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In this article we will discuss about the foreign capital in India:- 1. History of Foreign Capital 2. True Nature of Foreign Capital 3. Purpose-Wise Composition 4. Role.
History of Foreign Capital:
Before 1857:
Starting roughly with the conquest of Bengal in 1757 by the East India company, there was a continuous outflow of resources from India to Britain for almost a century. The preoccupation of British merchants, whom Adam Smith called ‘Plunderers, was to secure a flow of goods and treasure from India to Britain without any equivalent return. In this entire period, there was almost no British capital investment in India.
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A witness told the British Parliamentary committee on Indian Affairs, that “capital is, I believe, never taken from England to India. It is made there and remitted home. ” The fact is that the East India company never seriously considered India as an investment outlet for British capital.
Rather, India was valued for the “great annual addition it made to the wealth and capital of England.” Digby estimated that between 1757 and 1815, something like £500-1000 million worth of treasury was taken by the British from India. The magnitude of this sum can be appreciated if it is realised that, at the turn of the last century in 1905-06, the aggregate capital invested in India amounted to only £ 348.7 million.
Whether this drain was mainly in form of bullion or goods, or whether it went directly to England or indirectly via America or Europe is insignificant. The ultimate effect was the same.
It “Robbed India of the capital that could have promoted and strengthened her industry but which provided the chief base for the rapid expansion of credit in England which made possible the epoch-making innovations of the English Industrial Revolution.”
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This colossal drain delivered what left its mark over the entire subsequent period. The low propensity to save, the tendency to waste savings in conspicous consumption or to accumulate idle hoards, perhaps all goes back to the period in which there was no sense in being thrifty and in making productive investments.
The absence of adventurous entrepreneurs, the tendency to look to the govt. also has something to do with the experience of a period in which risk-taking involved losses without compensation for the risk-taker and profits only for the East India company and its agents.
There is little doubt that the “bleeding of India” destroyed India’s economic capacity, retarded her advance towards industrialisation but played a significant role in the establishment of Britain’s economic supremacy in the world in the subsequent period.
1858-1948:
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By the middle of the 19th century, England had become, the workshop of the world’, the great supplier of manufactured goods to all other countries, which, in turn, provided her with the necessary raw-materials. It was now that India became particularly important both as a source of raw-materials and a market for British goods as well as a sphere for the safe and profitable investment of British surplus capital.
Profitable investment opportunities in England had narrowed after the heyday of the Industrial Revolution had passed. At control such as Latin America had also become risky and unprofitable. Accordingly, pressures built up demanding safe investment outlets in India and the govt. obliged by guaranteeing the necessary return. As a result, the years 1853-55 saw the beginning of British capital investment in India.
Unfortunately, no reliable estimates of the total amount of foreign capital invested in India during the 19th Century are available. However, a general idea may be had from various estimates made from time to time.
Among the earliest estimates are those of Edgar Crammond who put the total foreign investments in India at Rs. 347 crores in 1897 and Rs. 645 crores in 1910. Sir George Paish estimated it at Rs. 547-548 crores in 1910 while H.F. Howard placed them at Rs. 675 crores for the same year. Towards the close of the 1920’s, the amount of foreign capital invested in India became the subject of a controversy.
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Findly Shirras put the figure around £ 481-500 million whereas G.D. Birla, the noted industrialist, held it at £ 1000 million in 1929. Prof. B.R. Shenoy put the estimate at £ 830 million in 1939.
In June 1948, according to Reserve bank Survey, India’s total foreign debt was about Rs. 5000 million. Of this, Rs. 2876 million was foreign investment in the true sense of the word, the balance being made up of short term bank or commercial liabilities.
True Nature of Foreign Capital:
To describe the foreign capital invested in India as the export of British capital would be what R. Palme Dutt describes as “too bitter a parody of the reality.”
Over the whole period before the First world war, except the seven years, 1956-62, when imports exceeded exports, the export of capital from England to India was more than counter-balanced many times over by the opposite flow of ‘Tribute’ from India to England even while the capital was being invested.
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Thus, the British capital invested in India was, in reality, first raised in India. The original British investment in India was very small. The new Mercantile, banking and plantation enterprises which arose in the first half of the 19th Century, were mostly financed by British officials out of their savings.
Their salaries were large enough to permit substantial saving even after allowing in aristocratic standard of living. These savings were available to the British enterprise in India and it is small wonder that most European industrialists did not find capital to be scarce. To the same were added the ploughed-back profits of foreign companies.
That there was little real transfer to resources from Britain to India for investment is further confirmed by J. M. Keynes who found that between 1899-1909, the amount of new capital invested in India £ 4-5 million and the interest payable on former private investments was almost equal.
This is also consistent with Y.S. Pandit’s indirect estimates of capital transfers between India and Great Britain and also with Imlah’s finding that over the period, 1796-1913, the income from foreign investments by British citizens “not only filled in whatever gaps were created by deficits on trade and services, but it also supplied most of the surpluses which were available for new investment abroad.”
Purpose-Wise Composition of Foreign Capital:
Most estimates of foreign investments in India don’t give their purpose-wise break-up. However, Sir George Paish calculated that of the total British investments in 1910, as much as 97% was devoted to purposes of govt., transport, Plantations and finance, that is, “to purposes auxiliary to the commercial penetration of India, its exploitation as a source of raw-material and markets for British goods and in no way connected with industrial development.”
Only remaining 3% was invested in mines and industries and such other fields as could help in the economic development of the country.
There was a certain relaxation in this pattern during the twenties and thirties of the 20th century when investment in manufacturing amounted to 28%, the remaining 72% being still devoted to such sectors as trading, financial, Plantations and transport.
Although the total volume of foreign capital invested in modern industries was paltry by any standard, yet it dominated the Indian industrial scene and overwhelmed India capital.
According to Dr. Gian Chand, out of about 761 important firms in the country, nearly 56% were controlled by foreigners and they covered a wide variety of industries including some of the more important ones such as shipping, exports, foreign trade, banking, oil, coal, coffee, jute, tea, copper and heavy chemicals.
British interests controlled 54%, of coal, 48% of engineering, 80% of jute, 30% of chemicals, 40% of sugar and 30% of electric supply. Only in cotton textiles did the Indians have a larger share from the beginning. But even here, about 30% of the capital was foreign, the management mostly foreign and the technical cadre had perforce to be mostly imported.
Role of Foreign Capital:
Almost half of the aggregate foreign investment, in George Paish’s estimate, was under “Government and Municipal”. These investments carrying govt. guaranteed return, did not represent development expenditure in the modern sense of the term.
What is more, some of the proceeds of these loans were directly remitted back to Britain as “Home Charges”. The only productive investment reserved for the public sector was in railways and irrigation.
Railway construction in India, as in other colonies, was a major sphere of British investment. Around 77% of the strictly economic investments in Paish’s table went into the railway thereby providing the economic overheads.
A pertinent question arises: The enormous investment in railways, made within a relatively short period of time, was in the nature of a ‘Big Push’ which should have led to wide spread external economy effects.
Why did this not happen in India? Why did railways not become, as foreseen by Marx, “the forerunners of modern industry?” There are several reasons.
The first is that the 1918, the Indian Industrial commission found the freight structure of the Indian railways favourable for moving raw-materials to ports.
Secondly, the branching out of complementary investments in coal, iron and steel, machine-building, which Marx anticipated, was not allowed to proceed or was very slow. Railways together with jute did induce British capital to promote a slow development of coal mining industry. But that was about all.
No effort was made towards manufacture of locomotives and other basic railway equipment in the India itself; rather, the cheap sea transport facilitated its easy import from England. This explains why railways failed to give rise to a flood of “Satellite Innovations” that could develop into a general “take off” as happened in other countries.
In fact, as Buchanan points out, railway development was accompanied by such a combination of conditions free trade and competition with countries already far-advanced in industry-as to develop European rather than Indian industry.
Railway construction gave British manufactured goods access to the remote and under-developed parts of the country where they uprooted traditional crafts but encouraged the production of raw materials for export. Various parts of India became single-crop areas, the Punjab specialised in wheat, Bengal in Jute, Maharashtra in Cotton, Assam in Tea and Madras in groundnuts.
Some foreign capital was invested in irrigation also. These works, although productive in the strict economic sense, only hastened India’s conversion into an agrarian and raw-material appendage of England and facilitated the profitable investment of British capital. Besides, they secured substantial revenue. Works in the Punjab yielded a profit up to 10.5% although the average return for the country, as a whole, was 7.1%.
Apart from the railways and irrigation projects, foreign investments went into raw-material production for export, tea plantations and later jute. There is evidence to suggest that the govt. gave encouragement to British enterprise in these lines of activity.
The export bias in foreign investment probably also had a noticeable effect on guiding the How of indigenous policy of “guided underdevelopment” foreign capital established a special ‘foreign trade-cum-investment pattern for purposes of feeding Britain and other industrialising countries with cheap raw-materials and food.
The multiplier effects, in terms of income, employment, capital, technical knowledge and growth of external economies of these investments were largely exported back to the developed countries. What is more, by dampening the growth of manufacturing industry producing for the home market, foreign capital, assisted by colonial administration, burdened India with wrong production patterns.
Much is made of the advantage India gained by the creation of ‘additional employment for its vast population’. That some employment was created cannot be doubted but firstly, this was very meagre and, secondly, a lion’s share of it went to the foreigners who monopolized nearly all the high salaried supervisory posts in the construction as well as the operation of the foreign enterprises.
Of the officers drawing Rs. 800/- a month and above, only 4% were Indian in 1887 and 10% in 1913. This fact not only deprived the Indians of their legitimate share of additional employment opportunities but also reduced them to mere “drawers of water and hewers of wood.”
Some have emphasised the “innovative and know-how” aspect of foreign capital. For example, the Fiscal Commission (1921) declared that “by admitting foreign capital freely, India admitted the most up to date methods and the newest ideas.” That British enterprise had an initial advantage is, no doubt, true. It was after all in touch with the world’s pioneer in industrialisation.
However, it is equally true that foreign enterprise was most jealous of these advantages. In order to maintain these advantages, foreign, companies created barriers to the entry of Indians into those fields of knowledge and enterprise which were their monopoly.
Besides, as Bagchi has explained, “the low proportion of industrial investment to the National Income and the small share of the capital goods industry in the modern industrial sector told against such innovations”. That is why there was no evidence of “technical dynamism” brought in the wake of foreign investments.
The foreign controlled sector in India did not generate even a lagged development impact by making a share of its profits available for investment outside it. Thanks chiefly to the foreign investor’s bias in favour of investment in branches of foreign companies; such a leakage of profits was firmly plugged.
The fact is that foreign capital was basically antinational. In other countries, it at least represented an addition to the scarce internal capital resources. In the case of India, instead of adding anything to the resources of the country, foreign capital drained the country of its own wealth as well.
Foreign enterprise sent out of India most of its profits and not merely interest on capital. And these profits were quite substantial.
In early twenties of the present century, it was estimated that, apart from the Home charges, another Rs. 1699 millions flowed out of the country every year by way of profits, Commissions etc. Some ten years later, Sir Visvesvaraya estimated that the British capitalists earned Rs. 1610 millions annually.
Instead of helping and encouraging Indian capital, foreign capital only replaced and suppressed it. The concentration of various enterprises in the hands of the foreigners enabled them to impede the emergence of Indian companies and to strangle those which appeared.
The coal industry is a case in point where European collieries undersold their Indian counterparts so that by January 31, 1933, 243 of the 353 mines in Bengal and Orissa belonging to Indians were closed.
The British banks, persuing a policy of discrimination, refused credit to the indigenous banks, hampered their access to the clearing house; prevented them from opening more branches; would not allow their own clients to deposit money in banks belonging to Indian capital; discouraged the growth of Indian staff, thereby making it difficult for Indian banks to operate.
Dr. Pattabhi Sitaramayya, once the President of the Indian National Congress, cites a typical example:
“When I started the Andhra Bank in 1923, the local agent of the Imperial, Bank (British controlled) would not allow the local merchants to take shares, much less to become directors or Secretary and least of all to have transaction with the new bank —we had to fight our way every step and every inch.”
The British monopolies, on the other hand, used their banks to consolidate their position in trade, insurance and industry. Certain grave consequences followed from this discrimination and competition. In the first place, Indian capital quickly reached a high degree of concentration because only those, who possessed large financial resources at the start, could exist when faced with competition from foreign capital.
In the second place, this led to immense expansion of lending and commercial capital in India at the cost of industrial capital formation for few Indian capitalists could venture to enter the industrial field in the face of foreign competition. In the third place, the managing agencies, which big British capital used to exploit India, were also used by Indian big capital as a method of lighting foreign capital.
They could hardly avoid doing so since, for a long time, an isolated Indian enterprise could not get banking support. The big banks were controlled by foreign capital which wanted to discourage Indian enterprise, or by Indian big capital which did not treat possible competitors kindly.
Foreign exploitation of the mineral resources of the country was the most serious disadvantage as it meant the permanent loss of national resources which, once exhausted, could never be replaced.
Sir Thomas Holland found that the whole output of high grade manganese ore for the period 1892-1911 about 4.5 million tons-was exported, thus contributing to the economic development of other countries while India received, as compensation, only a partly £ 56,000.
So keenly was the loss of mineral wealth felt that many in the country like Madhulkar and Thackersey wanted the mineral wealth of the country to be buried and underdeveloped than that it should be carried away by the foreigners.
Economic evils of the use of foreign capital were matched only by the serious political consequences. Foreign capital gave birth to powerful vested interests which were opposed to India’s political freedom. Lord Dufferin’s Minute is most illuminating in this regard.
He wrote:
“……. however we may admit that India should be primarily governed in the interests of the Indian people, it would be criminal to ignore the responsibility of the govt. towards those who have sunk large sums of money in the development of Indian resources on the faith of official guarantees …. the same considerations apply in almost equal force to that further vast amount of capital employed by private foreign enterprise in manufacturing, the tea planting, and in the indigo, jute and similar industries on the assumption that English rule and English justice will remain dominant in India.”
No wonder, they tried their best to deny or at least delay as much as possible, the grant of independence to India which would have meant a more rapid emergence of Indian enterprise but an end to the monopoly gains of foreign enterprise.
In spite of all the advantages which India gained in the world market by her tea and jute industries, from her growing paper, sugar and cement factories, her railways and irrigation works, there were British manufacturers at both the ends and in between lay India which they exploited.
Tea and jute magnates built up industrial empires with Indian labour and with a capital much of which was made in India. As regards India’s economic development, this may be seen from the fact that in 1946, a mere 2% of the country’s working population was engaged as factory labour.
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