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Myth of Laissez-faire in Colonial India

groups which concerned themselves with the economic, particularly the financial Myth of Laissez-faire policies of the government of India


Myth of Laissez-fairein Colonial India

The Financial Foundations of the British Raj (Ideas and Interests in the Reconstruction of Indian Public Finance 1858-1872) (revised edition)

by Sabyasachi Bhattacharya; Orient Longman, Hyderabad, India, 2005; pp 384, Rs 695.


t a convivial occasion hosted by the late Sachin Chaudhuri, founder editor of the Economic Weekly, Rammanohar Lohia, the legendary, nimble-witted, Indian socialist, and a well-credentialed economist, confessed how he was completely trumped by the clarion question of a visiting Italian economist, Travagliani: “Why are you Indians so critical of laissezfaire when you have never even tried it”? India, after all, “was the only part of the British empire to which laissez-faire never applied” [Hobsbawm 1969:148]. The clinching evidence for this is now provided in the revised edition of this beautifully researched book, first published in 1971, which carries an expanded introduction that reviews the state of the art and a new edited imprint of the original text. Its primary focus is upon ideas and interests, Indian and British, and the contestations, which went into the making of the financial and economic policies of the raj during the intensely formative period following the transfer of the governance of India from the East India Company to the British crown (1858). The period 1858-72 witnessed revolutionary innovations in financial organisation and policy commencing with the appointment of the first finance minister of India (then called the finance member) James Wilson, founder editor of the The Economist. It saw, among other things, the introduction of the budget system, the income tax and paper currency.

The overarching theme of the book is: “Though the laissez-faire principle was often invoked in defence of a policy of studied inaction in certain policy areas, it did not serve as a guide to practical policy. The policy actually pursued...may be more correctly described as discriminatory interventionism than laissez-faire” (p 40) (emphasis provided). Its chosen instruments were tax and expenditure policies to subserve selected interests and achieve specific objectives. “Laissez-faire was modified when the industrial and mercantile interests of England so demanded, and the Indian government, pursuing a policy that was essentially pragmatic, often deviated from laissez-faire in important segments of public policy” (p 101).

The distinctive feature of the book is the perceptive analysis of the complex interplay of ideas, interests, and policies. The ideas, based on a thick underlay of Benthamite utilitarianism, were an amalgam of “general notions derived from the philosophy of economic liberalism and the financial principles associated with the name of Gladstone” and “what one may call a special theory for India”, which “derived from the special needs the government had to meet in the Indian empire” (pp 40-41). These were: first, the need for security; second, the encouragement of capital investment through state guarantees, or some form of subsidy, as in the case of construction of railways and irrigation works, aptly called “private enterprise at public risk”, third, to “aid the merchant indirectly, rather than play an entrepreneurial role” (p 43); and finally, “to help India perform her special role as the supplier of raw materials” (p 44).

Two Kinds of Pressure Groups

Ideas, however, do not operate in a vacuum. They involve complex interactions with both the bureaucracy and groups who have a real community of interests. “This study is confined to those groups which concerned themselves with the economic, particularly the financial policies of the government of India” (p 4). In attempting to formulate a workable taxonomy of interest groups, the author, rather surprisingly, says: “We have not found in relevant literature a suitable typological scheme” (p 6). This overlooks, among others, Mancur Olson’s classic monograph Public Goods and the Theory of Groups (1965). If for any reason the author found Olson’s framework unsuitable, surely this aspect merited discussion. Nonetheless, his typology has a useful dichotomy of two broad groups. The first type comprises the “highly organised groups, each more or less homogeneous in terms of economic interests and pursuing objectives specific to those interests” (p 6) as exemplified by the chambers of commerce (Calcutta, Bombay, Madras and Karachi), the British Indian Association (Calcutta), the Calcutta Trades Association and the Indigo Planters, which was dominated by Europeans. These groups were interested chiefly in the government’s policy concerning tariffs, income tax, inland duties, and land regulations affecting plantation enterprise. The second type of pressure group, although more heterogeneous, was nevertheless united in formal associations and usually offered general policy prescriptions because their heterogeneity precluded special pleading on behalf of a single economic group. These were broad-based coalitions like the East India Association, the India Reform Society and the Bombay Association.

The techniques used by pressure groups were necessarily limited in an authoritarian system. Typically, they involved the petitioning or memorialising the relevant organs of government, but proximity to the apex of the pyramid, India Office and Parliament, gave the pressure groups in England an edge over those in India. Another method was through deputations to the secretary of state or the top members of the government of India. The third method was propaganda through publicity organs like the periodical Cotton Supply Reporter or newspapers such as theHindoo Patriot run by the British Indian Association, and the Englishman and the Pioneer representing the European commercial community in India. Similarly,Rast Goftar,

Economic and Political Weekly September 2, 2006

the leading Parsi journal of Bombay, was used for propaganda by Dadabhai Naoroji and his associates in the East India Association. Lobbying in Parliament was an art, which Indians were gradually beginning to acquire. Not all lobbies were actuated by direct self-interest. There were critics of British policies in India like Henry Fawcett, MP for Brighton (1865 and 1868) and professor of political economy at Cambridge (1863-84), who became notorious for his pro-Indian proclivities. Finally, another channel between a pressure group and the government of India was through a group’s representation in the Legislative Council and official committees. However, “foreign rule placed the indigenous pressure groups under special disabilities. Not the least of these was the social distance between the two races. This gave British interest groups an immense advantage over Indian ones” (p 24). All these varied constitutional techniques of lobbying were beyond the reach of the common people, the “silent many” as the viceroy Mayo called them, whose grievances and demands found vent in massive violent upsurges like the Indigo rebellion of Bengal or the Deccan riots. But even the raj did not treat agrarian protest as a law and order problem. Is there a moral for contemporary India?

India as a Milch Cow

The post-1857 period, under the stewardship of finance members Wilson, Laing and Trevelyan, witnessed notable institutional innovations, the most important of which was the budget system that ensured a complete review of the income and expenditure of the coming year and a full scrutiny of the past year. It also ensured that expenditure would not exceed specific sanctions on each head of charge. Concomitantly, the new system of audit and accounts modernised the financial system inherited from the East India Company. Mayo’s landmark scheme of financial devolution was implemented in 1871-72. However, the Government of India Act 1858 concentrated full financial control in the hands of the secretary of state in council. The improvements in organisational efficiency were not reflected in the overall budgetary position, which showed deficits in all financial years except for 1862-64, 1865-66 and 1870-72. More importantly, as Walter Bagehot asserted, 19th century India remained very much a member of “a family of arrested civilisations”. Mayo too wrote scathingly of “European officials who look on India as a milch cow for themselves”; of English merchants, “who did not pretend to have any other object than the rapid acquirement of as much money as will enable them to live at home in idleness”; and of the native of substance whose only idea of taxation is to ravish the poor” (p 288). In fact, there was an uncanny commonality of interest between the British mercantile community in India and propertied Indians, who were both united in their opposition to increases in direct taxation, while very supportive of indirect taxes like the salt tax.

The author rightly cites the Indian opium question as a good instance of “how often questions of ethics and economics became inseparable in public discussions in this period” (p 90). There was no doubt a considerable body of opinion in England as well as India that was against the opium traffic on moral and other grounds. The government monopoly in opium, as Mayo admitted, was “one of the deepest blots on our escutcheon” (p 294). Ironically, Indian public opinion, with rare exceptions, was notably silent on the moral aspect of the opium question, as rightly pointed out by Dadabhai Naoroji, who also noted that many Indian newspapers took the stand that the opium revenue could not be given up for fiscal reasons (p 292). John Bull’s self-interest always morphed into his economics, and his economics soon became his ethics, but were contemporary Indians any less complicit in this sordid commerce?

Limits to Role of Ideas

This book, apart from its intrinsic contribution, has an important corollary. It also exposes the curiously truncated character of the hackneyed and sufficiently vulgarised quotation from Keynes:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood... Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist... The power of vested interests is vastly exaggerated, compared with the gradual encroachment of ideas (1936:383).

The economic history of India (18581872) conclusively demonstrates that ideas per se have little influence on events and policies. Rather it is the interplay of ideas, institutions, personalities and pressure groups.

However, this illuminating monograph raises a tantalising question. It does not explain whether the doctrines and policies of the East India Company had any carryover influence on the successor government considering that Sir James Steuart (1713-80), the Scottish political economist, author of the pioneering classic, An Inquiry into the Principles of Political Economy (1767), was an adviser to the East India Company. He has been rightly called “the first Economic Adviser to the Government of India” (Sen) who presented a case for detailed state intervention into every aspect of economic life. “It would not be any great exaggeration to say that A P Lerner’s chapter on functional finance [in his Economics of Control, 1944] seems almost a paraphrase of Steuart” [Sen 1957:122]. Is it conceivable that the strong institutional memory of the East India Company that passed through its civil servants trained at the Haileybury College did not also transmit the doctrines of Steuart to the successor government of India, which surely did not innovate on a ‘tabula rasa’?

Overall, Bhattacharya’s book is a distinctive work of historical scholarship, not least because of its sternly non-ideological stance, a shining contrast to the dogmatism of much of this genre in India. The robust scholarly apparatus too is draped in lapidary prose.




Hobsbawm, E J (1969): Industry and Empire,

Pelican Books, Harmondsworth. Keynes, John Maynard (1936) [1973]:The General

Theory of Employment, Interest and Money,

Macmillan, London. Olson, Mancur (1965): The Logic of Collective

Action (Public Goods and the Theory of

Groups),Harvard University Press, Cambridge,


Sen, S R (1957): The Economics of Sir James Steuart, Bell, London.

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