TEORIA DE LA ATENCIÓN BUROCRATICA

India’s industrial capital was very modest at the beginning of the twentieth century, when compared with rural capital and merchant capital. In 1913, total rural indebtedness amounted to 5 billion rupees and the total value of agricultural land was rated at 40 billion rupees. At the same time, only 300 million rupees were invested in industrial enterprises. There were altogether about 2,700 joint-stock companies with a total capital of 760 million rupees; 500 of these 2,700 firms were industrial enterprises. The average investment in the non-industrial firms was 0.2 million rupees per unit and in the industrial firms 0.6 million rupees per unit. This average investment per unit is not just a statistical figure; it corresponds quite accurately to the normal investment required for a medium-scale cotton textile mill. Large investments of a single firm, like that of the Tata steel mill, which required 23 million rupees, were very unusual indeed. It is even more surprising that the Tatas could raise this enormous amount within three weeks in 1907. There were altogether 8,000 shareholders who contributed to this initial capital of the Tata Iron

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61 and Steel Company (TISCO). Many of them were capitalists from Bombay, but there were also 15 Maharajas among them, who together contributed 3 million rupees and thus matched the contribution of the four members of the Tata family, who were the main sponsors of this venture.

The Tatas had selected an extremely auspicious moment for raising this large amount of capital. The year 1907 was one of exceptional economic growth; at the same time the Swadeshi agitation, which arose after the partition of Bengal in 1905, had fired the imagination of all patriotic Indians, many of whom actively boycotted imported British goods. The Tatas appealed to this patriotism and provided an opportunity for rich men to show their patriotism without running the risk of indulging in anti-British demonstrations. There were such patriots also among the Maharajas and they had to be very cautious in showing their patriotic feelings, as they were utterly dependent on the British Indian government, which could easily remove them under some pretext.

Swadeshi, the indigenous production of all essential commodities, was a powerful watchword at that time. Many small industrial firms were also founded so as to fulfil this programme, but most of them went bankrupt, as they lacked the necessary technical knowledge. The Tatas, however, had a proven track record and had also a good deal of capital of their own; thus they were able to raise the huge amount required for their steel project so easily. This example shows that under favourable conditions large amounts of industrial capital could be raised in India, but the conditions were almost always unfavourable. The small entrepreneur who wished to start a new venture could not hope to raise capital as the Tatas did.

He depended on a suitable institutional framework that would provide industrial credit. In Japan the finance minister, Prince Matsukata, had established such a framework in the late nineteenth century. His programme culminated in the establishment of the Industrial Bank of Japan in 1900. In addition to a differentiated banking sytem, there was also a system of deposit bureaux of the finance ministry, which helped to gather small savings and to channel them into the mainstream of the national economy of Japan.

By 1914 there were 12 million depositors who had entrusted their savings to the government in this way. In India, however, anybody who had any savings at all deposited them rather on his wife’s neck in the shape of a golden necklace. Only in severe distress would he think of asking her to part with this ornament to save the family from starvation or to hold on to the land when the moneylender foreclosed

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the mortgage. Thus the savings of small people were never available for large-scale investment.

The scarcity of industrial capital in India was, however, not only due to the lack of an adequate financial infrastructure; it was also related to an even more fundamental problem: the enormous appreciation of the value of land. Between 1860 and 1913, the price of land rose by about 4 per cent per year, while other prices increased only at a rate of about 1.5 per cent. This unjustified appreciation of the value of land led to the strange situation that this value, which made up a quarter of national wealth in 1860, amounted to one-half of it in 1913. This pernicious type of appreciation, which was in contrast to the experience of all industrial countries, was a much more serious obstacle for the accumulation of industrial capital than the hoarding of precious metals, which is usually mentioned by those who try to explain India’s retarded industrialisation. While this appreciation prevailed, it was impossible to channel rural capital into industrial investment.

The appreciation itself indicated that there was plenty of money in the countryside, but it was chasing around for land and could not be syphoned off. The Japanese combination of land mortgage banks, deposit bureaux and an industrial credit bank could have helped to attract some rural money and to convert it into industrial capital.

Such instruments were not available in India under colonial rule, however. The British Indian administration was only interested in collecting the land revenue and this task was facilitated by rural moneylending; no further innovations were required for this purpose. The primacy of a colonial policy of taxation and budgeting with the main aim of meeting the Home Charges stifled India’s financial development, and it also contributed to that disproportionate appreciation of the value of land, which was not at all related to any increase in its productivity.

The managing agencies played a special role within this hidebound colonial system. They offered a package deal for everything that was in short supply in India—industrial capital, technical knowledge, modern management, international commercial intelligence, etc. Initially, a managing agent was just an executive who helped an entrepreneur to establish and to run a plantation, a coal mine or a factory. Such an entrepreneur was often not familiar with local conditions and also did not want to hire managers on his own, but gladly turned to an already established team with a proven record of managerial skills. Such managing agencies were compensated by getting 10 per cent of total turnover

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63 as a commission. This provided them with an incentive to do their best for the enterprise. Soon these agencies were managing many different firms simultaneously.

When the development of this system of management reached a certain stage, there was a reversal of the roles of managing agent and entrepreneur. Success, experience and creditworthiness enabled the managing agencies to float new companies themselves. Often these companies consisted only of a letter-head, but they did have shareholders, who were totally at the mercy of the managing agency.

The agency itself would retain only a small amount of the shares of such a company under its management, as it controlled it anyhow.

Under such conditions, the managing agencies were tempted to play financial games with the shares of such letter-head companies. The market was tight and the investors gullible; thus some window-dressing and a high dividend could help to sell shares at a profit. A managing agent could shift profit and loss from one company under his control to another and thus inflate the balance sheet of the one whose shares he wanted to sell. Once the deal was concluded, he could repeat the performance with another company under his control. Such financial wizardry was much more profitable than the 10 per cent commission with which the managing agents had to be satisfied in the initial stages of their business. Now they took the commission and added to it the profit they could make by acting as unofficial investment bankers and brokers. In the absence of genuine investment banking, they had a field day in conducting this type of business.

This strategy, which had been adopted to some extent already by Dwarkanath Tagore, proved to be so attractive that it did not remain restricted to Calcutta, but was also copied by the Bombay textile magnates. The dangers inherent in this game were that the managing agents made a speculative virtue out of the necessity imposed upon them by the scarcity of industrial capital in India. Moreover, managing agents tended to stick to ‘business as usual’ rather than taking risks in promoting technological innovation. They used their brains for designing financial transactions rather than for planning industrial progress. The large British managing agencies in Calcutta became veritable giants in the field of export-oriented industries, and through the shipping companies, which usually also belonged to their industrial and trading empires, they even controlled the lines of maritime transport. They had branch offices in London and in Asian ports and had all the commercial intelligence of the world at their fingertips. They used this, however, for restrictive practices in order

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to dovetail supply and demand, rather than for the exploration of new avenues of economic growth. Independent companies that did not belong to one of these great managing-agency empires could not survive and had to come to terms with them. This was shown by the example of the old Bengal Coal Company, which was one of the largest coal producers in India and sold its coal in the free market. In 1908, it surrendered its independence under the pressure of its own shareholders and entrusted its management to the agency of Andrew Yule, who controlled one of the largest trading empires and saw to it that from now on the Bengal Coal Company would neatly fit into the pattern of restrictive market manipulation.

Rising land prices without any increase in agricultural productivity and restrictive market manipulation with very limited industrial investment by the large managing agencies—these are the two main features of Indian underdevelopment that emerged in the nineteenth century. Both are symptoms of the same disease:

financial paralysis under colonial rule. Capital, the most mobile factor of production, got stuck to land, the immobile factor of production. The rapid appreciation of the value of land meant that the land itself, rather than any improvement in its productivity, which would also have given employment to agricultural labour, attracted almost all the available capital. Since there was hardly any capital investment that generated income in terms of wages, there was not much demand for industrial consumer goods. In this way industry was starved of capital and demand, and fell into the clutches of managing agents who indulged in restrictive practices and financial speculation in order to make the most of a situation that they accepted and that they did not try to change. This whole pattern had congealed in the nineteenth century and even major shocks of different kinds such as the First World War, the Great Depression and the Second World War could not change it. These shocks affected the world market and the colonial system much more than the Indian economy, which continued to suffer from the chronic disease of colonial paralysis. Only after India attained political independence could some progress be made in overcoming this paralysis, but the colonial heritage remained a burden for a very long time.

The Indian market, which developed in the course of the nineteenth century, was a fragmented one. Regional isolation, which was due to high costs of transport, was overcome by the expansion of infrastructure such as the railway network. But at the same time the pressure of rent and revenue, of rural indebtedness and

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65 population increase had influenced the structure of the demand for different kinds of commodities. There was a small top stratum of salaried employees, traders and moneylenders who had benefited from colonial rule. They could afford to buy a variety of commodities beyond the bare necessities of life, but they bought imported goods to a large extent. The poor masses had not much buying power; at the most they would be able to buy a limited quantity of coarse grey cotton cloth. The export of agricultural produce was stepped up under colonial rule, but there was little scope for indigenous processing of such export commodities.

Industrialisation was in this way restricted to a few lines of production, which remained isolated from each other and did not have linkage effects. The formation of industrial capital was very limited under such conditions, and the expansion of the market was static and not dynamic. Even major events, which should have led to dynamic change, did not make a lasting impact. The First World War was such an event; it had important economic consequences, but it did not change the course of India’s fate to any considerable extent—except perhaps for its long-term effects, as it was the beginning of the end of colonial rule.

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