by Utsa Patnaik
TABLE 13.3: Total Tax Revenue and Income Tax (in Rupees Crore), and Percentage Share of Income Tax in Total Taxes, 1938–1945 (one Crore = 10 million)
Source: P.S. Lokanathan (1946), 38.
Contrasting Keynesian Wartime Policies in India and in Britain
In articles published in British newspapers in late 1939, and in How to Pay for the War, Keynes repeated his earlier observations on the absolute necessity of reducing mass consumption in Britain. However, his initial proposals of raising resources through profit inflation and compulsory savings met with a reception from the trade unions that was “frosty” according to Keynes biographer Robert Skidelsky. Labor leaders, especially Aneurin Bevan, certainly did not suffer from money illusion and strongly opposed inflation as a means of war finance. Facing strong trade union opposition, Keynes was obliged to give up profit inflation and advocate additional taxes to control ex ante demand. Keynes was not in favor of rationing of essentials even in wartime, and his views on this coincided with those of right-wing economist F. von Hayek, who commended Keynes’s position. Wiser counsel from other members of government prevailed and rationing of all essential commodities was introduced. In order to ensure working class support, not only was the socially divisive and highly regressive measure of inflation given up as an explicit method of war financing by Keynes, but he reformulated “compulsory savings” as the better-sounding “deferred incomes.” Additional taxation of £250 million was considered enough in the 1941 budget to cover the inflationary gap.24
Keynes worked out a preliminary estimate of national income for Britain and a detailed plan to distribute the proposed increased tax burden equitably over its population. He estimated Britain’s net national income, at market prices, at £6229 million in 1940.25 Families earning below £5 per week were to be exempt, while graded taxation was to be imposed on higher income groups. Given a total population of 47.5 million, this meant a per capita annual income of £131.14, while in India in 1940 per capita income was Rs.64 (or £4.27).26 The average income of the Briton was 31 times that of the Indian, and the additional taxes in Britain’s 1941 budget amounted to £5.26 per capita, or 4 percent of average income. The monetized deficit financing per capita in British India in 1942–43, however, amounted to 20 percent of the Indian’s per capita income.
Keynes’s idea of deferred income was precisely what was entailed in the agreement signed by the British government with the colonial state, which put the onus of footing the war bill on India, with a mere undertaking to repay after the end of the war, except that the deferred income was to apply to an entire people, not particular classes that could afford to pay. The amount was astronomical relative to paying capacity; the method used was deliberate rapid inflation, highly regressive in hurting most the already poor among the peasantry and all rural net food purchasers; and there was no specific deadline by which repayment would take place, if at all. India was Britain’s largest creditor: its sterling debt to Egypt was far smaller.
As far back as 1867, a noted administrator in India, W. W. Hunter, had identified the classes in Bengal that were entirely dependent on purchasing food from the market and were therefore the most vulnerable in the event of food price inflation. These classes comprised laborers, artisans, and fishermen. In his remarkable little book titled A Famine Warning System for Bengal, Hunter had given the estimated numbers belonging to these classes for the different districts of Bengal Province, the prevailing price of rice, and the extent of rise in this price that should serve as a warning trigger for government to intervene to prevent a famine arising from further inflation.27 Hunter’s book is significant in showing that administrators did not think of famine as arising from decline in food availability alone, as in a drought, but clearly specified what A. K. Sen was later to term “failure of exchange entitlements” of net food purchasers as a cause of famine, and advocated a warning system to prevent inflation beyond a point deemed to be safe.28
Exactly the opposite policy was followed during wartime, and the measures to promote rapid inflation detailed so far were quite deliberate: administrators were not so obtuse as to be unaware of the adverse impact of inflation on the population, a much higher fraction of which had become pauperized and landless after the Depression years and was more vulnerable than ever before. As the actual deaths mounted, the thrust of policy continued to be to suck food grains away from the famished rural population, and available food supplies with Britain were directed not to India but to other countries in Europe.29 The rulers cared little for what today would be termed “collateral damage,” of deaths from rapid inflation and its impact on production, since it was clear to them that the days of British rule, and hence of tax collection in India, were numbered.
Was there an economic alternative to the imposition of the enormous burden of war financing on India and the resultant extinguishing of 3 million lives? Indeed, there was. The total deficit of Rs.606 crore between 1940–41 and 1945–46 (see column 5 of Table 13.1), arising from the government of India’s own excess budgetary spending, and the inflation this entailed, was absorbable through reduced consumption by the population. It was the additional war expenditure imposed on India from 1940–41 onward, the “recoverable expenditure,” entailing forced savings nearly three times higher and totalling Rs.1740 crore by 1945–46, that led to the extreme compression of rural consumption in Bengal and claimed three million lives. This was an impossible sum demanded of a people already overtaxed, drained for two centuries of exchange earnings, and pushed into under-nutrition. But it would not have been an impossible sum for the metropolitan population, which had a per capita income thirty times that of the Indian population. The sum of Rs.1740 crore or £1276 million spent from 1940–41 to 1945–46 could have been raised by additional annual taxation in Britain of £4.5 per capita, and if the United States had also chipped in, then the per capita burden of this expenditure on the combined population of the two countries would have been only £1. Along with this, crediting India with its own external earnings from the world, which instead were entirely appropriated by Britain, even as famine raged, would have been the more humane solution.
At Bretton Woods, 1944 and later, Britain argued for cancelling part of its debt and for postponing repayment of the rest beyond the end of the war, citing lack of capacity to pay. According to Skidelsky, the intention Keynes expressed from the beginning was to get at least one-third of Britain’s total sterling debt to other countries written off and another one-third paid in future installments. Keynes took a strong position against that of the Indian delegation and scuttled its request for partial trilateral convertibility involving the United States, which could have made some dollar funds available immediately to India for badly needed food imports, since only the United States had goods to export. Keynes insisted that it was a bilateral matter between India and Britain, even though India had financed Allied forces, not Britain’s alone. The Indian delegation, including its British finance member, pressed Britain to honor its commitment of repaying sterling debt, citing the extreme suffering the population had gone through. The illogical response was that the suffering was in the past. It was even suggested by a member of the British delegation that writing off sterling debt be made a condition for Indian independence, but this was not supported, fortunately, by Keynes.30
On the issue of sterling balances, the creditor nation, India, was in a weaker position than the debtor imperialist country that, using its political position, had unilaterally taken a forced loan of gargantuan proportions and when the time came for repayment, was implacable in trying to reduce its obligation drastically. With not a penny of sterling funds owed to India released, and with India’s own wartime earnings from export surplus entirely taken over by Britain, very little food imports could take place: by 1946, per capita grain availability had dropped further to 137 kg. in India. By April 1946, Keynes was prematurely dead from a long-standing heart problem. The policies that followed in India to raise wartime resources were thus in
sharp contrast to those followed in Britain. An equitably distributed tax burden over classes at different levels of income was worked out, while part of extra taxes were to be repaid after the war ended. But no such considerations existed when it came to a colonized population with one-thirtieth of the per head income of the Briton.
Sterling balances owed to India under interim agreements were divided into two accounts in 1947, the first containing only £65 million that could be spent, while the second was frozen. In 1948, the balances in the two accounts were £80.6 million and £1,033.2 million respectively; the 30 percent sterling devaluation against the dollar in 1949 greatly reduced purchasing capacity of both balances, even as the second remained frozen until the 1950s, a decade after the famine, when the inflation caused by the Korean War had reduced real values further. Whatever was paid up was divided between India and Pakistan in proportion to their populations. India’s share of the depleted sterling balances helped it to launch the ambitious Second Five-Year Plan for development by providing a buffer against balance of payments worries for two to three years. The small fraction of sterling balances that Pakistan received is not likely to have been spent for the benefit of its eastern region, which later became Bangladesh, from where the majority of the famine victims had hailed. Even in this very limited sense, no compensation was received for the enforced sacrifice of millions of lives.
The policies followed were of demand management, which are always opaque to the general population, and remain opaque to this day, even to the educated elite. The extreme compression of mass demand to raise forced savings that led to three million civilian deaths could be successfully camouflaged as a simple famine and continue to be attributed fallaciously to natural phenomena like cyclone, or to food shortage, or to speculation and hoarding, or to not importing food in time, or a combination of these factors.
PART 4
CHAPTER 14
Postwar Dirigisme and Its Contradictions
Capitalism emerged from the war facing a serious threat to its survival. The socialist bloc had expanded greatly through the Red Army’s march across Eastern Europe; and though the left lost the Greek civil war, partly no doubt as a consequence of the Yalta agreement that prevented adequate Soviet support for the revolution, a “Soviet threat” nonetheless loomed large over Western Europe, where in any case the Soviet Union enjoyed much goodwill because of its epic struggle against Nazi Germany. The working class in Western Europe, which had made enormous sacrifices during the war, was determined not to go back to the prewar years of Depression and unemployment. An expression of this determination was the defeat of the Winston Churchill–led Conservative Party in the postwar British elections.
It was also clear that the old imperialist powers of Europe could no longer hold on to their colonial possessions in the face of the postwar upsurge of national liberation struggles. Many of these struggles were led by the Communists, but whether they were or not, they almost invariably enjoyed the support of the Soviet Union.
The Restructuring of Capitalism
Capitalism’s response to this threat to its survival was twofold. One was to start the cold war against the Soviet Union; the other was to restructure itself in several ways, as a means of rolling back the socialist challenge, by making concessions that it otherwise would have recoiled from. There were at least three major spheres where such concessions were made.
The first concession was the institution of electoral democracy based on universal adult suffrage, which, even in France, the country of the classic bourgeois revolution, occurred only in 1945. Many believe these days that electoral democracy with universal adult suffrage is a “natural” accompaniment of capitalism. This, however, is untrue; its realization occurred predominantly in the postwar years and only after long years of struggle. (Even in Britain, women had got the vote only in 1928, and still some property-based restrictions on suffrage had remained.)
The second concession made by capitalism was political decolonization. In East and South East Asia where the United States had become the preeminent power after the defeat of Japan, it sought to place itself in the position occupied earlier by the old colonial powers and thereby prolong imperial occupation. But this policy, which had disastrous consequences in Korea and Vietnam, could not succeed; the process of political decolonization could not be halted, though in many instances, such as West Africa, it still remains incomplete in crucial ways to this day, as French troops continue to remain stationed there.
Yet more important and contentious than political decolonization was the process of economic decolonization, that is, former colonies’ acquiring control over their own natural resources, which metropolitan capital had seized during the colonial era. Economic decolonization was bitterly fought by the metropolitan powers, with coups against third world leaders, like Mossadegh in Iran and Arbenz in Guatemala, who dared to nationalize their country’s resources. There was a full-fledged invasion of Egypt by a joint Anglo-French force when Nasser nationalized the Suez Canal. The Soviet Union’s role was particularly important in making economic decolonization possible. Toward this end it helped to build up the public sector in many third world countries for developing and processing their natural resources, the control over which was snatched back from metropolitan capital.
The third concession that capitalism had to make was the institution of state intervention in demand management, as had been advocated by Keynesianism. State intervention through monetary policy had always been there, as was the use of the fiscal instrument for stimulating demand by inducing capitalists to spend more. What Keynesianism had advocated, however, went further, namely the direct intervention by the state, through its own spending, to maintain aggregate demand close to full employment output. This got instituted in the postwar period.
It may appear odd at first sight to call the maintenance of a high level of aggregate demand through state intervention in this manner, which keeps up employment, output and profits, a concession on the part of capital. It represents after all a “Pareto-improvement” compared to a state of large-scale involuntary unemployment, in the sense that nobody is worse off through such improvement, while some, if not all, are better off, which includes the profit-earners. Then why should capitalists object to such intervention in the first place?
Even capitalists, in other words, benefit from an increase in state expenditure that is meant to increase aggregate demand, by getting larger profits. If the increase in state expenditure is financed by a fiscal deficit, then the rise in profits caused by it is obvious. But even if the increase in state expenditure is financed entirely through taxes on profits, there need not be a fall in post-tax profits compared to the initial situation if the workers consume their entire income. In this case, moreover, since capacity utilization improves, so does private investment over time, and hence profits. Why, then, should capitalists object to state intervention in demand management through fiscal means, that is, through enlarged state expenditure?
The opposition of capitalists to state intervention through fiscal means for raising employment, certainly as long as unemployment remains greater than the “inflationary barrier,” appears at first sight to be inexplicable. And yet, there can be little doubt about the reality of such opposition, which has manifested itself time and again. There was the opposition to Lloyd George’s 1929 plan of fiscal-deficit-funded state-run public works for overcoming mass unemployment, which predated the “Keynesian Revolution.” And in the 1930s, when Roosevelt’s New Deal had started a recovery in the United States, it was soon abandoned under the pressure of financial interests precisely because of its success, plunging that country once again into a recession in 1937.
In chapter 12, we argued that this opposition is not of an economic but of an epistemic character. Direct state intervention in demand management, which bypasses the capitalists, undermines the social legitimacy of the system. The capitalists’ class instinct therefore tells them to oppose such intervention, to project an intell
ectual position that helps to enforce an “epistemic closure,” where there is no scope for looking beyond the capitalists to generate a recovery. This way, there is no chink left for questioning the social legitimacy of the system.
In the immediate postwar period capitalism, faced with a threat to its survival, had little choice before it. It had to put up with Keynesian demand management through state expenditure, both in the United States and in Europe, because of which the postwar era saw capitalism achieve high rates of employment that were, over a comparable period of time, quite unprecedented in its entire history. Such state intervention in demand management required, to start with, an appropriate international monetary arrangement, one the Bretton Woods system provided.
The Bretton Woods System
The presumption behind state intervention in demand management was that the pursuit of private rationality by economic agents produced in the aggregate an outcome that was not only socially irrational but also inimical to private interests, which a situation of involuntary unemployment evidently was. The state was seen, therefore, not as an entity having some specific interest of its own and entering the fray to achieve it, but as the promoter of the social interest. It effected an intrusion of social rationality into a sphere characterized by the pervasive, and futile, pursuit of private rationality. An obvious necessary condition for this to happen was that the state must have the autonomy to pursue policies it considered appropriate.
