Deepak Lal: De-Industrialisation and peasant ruin?

THE RAJ LEGACY - II

In the light of the complaints against Prime Minister Manmohan Singh's Oxford speech, I had in my last column set out the overall economic balance sheet of the Raj and showed that it did begin to end India's ancient economic stagnation and to deal with scourges like disease and death from famines. In this column, I examine the other bugbears of nationalist and Marxist critiques of the Raj.

First, de-industrialisation. The Raj's policies of free trade and laissez faire are held to be responsible. Imports of cheap Lancashire textiles did lead to a fall in Indian handloom exports between 1824 and 1832. An inevitable decline, given the technological revolution taking place in England.

Nevertheless, within 20 years, indigenous entrepreneurs had set up modern textile mills, and by 1875 began exports, which undercut Lancashire. Many other modern industries were set up in the latter half of the 19th century. The first jute mill was set up in 1854, and the first steel mill by the Tatas in 1911.

Other industries including paper, sugar and engineering were also established during this free trade and laissez faire period. The overall rate of industrial growth was higher (4-5 per cent p.a. between 1880 and 1914) than most other tropical countries and higher than that of Germany (4 per cent p.a.).

This industrial development encompassed both import-substituting and export industries. By 1913, manufactures accounted for 20 per cent of Indian exports, which in total were about 11 per cent of national income, as compared with the cotton textile exports in 17th century Mughal India of about 1.5 per cent of GDP. Thus, Indian industrialisation in the free trade laissez faire period of the Raj was impressive.

It was not a period of de-industrialisation, as claimed by critics. Though some handloom workers were displaced, the share of industrial employment (in both the handicraft and modern sectors) in total employment did not decline in the second half of the 19th century.

There was, at worst, a relative decline in employment in the traditional handicraft sector, as is borne out by the fact that handloom production (supposedly destroyed in the 1820s) remains a substantial industry in India today.

This Indian head start in industrialisation was hampered by two developments. The first was the introduction of labour laws in 1881""soon after similar rights had been granted to British workers""to protect industrial labour from perceived abuses.

They were rightly described as "the result of agitation [in the UK] by 'ignorant English philanthropists and grasping English manufacturers'". By raising the effective price of labour, they hobbled Indian industry, and continue to do so to this day.

Resulting in an increasingly capital-intensive form of industrialisation, India could not fully utilise its most abundant resource""labour""with deleterious effects on industrial employment and poverty alleviation.

The resulting and growing un-competitiveness of Indian industry led to demands for protection, particularly from a textile industry facing increasing competition from Japanese industry not hobbled by such labour laws.

The Raj succumbed to these protectionist pressures in the early part of the 20th century, but largely for fiscal reasons. The British had realised that limited fiscal exactions were required to prevent a nationalist revolt against their rule.

Thus, contrary to D Naoroji and R C Dutt's assertions, the tax burden, far from rising, fell during the Raj from Mughal times. Having fixed a relatively low and fixed land revenue demand, whose value declined in real terms, by the end of the Raj, land revenue was only 1 per cent of national income, as compared to about 15 per cent under the Mughals. The total tax burden was only 6 per cent under the Raj""less than either in its preceding and successor regimes. This paucity of revenue, whose first charge was to pay for the Indian army, which maintained the British Pax east of the Suez, and the notorious "home charges" (which, despite nationalist exaggeration, never amounted to more than 1.5 per cent of GDP), which financed the administrative "steel frame", there was little left for the social and physical infrastructure required for economic development. It is, in fact, remarkable that the Raj did manage to do as much as it did with so little.

It was to meet its chronic fiscal crisis that the Raj turned its back on free trade after 1914 by introducing revenue tariffs. With the labour laws, this set India on that long and disastrous road of inward-looking, capital-intensive industrialisation, which is only now being partially reversed. It was this poisoned chalice which was the most deleterious legacy of the Raj. But, ironically, it is this very legacy which the Marxists and nationalists still seek to defend.

While the modest rural development during the Raj limited the extent and spread of the benefits of modern economic growth, many of the nationalist-Marxist charges of increasing concentration of land and proletarianisation with the commercialisation of agriculture, of increasing usury, growing indebtedness and peasant ruin are unsubstantiated.

By using their limited fiscal resources to extend irrigation to the dry zones in the West, the Raj created new productive agriculture by sensibly undertaking the most socially productive form of public investment at the time. Dr J A Volcker's 1891 report pioneered the "leading inputs" approach to agricultural growth, which governs agricultural policy to our day.

Its full implementation has had to await the technological "green revolution" of the 1960s, and the complementary publicly provided infrastructure, which a less fiscally hamstrung government of independent India could provide.

Thus, in judging the Raj, one can look at the glass as half-empty or half-full. But, unfortunately, the nationalists and Marxists critics are pointing not to the air but the water in the glass!