
trade, this meant that by 191° a sum of about £3,000,000 would have
to be made good from other sources. To provide for future losses in
revenue, the customs-duties on a number of articles, such as tobacco,
beer, spirits and petroleum, were raised and a higher ad valorem duty
imposed on silver bullion. The seasons following, up to the outbreak
of the war, were prosperous. Revenues from almost all sources showed
increases, and speculative purchases of the exportable opium greatly
reduced the losses anticipated in the receipts from sale of the drug.
In the financial year ending March, 1911, there was a budget surplus
of nearly £6,000,000, and in 1913 an even larger surplus of £7,600,000.
These large balances excited some criticism of under-estimation of the
revenue; but they left India in a strong financial position when the
Strachey, India, note to chap. x.
1
## p. 327 (#365) ############################################
REVENUES AND DEBT
327
war broke out, and enabled the government to meet successfully some
of the difficulties which arose during its early stages.
Figures of revenue have hitherto been sparingly quoted. The rupee
has varied so greatly in value that it is impossible to adopt any fixed
standard for conversion into sterling. Apart from this, owing to
alterations in the system of keeping the public accounts, no compari-
sons of any accuracy can be instituted between the figures of different
periods. But by 1913–14 the rupee had become comparatively stable,
and the figures of that year may usefully be quoted to illustrate
generally the increase in revenues since 1860 and the main sources
from which they were derived.
. . .
. . .
. . .
5,318
Revenues of India, 1913-14 (in thousands of pounds sterling)
£
Land-revenue
21,391
Opium
1,624
Salt . . .
3,445
Stamps
Excise
8,894
Customs
7,558
Income-tax
1,893
Forests
2,220
Interest
1,352
Post Office and Telegraphs (net receipts) 3,598
Railways (less working expenses)
17,625
Irrigation
4,713
Military receipts
1,369
Other heads. . .
4. 307
. . .
. . .
. . .
Total . . .
£85,307
. . .
The gross revenue of the country had nearly doubled, but, though
the sources remained much the same, there had been a material
change in their relative importance. The contribution of land-revenue
to the total had fallen to 24 per cent. , while the commercial services
were yielding a steadily increasing surplus. The opium revenue had
become unimportant. Though excise and customs had increased in
productiveness, the proportion of economic to tax revenues was still
high. But the pressing demands of the state in war time could only
be met by resort to taxation, and, consequently, in the following years
there was a great expansion in the receipts from excise, customs and,
above all, income-tax.
The total debt after the Mutiny amounted to some £98,000,000,
the whole of which had been borrowed for unproductive purposes and
the interest was a dead weight on the revenues. There were additions
to the debt in 1877-8, as a consequence of the famine of that year and
the military operations in Afghanistan which followed the famine.
Some further debt was incurred in 1896 to 1898, again to meet deficits
caused by famine and war, but, with these exceptions, the great bulk
of the rupee and sterling debt was incurred in connection with the
## p. 328 (#366) ############################################
328
THE FINANCES OF INDIA, 1858–1918
construction of railways and other public works. By a system in-
stituted in 1880-1, an amount of the ordinary debt, equivalent to the
capital expenditure on public works supplied from ordinary revenues,
or from the famine insurance grant, was transferred to the public
works portion of the debt. As the state of finances improved after
1901-2, larger allotments were made to public works, resulting in a
corresponding reduction of the ordinary debt. In 1881–2, reckoning
the rupee at is. 4d. for purposes of comparison, the ordinary debt
stood at £74,000,000 and the public works debt at £48,000,000. By
1898–9, the figures were £63,000,000 and £169,000,000 respectively.
There were subsequent changes in the method of distributing the debt
between the productive and unproductive heads, but the net result
of the transactions up to the outbreak of the war was that by far the
greater portion of the debt stood invested in public works which more
than repaid the interest due on the capital outlay, while that portion
of the debt which imposed an actual burden on the country had been
reduced to very small limits. The position was summed up by the
finance minister as follows:
Out of a total debt equivalent to £274,000,000 outstanding at the end of March,
1914, only about £13,000,000 represented ordinary, or unproductive debt. Our
total annual interest charges amounted to some £9,250,000. Railways and irriga-
tion works in the same year yielded us a return of £15,250,000.
