1 May 2008
Indian Fiscal Autonomy Convention (1919-1939)
What Did it Mean?
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1. The Importance of India
Material Self-interest in India
The material self-interest was economic and
strategic. India was a captive market, for long prevented by a system of
countervailing excise duties from protecting its cotton-manufacturing
industry from the products of Lancashire.
Even after the Fiscal Convention of 1920 had thrown out this system, and
established that when the Government and Legislature of India, acting for the
benefit of India and in response to Indian opinion, were agreed on fiscal
policy, the Secretary of State would not exercise his overriding power on
behalf of any British interest, it remained true that British control of
Indian government conveyed substantial economic advantages. At least it
prevented the development of Indian economic policy on autarkic lines which
most British people honestly believed to be harmful to India—and which would
certainly have been harmful to Britain. Strategically, India
became the trunk of a systematic corpus of imperial defence whose limbs
stretched from Hong Kong
to the Middle East,
from East Africa
to the northern passes of Burma.
Apart from the Indian forces themselves, it was an essential overseas
training-ground and cantonment for the British Army. And for this India
paid. Such benefits were not lightly yielded to political pressure.
tangible but nevertheless very powerful interest was the prestige and
authority that Britain
gained in world affairs from being master of an immense empire of which India
was the heart. Without that empire and the naval power that cemented it she
was but a medium-sized European country. With it, she was great among the
greatest, boasting a world-wide Pax Britannica. Without India,
the subordinate empire would be scarcely more than a string of colonial
beads. Pride is less easily sacrificed than even major material interests.
"In the years before
imperial commitment meant three things in practice: that India
should be retained as a market for British exports. which meant that the
Government of India should not impose insurmountable barriers, especially
tariffs, to the flow of British merchandise to India; that the Indian army be kept
available for the imperial cause; and that the
Indian administration should ensure that
repayment of interest on guaranteed debt bonds was made smoothly and that
adequate revenue and remittance was available for the Home Charges. Isolating the imperial factor in India
policy allows us to pin-point the fundamental dichotomy of British rule in India.
Each prong of its triple commitment cost the Government of India
money…. As an India Office memorandum pointed out in June 1931: If a Federal
Government were established in India, the aggregate charges under these three
heads (Defence, Service of the Debt, and Salaries and Pensions) would, at a
very conservative estimate, absorb three-quarters of the total revenues of the
Federation, and a very large proportion of these payments would have to be made
in sterling. This fact illustrates vividly the direct interest which the
British Government must continue to retain in the financial administration of India,
and explains why it is necessary to impose such measures of Parliamentary
control as may be sufficient to ensure that these obligations are met. . .
There is no escape from the conclusion that so long as the British Government
retains obligations which absorb so large a proportion of the total revenues of
it must retain a direct interest in the financial administration of the
country. This by no means implies that financial administration must remain
under close or detailed control, but merely that provision must be made to
ensure that the financial stability and credit of the country will be
maintained, as unless this can be ensured the obligations falling on the
British Government could not be met. This, from the purely British point of
view, is the primary object of the [financial] safeguards."
3. The Origin of the Fiscal Autonomy Convention
The Report of the Joint Select Committee of
Parliament on clause 33 of the government of India Bill 17 November 1919 stated
“Nothing is more likely to
endanger the good relations between India
and Great Britain
than a belief that England's
fiscal policy is dictated from Whitehall
in the interests of the trade of Great
such a belief exists at the moment there can be no doubt. That there ought to
be no room for it in the future is equally clear. India's
position in the Imperial Conference opened the door to negotiation between India
and the rest of the Empire, but negotiation without power to legislate is
likely to remain ineffective. A satisfactory solution of the question can only
be guaranteed by the grant of liberty to the Government of India to devise
those tariff arrangements which seem best fitted to India's
needs as an integral portion of the British Empire.
It cannot be guaranteed by Statute without limiting the ultimate power of
Parliament to control the administration of India,
and without limiting the power of veto which vests in the Crown; and neither of
these limitations finds a place in any of the Statutes in the British
Empire. It can only, therefore, be assured by an
acknowledgement of a convention. Whatever be the
right fiscal policy for India,
for the needs of her consumers as well as for her manufacturers, it is quite
clear that she should have the same liberty to consider her interests as Great
New Zealand, Canada
and South Africa.
In the opinion of the Committee, therefore, the Secretary of State should, as
far as possible, avoid interference on this subject when the Government of
India and its Legislature are in agreement, and they think that his
intervention, when it does take place, should be limited to safeguarding the
international obligations of the Empire or any fiscal arrangements within the
Empire to which His Majesty's Government is a party”
4. What Did the Fiscal Autonomy Convention Mean in Practice?
“…British goods were becoming
less competitive vis-à-vis foreign and sometimes even Indian goods, (which) led
Britain to make a last ditch attempt to secure for itself as much of the
colonial markets (India being the single largest market up to 1935) as
possible, through several measures including imperial preference.
It is in this overall context of imperial needs and compulsions that the
changes in tariff policy after the war—the announcing of the Fiscal Autonomy
Convention in November 1919, the appointing of the Fiscal Commission in October
1921 and the introduction of discriminating protection and imperial
preference—were to occur … (and) within
which British tariff policy functioned virtually till independence.
What "autonomy" did these conditions leave India?
First, the Government of India's position was, to begin with, formulated in
accordance with overall imperial interests under the direction of the Secretary
of State who consulted the Board of Trade and British commercial interests. As
Sir George Rainy, the Commerce Member, made clear in 1930: the Fiscal Autonomy Convention meant that
"there is always previous consultation with the Secretary of State"
before the Government of India places its final proposals before the
legislature. Further, the Secretary of State was to firmly
remind the Government of India that the intricacies of the working of the
Fiscal Autonomy Convention may be unclear to the "world at large",
but the Government of India should have no doubt that "prior consultation
with the Secretary of State in regard to fiscal matters" was not a
"mere formality" but "a real and essential part of the procedure
we have adopted".
Second, considering that the Government of India would have
"consulted" the British government (and thus accommodated British interests)
before placing proposals before the Indian legislature, the disputes between
the Government of India and the legislature would normally occur on the
question of preserving British interests at India's cost. When and if the
Government of India and the Legislature failed to agree, then, as Sir George
Rainy put it, "The Convention is at an end" and "under the
present (1919) constitution.... The Government of India comes once more under
the control of the Secretary of State."
Third, very little room for maneuverability for pursuing Indian
interests existed if the Secretary of State could intervene in all fiscal
measures which could be shown to have a link with "safeguarding the
international obligations of the empire" or which affected "any
fiscal arrangements within the Empire to which the Majesty's Government is a
party". For example, this meant that India
could not independently enter into commercial agreements with foreign
governments—a restriction which was removed from the Dominions in 1907.
Whatever be the claims, in
actual practice the influence of the Secretary of State on India's
fiscal policy remained considerable and at several crucial points proved to be
decisive. For example, when British interests were
threatened, recommendations of Tariff Boards appointed by the Government of
India were often not accepted and sometimes even suppressed, as in 1932,
recommendations of government-appointed commissions were not accepted, such as
the recommendation of constituting a permanent tariff board made by the 1922
Fiscal Commission, the Government of India was ordered to push through tariff
agreements by certification in the legislature when the latter rejected it, as
in the case of the Indo-British Trade Agreement
of 1939, and so on. And, of course ... the commercial safeguards incorporated
in the 1935 Act, which prevented any discrimination against British goods and
companies, took away further from the notion of fiscal autonomy of India.
Imperialist historiography has however seen the Fiscal Autonomy
Convention as leading to major sacrifices for British interests in India's
favour. It has been seen as the "proximate cause" of the
"deliberate surrender of the largest export market in the world for a
stable British manufacture" (cotton textiles).
There was in fact no "deliberate surrender" of the British market in India….
unable to maintain its exports, despite using imperial preferences and other
measures to thwart protectionism in India,
because of the crisis in her own economy and the fall in its international
competitiveness. Also, Indian industry was able to get a certain amount of
protection partly because of factors independent of British initiative, such as
the two world wars and the Depression which weakened Britain's grip over the
Indian economy and provided some natural protection to Indian industry, and
partly because of the "catch-22" or contradictory position British
colonialism in India was placed in, where to meet one imperial interest, that
of securing remittances from India to meet the rapidly increasing home charges
and military expenditure and to strengthen the sterling, it had to depend
heavily on custom revenues raised in India, thus partially overriding another
imperial interest, that of maintaining its export markets. There was no
"deliberate surrender" or decolonization involved in all this.
The chief role of the Fiscal Autonomy Convention in practice was to give
the "Government of India some elbow-room" to devise fiscal measures necessary
to maintain wider imperial interests, without being too closely hemmed in by
the constant pressures of lobbies like Lancashire, as it was earlier. In
fact even the Secretary of State at times used the Convention to resist Lancashire
pressure (often expressed through the British Cabinet) and supported the
Government of India in its efforts to raise enough revenue through custom
duties to meet its imperial requirements.
Apart from this, to the extent
that the Convention mollified Indian opinion, "the political benefit made
was now willing to subordinate its market or industrial export interests to its
financial interests (that of securing remittance to strengthen the sterling and
finance the home charges, military expenditure, etc.), she was not willing to
altogether give up the former. Forced to increase overall tariffs ... the
effort was now to bargain for imperial preference to British goods in
return—i.e., the aim was to raise revenue through tariff duties without, as far
as possible, damaging British exporting interests. However, given the political
situation in India, it was felt that "imperial preference" could not
be introduced without a review, by a Commission which commanded some credibility
in India, of the "general question of the fiscal policy to be adopted by
Consequently, in October 1921, the Government of India decided to appoint a
Fiscal Commission, the terms of reference to which were "to examine with
reference to all the interests concerned the Tariff policy of the Government of
India, including the question of the desirability of adopting the principle of
Imperial Preference, and to make recommendations" The
Commission, meeting the demands of Indian commercial chambers, had an Indian
majority, seven members out of 11 (J.M. Keynes, Vice-President, having had to
drop out in the middle of the Commission's proceedings), as well as an Indian
President, Sir Ibrahim Rahimtoola.
Apart from the President, the Commission had members like G.D. Birla and
Narottam Morarjee who commanded the confidence of Indian commercial
Tomlinson, B. R., The economy of modern India, 1860-1970, The New Cambridge
history of India;
Press, 1993. Book description.
- The Political Economy of the Raj 1914-1947: The Economics of
Decolonialization in India,
review by Morris
David Morris in The Journal of
Asian Studies, Vol. 41, No. 2. (Feb., 1982), pp. 405-407.
- “THE POLITICAL ECONOMY OF
THE RAJ: THE DECLINE OF COLONIALISM”, The Journal of Economic History, March 1982, pp. 133-137
– this is a summary and restatement of Tomlinson 1979.
AND THE BRITISH EMPIRE,
1880-1935”. Indian Economic and Social History Review [India]
1975 12 pp. 337 ff.
 LAD, 1930, Vol. III, pp. 2257-58, Quoted in Adarkar, Indian Fiscal Policy,
 Secretary of State to Willingdon, Viceroy, 27
October 1934, L/E/9/1032, IOR, London
 Adarkar, Indian Fiscal Policy, p. 600
 Dewey, "The End of the
Imperialism of Free Trade"; see also Drummond, British Economic Policy
and the Empire, for similar views.
 For example, an attempt was made to use the princely states,
"Muslims and other minorities", as "breaks" or
"influences" against those arguing for protection against Britain.
See note by the Secretary of State, 3 February (year ?), L/P0/270, IOR, London.
 See Chatterjee, "Lancashire
Cotton Trade", p. 82.
 See, for example, Samuel Hoare,
Secretary of State, to Kirpatrick, 3
February 1933, L/PO/270, I0R, London;
and Secretary of State to L. Kershaw, 28
January 1931, L/P0/50/II, I0R, London.
Of course, the Convention did not prevent the Home Government from intervening
on behalf of Lancashire and other British industrial
interests, when it chose to, by asking the Board of Trade or the Secretary of
State to influence the Government of India's
decisions on fiscal matters. In fact there was a move, in the 1930s, to make
the Secretary of State intervene more "effectively" in the Indian
government's decision making. See Note by Economic and Overseas Department on
Trade Depression, the Boycott of Foreign Goods, Protection in India
and the Fiscal Autonomy Convention, with Special Reference to Lancashire Trade,
12 September 1931, L/P0/52;
and correspondence between Viceroy and the Secretary of State,
September-October 1931, in L/P0/50 IOR, London.
 See Chatterjee, "Lancashire Cotton
Trade", p. 82.
 Fisc. Corn. Rep. 1922, p.4 and Chatterjee, "Lancashire Cotton
Trade", pp. 107-11.
 Fisc. Corn. Rep. 1922, p. 6.
 Silver Jubilee Souvenir, FICCI, p. 28.