Economic perspectives from the folds of time

If you are eager to read a comprehensive history of the economic policies of the princely states, well, that waits to be written, as Tirthankar Roy observes in The Economic History of India: 1857-1947 , third edition ( www.oup.com ). Let that not dishearten you, though. Because, based on the limited research available on the three largest states — Hyderabad, Mysore, and Travancore – a few propositions can be advanced, Roy notes.

“First, the broad composition of public expenditure and revenue in the States conformed to that of British India. The land tax dominated revenue in the nineteenth century. Administration, including police, justice and palace expenses, took away a large proportion of the expenditure.” The author mentions, for example, that in Mysore (1905-10), these heads accounted for over half of public expenditure.

Another common feature was that the structure of revenue and expenditure changed in the same direction as in British India from the last quarter of the nineteenth century; for instance, the importance of land tax declined and that of commodity taxes and royalties increased, Roy informs. “In Mysore, the share of income from excise, forest royalties, state railways, and royalties from the Kolar gold mines increased their share substantially between 1880 and 1910. Forest income was also crucial in the numerous sub-Himalayan states.”

On the expenditure side, too, there were shifts; infrastructure began to increase its share, the author narrates. Here, again, the princely states were largely following the priorities in British India, which explains why in the late nineteenth century the main item of expenditure was the railways.

Divergent experiences

An insight of value in the chapter on ‘fiscal and monetary systems' is that, in the inter-war period, some of the larger states began to play a more active and explicitly developmental role; so much so, the experiences of different states began to diverge. Looking behind the divergence, the author sees a major role played by the nature of local politics and by the technocrat-advisors who commanded influence in some of the states. He cites the case of Mysore, where there was much interest and commitment towards industrialisation under the initiative of the state; and where the debates on industrial policy anticipated some of the same issues debated in the 1950s discourse on development strategy. “Inter-war Mysore also saw the implementation of large hydroelectric projects.”

In Travancore and Baroda, Roy finds that the emphasis was on the social sector, education and health, with the role of ‘outsiders' in the framing of development policy turning out to be significant. In contrast, Hyderabad confined itself to industrial development under the leadership of the local landed and trading communities, he distinguishes. “In this effort, Hyderabad pioneered the concept of state-backed investment banking, which has been used extensively by central and state governments in post-Independence India.”

Paucity of investment

A section titled ‘poverty of the state' rues that there were several channels of ‘leakage' of potential funds for investment in British India, the most notorious being government remittance. “Given revenue, a large remittance would lead to lower government expenditure within India, and given a net receipt of sterling from abroad, a larger remittance implied lower capacity to import machinery and raw materials needed by industry. The issue of remittance, however, is shrouded in ambiguity…”

The more important reason behind the poor and biased effort at investment was the government's limited resources, reasons Roy. He refers to statistics on how the tax per head and per unit of GDP was much too low. “Government revenue as a proportion of GDP was 5 per cent in India (average of 1920-30), 19 in the UK, and 29 in Japan. Government revenue per head in India was about one-eightieth that in Britain. Adjusted for differences in price level, the British Indian tax per head would still be no more than 5-8 per cent of the tax per head in Britain.”

Even in comparison with the tropical British and French colonies in Asia, British India was a rather poor government, Roy points out. For example, between 1920 and 1930, the government of the Federated Malay States spent on average more than ten times the money spent in British India per head, he states. “That of Ceylon spent more than three times, those of the Philippines and the Dutch East Indies more than double, and those of Siam (Thailand) and French Indo-China 40-50 per cent more.”

Expenditure commitments

What were the expenditure commitments, closer home? Defence, civil administration, and debt service, the author recounts. About half of the home charges in the pre-war years consisted of interest payment on loans raised to finance construction of railways and irrigation works, he adds. “The item next in importance was payment for the maintenance of army and marines. A third component was pension payments for officials who had served in India and retired to Britain. Office expenses and stores purchased, formed the other items of expenditure.”

The chapter highlights how, even though the effect of direct war finance upon the budget receded from the second decade of the century, the budget continued to be influenced by imperial concerns of administrative and political stability, leaving too little for spending upon what would be seen today as development heads.

Roy underlines, for instance, that not more than 25 per cent of total expenditure consisted of investment, going into the construction and repair of national assets; and that, if we consider only net investment (i.e. creation of new assets), the percentage was smaller. “The major sectors that saw capital expenditure were irrigation, roads, railways, and telegraphs. Increasingly from the inter-war period, investments under these heads went into depreciation rather than new assets.”

Pre-colonial India

Rewinding to taxation in pre-colonial India, during the Mughal rule, one reads that no uniform rate was applied to all lands and regions, though the common shares of the state fell between one-third and one-fourth of the gross produce. “Among the Marathas and in south India, rates like 50 per cent of gross produce of irrigated land, and one-third of dry land, seem to have been usual.” Actual collection from the peasant, however, was invariably less than the stated rate, when adjusted for the lowly assessed lands, Roy elaborates. For example, the revenue system had a history of remissions and rescheduling in times of stress.

While it can be strange to know that a large proportion (60 to 80 per cent) of the tax collected was distributed among the tax collectors, the book clarifies that the retained amount was not all income for the tax collectors, but spent on a variety of administrative and military services that they depended on.

Disparity was patent in Mughal India, with a few hundred families having access to a very large share of the gross agricultural output of the nation, even as a considerable part of the state income was spent – not for the commoners' good – but on palaces, administration, and the army. “Those connected with the state were, on average, wealthy and their consumption provided a sustained demand for high-quality crafts and services. Numerically, the consumers of high-quality crafts were a small minority compared to the cultivating population…”

Right pick for those interested in gaining a perspective on many of the issues that continue to hound us.

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