Thoughts on economics and liberty

Hindu Capitalism #10. Dadabhai Naoroji’s notes on the displacement of Indian capitalism

Dadabhai Naoroji's key thesis is perhaps best captured in the following extract from his book, Poverty and UnBritish Rule in India (1901). The point he is making is that capital accumulation in India was seriously compromised by British rule.

Note that he is NOT against foreign investment (this should be a salutary lesson to BJP and Congress who have opposed FDI). He is merely pointing out that the displacement of credit and banking from traditional Indian sources has meant that capital accumulation is primarily taking place abroad.

In isolation Naoroji's thesis can be refuted. His s writing should be seen in the light of other developments in Indian capital markets in British India. As indicated in my earlier research restrictions were imposed on traditional Hindu banking through preference to joint stock banking – even though the traditional system had done an outstanding job.

In a competitive situation, everyone benefits. But with barriers to competition (in this case regulatory barriers) imposed on Hindu capitalism, it is possible that Naorji had a point. This may explain why, despite relative freedom, India performed so poorly under British rule.

EXTRACT

(p.264)

these Native States have exported so much more merchandise than they have imported. Thereupon the Report remarks thus:—“The greatest balance is in favour of Rajputana and Central India, caused by the import of opium from that block. Next to it is that of the Central Provinces. It is presumed that these balances are paid back mainly in cash” (the italics are mine). This, then, is the way the treasure goes; and poor British India gets all the abuse—insult added to injury. Its candle burns not only at both ends, but at all parts.
 
The excessive foreign agency eats up in India and drains away out of India a portion of its wretched income, thereby weakening and exhausting it every year drop by drop, though not very perceptibly, and lessening its productive power or capability. It has poor capital, and cannot increase it much. [Sanjeev: Almost certainly this state of affairs was due to regulatory barriers against Indian capital] Foreign capital does nearly all the work, and carries away all the profit. Foreign capitalists from Europe and from Native States make profits from the resources of British India, and take away those profits to their own countries.
 
The share that the mass of the Natives of British India have is to drudge and slave on scanty subsistence for these foreign capitalists; not as slaves in America did, on the resources of the country and land belonging to the masters themselves, but on the resources of their own country, for the benefit of the foreign capitalists.
 
I may illustrate this a little. Bombay is considered a wealthy place, and has a large capital circulating in it, to carry on all its wants as a great port. Whose capital is this? Mostly that of foreigners. [Sanjeev: This is clearest evidence that British rule displaced Indian traders and bankers. Given that Indian bankers financed the British till mid-1850s at least, the fact that they were not able to undertake banking activity must have its roots in regulatory barriers – someone needs to study this!]
 
The capital of the European exchange banks and European merchants is mostly foreign and most of the Native capital is also foreign —i.e., that of the Native bankers and merchants from the Native States. Nearly £6,000,000 of the capital working in Bombay belongs to Native bankers from the Native States. Besides, a large portion of the wealthy merchants, though more or less settled in Bombay, are from Native States. Of course I do not mean to say anything against these capitalists from Europe or Native States. They are quite free and welcome to come and do what they can. They do some good. But what I mean is, that British India cannot and does not make any capital, and must and does lose the profit of its resources to others.
 
If British India were left to its own free development it would be quite able to supply all its own wants, would not remain handicapped, and would have a free field in competition with the foreign capitalists, with benefit to all concerned. [Sanjeev: this once again indicates some regulatory restrictions – need to study this point further.]
 
The official admission of the amount of the drain goes as far as £20,000,000 per annum; but really it will be found to be much larger (excluding interest on railway and public works loans):—add to this drain out of the country what is eaten and enjoyed in the country itself by others than the Natives of the country, to the deprivation by so much of these Natives, and some idea can be formed of the actual and continuous depletion. Now, take only 220,000,000 per annum to be the extent of the drain, or even £10,000,000 per annum; this amount, for the last thirty years only, would have sufficed to build all the present and great many more railways and other public works.
 
There is another way in which I may illustrate the burning of the candle at all parts.
 
First of all, British India’s own wealth is carried away out of it, and then that wealth is brought back to it in the shape of loans, and for these loans British India must find so much more for interest; the whole thing moving in a most vicious and provoking circle.
 
Will nothing but a catastrophe cure this? Even of the railway, etc., loans the people do not derive the full benefit. I cannot go into details about this here. I refer to my correspondence with the Secretary of State for India. Nor can I go here into the calculations about the drain. I can only refer to my papers on “The Poverty of India” and “Condition of India.” Let Sir Grant Duff kindly show me where I am wrong in those papers, and I shall be thankful; or he will see that no country in the world, not even England excepted, can stand such a drain without destruction. Even in those days when the drain was understood to be only £3,000,000 per annum, Mr. Montgomery Martin wrote in these significant and distressing words:
“The annual drain of £3,000,000 on British India has amounted in thirty years, at 12 per cent. (the usual Indian rate) compound interest, to the enormous sum of £723,900,000 sterling So constant and accumulating a drain, even in England, would soon impoverish her. How severe, then, must be its effects on India, where the wage of a labourer is from twopence to threepence a day I Were the hundred millions of British subjects in India converted into a consuming population, what a market would be presented for British capital, skill, and industry!”
 
What, then, must be the condition now, when the drain is getting perhaps ten times larger, and a large amount besides is eaten up in the country itself by others than the people? Even an ocean would be dried up if a portion of its evaporation did not always return to it as rain or river. If interest were added to the drain, what an enormous loss would it be!
 
In the darkness of the past we see now a ray of light and hope when the highest Indian authority begins to perceive not only the material disaster, but even the serious “political danger” from the present state of affairs. I only hope and pray that Britain will see matters mended before disaster comes. Instead of shutting his eyes like an ostrich, as some persons do, the Secretary of State for India only last year, in his despatch of 26th January, 1886, to the Treasury, makes this remarkable admission about the consequences of the present “character of the government,” of the foreign rule of Britain over India:
 
“The position of India in relation to taxation and the sources of the public revenues is very peculiar, not merely from the habits of the people and their strong aversion to change, which is more specially exhibited to new forms of taxation, but likewise from the character of the government, which is in the hands of foreigners, who hold all the principal administrative offices, and form so large a part of the Army. The impatience of new taxation, which would have to be borne wholly as a consequence of the foreign rule imposed on the country, and virtually to meet additions to charges arising outside of the country, would constitute a political danger the real magnitude of which, it is to be feared, is not at all appreciated by persons who have no knowledge of or concern in the government of India, but which those responsible for that government have long regarded as of the most serious order.” [The italics are mine.]
 
This gives some hope. If, after the faithful adoption of the policy of 1833 and 1858, our material condition does not improve, and all the fears expressed in the above extract do not vanish, the fault will not be Britain’s, and she will at least be relieved from the charge of dishonour to her word. But I have not the shadow of a doubt, as the statesmen of 1833 and the proclamation of 1858 had no doubt, that the result will be a blessing both to England and India.
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Sanjeev Sabhlok

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3 thoughts on “Hindu Capitalism #10. Dadabhai Naoroji’s notes on the displacement of Indian capitalism
  1. prof premraj pushpakaran

    prof premraj pushpakaran writes –2017 marks the 100th death anniversary of Dadabhai Naoroji !!

     

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