LECTURE 2 BEGINNINGS OF INDIAN ECONOMICS

Transcription

1 LECTURE 2 BEGINNINGS OF INDIAN ECONOMICS It is customary to trace the origins of economics to Arthashastra of Chanakya, also known as Kautilya. Many people who do this would like us all to believe that everything was invented in India, including economics. Artha has many meanings in Sanskrit, including meaning, but it also means money, so arthashastra has been adopted as the word for economics in Indian languages. But Chanakya s work itself is about something else altogether. His real name was Vishnugupta; he was prime minister of Chandragupta Maurya, who is supposed to have ascended the throne of Magadh, which was in or close to present-day Bihar, in 321 BC. Arthashastra is in the form of advice to the king about how to manage his kingdom. It has a link with today s economics insofar as it talks about taxation, military strategy and so on. Managing public finances was an unavoidable part of managing a kingdom; but the royal court in those days was not so large or well organized, and managing the finances had not become a specialized function. Still, there is much in Arthashastra that can be called economics. Ajit Dasgupta s book is a good introduction to Arthashastra. 1 In the lectures I gave last year, I traced modern economics to a controversy in 17 th -century England between those who wanted to compete with the Portuguese for maritime trade with India, and those who thought that Britons should continue to mind their own turf and buy spices and textiles from the Turks who brought them from India and beyond, across Egypt. The seventeenth century was also the time when printing methods were standardized and it became easy to print a few hundred copies of pamphlets or, what were then called, tracts. So a new trend started: people would address a tract to a nobleman in the hope that he would bring it to the notice of the king; but they would also print and send some copies around to create public opinion in favour of what they wanted. A typical example is Digges Disputations, which present the arguments for and against direct trade with India. 2 The dialogue goes something like this. The opponent says that British ships are making good profits in trading with the Turks in the Mediterranean and the Baltic; why should they be taken out and sent on an uncertain voyage round the Cape? Digges says that India trade would be more profitable. The opponent says that the Cape Route is too dangerous. Digges says that out of the 22 ships that sailed in 17 voyages, only four were lost, and their loss was more than made up by the profits. The opponent points to the lives of 450 sailors lost in the voyages. Digges says that they are still learning about the route and its dangers; as they learn, losses of life will be reduced. In the meanwhile, it is better for men to become sailors than beggars. The 1 Ajit K Dasgupta, A History of Indian Economic Thought, Routledge, London and New York Dudly Digges, The Defence of Trade, in a Letter to Sir Thomas Smith Knight, Gouernor of East-India Companie, etc, from One of that Society, etc., Vexat Censura Columbae, London, Printed by William Stansby for John Barnes, 1615; 1

2 opponent says that the ships are needed for defence of Britain. Digges says that more ships would be available for home defence when the fleet expanded. The opponent says that shipbuilding is taking away so much wood that forests are being cut down. Digges says that the India trade is so profitable that it could easily pay for wood from Ireland and West Virginia. The opponent says that the Indies export only luxuries like silks, calicoes, pepper and nutmeg. Digges says that those luxuries are exported from Britain to Europe and earn good money, and that the voyages create jobs. The opponent says that nothing has become cheaper. Digges gives figures to disprove it: the price of pepper has fallen from 4 shillings to 2 shillings a pound, of nutmeg from 5s to 2s 8d, of cloves from 8s to 4s, and of mace from 10s to 6s. Such was the public debate in England. It was not amongst economists; economics as a subject did not exist until the late 19 th century, when it entered universities as political economy. Amongst the first British writers on economic subjects in Britain, Sir William Petty was a physician and surveyor, Henry Thornton was a banker and member of Parliament, John Law was a banker and courtier, Adam Smith was professor of logic and moral philosophy, Thomas Malthus was a priest and professor of history and political economy, Ricardo was a speculator and racketeer. If there was a parallel debate in India, we have no knowledge of it, because printing had not yet arrived. If there were any debates, they must have been verbal debates in kings courts and merchants mansions; they are lost to us. Indian debates become accessible only after the printing press arrives; and since the first presses to arrive were English-language, the early discussions were also in English, although authors who wanted to disseminate their views were soon publishing in Indian languages, especially Bengali, Marathi and Tamil. Distribution of world manufacturing output, (per cent) India China Developed core Rest Source: Clingingsmith and Williamson (2004:36). The debate continues to this day, drawing in economists using new sets of data and new techniques. To give you its flavor, let me tell you what David Clingingsmith and Geoffrey Williamson wrote in Till 1750, India and China were the world s greatest 3 David Clingingsmith and Jeffrey G Williamson, Indian deindustrialization under the Mughals and the British, Harvard University, October

3 economic powers, accounting for over a half of the world manufacturing output. But in the 18 th century, the law and order imposed by the Mughal Empire in India broke down. Output per worker in Indian agriculture fell, agricultural prices went up, so did wages, and India s textile production became less competitive. This accentuated after 1800, when Britain began to export machine-made textiles. They were much cheaper than Indian handspun and handwoven textiles, so India lost its own domestic market to British textiles. After 1860, however, India itself began to produce machine-made textiles; its deindustrialization ended, and slow reindustrialization began. 4 That is the broad sweep of history. Scholarship goes back centuries, perhaps millennia in India. But economics as we know it today was invented in the west, and could not begin to develop in India until tertiary education in English arrived. The three presidency universities in Bombay, Calcutta and Madras were set up in 1857; they taught literature, philosophy and science to begin with. But literate people could think about and discuss economics. In India, the first major economic debates in English language began in the last quarter of the 19 th century. At that time, their main subject was famines, whose frequency and intensity reached unprecedented levels in In those 15 years, there were 17 famines; they killed 2.6 crore people, at a time when the population was no more than 25 crore. There are two ways in which a government can alleviate a famine. The first is to supply foodgrains free or at low prices. The British government would not do that. It believed in the principle of laissez faire, which ruled out free supply or subsidies: that would be interference in the working of the free market. It was not equally rigid about offering work to the needy. But it believed that such employment must not compete in the normal labour market, or give succour to those who could find work on their own. So it devised three rules. First, people would be offered work at least a day s walk away from their homes; they would thus not be able to stay at home, and would have to camp out in the open something they would do only if they were desperately poor. Second, the wage should be such that people could barely survive on it; it should not be so high as to encourage people to take up work voluntarily. Finally, the work should be hard and unpleasant enough for people to avoid it if they could help it; breaking stones was a favoured form of work. It was in the context of this tough and heartless attitude of British rulers that Dadabhoy Naoroji wrote his Poverty of India 5. It was based on speeches he gave as member of East India Association, a typical British club with branches in London and Bombay, which provided members with a place to meet, eat, read, drink and discuss, and occasionally held talks. Let me state Dadabhoy s message in his own words: 4 See also Prasannan Parthasarathi, Why Europe grew rich and Asia did not, Cambridge University Press, Cambridge 2011; the European response to Indian cottons, 5 (printed in London by Vincent Brooks, Day and Son, 1878). 3

4 The chief cause of India s poverty, misery, and all material evils, is the exhaustion of its previous wealth, the continuously increasing exhausting and weakening drain from its annual production by the very excessive expenditure on the European portion of all its services, and the burden of a large amount a year to be paid to foreign countries for interest on its public debt, which is chiefly caused by the British rule. The obvious remedy is to allow India to keep what it produces, and to help it as much as it lay in the power of the British nation to reduce her burden of interest on public debt; with a reasonable provision for the means absolutely necessary for the maintenance of the British rule. For this purpose it is necessary, on the one hand, to limit within a certain amount, the total of every kind of expenditure (pay, pensions, and every possible kind of allowance) for the European portion of all the services both in England and India, directly or indirectly connected with or under the control of Government (including, therefore, guaranteed railways, other works, manufactures, and local funds, &c) Briefly, what Dadabhoy was saying was that British rulers in India were too expensive; the proportion of revenue of the Indian government spent on British civil servants and soldiers should be reduced. This was the first statement of the drain theory, on which many Indian and British economists have worked for almost a century and a half. Dadabhoy collected piles of statistics to show how poor Indians were; according to him, an average Indian was even less well off than prisoners in Indian jails. The enormous volume of work done since his time has not given better answers. His basic point, that India paid for the cost of British rule by exporting more than it imported, has been confirmed for the late 19 th century: India s export surplus paid for home charges the costs of India office, which was a department of the British government in London, pensions of British civil servants who had worked in India, and interest and dividends of Indian firms that had investments in India, particularly in tea, jute, coal and indigo. When India became independent, one of the first things the new government did was to introduce such stringent restrictions on the remittance of profits on foreign investments in India that British industrialists and investors sold out; by the 1970s, there was little British investment or indeed, foreign investment left in India. There was fierce and energetic discussion of the charges levied by Dadabhoy Naoroji. I will summarize here the contribution of Romesh Dutt, who wrote in or just before 1903 and gave the clearest expression to the charges 6. According to him, the average Englishman earned 42, from which he paid 3 10s, in taxes, that is, 70 shillings on 840 shillings, or one-twelfth (8.33 per cent). The average Indian earned 2, equal to 40 shillings or 480 pence, on which he paid 4s 8d or 56 pence or 7-sixtieths (11.67 per cent). England taxed its poor Indian subjects more than it did its own much better off subjects. Second, it employed Englishmen at vastly inflated salaries in the Indian 6 Romesh Dutt, The Economic History of India under Early British Rule, Vol II from the Accession of Queen Victoria in 1837 to the Beginning of the Twentieth Century, Kegan Paul Trench, Trubner, London Chapter XIV, India in the Twentieth Century, pp

5 government and army; it paid these Englishmen leave pay and travel costs when they went home on leave, and paid their pensions when they retired. All these Englishmen could be replaced by Indians at a much lower cost. These home charges, together with the cost of money borrowed by the various Indian railway companies in Britain and the salaries, pensions and interest paid in Britain by British companies in India, made it necessary for India to export far more than it imported. That depreciated the Rupee against the Pound, worsened terms of trade, and raised the Rupee costs of home charges. Dutt asked Britain to do two things: Retrenchment and Representation. He wanted it to reduce the cost of its establishment paid by India, and he wanted Indians to be represented in making decisions regarding themselves what we would call democracy today. The economic debate underwent major changes after the beginning of the 20 th century, and especially after the World War I of First, there was a change of locale. London and Englishmen went out of the discussion; by this time, an Indian intellectual class had emerged, and the debate became entirely Indian, centred on Bombay and Calcutta. Second, the famines ceased, and the debate broadened out to more subjects, including the economic consequences of British rule, Indian finance, industry, and public finance. Finally, the discontent with British rule that had characterized the late 19 th century abated. This is the period of the rise of the Congress, of the demand for independence, and of national leaders like Tilak, Gokhale and Gandhi. Their activity was political; it was little reflected in the economic writings of that time. But Mahadev Govind Ranade was a serious scholar. He taught economics in Elphinstone College, and covered Adam Smith, John Stuart Mill, Malthus, Bastiat, Ramsay, McCulloch and Senior. He did do detailed thinking on economic development of India in the late 19 th century. Unlike other nationalist leaders, Ranade did not think that the British had impoverished India. He thought that India had been poor even before. But the rise of mechanical industry in Britain had created competition that India s craft industries could not face; absence of industrial protection had accelerated the process of deindustrialization and ruralization: This Dependency has come to be regarded as a Plantation, growing raw produce to be shipped by British agents in British ships, to be worked into fabrics by British skill and capital, and to be re-exported to the Dependency by British merchants to their corresponding British firms in India and elsewhere (Das Gupta 1993: 90-91). Joseph A Schumpeter was developing the theory of the trade cycle in Vienna at about the same time; its central idea was that industrial innovation was the driver of economic growth 7. Ranade had the same idea. He applied it to India: the failure of India to industrialize had led it to stagnate, because industry is the home of technical progress. Ranade was in favour of free imports of raw materials, machinery and skills until we learn 7 An abridged version is available at ess_cycles.pdf 5

6 our lessons properly and need no help. He was not against temporary help such as loan guarantees, interest subsidies, technical training and government purchases. He noted that there was no mechanism for connecting savers and industrialists who wanted access to the savings. He suggested district or city committees of industrialists coming together and taking deposits from local savers. He did not foresee the development of modern financial markets, which perform the same function. But if we allow for this lack, which was more due to the absence of the financial sector at that time, Ranade was a surprisingly modern economist for his times. 8 This was the flavour of the economic debate at the end of the 19 th century. In the late 19 th century, the debate was amongst a small number of Indians who were educated in English and had the means to visit England; they were joined by Englishmen who had either worked in India, or were involved in the administration of India from London. But soon the volume of publications in India grew; by the early 20 th century, British participants dropped out, and the debate became largely Indian. From time to time, the British or the Indian government appointed a commission or committee on important issues, such as public finance, industry, labour, currency, railways, merchant navy, the plague, or irrigation; the evidence they gathered and their reports generated public discussion. Then there were societies, some of which ran magazines. Satish Chandra Mukerjee founded a study circle called the Dawn Society in Calcutta in 1903, and published a magazine called the Dawn. Gopal Krishna Gokhale set up the Servants of India Society in Poona in An Indian Journal of Economics came out from Allahabad in The volume of economic writing and discussion became considerable; I will just give you an idea of the kinds of things people got interested in and wrote about at that time. The world had seen many wars; but the war of was the first one that encompassed the entire Eurasian continent, from China to France. Britain s economic capacity was strained; it used India s resources liberally. It expanded the Indian army to 2 million men, and sent them to fight in war theatres stretching from Iraq to Flanders. As a result, England emerged out of the War more grateful to India and mindful of its ambitions of greater independence. However, the British government did not have a democratic machinery through which it could hear Indian opinion. The Viceroy had an Imperial Legislative Council of handpicked men who framed laws. It had some non-official members. Gopal Krishna Gokhale was one of them. He introduced a bill in 1911 based on British and Irish precedents, which proposed compulsory education for boys between 6 and 10; provincial governments could extend it to girls if they wanted. The education would be free for children of poor parents who earned less than Rs 10 a month. The government was extremely averse to increasing expenditure; but the entire scheme was estimated to cost Rs 50 lakh, which the central government found affordable. But by this time, some British were very paranoid of the nationalist movement; they felt that Indians would be more discontented and dangerous if they were educated. So the scheme was dropped. 8 James Kellock, who taught in Wilson College, Bombay, wrote a good biography of Ranade (Mahadev Govind Ranade: Patriot and Social Servant, Association Press, Calcutta 1926). 6

7 But the government appointed a host of committees on various economic topics. Some were appointed by the Secretary of State, who was the minister responsible for India in the British government in London; they were called Royal Commissions. Some were appointed by the Viceroy in India, and were called committees. Reports were submitted by an industrial commission in 1919, a committee on currency and finance in 1920 and another one on the same subject in 1926, a committee on railways in 1921, a fiscal commission in 1922, a mercantile marine committee in 1924, an external capital committee in 1925, a taxation inquiry committee in 1925, a Royal Commission on Indian Currency and Finance (that is, a committee of the government in London) in 1926, a road committee in 1927, a Royal Commission on Indian Agriculture in 1928, a states committee (that is, a committee on princely states) in 1929, a commission on a constitution for India in 1931, and a labour commission in The government was in a frenzy about what would be called reforms today, and it proceeded in a typically British fashion: it would appoint a committee of official, unofficial and expert members, its report would be considered by the central and provincial governments and action would be taken once agreement was reached on the best course. There was little action because of the political confrontation between the government and the Congress. But there was much discussion amongst economists and in the press. Debate was not confined to the subjects of the commissions and committees, but was much broader. In particular, there was much writing on agriculture and industry. The British had taken over India in bits and pieces; roughly a third of it continued to be ruled by Indian maharajahs and nawabs right till independence. The basic model of the Mughal empire, which ruled in the north, was that the emperor divided the empire into jagirs and gave them to his army commanders; they got a salary from him and had to give a third of their farmers output to the emperor. When the Mughal empire broke up, it was replaced in some areas by the British empire, which continued to collect its share from the zamindars that is, landlords. The share was calculated once in a decade or two; in between, the tax to be paid was constant in terms of money. This system of revenue collection was called permanent settlement. In the areas ruled by Marathas chiefly the Bombay and Madras presidencies and Central Provinces there were no zamindars; the farmers paid land tax directly to the government. This system was called ryotwari. In parts of Punjab, UP and MP, a village was collectively responsible for collecting and paying tax; this system was called Mahalwari. Crops fluctuated according to the state of the monsoon, but land revenue was fixed. So farmers in the ryotwari areas could not pay from time to time, and their farms were sold off. Or they borrowed money from local rich men and shopkeepers, and had to pay interest; if they could not pay, their moneylenders took away the land. Thus, land-related problems were complicated, and attracted much writing 9. 9 R C Dutt, Famines and Land Assessment in India, N G Mukerjee, Handbook of Indian Agriculture, 1901, and Handbook of Agricultural Science, S C Dutt, Rural Reform, N N Gangoly, Grievances of the Tenantry in the Province of Agra, A C Guha, A Brief Sketch of the Land Systems of Bengal and Behar, S C Roy (ed): Agricultural Indebtedness in India and its Remedies: Selections from Official Documents, 1915, and Land Revenue Administration in India: the Permanent Settlement in Bengal. Ganga Ram, The Agricultural Problem of India, G S Dutt, A Practical Scheme of Agricultural Organization and Rural Reconstruction in Bengal, D S Dubay, The Way to Agricultural Progress, J Matthai, 7

8 As I said earlier, India was the world s leading manufacturer of textiles till the 17 th century. Then from the 18 th century onwards, Britain set up a mechanized textile industry; its cheap, machine-made textiles took away the market of the Indian handmade textiles, first in Asia and Europe and then in India itself. From the middle of the 19 th century, Indian entrepreneurs themselves imported machinery and set up a textile industry in western India. British businessmen mined coal in Bihar and Bengal, set up a jute bag industry in Bengal and a tea industry in Assam and grew indigo in Bihar for export to Europe. But west European countries, especially Germany and France, industrialized more rapidly; India fell back. Many Indians were concerned with the relative industrial decline of India. The British government of India itself appointed a commission to inquire into the state of industry. 10 The concern with lack of industry in India and British responsibility for it diversified into many surveys of industry. 11 There were also a number of studies of individual industries. 12 The best survey of the Indian economy at this point is that of M Visvesvaraya, who started as an engineer in the government of Bombay and eventually became prime minister of Mysore. 13 He marshaled the basic facts then available about the Indian economy (just after World War I), assessed the performance of the Indian government, showed the difference between the state of the Indian and major European economies, and then gave a plan about how to bridge the distance. Such was the state of Indian economics before World War II. 14 It is not possible to list postwar literature, because it is too large. The War was followed by independence. The government that took over was nationalist and socialist, and determined to take a lead in developing the country. To plan for the country, it had to have basic facts about it. So it invested heavily in the collection of statistics. The statistics gave fodder on which an economic research industry could feed; but it also directed work towards official statistics. I shall not try to review this enormous literature, but will go straight to the current state of economic debate. Professor Gadagkar asked me to introduce you to Indian economics. I took this to mean economics by Indians, and not economics of India or for India. For almost a century Agricultural Cooperation in India, G Advani, Etudes sur la Vie Rurale dans le Sind, R K Mukerjee, The Ground-work of Economics: the Rural Economy of India, B G Sapre, Economics of Agricultural Progress, S K Iyengar, Studies in Indian Rural Economics, N N Gangulee, Problems of Rural India, N M Pal, Some Social and Economic Aspects of the Land Systems of Bengal, N G Ranga, Economic Organization of Indian Villages, K B Saha, Economics of Rural Bengal, T Murari, Methods of Livestock Improvement, Indian Industrial Commission, Report, G N Gupta, The Industries and Resources of East Bengal and Assam, H H Ghosh, Advancement of Industry, A Latif, The Industrial Punjab, V G Kale, Indian Industrial and Economic Problems, G Balkrishna, Industrial Decline of India, K V G Iyer, Indian Industrialism, D R Gadgil, The Industrial Evolution of India in Recent Times, B D Basu, Ruin of Indian Trade and Industry, R K Das, Industrial Efficiency of India, M N Pal, The Industrial Development of India, N C Choudhary, Jute in Bengal, B R Rau, The Economics of Leather Industry, V Puntambekar and J Varadachari, Handspinning and Handweaving, K B Bharucha, History of the Cotton Mills Industry in Western India, M P Gandhi, How to Compete with Foreign Cloth, C D Pande, Commerce de Cotonnades britanniques dans l Inde, M Visvesvaraya, Reconstructing India, London, P S King and Son, The most comprehensive guide to the literature of those times is Jagdish Prasad et al, Bibliography of Economic Books Relating to India, Department of Economics, University of Allahabad, printed at the Banerjee Press, Calcutta, 1923.; file:///volumes/intenso/prasad%201923%20bibliography%20of%20indian%20economics.pdf 8

9 and a half, Indians have been going to Britain and the US to study. Mahatma Gandhi went in 1888; and he was not the first. Many of those who went settled down abroad and followed academic careers. Their interest in India is marginal and fleeting. They write for a market outside India, and have adapted themselves to its requirements. They are not the people Professor Gadagkar meant; it is economists working in India he meant. These also fall into two groups. There are people who have done a degree abroad; many of them have also held academic positions abroad before coming back, or have moved back and forth between India and abroad. They are attuned to the academic standards of their almae mater, and many of them continue to publish in journals abroad. In other words, they function in two academic markets, one in India and one abroad. I was one of them. But there are also economists who have few or no connections abroad. They write primarily for the Indian market. I wanted to cover both these groups. But they could not be covered comprehensively; far too much has been published in this country. And it is not available in any convenient place. Even Delhi does not have a good library that covers the bulk of the work done in India. So I decided to concentrate on two entirely web-based libraries. One is the writings of 130 economists working in India who have got international recognition. The list does not include Indian economists who live and work abroad. And it does not include the thousands of economists who do not write for an international market. It includes economists who live and work in India, but whose work meets international standards. 15 But then, I thought that their work was too limited for my purpose. There is a vast amount of economics being done in India, and I should give you a flavor of it. So I have also covered articles in Economic and Political Weekly. EPW has a remarkable history. Its founder, Sachin Chaudhuri, started it in Bombay in 1949 as Economic Weekly, soon after India became independent. There was a new, Indian government in Delhi. It was struggling with the problems created by independence and partition, and had ambitions of making India prosper and develop a just society. Sachin Chaudhuri started the EPW as a commentary on current political and economic events. But he was also a great host. He had a flat just behind the Taj Mahal hotel in Bombay; all his friends were free to drop in on him any evening, and to take their friends with them. Once there, they had a drink if Sachin could afford it, and tea if he could not. But they would chat, and discuss everything on earth till ten or eleven; then they would wend their way home or elsewhere. If any one of them had a coherent argument, Sachin would ask them to write it up. So although Economic Weekly began as a news magazine, it was soon carrying more serious comments, which eventually burgeoned into semi-academic articles. I strayed into this circle of Sachin Chaudhuri s friends. I came back from abroad in 1963, and took a readership in the Bombay School of Economics. My colleague, Professor R K Hazari, took me to one of Sachin Chaudhuri s soirées. Since I was a bachelor and lived just down the road from Sachin s flat in Colaba, I started dropping in at his house, and taking part in whatever debates were going on. Once in a while, Sachin would say to me after the evening was over, Why don t you write that up? And I would write it up as a note or an article. That is how I got interested in Indian economics, and made many contributions to it in the next two decades

10 Sachin died in Just before his death, Sachin closed down Economic Weekly, which was owned by a businessman friend of his, collected money from his friends including Rs 1,000 from me, and set up Samiksha Trust to give the magazine greater stability, and started Economic and Political Weekly. When he died in 1967, the baton passed on to his young assistant editor, Krishna Raj. Krishna Raj died in 1999, and the editorship passed to Ram Reddy. Economic Weekly and Economic and Political Weekly were secular and mildly left of centre; but they were extremely open to dissenting views until Ram Reddy took over. Now one does not find major debates in EPW; but it continues the tradition of publishing empirical economic studies. So EW and the EPW are the other source I am going to use in his series. But I cannot use these sources comprehensively in this series. I am going to take up just a few concepts and analyses that have had great influence one might call them hot topics and take you through the debates they have generated. Beginning with the next lecture, I shall introduce you to some of the most interesting trajectories in present-day Indian economics. 10