Rider, Thomas Duncan, "The Tariff Policy of the Government of lndia and its development Strategy, 1894-1924", Ph.D., Minnesota, 1971. – from “summary and conclusions

 

“The most important re­quirement of tariff policy was that it preserve the customs duties as a source of revenue for the Government of India. Tariff policy also must not impede economic development. Nor could it jeopardize India's positive balance of merchandise trade, which provided the Indian government with sterling funds to meet its sterling oblig­ations, supported the rupee exchange rate, and provided the backing for India's silver currency….  It may be that at some time prior to 1894 attention to the well-being of British economic interests was an objective of British policy in India; between 1894 and 1924 it was a constraint on the formulation of tariff policy….  Budget deficits, caused … by the depreciation in the rupee exchange, forced the Government of India in 1894 to impose a duty on imports. The initial exclusion of cotton yarn and cloth from the import duty was necessitated by the ability of Man­chester export interests to prevent any tariff legislation in In­dia that threatened the level of cotton exports to India. The ex­clusion of cottons, however, proved politically unpopular in India. As a result, the final solution was to tax imports of cotton cloth and to countervail that cotton duty with an excise on Indian yarn production. The cotton duty and the countervailing excise, while popular with neither Bombay nor Manchester, were tolerated by both. Though it had opposed concessions to Manchester, the Indian govern­ment accepted the arrangement also because it was essential to the survival of the revenue tariff. As a result of the stabilization of the rupee exchange in the late 1890s, the Government of India avoided an increase in the general revenue duty, which would in turn have jeopardized the concordat….. (T)he Indian revenue tariff was tolerable to British export interests only so long as it did not affect the existing level of trade… the India Office and therefore the Indian government was susceptible to British pressure. Despite the imposition of a revenue duty, tariff policies generally conformed to the British model and India's tariff pol­icy could be called a modified free trade policy. India retained that modified free trade despite bilateralism in Europe and Imperial preference within the British Empire. India generally avoided bi­lateral agreements and with one exception did not discriminate among her trading partners ….  Nor did India grant pre­ferences to Great Britain even though Britain's share of India's import trade declined significantly after the adoption of free trade in India in the 1850s and even though the self-governing colonies granted preferences to Britain. With India's balance of payments surplus helping to finance Britain's deficits with other countries, tariff reformers in Britain could avoid the issue of India's place in a general scheme of preferences. The price for India's accept­ance of a general scheme of Imperial preference, the right to pro­tect selected Indian industries, was a price which British export interests would be unwilling to pay. The presence of British Liberals in office after 1905 halted the extension of preferences to Britain except for a single instance, the preferential treatment granted ear­lier by Lord Curzon's government to British oil companies in the ex­ploitation of oil reserves in India and Burma.

British officials in India were development minded. They be­lieved the modified free trade policy to be consistent with their development strategy. They encouraged the agricultural export and transportation sectors, believing that development in those two sectors would lead to the establishment of an industrial sector in India by private enterprise. Indian agriculture, however, did not respond satisfactorily to their promotional efforts. Nor had the expansion of India's external trade and the construction of rail­ways encouraged the development of industries by Indians.  Indian critics of British economic policy convinced the Indian public that an agricultural strategy could not achieve sufficient economic growth and that industrialization by means of tariff protection was essential to economic well-being. The use of tariff protection to correct India's industrial insufficiency would, however, disturb the "Concordat of 1896," reduce the revenue yield of the Indian tar­iff, and require tariff policy in India to depart significantly from British tariff policy. Some industrial strategy that excluded all-out tariff protection must be devised. The development of a possible alternative industrial strategy, a program of state assistance and entrepreneurship on the provincial level, was frustrated by Lord Morley's veto in 1910.

…  A diminution of the volume of India's foreign trade during the (First World) war and the likelihood that it would face numerous trade restrictions after the war reinforced the view that foreign trade would no longer prove an important growing point in the Indian economy. Secondly, the acquisition by Japan and America of markets held by Europe prior to 1914 suggested that British exporters would face formidable competition in the Indian market after the war and that the development of import-replacement industries in India would not be possible without tariff assistance. The continuation of a modified free trade policy was unlikely to benefit either Indian manufactures or British exporters. Thirdly, the temporary isolation of India from European industrial competition and the additional demand generated by the government's war effort stimulated the development of some young Indian industries that would have difficulties once trade and demand conditions were again normal. Finally, the dependence of India upon Europe for many essential manufactured items encouraged British officials to view greater industrial self-suff­iciency as crucial to India's defense posture. An industrial strategy that involved state industrial assistance and enterprise, while pre­serving a low revenue tariff as a source of revenue, was recommended by the Indian Industrial Commission in 1918. It was vetoed again, this time by Indian politicians and by the Indian and European bus­iness communities.

(With )The … working out of the Fiscal Autonomy Convention between 1916 and 1922….  The British cabinet  also accepted the Indian government's determination to grant tariff protection to selected infant industries after the war. The interests surrounding Indo-British trade were to be placated by the grant of preferences by India to British goods. Autonomy in tariff matters became even more indispensable to British officials in India as a result of three developments immediately after the war: the constitutional reforms of 1919 which gave Indian politicians greater influence over the decision-making process, the need to raise the tariff revenue yields in 1921 and again in 1922, and the decision that India would participate in bilateral negotiations with Britain and with the Em­pire concerning preferential tariffs.

… The Indian government …. In 1919 India indicated its willingness to grant preferences on a bilateral basis after a British cabinet com­mittee excluded the possibility of an Empire-wide scheme of prefer­ences but only if it received an offer from His Majesty's Govern­ment sufficiently attractive to win over Indian public opinion. Indians were demanding that India be given the same degree of tariff autonomy as enjoyed by the self-governing colonies and specifically that India be allowed to protect her nascent industries.

While opposed to high tariff protection, the Government of India was prepared to accept "discriminating protection," that is, protection to selected infant industries, and believed that it might do so without a radical revision of its tariff which would disturb revenue yields and British export interests. It was also willing to stand by its offer of selective preferences to British imports in return for a satisfactory offer from Britain. A commission to consider Indian tariff policy was forced upon the Indian government, however, by Indian politicians, and the Indian Fiscal Commission, while accepting tariff protection for Indian industries, proved cool to Imperial preference. Fortunately the commission was moderate and recommended a retention of the revenue tariff. … The commission did not, however, foresee the world depression in the 1930s and underestimated the ability of Japanese importers to com­pete in the Indian market at the expense of both Indian industries and British importers. Both the world depression and Japanese im­ports were to upset the settlement that had been worked out in the early 1920s.

The above summary suggests the impact of Indian economic development on the formulation of tariff policy. It does not attempt the reverse, that is, to assess the impact of tariff policy on the process of economic development in India. The latter task would raise considerable difficulties. It would not be easy to isolate tariff policy as the variable factor in the performance of the eco­nomy when there are many other factors that were more important in determining the nature of Indian economic development than was tariff policy. Considering the relative size of India's foreign trade in relation to the total economy, the manipulation of tariff rates up or down would have had a minimal impact on the performance of the economy. It would even be difficult to determine the responsi­bility of tariff policy for what many regard as India's industrial insufficiency, given the much greater importance of agricultural stagnation in India as an explanation of that insufficiency.

Even if it were shown that another tariff policy might have achieved a larger rate of economic progress, measured in terms of net national product, it would have to be shown that the faster rate of economic progress was appropriate to India's needs….  It is by no means certain that maximizing the growth of the national product or even achieving the rate of eco­nomic development experienced by Western Europe, the United States, and Japan would necessarily have been appropriate for India in the British period….

British economic policy, including Indian tariff policy, has been judged inappropriate because it failed to achieve an adequate growth rate, "adequate" being determined by the European and Amer­ican models. This is an arbitrary criterion. A more relevant cri­trion for evaluating tariff policy and the whole development strat­egy of the British in India would be whether it generated an appro­priate economic structure, and how that structure affected Indian society, culture, politics, etc. It may be that the rate of eco­nomic progress in India between the 1850s and the 1930s met adequately most societal needs even though it fell short of the rate considered adequate by the Indian critics of British policy or by many modern economists. It may be, on the other hand, that its consideration of non-Indian interests in the formulation of eco­nomic policies and its alien character made the British government in India unsuitable as an instrument for achieving an appropriate economic structure even though British administration did achieve some positive benefits for India.

It is also not a sufficient indictment of British develop­ment strategy merely to point out that it was constrained by pol­itical realities or to suggest that British officials, in pursuing that strategy, made political compromises. Both are a necessity for any bureaucracy at all vulnerable to political forces. Economic plans that are not constrained by political realities and that can not bend to political necessity are useless to a bureaucracy that must look to its base of support. nationalist politicians were quarreling with those political realities upon which economic pol­icy rested. By doing so they exerted a counterforce which allowed the Government of India to concern itself less with British export interests. In other words they were able to change political re­alities.

The nationalist critique of economic policy performed another useful function. The economic development of India under the Bri­tish involved social costs too often neglected by British officials, and Indian politicians were correct to point them out. The develop­ment of the agricultural export sector undoubtedly did make the peasantry more vulnerable to draught and did require them to seek capital from money-lenders. The development of transport probably did benefit imports and Indian industries in transportation cen­ters, particularly the port cities, more than it benefitted tradi­tional industrial centers. wconomic development during the Bri­tish period did involve great costs to many-groups in India, and it was appropriate for nationalists to ask whether the welfare gains exceeded those costs.

Indian Moderates generally recommended a more rapid rate of economic development as a palliative for the social costs resulting from the development process. Specifically they recommended all-out industrialization. It is doubtful that industrialization would have reduced the social and cultural costs of economic change; in fact Indians advocating all-out industrialization candidly admitted that the social and economic costs of their program were high but assumed the eventual welfare gains would exceed the costs involved. It is also not inappropriate to question that assumption.

The unbalanced development strategy pursued by the British in India may or may not have been the optimal approach to economic development in India during the British period. But given that strategy, the nature of the world economy, the revenue needs of the Government of India, and the existence of powerful export interests in Britain, the policy of modified free trade was appropriate tariff policy for the Indian government in the 1890s. Economic and political realities changed considerably between 1894 and 1924, however, and by the end of the First World War, the policy of discriminating protection was appropriate. The modified free trade policy and then discrim­inating protection were both successful political settlements. They were tolerated by the resident British commercial community and by the British cabinet. Most Indian businessmen were not particularly protectionist and seem to have been relatively satisfied with the modified free trade tariff and then with discriminating protection, tariff policies they had had a hand in shaping. The pattern of  cooperation betwen the major Indian business communities and Bri­tish officials remained intact into the late 1920s. Until then protectionist-minded politicians were not in a position to force tariff protection on the bureaucracy. In the 1920s, however, divi­sions had appeared among Indian politicians over tariff protection, and other political demands had a higher priority.

The standard imperial argument has exaggerated the influence of British economic interests in Britain and in India over the form­ulation of tariff policy and obscured the importance of other con­siderations. Tariff policy is only one aspect of the total econo­mic policy of the Indian government, yet I would suspect that the considerations that determined other economic policies are equally complex and the attempt to explain them in terms of the imperial argument also an oversimplification. We shall be able to ask more relevant questions about the nature of Indian economic development in the British period, its adequacies and inadequacies, about the appropriateness of British policy, about the impact of economic change on Indian society, and so forth, if we avoid assuming the subservi­ence of the Government of India to British economic interests.

It may be that the British administration of India handicapped or even prevented the Indian economy from responding successfully to societal demands and to the opening up of India to the world economy. As of yet, however, the verdict can not be pronounced. ”