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1 May 2008

Indian Fiscal Autonomy Convention (1919-1939)

What Did it Mean?

1. The Importance of India to Britain 1900-1914

British Material Self-interest in India[1]

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.

A less 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 1914 India's 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 India, 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."[2]

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 Britain. That 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 Britain, Australia, 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.[3] 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".[4]

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.[5]

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).[6] There was in fact no "deliberate surrender" of the British market in India…. Britain was unable to maintain its exports, despite using imperial preferences and other measures to thwart protectionism in India,[7] 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.[8] 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.[9] Apart from this, to the extent that the Convention mollified Indian opinion, "the political benefit made it virtuous".[10]

Though Britain 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 India".[11] 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"[12] 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.[13] Apart from the President, the Commission had members like G.D. Birla and Narottam Morarjee who commanded the confidence of Indian commercial opinion."[14]

References

Tomlinson, B. R., The economy of modern India, 1860-1970, The New Cambridge history of India; 3/3, Cambridge University Press, 1993. Book description.

- The Political Economy of the Raj 1914-1947: The Economics of Decolonialization in India, MacMillan 1979**.

Note 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

Note – this is a summary and restatement of Tomlinson 1979.

- “INDIA AND THE BRITISH EMPIRE, 1880-1935”. Indian Economic and Social History Review [India] 1975 12 pp. 337 ff.