by Utsa Patnaik
While it grew rapidly, trade also became more volatile during the two decades following 1914, and the use of Council Bills came to be regularly supplemented by, and in many years entirely supplanted by direct sale or purchase of sterling for rupees by the Secretary of State. For example, the spike in India’s merchandise export surplus earnings to a two-year total of £158 million during 1918 and 1919, and restriction on private gold imports, meant that the rupee value of the commodity export surplus at the official exchange rate exceeded the entire central government revenues, while even at the appreciated market exchange rate it was over three quarters of the revenues, so Council Bills no longer sufficed as the sole means of payment to producers. A part of India’s exports of strategic war materials was taken by Britain without any payment at all, a little over one third of export surplus was paid out from the budget through Council Bills, while the rupee equivalent of the remainder was raised by selling sterling to private buyers.
We use mainly data from the Statistical Abstracts for British India to arrive at the value of the commodity export surplus, namely the transfer for the period 1900 to 1921, at £479 million. This estimate of the drain is an underestimate since the financial stratagems used by Britain to avoid entirely or postpone indefinitely its payments due to Indian producers could not be taken into account. A question may arise, if revenues became insufficient to pay out rupees against export surplus, why did the government not resort to even higher taxation as it had done so often in the past? The answer is that taxes had been raised by over half already from 1914 to 1918, including a further tax on salt, the perennial favorite; and from late 1918 the global influenza pandemic intervened to devastate India.
Demobilized soldiers returning from war theaters in Europe and Mesopotamia caused the pandemic to spread rapidly, claiming between 13 to 15 million lives during 1918–19, about a quarter of the estimated global tally of 50 to 60 million deaths and the highest for any country. The entire increase in population since the 1911 Census was wiped out, and British India, excluding Afghanistan and Burma, actually showed an absolute decline of population in the 1921 census compared to 1911. But there was no sparing the people even under such dire conditions. Imperialists did not believe in tempering the wind to the shorn lamb. The colonial government decided to give £100 million as a “gift” to Britain to support its war needs by increasing Indian sterling debt to that extent, and this was followed by another “gift” of £45 million to Britain the next year.20
TABLE 10.4: Indian Subcontinent’s Trade Balance with the UK and Rest of World (USD Millions)
Note: Indian subcontinent (S.C.) refers to todays India, Pakistan, Bangladesh, and Sri Lanka. ROW refers to “rest of world” (excluding UK).
Wartime restrictions on imports led to a post-war import surge and India saw a rare two years of trade deficit during 1920 and 1921, which was met by the Secretary of State selling rupees to purchase sterling from the public. In the next triennium, 1922 to 1924, however, India’s merchandise export surplus bounced back to Rs.141 crore or £89 million annual average, reaching its highest level in 1925 at £125 million. As primary product prices started falling from that year, volume increases compensated to some extent for the price fall until 1928. Thereafter, the collapse of primary product prices from 1929 caused the export surplus to decline to below Rs.11 crore or £8 million by 1932. There was acute agrarian distress with farm debts rising fast, and a loss of mortgaged assets including land, both soon leading to pauperization of the peasantry. The employment problem was exacerbated with the colonial government cutting all productive expenditure in the domestic part of the budget, to implement the dogmatic balanced-budget deflationary policies advised by the Treasury in Britain to maintain the system of fixed exchange rates. (The implications of this for the Great Depression are discussed later.)
Only two years into the Depression, the 1931 Census recorded 38 percent of rural workers as dependent mainly on wages compared to 26 percent in 1921. Millions of small producers liquidated what little assets they had in the struggle to survive, and every year from 1932 to 1938 saw a torrent of distress gold flowing out of the country to Britain. Trying to cope with reduced trade and domestic unemployment, Britain intensified its invisible tribute demands on India even as the latter’s commodity export surplus earnings declined drastically.
Using the balance of payments estimate by Banerjee, modified by separating financial gold from commodity gold on the basis of data from the Statistical Abstract for India 1920 to 1940, we find that during the period 1922 to 1938 the total commodity export surplus was £827 million. The total invisible liabilities heaped on India were £1209 million producing an exceptionally large current account deficit of £382 million. This deficit was balanced in the capital account by financial gold outflow of £260 million and addition to debt of £122 million. India accounted for nearly two-fifths of gold inflows into Britain during this period.
Kindelberger,21 quoting a study by Triantis,22 points out that while six countries mainly in Latin America saw the steepest fall in their exchange earnings, India was put in the group of countries with moderately severe decline by 60 to 75 percent in external earnings. Our data show, however, that India suffered a 94 percent decline in merchandise export surplus between the peak in 1925 and the trough in 1932, and even compared to 1929 there was over 85 percent decline by 1932. All these countries saw large outflows of financial gold. While other countries devalued their currencies, the Indian rupee was kept tied to sterling and there was no rupee devaluation until sterling itself was devalued.
The balance of payments estimates for India incorrectly classified its large distress gold outflow as exports in the current account, thus treating it as commodity gold and thereby suggesting a rosy and wholly unrealistic picture for the 1930s. As in a mirror image, in British studies these same financial gold inflows from India and other colonies were incorrectly recorded as imports in the current account, as in Mitchell and Deane23 and by other scholars using this data source. Thereby, the current account was fallaciously inferred by many authors to be in much larger deficit, to the extent of these gold inflows, than was the case. In fact, the financial gold inflows from colonies in many years completely offset Britain’s true current account deficit and contributed to its faster recovery compared to other industrial countries.
We can now summarize our estimate of the drain, made over four sub-periods, covering the period 1765 to 1938; see Table 10.5. (The period 1765 to 1900 was depicted in chapter 9.) The interest rate used for compounding remains 5 percent, and two terminal dates are considered—the first up to Independence in 1947 and the second up to 2020. For comparison, the GDP of India and the United Kingdom are also given for selected years. By 1947, the compounded value of the drain was 38 times the GDP of the UK that year, and 78 times India’s GDP. The exchange rate against the dollar over the entire period may be taken as roughly, £1 = $4.84. In dollar terms, the absolute value of drain from 1765 to 1938 amounted to $10.5 billion. The compounded value to 1947 works out at $1.95 trillion and up to 2020, at $65.64 trillion, the latter figure being three times the GDP of the United States that year. In Table 10.5, GDP figures are in current prices as are the series used for computing the drain.
TABLE 10.5: Estimated Value of Drain from India, 1765–1938
Source: Authors’ calculations from previously cited data and sources.
Figure 10.4: British India’s Per Capita National Income 1900–1946 in Rupees in Constant 1949 Prices (three-year averages)
Source: S. Sivasubramonian, National Income of India (Delhi: Oxford University Press, 2000).
The impact of this sustained drain of all net external earnings, combined with expansion of the reserve army of labor owing to displacement of domestic manufacturing production, was stagnation of per capita income. The definitive estimate of the whole of India’s national income by S. Sivasubramonian was adjusted for British India by applying its share of population in total population, while for obtaining per capita annual income
the population for each year was obtained by interpolation from the decennial population totals. There was a 12 percent rise in real per capita income over the period 1900–05 to 1927–31, and decline thereafter with a net gain of less than 5 percent over nearly half a century, taking 1942–47 as the terminal period (see Figure 10.4).24 Per capita annual food grain absorption, which is an important index of the compression of mass internal demand, declined sharply over the same period.
PART 3
CHAPTER 11
The Unraveling of the Colonial Arrangement
By the term “colonial arrangement,” we mean the entire network of relationships that prevailed in the latter half of the nineteenth century. These involved Britain, the late industrializers of Continental Europe and the temperate regions of European settlement, and the colonies of conquest located mainly in the tropical and semi-tropical regions.
What this relationship entailed, to recapitulate in brief, was that Britain kept its own market open to the new industrializers, while finding a market for its own goods in the colonial economies (and also China) at the expense of the local craftsmen there. It substantially “drained away” the economic surplus of these colonies, using these funds for settling its current account deficits with, and also making capital exports to, the new industrializers. The commodity-form these capital exports took was of the products that constituted the colonies’ exports. So, the colonies played three roles: first, providing a market for the leading capitalist economy’s goods and indirectly for the goods of the metropolitan capitalist world; second, providing the surplus for capital exports and for a diffusion of capitalism; and, third, providing an appropriate commodity-form that could make all this possible.
This colonial arrangement unraveled after the First World War. Not that all these roles simultaneously ceased to be played by the colonies, but some did. In particular, the role of the tropical colonies as a source of surplus extraction did not diminish, though there was a problem in finding the commodity-form it should take after the world agricultural crisis, when agricultural prices collapsed and gold became for a number of years the form of surplus extraction. In fact, the role of surplus extraction actually increased during the Second World War, compared to what it had been earlier, when colonial surplus was required for war finance. So large was the surplus extracted during the war years that three million people died in the 1943–44 Bengal famine. But the role of the colonies in providing a market for British goods diminished after the First World War.
There were several reasons for this. An obvious one is the inherent limits of the colonial markets. To understand these limits, let us go back to the simple example given in chapter 8. The process of deindustrialization in the colony occurs through two means: one is through the “drain” of surplus itself, which takes the commodity-form of primary goods, and the other is the substitution of imported metropolitan manufactures for those produced by local craftsmen. The drain of surplus does not create any demand for metropolitan manufactures; rather, it destroys the demand for the products of the local craftsmen, which had arisen earlier because of the spending of the surplus internally by the Emperor and his nobility and tax-gatherers, who, taken together, had constituted the landlord class. A market for metropolitan manufactures arises only to the extent that primary producers’ incomes in the colony are left with the producers themselves (or with those, such as merchants and residual landlords, living off them) and not “drained” away.
There is, therefore, an inherent contradiction between the “source-of-surplus extraction” role of the colonies and their “market-provider” role. The greater the surplus extracted from the colony, the smaller is its role as a market for metropolitan goods.
One can appreciate the contradiction between these two roles of the colony and still visualize the contradiction as occurring only within a particular slice of time. In a colonial economy growing at say 5 percent per annum, if we take a year, for example, we can say that if a larger share of output is taken away as drain then the market for metropolitan manufactured goods is correspondingly smaller. Nonetheless, the market for metropolitan goods would still be growing at more than 5 percent per annum as long as local craft production has not been completely eliminated, and exactly at 5 percent per annum when it has been completely eliminated. It may, therefore, be thought that though the drain of surplus constricts the market for metropolitan goods in the colony, this market can nonetheless continue to grow over time and hence continue providing a stimulus to capital accumulation in the metropolis.1
The drain, however, affects not only the size of the market for metropolitan manufactured goods in a given slice of time, but also the growth rate of the colonial economy and hence the growth rate in the size of the market for metropolitan goods. Since the bulk of the economic surplus, other than what was spent for maintaining the colonial administration locally and the residual amount that was left to the local landlord class, was drained out and not invested in expanding the productive base of the colonial economy, the growth rate of that economy was near zero, if not negative. It could be negative, leaving aside the statistical impact of deindustrialization, since irrigation works and other assets inherited from earlier were not always maintained.
In India, all public investment projects had to fulfill a narrow “rate of return criterion.” Because over large tracts of the country, notably Bengal, the revenues obtained by the colonial administration were permanently fixed, the rate of return on any investment project was nil for the colonial state and no “land-augmenting” investment was undertaken in such tracts. Even in other parts, where revenue settlement was not permanent but revised periodically, say once every thirty years, the rate of return criterion ruled out any productive investment in agriculture. Because agriculture was the cornerstone of the economy, this meant overall economic stagnation. The role of agriculture can be gauged from the fact that even when “discriminating protection” for domestic manufacturers in a few industries was introduced in India in the interwar period, investment in these industries, after an initial burst, tended to peter out.2 This was because the home market, whose size was determined by the size of agricultural output, was more or less stagnant due to the stagnation of agriculture, and protection only brought to the local producers a larger share of this stagnant market. In the entire period of colonial rule in India, no major investment projects were undertaken other than in the “canal colonies” of Punjab. And even investment in railways, where the government guaranteed a 5 percent rate of return, did not have any linkage effects on domestic industry, and was undertaken mainly for extracting raw materials from the colony so that its growth-enhancing role was negligible.3
The drain of surplus from the colonial economies, therefore, not only adversely affected the size of the market that metropolitan goods could access, but also kept these economies virtually stagnant. Once this market was exhausted, no further stimulus could be derived by the metropolis from the colonial market for sustaining capital accumulation. To be sure, if the process of colonialization could extend to newer areas, then this stimulus could be kept going longer, but once the process of colonialization was complete, this stimulus had to get exhausted. Something of the sort seems to have happened after the First World War.
The emergence of Japan as a new capitalist power in Asia that launched a relentless drive to capture Britain’s Asian markets was the other major factor that made the earlier colonial arrangement no longer effective. Japan had been the one Asian country not forced to join the ranks of colonies and semi-colonies of the metropolitan powers, and, though it had been subjected to unequal treaties by these powers, the Japanese state after the Meiji Restoration had both sufficient will and sufficient elbow room to push through a program of capitalist industrialization and launch an aggressive drive for export markets. (Many have disputed the claim that Japanese industrialization was export-led, but this is an issue that need not detain us here.)
Japan’s case has often been cited, notably
by Paul Baran, as an illustration of how countries in the periphery, had they not been victims of imperialist annexation, could have embarked on an industrialization drive in emulation of the metropolitan countries and promoted by their states.4 While this argument is valid within the context it was made in, it should not be forgotten that capitalist industrialization, if it is to be transformative and not of the “enclave” variety, necessarily requires imperialist annexations or to be “accommodated” within a world of imperialist annexations, as Japan was to exemplify. (To what extent recent examples like South Korea and China disprove this generalization will be discussed later.) Hence the idea that the entire third world could have developed Japan-style capitalist industrialization if only it had not been colonized cannot withstand scrutiny.
Britain sought to counter Japan’s relentless drive to penetrate its Asian markets by enlisting the support of the local bourgeoisies in its colonies, which had come up in the interstices of colonialism but whose ambitions had been kept in check by the very structures of colonialism. The introduction of “discriminating protection” in India referred to above, which permitted a limited break from the colonial pattern of international division of labor and used the “infant industries” argument in its own justification, was one instance of such forging of an alliance. The “Buy Empire” campaign that was launched in the colonies was another. A system of “imperial preferences” in matters of tariff was instituted that sought to keep out “outsiders” like Japan from the Asian colonial markets of Britain. But though these measures, including at a later date the imposition of quantitative trade restrictions on Japanese imports into these markets, for instance through the so-called Indo-Japanese protocol of the 1930s, did little to revive Britain’s fading prospects in the Asian colonial markets, they strengthened Japan’s resolve to go imperialist itself. While Britain’s concerted effort to keep Japan from encroaching upon the markets of its empire bore little fruit for Britain, it persuaded even larger segments of the Japanese ruling class that Japan may as well also acquire a larger empire for itself.
