Indian Finance Three Essays With An Introduction And Appendix

Front matter

THREE ESSAYS,

(Eepiiblishcd from the " Nineteenth Century") WITH AN INTRODUCTION AND APPENDIX.

AND PEOFES30E OP POLITICAL aaBSiPaCB L'NIVERSITY OF CAMBRTDOE.

Contents

TAGK

INTRODUCTORY REMARKS ... 1

THE FINANCIAL CONDITION OF INDIA ....... . 17

I. The Financial Condition Of India. 1

As there seems to be every probability that during the next few months an unusual amount of public attention will be directed to Indian affairs, I think the present may be regarded as a suitable time to. consider the financial condition of that country. With the view of treating the subject with as much clearness as possible, it will be desirable in the first instance to ascertain what is the real revenue of India. Much of the complexity which so often confuses discussions on Indian finance arises from the want of any definite understanding as to the sense in which certain terms are employed. From the last financial statement of the Indian Finance Minister, it appears that he estimates the real revenue of India at between 37,000,000?. and 39,000,000?. ; whereas a short time afterwards the revenue was officially stated at more than 63,000,OOOZ. This great disparity of course arises from the gross revenue being referred to in the one 'case and the net revenue in the other. It has not unfrequently been said, in discussions on Indian

i February, 1879.

C finance, that it cannot be of any moment whether the revenue is estimated at its gross or its net amount ; it is, after all, simply a matter of account. In one sense this, no doubt, is true ; but there will be no difficulty in showing that it is of the first importance to give as much prominence as possible to the net, as distinguished from the gross, revenue of India.

Few things have done so much harm to Indian finance in the past, or may cause greater embarrassment in the future, than an exaggerated idea as to the revenue which the Indian Government has to spend. Although there is much in the present financial condition of India to cause serious apprehension, yet there is one circumstance connected with it which may fairly be regarded as a most hopeful omen for the future. Until quite lately, India was looked upon as an extremely wealthy country, and there was no project, however costly, that India was not supposed to be rich enough to pay for. Now, however, juster ideas of the resources of the country and of the condition of the people prevail. The recurrence of famines, and other circumstances which have caused more attention to be directed to Indian questions, have at length led the English public to take firm hold of the fact that India is an extremely poor country, and that the great mass of her people are in such a state of impoverishment that the Government will have to contend with exceptional difficulties if it i.] THE FINANCIAL CONDITION OF INDIA. 1 ( J

becomes necessary to procure increased revenue by additional taxation. It is not more true of an individual than it is of a nation that, if it is desirable to check all extravagance, and secure rigid economy, the amount of the income which is available for expenditure should not be over-estimated. It is often said that if a man comes into possession of an encumbered estate, the mere amount of the mortgages and other debts upon the property does not form an accurate measure of the real extent of his embarrassments, for he has constantly to contend with the difficulty of possessing an income so much less than its nominal amount. Having perhaps ten thousand a year to spend, he is regarded by the world as the possessor of twice as much, and is expected every hour of his life to live accordingly. The position of India is not dissimilar to this. Year after year the Government of India has been living beyond its means. Deficits have been repeatedly recurring, and debt has been steadily and surely accumulated. Nothing, therefore, can be of greater importance, and nothing can be more likely to bring about a better state of things, than to ascertain what is the real amount of the revenue which the Indian Government has at the present time to spend.

On official authority 1 it was stated when the Indian

1 See speecli of Mr. Stanhope, the Under-Secretary of State for India, in the House of Commons, August 13, 1878. Hansard, vol. ccxlii.

c 2

20 INDIAN FINANCE. [r.

Budget was discussed in the House of Commons, that the revenue of India in 1876-77 was 55,995,7S5 , in 1877-78 53,635,472?., and the revenue for 1878-79 was estimated at 63,195,000?. "Without desiring to question the correctness of these figures as mere statements of account, I believe it can be easily proved that they are calculated to produce the most mischievous and misleading conclusions as to the true position of Indian finance. In the first place they would seem to show that the revenue of India, which is almost stationary, is rapidly increasing ; and in the second place a most exaggerated opinion is likely to be formed of the resources of the Indian Government. If the items of revenue and expenditure for any year are examined, it will be at once seen that the large foregoing totals of revenue are arrived at by estimating gross instead of net revenue, and by including amongst the receipts many items which really do not represent revenue, but expenditure. Thus the following is' an official statement of the ordinary revenue and expenditure for the year 18 76-77. 1 In making a comparison between revenue and expenditure, I think it is fairer to select this year, because since the year 1876-77 the finances of India have been seriously disturbed by the large expenditure caused by the famine in Southern India and by the cost of the

1 See Finance and Revenue Accounts, printed as a Parliamentary paper, No. 176, May 16, 1878.

THE FINANCIAL CONDITION OF INDIA.

Afghan war. In the following table all the items of receipt and expenditure are included which are contained in the official return. I have, however, with a view of exhibiting the accounts in the simplest possible manner, arranged the items of receipt under three classes. In the first class all those receipts are included which represent real revenue. The second class embraces those receipts which are exceeded in amount by the expenditure necessary to obtain them, and must therefore be regarded as items of expenditure rather than as sources of revenue. In the third class various items of expenditure are included, against which, as a set-off, there are no corresponding receipts.

ORDINARY REVENUE AND EXPENDITURE, 1870-77.

CLASS I.

Items of Receipt loliich produce lievenue.

Gross Receipts.

Expenditure,

Net Revenue.

159,568 411,'335

153,726

249,622 j?

5,842 161,713 gait

Excise on Spirits and Drugs

Stamps .... .

Forest . . ....

Mint

Provincial contributions . . (Adjusting receipts from Provincial Governments (provincial deficits) ....

Adjusting receipts to Provincial Governments (provincial surpluses) . . .

Miscellaneous

Net Revenue . .

44,603,626 ...

7,186,057

INDIAN FINANCE.

Brought forward ' 44,603,626 CLASS II.

Expenditure, j Net Revenue.

7,186,057 37,417,56

Items of receipt which, leiug \

balanced ly a larger cxpen- |

diture, do not represent re-

venue, but outlay.

'Gala by exchange on trims- j

actions with London . . ] 505,120 S Loss by exchange on trans- ' \ actions with London . . ! - 2,181,611 f Tributes and contributions . j 694, 934 t Allowances and assignments i 1 tinder treaties and encase- !

( Receipts in aidj of stiperan-

1 nuation, retired, and com- |

x passionate allowances . . | 607,242

Superannuation, retired, and | [ compassionate allowances . 1,798,569

Receipts for interest . , . 536,281

Payment for interest on per- , manent and floating debt . 4,512,722

Payment for interest on service funds, &c ... 394,514

CLASS III.

Items of expenditure to wh ich

there are no corresponding

items of receipt.

Administration j ... 1,474,095 |

Minor departments . . . i ... 320,138 i

Ecclesiastical | ... 163,866 |

Medical I . 596,887

Stationery and printing . . ... j 443,776 |

Political agencies . . . . i ... [ 505,228 I

CiviJ, furlough, and absentee j |

Refunds and drawbacks . . .. I 291,106 '

Famine relief j ... [ 2,145,431 I

From these figures certain conclusions can be drawn, which may be regarded as of fundamental importance in forming a correct opinion as to the actual position of Indian finance. It thus appears, and it is a fact which cannot be kept too prominently in view 5 that the entire revenue of India, with the exception of 504,208?., is derived from the six following sources : land, opium, salt, excise, customs, and stamps. The various other items of revenue mentioned in the accounts cannot be fairly considered as sources of revenue. They do not in fact produce revenue ; but, on the contrary, should be regarded as causes of expenditure. Thus the revenue of 794,328?. from the Post Office requires an expenditure of 859,783?. to obtain it. A receipt of 341,227?. from the telegraph is more than balanced by an expenditure of 4 73,1 2 71. But if any further illustration were needed to show that no accurate idea can be formed of the real revenue of India by adding together all the items of receipt which are now included in the statement annually published of revenue and expenditure, it is only necessary to refer to the items of receipt which have been arranged under Class II. Amongst these there is one of 505,129?. described as "gain by exchange." "When it is remembered that in this very year India had to bear a most serious loss from exchange, amounting to no less than 2,181,611?., it is evident that, if any good could result from augmenting her nominal revenue, 2,000,0002. might be added to each side of the account, and the gain by exchange might be represented as 2,500,0002. * But unless the subject is confused by unnecessary complications, nothing can be more easy than to arrive at correct conclusions with regard to the amount of the real revenue of India. It has been already stated that the revenue, with the exception of the sum of 504,208?., is derived from land, opium, salt, excise, customs, and stamps, and if, as has been done in the above table, the cost of collecting each of these items of revenue is deducted from their gross amount, the real revenue of India is shown to be only 3 7, 41 7, 5 6 9Z. The conclusion which has been just arrived at as to the amount of

1 It is sometimes said that no harm can result from exhibiting the Indian revenue at its gross instead of its net amount, because the same course is adopted with regard to the English revenue and expenditure. There is, however, such a fundamental difference between the position of English and Indian finance, that a mode of exhibiting revenue which may be perfectly suited to the one country is altogether unsuited to the other. Thus the difference between the gross and net revenue of England is much smaller than the difference between the gross and net revenue of India. In 1877 the gross revenue of England was 78,565,036Z., and its net revenue was not less than 68,000,000^. Many of the items of receipt which in India are balanced by a larger corresponding expenditure represent in England important sources of revenue. Thus, the Post Office, as has been shown, causes to India a loss of about 65,OOOL, while it yields in England a net revenue of more than 2,000,000^., after allowing for the cost of the packet service.

the real revenue of India is fully confirmed by the Indian Finance Minister, Sir John Strachey, who, about twelve months since, estimated the net ordinary expenditure of India at between 37,000,000?. and 38,000, 000 ?., and said that the ordinary revenue is only just sufficient to meet it.

It may perhaps be thought that I have laid too much stress on the importance of keeping steadily in view the distinction between the gross and net revenue of India ; but it can scarcely be denied that, if excessive expenditure is bringing embarrassment upon the finances of a country, nothing is more essential to secure strict economy than, as far as possible, to discourage any exaggerated estimate being formed of the actual amount of such a country's revenue. Thus, as one illustration, it may be mentioned that the military expenditure of India is estimated by Sir John Strachey at more than 17,000,000?. a year. Such an expenditure would be sufficiently serious if it were defrayed out of a revenue which was, as the Indian revenue has been represented to be, rapidly increasing from 56,000,000?. to 63,000,000?. ; but how incalculably more serious must such an expenditure be, and how much more likely is it that retrenchment will be demanded as an imperative necessity, when it appears that this enormous charge of more than 17,000,000?. a year has to be met, not out of an increasing revenue of 63,000,000^ but out of an almost stationary revenue of about 3S ; 000,OOOZ.

In the statement that has been given of the receipts and expenditure for the year 1876-1877, it was shown that the ordinary revenue fell short of the ordinary expenditure by about 1 3 000,000. As it may be thought that this year was an exceptional one, it will be desirable again to refer to the financial statement of Sir J. Strachey ; for nothing can be more explicit than the opinion he expresses that the normal condition of Indian finance is one in wHch. the ordinary revenue is barely sufficient to meet the ordinary expenditure. Thus he says :

"A careful examination of the accounts of the seven years ending on the 31st of March, 1876, a period long enough to illustrate fairly the state of our finances, made it plain not only that we had, when I spoke, made no proper provision for the cost of famines, but that we possessed no true surplus of revenue over expenditure to cover the many contingencies to which a great country is exposed/' 1

Of the many contingencies necessitating increased expenditure to which Sir John Strachey refers, it is

1 See speech of Sir John Strachey in bringing forward his proposals for the creation of a Famine Fund. Calcutta, December 28, 1877. This speech, which contains a most ^able review of the finances of India, was published in the session of 1878 as a Parliamentary paper.

only necessary here to mention two War and Famine. At the time he spoke India was in a state of profound peace ; but within less than a twelvemonth a war has been undertaken which will throw upon her finances a charge, the amount of which it is impossible at the present time to calculate. For the other contingency famine, Sir John Strachey was at the time attempting to make some provision by imposing additional taxation on the people of India. In view of the occurrence within twelve years of four serious famines in different parts of India, and of the fact that between 1873 and 1878 famines have thrown a charge upon the Indian revenues of no less than 16,000,000?,, no other alternative presents itself to the Indian Government than to treat famines, not as exceptional or accidental occurrences, but as calamities which are so certain to recur that provision should be made to meet them out of the ordinary revenue of the year. The amount that is required to provide an adequate fund for the relief of famines was estimated at 1,500,000?. a year. As the Government of India have repeatedly declared that they are fully sensible of the very serious consequences, both financial and political, that may be produced by adding to the taxation of India, it cannot be supposed that they would sanction additional taxation unless they were compelled to do so by urgent necessity. Nothing, therefore, can more conclusively show that the ordinary revenue of India is only just sufficient to meet its ordinary expenditure, no margin being left to provide for those many contingencies which it is officially stated are certain to recur, than the fact that a careful financier like Sir John Strachey admitted that, in order to create the Famine Fund which he says is essential to place the finances of India on a sound basis, no other course was open to him than to provide this fund from new- taxation. I shall subse quently have occasion to describe the particular taxes which have been imposed with the object of creating this fund; and fully admitting that the Indian Government would not wantonly or unnecessarily impose taxation which is exceptionally unjust and burdensome, nothing can more forcibly illustrate the gravity of the financial position of India at the present time than the circumstance that, amongst the new taxes which have recently been imposed, it has been thought requisite to levy what is virtually an income-tax of fivepence in the pound on incomes of no more than four shillings a week. But, before considering the nature of the new taxation that has lately been imposed in India, and before showing to what straits the Indian Government will be reduced if in future years they should have to obtain additional revenue to meet recurring deficits, it will be desirable to make as careful an estimate as possible of the future prospects of the revenue and expenditure of that country.

It must be evident that no question relating to Indian finance can be of more fundamental importance than to examine the chief items of her revenue and expenditure, with the object of ascertaining whether, if expenditure increases, it is likely to be met by a corresponding growth of revenue. If such an examination is made, I am afraid that no other conclusion can be arrived at, than that the outlook for the future is gloomy in the extreme. It will be shown that if India continues to be governed as she now is, and if no change is introduced into the administration of her finances, it is inevitable that any possible growth of her revenue will be altogether inadequate to meet the certain increase in her expenditure, and no other prospect will lie before her Government but augmented indebtedness and additional taxation.

Reverting to the six sources from which the revenue of India is derived namely, land, opium, salt, excise, customs, and stamps I will, as* briefly as possible, consider what is the probability of an increase in each separate head of revenue. With regard to the land revenue, from which nearly onehalf of the entire net revenue of India is obtained?

it is scarcely necessary to remark that there cannot, from the manner in which, the land revenue has been settled, be any material increase in its amount for a considerable number of years. Over a large portion of the most fertile districts of India, the land revenue is permanently settled ; the Government having commuted the land revenue for a fixed annual rentcharge to be paid in silver. Of the entire land revenue about one-fifth is derived from the permanently settled districts, and therefore, as far as this portion is concerned, it is incapable of any augmentation. In the North- West Provinces, and in other parts of India, what are known as thirty years' settlements prevail. The amount of the land revenue, in these districts, is fixed for thirty years, and until the expiration of this period it is of course impossible that there can be any increased assessment. From time to time, as these thirty years' settlements fall in, the land can be reassessed ; but many who are most competent to express an opinion confidently assert that the agricultural classes in India, except in the pemanently settled districts, where an increase of the land revenue cannot be obtained, are not in a condition to bear a heavier assessment.

Although there would thus appear to be no immediate probability of the amount derived from the land revenue being materially increased, there is unfortunately no room whatever for doubt that the real value of this revenue has been within the last few years most seriously lessened. The land revenue is really a rent paid to the Indian Government in silver, and the amount of this silver rent is fixed, either permanently or for a defined period. A very considerable part of the expenditure of the Indian Government consists of payments which have to be made in gold. At least 17,000,000?., or about 45 per cent, of the entire net revenue of India, is expended in England in paying the interest on the Indian debt, in the purchase of stores, in salaries, pensions, &c., and this large and increasing outlay, known as the home charges, has to be made in gold. The Indian Government receives its revenue in silver, but has to find gold for the purpose of defraying 45 per cent, of its expenditure. Within the last few years there has been a most serious depreciation in the value of silver when compared with gold. Silver has fallen from GOd. to about 50d. an ounce; a sovereign, which could formerly be purchased with four ounces of silver, can now only be purchased with five ounces. Consequently about 20 per cent more silver is now required to pay the home charges than would be needed if there were no depreciation in the value of silver. The net land revenue is aJ)out equivalent in amount to the net home charges, and consequently, if this ' revenue were appropriated to defray these charges, it would virtually be reduced in value at least 3,000,OOOZ. a year, owing to the depreciation in the value of silver. "With regard, therefore, to the future prospects of the land revenue, I think it may be concluded, first, that there is little probability of any immediate increase in its amount, and secondly, that the depreciation of silver seriously 'lessens the real value of this revenue.

Next proceeding to consider the revenue derived from opium, there is no branch of Indian revenue which has lately shown so large an increase. It appears from an official paper which was laid before Parliament as recently as December, 1878, tliat the revenue from opium during the current financial year is likely to exceed the estimate by no less a sura than 1 ,240,000?. It has been stated that a part of this large increase is due to the Government, pressed by the necessity of finding funds for the Afghan war, having brought an unusually large quantity of opium into the market. But, whether this be so or not, I think it cannot be denied that no inconsiderable part of this increase in the revenue from opium must be due to a rise in the price of opium produced by the depreciation in the value of silver. For some time after the fall in the price of silver took place there appeared to be no movement in general prices in

India. Silver, in fact, liad simply fallen in value in relation to gold. Now, however, there seems to be a depreciation in the general value of silver in India, and prices are beginning to rise ; for in the same official return in which an estimate is given of the large increase of revenue expected to be derived from opium, it is stated that on account of a rise in the price of food, the army expenditure in India is estimated during the present financial year to exceed the estimate by 330,000?. As the Indian Government sells opium in the open market; the amount of the opium revenue will, in the absence of any counteracting circumstances, increase with the rise in general prices, Although, therefore, there is this favourable circumstance connected with the opium revenue, namely, that it is not prejudicially affected in the same way as the land revenue must be, by the depreciation in the value of silver, yet no prudent financier should ignore the fact that this revenue depends almost for its existence upon the action of the Chinese Government in admitting Indian opkim to their ports, while they forbid the cultivation of opium in China. Much valuable information on the subject of the opium revenue is contained in the evidence given before the Parliamentary Committee on Indian Finance. Among the many witnesses who were examined on this question there is no one whose opinion is entitled

D to more consideration than Sir Kutherford Alcock, who had not only resided in China for twentyfive years, but who at the time was her Majesty's Minister in that country. In the evidence he gave before the Select Committee on Indian Finance (May 23, 1871), he expressed the opinion that the Chinese Government were seriously contemplating putting an end to the importation of opium, and allowing its cultivation without stint in China. I do not presume to express any opinion of my own on the extent to which the opium revenue is likely to be affected by any action that may be taken by the Government of China. My sole object in calling attention to the subject is to show that the most productive of all the sources of Indian revenue, next to land, may, in the opinion of some most competent judges, be seriously reduced in consequence of a falling off in the Chinese demand for Indian opium ; and it therefore becomes the more essential that the finances of India should be administered with the utmost care and thrift,

Next proceeding to consider the prospect of a,n increased revenue being obtained from salt, it will, I think, be admitted that, although a small increase of revenue may be derived from an increase of population, yet nothing could justify an attempt to obtain an additional revenue from salt by raising the rate of the existing duties. The dutj 7 " now imposed, amounting to no less than 2,000 per cent, on the prime cost of the article, cannot but be regarded as a most onerous impost, when it is remembered that salt is as much a necessary of life as the air we breathe or the water we drink. It seems, moreover, that taxation on salt has reached that point when it produces a most serious effect in checking consumption. This is particularly the case in the poorest parts of India, such as Madras. This was felt so strongly by the late Lord Hobart, the able Governor of that Presidency, that he declared that nothing would induce him to be a consenting party to an increase of the salt duty. At the time Lord Hobart made that declaration, the duty levied on salt in Madras was one rupee, thirteen annas per maund. Within the last twelvemonth, the salt duty has been raised in Madras and Bombay from one rupee, thirteen annas to two rupees, eight annas. This increase of nearly 40 per cent, in the duty, has been defended as a part of a scheme for the equalisation of the salt duties throughout India. If, however, the equalisation of duties is an object of so much importance as to justify a large addition to the duty being imposed on the people of Madras and Bombay at the very moment when they were recovering from the ravages of a terrible famine, it at once becomes evident that

D 2 the duties cannot "be raised in India without Departing from this policy of equalisation ; for I believe it will be admitted that nothing could justify the raising of the salt duty in Madras and Bombay beyond the point to which it has recently been advanced.

With regard to the last three branches of revenue excise, customs, and stamps little need be said. The present aggregate net revenue obtained from customs and excise does not amount to more than 5,000,0002. a year ; and the policy of the Government in recent years has been rather to diminish than to increase these duties. Moreover, one of the * most important items in the receipt from customs, namely, that derived from the import duty now imposed on cotton goods, must be regarded as existing on a somewhat precarious tenure. The repeal of this duty has been earnestly demanded by the cotton-manufacturing interest in England ; and the Government entered into an undertaking that the duty should be repealed as soon as the financial condition of India permitted. It is somewhat difficult to define the exact interpretation to be given to this promise ; but it is evident that its fulfilment will be persistently, and possibly successfully, urged. For when it w r as recently affirmed on the authority of the Secretary of State that India possessed a balance from which the expenses of the Afghan war could be defrayed,

it was immediately said by the manufacturing interest in Lancashire that if such a balance really existed its appropriation had been beforehand pledged to the repeal of the import duty on cotton goods. As, therefore, this important item of receipt in the customs duties of India will be liable to constant attack from persons possessing great power and political influence in England, and as there is no new excise duty which it has been suggested could be imposed, T think no other conclusion can be arrived at than that not only is there little chance of obtaining additional revenue from customs and excise, but, on the contrary, the Indian Government may, in face of the promises they have made about the cotton duties, find it difficult to maintain the revenue which they now receive.

In reference to stamps, it is only necessary to remark that if it were practicable to obtain additional revenue from this source, stamps would certainly not have escaped the watchful eye of the Indian financiers, who, when last year they were creating a famine fund, were apparently so hard pressed that, as previously stated, they were compelled to subject to direct taxation incomes of only four shillings a week.