Vol. 6 · pages 86–90

71THE IMPERIAL SYSTEM in their own name. In like manner the services they administered became a charge of the Government of India, which distributed among the various provinces sums from the consolidated fund for the maintenance of the services. It was by law provided that without the previous sanction of the Government of India the provinces were not to spend the fund allowed to them in creating any new office or granting any salary, gratuity, or allowance. 1 The public debt was no longer a charge upon the revenues of any particular Presidency alone, nor did there remain any question of primary or secondary liability as between the revenues of the other Presidencies. All the provincial debts became the debts of the Government of India and were charged to the revenues of India as a whole. In short, the financial system which was roughly analogous to the system of separation of sources and contributions from the yield was changed into a system of aggregation of sources and distribution of the yield; for, as observed in a Government Resolution by virtue of the Act of 1833, “British India, though for the sake of convenience subdivided into Presidencies under separate locally controlled governments, (became) in reality one sole grand Power in dependence on Great Britain, having undivided interests, a single exchequer, and controlled in all essential and general principles by one Government—the Governor- General in Council......The entire resources of India (were) applicable to one purpose only, the discharge of its engagements and those connected with its management in England, and to whatever section of British India funds (were) wanting, funds (were) supplied, as a matter of course, without any reference to the particular source from which they were derived.” 2 So comprehensive did the system of Imperial Finance become in time that when in 1858 the Crown took over from the Company the government of India it was found that “no province had any separate power of legislation, any separate financial resources, or practically any power of creating or modifying any appointments in the public service; and the references to the Government of India which this last restriction involved gave that Government the opportunity of interference with all the details of provincial administration.” 3 1 3 and 4 Will. IV, c. 85, s. 59. 2 Government of India, Financial Department Resolution, dated November 22, 1843. 3 Report of the Royal Commission on Decentralization in British India, p. 24.

72 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES Whatever may have been the merits of the Imperial system of Government from the military, political, legislative, or administrative points of view, it is a melancholy fact that as a system of finance it proved unequal to the strain imposed upon it. From its very start it suffered from the fatal disease of financial inadequacy, and it was only occasionally that the efforts of the Finance Ministers were successful in restoring an equilibrium and staving off the hour of crisis. How chronic the deficits were may be seen from the following figures :— 1 INSUFFICIENCY OF IMPERIAL FINANCES Year Surplus Deficit Year Surplus Deficit ££ £ £ 1834-35 … 194,477 1846-47 … 971,322 35-36 1,441,513 … 47-48 … 1,911,986 36-37 1,248,224 … 48-49 … 1,473,225 37-38 780,318 … 49-50 354,187 … 38-39 … 381,787 50-51 415,443 … 39-40 … 2,138,713 51-52 531,265 … 40-41 … 1,754,852 52-53 424,257 … 41-42 … 1,771,603 53-54 … 2,044,117 42-43 … 1,346,011 54-55 … 1,707,364 43-44 … 1,440,259 55-56 … 972,791 44-45 … 743,893 56-57 … 143,597 45-46 … 1,496,865 57-58 … 7,864,222 Anyone who ponders upon this pitiable story of Indian Finance as revealed by these deficits can hardly fail to wonder with Disraeli who remarked in the House of Commons that— “able as has ever been the administration of India, considerable and distinguished as have been the men whom that administration had produced, and numerous as have been the great Captains, the clever diplomatists, and able administrators of large districts with whom the Government has abounded, the v state of the finances of India has always been involved in perplexity, and India that has produced so many great men, seems never to have produced a Chancellor of the Exchequer.” 2 1 From the Financial Statement of British India for 1860-1 by Mr. Wilson. H. of C Return 33 of 1860, p. 100. 2 Sir Charles Woods’ Administration, by West, pp. 65-6.

73THE IMPERIAL SYSTEM The causes of this collapse, however, are not far to seek. The inadequacy of Indian Finances is mainly to be ascribed to an unsound fiscal policy. The policy was unsound for various reasons. In matters of state economy it is usual to argue that the expenditure to be incurred should determine the magnitude of revenue to be raised. But experience has shown that this stock maxim has proved ruinous wherever its limitations have failed to receive their due weight. It cannot be too often said that the growing expenditure of the State can only be sustained from the growing wealth of the society. Nor can it be too strongly emphasized that the test of sound finance does not merely consist in being capable of raising the requisite amount of revenue. It must be remembered that the mode of raising the revenue is an aspect of the question which is fraught with tremendous consequences for the stability and productivity of the nation. It is too obvious to be denied that a tax system by its unequal incidence may cause social upheavals, just as by its unwise incidence on trade and industry it may impoverish society by setting out of gear its economic mechanism and technique and eventually beggar the State by impairing the productive powers of society. Wisdom therefore requires that those who are entrusted with the financial management of the State should look beyond the more immediate object of raising and spending of money, for the “hows” of finance are very important, and can be seldom neglected in practice with impunity. The wealth of society is the only patrimony on which the State can draw, and the State that damages it cannot but end in damning itself. History abounds with instances of States wrecked by the unwise neglect of these evident truths, but if an illustration be wanted in further proof thereof, the system of Imperial Finance established in India is matchless for the purpose. The land tax was the heaviest impost of the Imperial revenue system in operation. The underlying doctrine of the tax in India has been that it is of the nature of rent paid by the cultivator to the State in virtue of the theory that the land in India has from immemorial times been regarded as the property owned by the State. The cultivator is not the proprietor, but is the occupier of the land. The land is let to him and the State is therefore justified in claiming the whole of the economic rent arising from the land. On this assumption the land tax has been imposed irrespective of the question of necessity or justice.

74 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES Besides this legal fiction of State landlordism there was also another economic principle which was taken to be the justification for the enhancement of the land revenue. There is reason to believe that the Physiocratic doctrine of produit net had its influence in the management and fixing of the land tax in India. We find high officials in India arguing in the early stages of the revenue management that “whether or not the principle of the French Economists of laying all the taxes on the land be......erroneous or otherwise, it is certainly conformable to the prevalent system in India; nor is that theory supported by the French alone, but by respectable authorities in England, who contend that all taxes fall ultimately on the products of the soil, and that in advancing a different doctrine the eminent author of The Wealth of Nations is at variance with himself, inasmuch as his previous data lead to that conclusion.”1 Whatever may have been the reasons for augmenting the land tax, few can deny that a heavy consolidated impost on the first exertions of any species of industry absorbing the whole or nearly the whole of its profits in ruinous and impolitic. It becomes an effectual bar to the creation of that produce on which the future exertions might be profitably employed and through the medium of which individual wealth and public revenue may be increased to an almost inconceivable extent. A land tax of this nature was sure to blast the very production of that wealth which industry would have otherwise brought into being. The land tax was so heavy that the system of tax prevailing in India might well have been called a near approach to the single tax system. 2 1 For this remarkable controversy, which has escaped even the comprehensive eye of Baden Powell, see House of Commons paper 306 of 1812-13. 2 The ratio of the land revenue to the total revenues of India was as given below :— Year Ratio Year Ratio Year Ratio 1792-3 to 1796-7 50.33 1817-8 to 1821-2 66.17 1842-3 to 1846-7 55.85 1797-8to 1801-2 42.02 1822-3 to 1826-7 61.83 1847-8 to 1851-2 56.06 1802-3 to 1806-7 31.99 1827-8 to 1831-2 60.90 1852-3 to 1855-6 55.40 1807-8 to 1811-2 31.68 1832-3 to 1836-7 57.00 Average, for 64 years 54.07 1812-3 to 1816-7 52.33 1837-8 to 1841-2 59.05

75THE IMPERIAL SYSTEM While the land tax prevented the prosperity of the agricultural industry the customs taxes hampered the manufactures of the country. There were internal customs and external customs, and both were equally injurious to trade and industry. The internal customs 1 were made up of transit and town duties. For the purposes of transit duties the country was artificially divided into a number of small customs areas. Goods may be manufactured and consumed ad libitum within each customs area, but the moment they left their own division they became liable to duty. The injurious effects of this regulation, though concealed, were none the less real. The transit duties held up trade, which in its turn reacted adversely on the manufacturers of the country. Adam Smith has told us how the growth of industry depends upon the extent of the market. Here for the purposes of the transit duties the whole country was cut up into small bits after the manner of squares on a chess board. What wonder is there if trade, and its handmaid, industry, both languished to a serious extent. The adverse effect on the transit duties was also felt in another way. In every country somewhat industrially advanced there is not only a social division of labour, but there is also a territorial division of labour, otherwise called localization of industry. Evidence is not wanting to show that the localization of industry formed a prominent feature of Indian economy. 2 Under it each locality in India specialized in a particular art or industry; for instance, cotton was grown in one locality, woven in another, and bleached in a third place. But it often happened that these localities were situated in different customs areas, and a raw good might have had to pay the transit duty many a time before it reached its finished stage. To avoid this each locality was obliged to waste its energies along unprofitable lines in order to escape the transit duties. The town duties, which formed a part of the internal customs, also worked in their effects towards de-urbanization. Commercial entrepots are admittedly vast instruments of the trade of a country. The opportunity of ready purchase and sale of almost every kind of commodity in any quantity, accumulated capital, extended 1 Mr. Travelyan, who closely studied the system, was so much horrified by its injurious effects that he wrote “although we now have ocular demonstration of its existence, yet when it has once been abolished the world will find it difficult to believe that such a system could have been tolerated by us for the better part of a century.”— System of Transit and Town Duties in the Bengal Presidency, p. 6. 2 See M. Martin’s Eastern India, 3 vols.