Enmeshed in a Web of Debt: Nineteenth Century India

This is a reposting of a contribution to the "How did India go from Being a Rich Country to a Poor Country" thread.

Two of the earliest policies in India were to establish monopolies in key industries such as salt, tobacco, and essential spices, as well as to discourage manufacturing.

The most significant early economic policy of the British was the salt tax. It is said that in hot regions salt is worth more than gold. It was a necessity of life, which is why the British made sure to monopolize it. Anyone who made their own salt could be imprisoned for up to 6 months, and the British would raid any house or building where suspected salt making was taking place. By the late nineteenth century these salt taxes constituted an onerous burden on the poor Indian population, as Abhay Charan Das notes in his The Indian Ryot published in 1881

Another thing about the Salt Tax


British policies also discouraged indigenous manufacturing. In England, imports of silk and cotton textiles faced duties of 70-80%, whereas British imports into India only faced duties of 2-4%. The result was that Indian exports to Great Britain decreased by 75%, whereas British exports to India increased by a factor of 50. Consequently, millions of artisans, craftsmen, spinners, weavers, potters, smelters, and smiths became landless agricultural laborers.

A third policy was to shift from income or production based taxes to property taxes. While this can be beneficial if it allows one to keep more of their surplus, it can be devastating to the poor, as no matter how low their income they have to pay the same tax. With the destruction of domestic markets the only way Indian landholders could acquire the money to pay their taxes was to export raw materials to Europe, but problems arose from there, because they could only sell to a single buyer that intermediated because agricultural producers, Calcutta, and Manchester. These monopsonies meant that it was the sole buyers, and not supply and demand, that determined the price that producers could get from their goods. Since power was always in favor of the monopsonies, most Indians could never make enough money to pay their taxes and debts and still live even a modicum above subsistence level. According to British reports in the 1890s, 80% of Indians were living on the margin of subsistence, 67% were undernourished, and in Bengal about 80% were undernourished. Contrast this with the observation of Tavienier in the seventeenth century in his book, "Travels in India"
"even in the smallest villages rice, flour, butter, milk, beans and other vegetables, sugar and sweetmeats can be procured in abundance."

I could also go into a little more detail. The paragraphs below are adapted from Mike Davis's Late Victorian Holocausts

In 1853, the Cotton Supply Association selected the Marathi province of Berar and the adjoining district of Nagpore to become places of specialized cotton monoculture. In Berar the Association dismantled the balutedari system through which local clans exercised managerial control over a complex network of social production including communal irrigation and cotton weaving. For 17 years the British reorganized Berar (which constituted 7,000 villages and 10.5 million acres of cultivable land) into the khatedari system, which was a variant of the ryotwari model that had been imposed on most of southern and western India. The government became the supreme landlord with peasant tenure strictly conditional upon punctual payment of revenue.

Diversity and mobility--the "characteristic features of precolonial Berar"--were replaced by coercive "standardization and sedentarization." Moneylenders and grain merchant became the collectors of taxes and the sole marketers of local cotton and the sole intermediaries controlling the transactions between the village world, Calcutta, and Manchester. Domestic manufacture was destroyed by punitive taxes on local woven goods to make way for British imports.

By 1867, Berar was sending as much cotton to Manchester as all of Egypt, but the producers of this cotton did not benefit at all. As one agent of the Cotton Association explained in 1869, "Speaking generally, the cultivator who produces and sells the cotton cannot in any way regulate the market price. For this he is dependent on the home market and many causes which combine to raise and lower the price in Liverpool."

The reason that the Association decided to monocrop Berar was to buffer against fluctuations in the supply of American cotton. As Charlesworth explains, "British Industry wanted Indian raw cotton as a sort of permanent twelfth man, always ready in the pavilion but only occasionally brought to the field of play. This role hardly produced the consistency of demand necessary to promote a more extensive commercial agriculture."

The Khatedars were sucked into a vortex of high taxes, chronic debt, and subsistence instability. The more wealthy khatedars were themselves able to become micro-exploiters, and by the 1870s holdings were fragmented into smaller and smaller parcels and worked by subtenants called bhagindars, who paid rackrents three or four times greater than those imposed on the Khatedars. By 1890 70% of the population was either bhagindars or landless laborers. In the 1890s, the overall population of Berar fell by 5% and life expectation at birth twice dipped into the 15 year range and 10 years in 1900.

In Deccan we see similar things happening. In an article called "The Commercialization of Agriculture in Colonial India: Production, Subsistence, and Reproduction in the 'Dry South' c. 1870-1930," David Washbrook writes commercial cultivation was "associated not with a broadening prosperity, but with a progressive crisis in agricultural production and social reproduction." Writing about Bellary, he notes that despite its heavy black soil it is one of the driest cultivated districts in India, and without irrigation, a family required 15-20 acres of average-quality land to produce its subsistence and pay taxes. By 1870s, most ryots farmed less than 7 acres of land, and only a few thousand elites could afford heavy metal ploughs required for deep ploughing. The others had to go deep in debt to acquire the necessary tools.

Debt and taxes and inadequate land holdings compelled small producers to substitute cotton for millet, selling cotton in order to buy more grain, even though cotton prices had declined by 50% relative to grain during the period. They did this because cotton was more responsive to labor intensity than millet, and they hoped to increase their harvest incrementally with massive amounts of unpaid family labor. But the more they produced the more cotton prices fell relative to grain, negating any advantages of extra labor.

Creditors were eager to oblige these farmers. The "magnates" of the sixties, who had dominated production during the years of the "cotton famine" in the 1860s, aggressively switched assets from cultivation to usury and cotton factoring. As Washbrook writes

In the Central Provinces inflexible revenue demands drained capital from the countryside and, as Davis writes, "put tenants at the mercy of a top stratum of malguzars who, no longer bound by any of the patrimonial obligations of the pre-British village system, ruthlessly combined the functions of moneylender and grain merchant. As smaller landowners defaulted, moreover, this elite acquired direct ownership of a vast swathe of the Narmada wheat belt." By 1889, more than 50% of the land had been transferred to moneylending castes.

Virtually none of the wealth generated by usury and rackrenting was reinvested in cattle, irrigation, or farm equipment. As D.E.U Baker notes in Colonialism in an Indian Hinterland: The Central Provinces, 1820-1920, "absentee landlords did not normally visit their villages, and were thus not in touch with their tenants, who were no more important to them than the man who rented their shops in the bazaar."

During the 1860s sir Richard Temple had aggressively pushed landowners into commercial production of cotton and wheat. There was a boom in wheat exports, but virtually all of the money from these exports went to moneylenders and big landlords who diverted their capital into usury and grain-trading. As a consequence of the wheat boom, speculative land prices rose dramatically, and in response the government increased the land taxes of the Central Provinces by 50% in 1887, with virtually all of that tax being passed onto producers through rent. As Narmada exports reached an all-time high in 1891-1892, British buyers switched to purchasing grain from the Argentine pampas (Argentine wheat exports increased from 4.1 million bushels in 1889 to 28 million in the early 1890s). For the heavily indebted producers in India this was catastrophic; between 1891 and 1896 the value of wheat exports in the Central Provinces fell from 16.6 million rupees to 4.3 million rupees. Coupled with the inevitable dry season that occurs every 12-15 years in India, the result was catastrophic famine.

Likewise, a famine occurred following the Indigo boom in Bihar, where the peasantry was forced into producing for the world market through the assamiwar system. As David Hardiman notes in "The Crisis of Lessar Patidars," "The Planters were hated throughout eastern India...They maintained small private armies of strong men, whom they would use to coerce the peasantry, forcing them to grow indigo." 220,000 acres where converted to indigo, representing a net loss of 150,000 acres of grain, which in north Bihard was the margin between survival and famine in a bad year.

Overall, without urban employment alternatives, with monopsonies and money lenders dominating the markets backed by colonial power, cultivators in India were caught between rising land values and therefore higher interest rates, and low crop prices. The creditor-debtor relationship meant that whatever surplus was created by the debtor went to the creditor, and the colonial government rigidly enforced debt laws. As Vasant Kaiwar notes, "The colonial state came to resemble a classic agrarian bureaucracy rather than a capitalist state."

But Kaiwar's characterization of the colonial state as resembling a "classic agrarian bureacracy rather than a capitalistic state" is misleading, because it implies that the core and the periphery as two separate systems rather than as two parts within the same system. The transformation of India into a land of debt peons producing cash crops for the European metropoles is standard fare for colonial empires. I've described this before in relation to the colony of Algeria.

First, when Europeans came in they grabbed all the land. After grabbing the land they took the forests. The seizure of public lands created large pools of excess labor, which in turn meant that the natives of Bone were vulnerable to fluctuations in the global market, in addition to having no market power. Eventually, Bône was transformed into an economy based on the extraction of mineral resources, specifically iron in this case, and its infrastructure was built for the export of these minerals to the metropole, in this case Paris. Because Bône was transformed into an extraction economy, it never developed advanced manufacturing industries such as those that were developing in the resource rich United States or the resource poor Germany at the same time.
What is notable about Bône is the racialized nature of the economy. Prochaska, in his book Making Algeria French: Colonialism in Bone, describes it as a dual economy, in which the “European economy can be likened by and large to a firm-centered capitalist economy, while the Algerian economy can be compared to a bazaar-oriented, precapitalist economy.” Prochaska provides ample data showing that high wage professions were dominated by Europeans; indeed, in 1883 100 percent of liberal professions—which include jobs such as Pharmacists, doctors, and architects—were done by Europeans. From the 1830s all the all into the twentieth century this dualism steadily became more pronounced; thus, instead of Europeans settlers bringing economic development to Bône, they “underdeveloped” the native part of the economy...

Angus Maddison also comments on how the British failed to promote industrial skills in India:

http://www.ggdc.net/maddison/articles/moghul_3.pdf

Again, to compare this to the Bone, this settler colony developed a patronage system where high ranking positions could only obtained through connections to a "big man," who of course was always European and only provided opportunities to other Europeans (there was a hierarchy of Europeans as well, but when push came to shove, Europeans always stuck together against Algerians and developed an identity separate from their metropoles).

Plain and simple, India's role in the Global Economic system was to ensure a stable supply of raw materials for the manufacturing industries in the European metropoles. The infrastructure built in India was purely done with extraction in mind and not local needs, as I have explained:

The British were concerned primarily with extracting resources; the irony is that the building of the railroads starting in the 1860s, which was supposed to bring progress to India, coincides precisely with the emergence of frequent famines. As W. Digby observed in 1901, "stated roughly, famines and scarcities have been four times as numerous, during the last thirty years of the 19th century as they were one hundred years ago, and four times as widespread."

In constructing this infrastructure for the purposes of extraction, they didn't pay attention to the unique ecological and hydraulic needs of India that were necessary to prevent erosion and malaria. They were also ignorant of the ENSO weather patterns that causes droughts ever 12-15 years. Thus, during years when there was plenty of water they didn't see the need to maintain local irrigation infrastructure, nor did they see the need to stockpile grains as a buffer against famine.

Elizabeth Whitcome, in Agrarian Conditions, notes that without proper underground drainage, the "capillary action of irrigation brought toxic alkali salts to the surface, leading to such extensive saline efflorescence that the superintendent of the Geological Survey warned in 1877 that once-fertile plains were on the verge of becoming a 'howling wilderness."'Within 15 years, about 5,000 square miles of farmland were blighted by salinity.

The Canals that the British did build blocked natural drainage and pooled water in swamps, an ideal breeding ground for malaria carrying mosquitos. Thus, the canal districts became notorious for their extraordinary incidences of malaria.

In contrast to the Mughals, who subsidized well construction, if ryots in British india tried to build wells at their own expense they were taxed 12 rupees per year.

The construction of the railroads and the push for ever increasing the cash cropping of wheat also was not done in a sustainable way. The construction of the railroads ravaged the forests of Satpuras for lumber. Greater wheat acreage absorbed pasture that was necessary for feeding cattle, the result being that cost of grass became so high that cattle became too costly for cultivators to maintain, which in turn resulted in a manure shortage, which increased soil exhaustion and reduced productivity.

Even when millions of Indians were starving in the 70s and 90s, India was a net exporter of food, as I also explained

during the 1876 to 1879 famine in India, when an estimated 10 million people starved to death, grain merchants exported over 700 million pounds of wheat to Europe in 1877-1878. But the grain exports was actually only a minor aspect of the famines. When reports would come in of a flood or drought (through the telegraph), speculators would begin hoarding grain in anticipation of rising prices, creating a self-fulfilling prophecy. Using the railroads, they would ship grain inventories from drought-stricken districts to central depots for hoarding. A contemporary, Buckingham, noted that

"The rise of prices was so extraordinary , and the available supply, as compared with well known requirements, so scanty that merchants and dealers, hopeful of enormous future gains, appeared determined to hold their stocks for some indefinite time and not to part with the article which was becoming of such unwonted value. It was apparent to the government that facilities for moving grain by the rail were rapidly rising prices everywhere, and that the activity of apparent importation and railway transit, did not indicate any addition to the food stocks of the presidency--retail trade up-country was almost at a standstill. Either prices were asked which were beyond the means of the multitude to pay, or shops remained entirely closed."

In the previous three years India had an above average harvest. Now India, like the rest of the world outside of Europe, is significantly affected by the ENSO weather cycle (El Nino and La Nina). Droughts and floods were wont to happen throughout the history of India. So, to hedge against droughts and floods, the Indians developed complex networks of patrimonial obligations. In above average years of harvest they would stockpile grains in anticipation of drought, sharing food with other villages, but in the three years preceding the droughts of the seventies all the surplus grain was exported to Europe...

There was slightly lower overall taxation under the British Raj than under the Mughals, but the taxes under the Raj were not reinvested in the economy. Whereas the Mughal elites spending spurred job creation in manufacturing, construction, and artisanship (i.e. they spent all their money in India), most of the taxes the Indians paid were drained out of the country. Vasant Kaiwar estimated than in the typical village in nineteenth century Bombay Deccadn, of every 19,000 rupees annually in taxes only 2,000 rupees were returned in expenditure. Annual revenue collection began with the impounding of grain in village stockyards. To eat from their own harvest, the ryots had to borrow to pay off their taxes. Typically moneylenders were able to buy crop at half market price and lend money to the ryots at 38% interest. If the peasant could not promptly pay off the principle, interest rates ballooned. As one former district officer recalled, "I remember one case which came before me in which a cultivator was sued for 900 rupees, principle and interest, the original debt being only 10 rupees worth of grain, borrowed a few years previously." As Baker notes, "creditors gave out loans in order to be able to secure dependents and it would have been foolish to make loans which, by improving the productivity of the debtor's land, helped him to become more independent."

Sources:
Late Victorian Holocausts: El Nino Famines and the Making of the Third World

Making Algeria French: Colonialism in Bone, 1870-1920


British History in Depth: The British Presence in India in the Eighteenth Century

The Economic and Social Impact of Colonial Rule in India

British Raj in India: Myths and Realities

Food Security: The Challenges of Agricultural Management in India

The British Empire, Ecology, and Famines in Late Nineteenth Century India